MANAGING RISK AND RISK FACTORS
FOSTERING A RISK-AWARE CULTURE
KEY RISK FACTORS
Kumba recognises that risk is an inherent and unavoidable aspect of its business. The company fosters a risk awareness corporate culture in all decision-making, and is committed to managing risk in a proactive and effective manner through a competent risk management framework. To support this commitment, risk is analysed in order to inform management decisions taken at all levels within the group. The principles of the risk analysis and management process are set out in the Kumba Risk Policy and Standard.
Management of risk is critical to the success of the company given its exposure to a wide variety of risks which could have a financial, operational and reputational impact on the group. Effective management of risk supports the delivery of Kumba’s strategic objectives.
The approach to the management of risk incorporates the following key steps:
- identifying the key and emerging risks that could have a significant impact on the ability of the group to achieve its strategic objectives;
- analysing risks and controls;
- ensuring that appropriate controls and responses are put in place to mitigate identified risks;
- monitoring the effectiveness and implementation of controls; and
- reporting regularly to the Executive Committee, the Risk
Committee and the board of directors.
Roles and responsibilities
The Risk Policy and Standard is supported by an integrated framework of risk governance and reporting, which regulates how the group manages the handling of risk. Through the combined assurance framework, critical processes, risks to these processes and assurance providers, are identified. Management is responsible for monitoring the progress of actions taken to mitigate key risks and reporting on this to the Risk Committee and the board.
Management is also responsible for the group’s system of internal controls and for annually reviewing its effectiveness in providing shareholders with a return on their investment that is consistent with a responsible assessment and mitigation of risk. This includes reviewing strategic, financial, operational and emerging risks, and compliance controls and risk management procedures, and their effectiveness.
KUMBA’S RISK MANAGEMENT PROCESS
Identification of risks
A consistently applied methodology is used to identify key risks at group business units, operations and projects. The risk management process involves holding risk workshops, at least once a year, at business units and sites, as well as a workshop at the crucial stages of every project. Key risks are updated regularly.
The Risk Committee facilitated a board risk workshop in 2011, in which the board identified headline risks to be mitigated and managed.
Analysis of risks and controls
Once a risk is identified, the process seeks to evaluate impacts, whether these are of a financial or non-financial nature, to determine what might cause them to occur and to assess the likelihood of their occurrence. Consideration of current controls to mitigate those risks is also undertaken in order to draw up a prioritised register of risks.
Determination of management actions required
If additional controls are required, these will be identified and responsibilities assigned.
Reporting and monitoring
Management is responsible for monitoring the progress of actions to mitigate key risks and is supported by the group’s internal audit programme which evaluates the design and effectiveness of controls to mitigate key risks. The results of the key risk management process are reported to the Executive Committee every month and to the Risk Committee and board every quarter.
Headline risk areas are:
- Regulatory, political and legal aspects
- Ore Reserves and Mineral Resources
- Employees’ safety and health
- Impact on communities
- Foreign exchange
- Commodity price and demand
- Operational performance
KEY RISK FACTORS
Regulatory, political and legal
Kumba’s businesses may be affected by political or regulatory developments, including changes to fiscal regimes or other regulatory regimes, in any of the countries and jurisdictions in which it operates.
|Mining operations and development and
exploration projects are subject to extensive
legislation and regulations. Legislation of this
nature could allow governments where Kumba
currently operates to extend fiscal regimes.
This could affect the economic viability of a
mining project and/or operation, place security
of tenure in jeopardy, threaten expansion, put
investment at risk and harm the reputation of
Kumba and the mining industry.
Kumba’s subsidiary SIOC is involved in legal action over the mineral rights of Sishen mine.
|Unforeseen changes to legislation, regulations and standards could impact on Kumba’s licence to operate and increase the cost of production. Failure to comply with regulatory requirements could result in the revocation of Kumba’s consents, licences and other rights required to conduct its business. Legal disputes may affect Kumba’s reputation, relations with government and key stakeholders as well as future earnings and cash flows. Poor relationships with stakeholders may lead to those stakeholders not having a clear understanding of Kumba and not giving the company their support.||Kumba monitors regulatory developments and either draws up or updates applicable policies and procedures to ensure compliance. All necessary actions are being taken by Kumba management to protect the interests of the company, its employees and shareholders from legal disputes. Kumba promotes early engagement with its stakeholders in terms of a defined policy.|
Inability to obtain adequate support installations and facilities, and related services with respect to infrastructure (the areas of water, power, roads, railways and ports, for example).
|Kumba does not own or operate any of
the logistical assets required to transport
its products. Kumba exports iron ore to
international customers through a single
channel rail and port. Labour and other
operational risks associated with managing
the rail and port operators’ assets fall outside
Kumba’s direct control.
|Inadequate support installations and facilities, and related services, principally in the areas of rail, port, power and water, may affect the sustainability or growth of the business, leading to a loss of competitiveness, market share and reputation.||Kumba promotes the early development of integrated strategies and alignment with the infrastructure owner/operator. It fosters the development of relationships by participation in industry groups, ongoing engagement at the highest level with key suppliers and service providers, and by lobbying to ensure effective service from key utility providers.|
Ore Reserves and Mineral Resources
Kumba’s Ore Reserves and Mineral Resources are subject to a number of assumptions which may be incorrect.
|All assumptions related to Ore Reserves and
Mineral Resources are long term in nature
and are subject to volatility owing to economic,
regulatory or political influences.
Mining by its nature depletes finite resources. In Kumba’s case, the company’s resource base is primarily in South Africa (Northern Cape and Limpopo provinces).
|Failure to maintain or enhance existing reserves or develop a sufficient number of new operations could negatively affect Kumba’s strategic objective of delivering on growth projects and, ultimately, on its prospects for the future. Resource exploration and development are speculative in nature and characterised by a number of significant risks.||Kumba is experienced in managing Ore Reserves and Mineral Resources and has robust procedures to reduce the likelihood of significant variation. All factors are consistently monitored by management. New mining properties are identified through an active exploration programme while current operations are expanded by the application of technology to beneficiate lower-grade iron ores. Kumba is investigating a second mining footprint.|
Kumba operations may pose environmental risks in the form of dust, noise or leakage of polluting substances from site operations and uncontrolled breaches of tailing dam facilities. Any impact on air quality, water purity and the land could cause harm to employees and surrounding communities.
|The mining process, including blasting and the
processing of orebodies, can generate dust
and noise and requires the storage of waste
materials in liquid form.
|Potential impacts could result in harm to the environment, water purity, air quality, employees, surrounding communities, fines and penalties and statutory liabilities for environmental remediation. There may be other financial consequences that could be significant. Any underestimated or unidentified rehabilitation costs will reduce earnings and could materially and adversely affect Kumba’s asset values, earnings and cash flows.||Kumba has a well-developed culture of compliance and risk management. Against the background of applicable legislation, these activities are closely monitored to limit the impact its operations have on the environment. This extends to electricity consumption, carbon dixoide emissions, water quantity and quality, dewatering, biodiversity, waste rock dumps, non-mineral waste, hydrocarbon spillage and dust emissions.|
Employees’ safety and health
Failure to maintain high levels of safety may result in harm to employees, contractors and communities near Kumba’s operations.
|Mining is a hazardous activity. Kumba operates
in a sector that is subject to numerous
safety and health regulations. A significant
growth in mining and production volumes
and a consequential increase in employee
and contractor numbers across the group,
increases the risk of injuries.
Exposure to noise and dust are the most significant occupational health risks facing Kumba, given the hazard profile of the business. HIV/AIDS infections and failure to comply with evolving regulatory health standards and adopt high levels of health management pose further health-related risks for Kumba.
|Failure to maintain high levels of safety can result in harm to employees, contractors and communities near Kumba operations and damage to the environment. Failure to meet safety objectives may be contrary to the company’s values, impact on its reputation as a good citizen, affect the morale of employees, the achievement of production targets and the group’s licence to operate. Kumba’s reputation could be damaged and this would have significant consequences for a wide variety of stakeholders, including investors, government and trade unions.||Kumba places a very high priority on
safety, investing considerable resources
in maintaining and raising standards and
constantly reviewing practices to improve
safety performance at all its operations.
Health-related risk mitigation includes improved occupational hygiene practice through the allocation of sufficient resources (equipment, competent people, facilities and quality assurance systems); improved medical surveillance programmes in order to distinguish between workplace noise-induced hearing loss, noise-induced hearing loss that is not caused by the job an employee does and hearing loss caused by a particular medical condition; and implementation of corporate hearing conservation programmes and standards as well as the implementation of dust suppression programmes.
Kumba provides anti-retroviral drugs and confidential counselling and testing (CCT) to employees with HIV/AIDS and runs education and awareness programmes to help prevent employees and members of their families becoming infected or spreading infection. Kumba also implements a disease management programme providing employees, contractors and communities with medication and related therapy.
The inability to recruit, develop and retain appropriate skills, the risk of potential strikes or other industrial relations disputes.
|Kumba is, to a great extent, reliant on the
large number of people employed in its
Despite Kumba’s good relations with bargaining unit employees and their trade unions, the group remains exposed to risks posed by organised labour disruptions and disputes.
The strong commodity cycle and the large number of projects being developed in the resources industry have led to an increased demand for skilled personnel.
|Failure to retain skilled employees or to
recruit appropriate new staff members
may lead to increased costs, interruptions
to existing operations, and delays in the
developing of new projects.
A labour disruption could result in production and financial losses while a high employee turnover could result in the loss of critical skills and corporate memory.
|Kumba seeks to mitigate the threats posed
by a unionised workforce through a process
of constructive dialogue with trade unions
and the maintenance of effective working
Kumba recognises that the war on talent is about to increase and a number of strategies have been implemented to attract, retain and develop best talent. The company continues to make refinements to its human resources activities to ensure that Kumba remains attractive to prospective employees.
Impact on surrounding communities
Mining operations affect communities in close proximity to Kumba operations.
|Dewatering associated with mining activities at Sishen and Kolomela mines, along with the Dingleton community’s proximity to the mining operation at Sishen mine, may have impacts on Kumba’s organisational responsibility and capability.||Dewatering results in the depletion of
underground water – the main source of
water for surrounding farmers. The Dingleton
community’s proximity to the mining operation
poses both safety and health risks to the
community. This could result in fines, penalties
and liabilities to third parties for injuries.
|Kumba has developed comprehensive processes to enable its business units to effectively manage relationships with communities and actively seeks engagement with all communities affected by its operations. Kumba has commissioned groundwater impact studies to address dewatering. There is continuous engagement with the Dingleton community representatives regarding the resettlement.|
Kumba is exposed to currency risk where transactions are not conducted in rands.
|Kumba’s iron ore export prices are determined in US Dollars and the company negotiates iron ore prices in that currency with customers.||Transactions denominated in foreign
currencies expose Kumba to exchange rate
fluctuations and could result in economic or
|Kumba sells US Dollar export proceeds on a short-term rolling forward basis with the view of reducing any short-term cash borrowings and matching the cash requirements of the company on a day-to-day basis. US Dollar export proceeds act as a natural hedge for operating activities while major capital expenditure is hedged.|
Commodity price and demand
The price of iron ore is subject to wide fluctuations.
|Fluctuations in the price of iron ore and the freight rate can occur. These reflect underlying global economic and geo-political factors, industry demand and supply balances, and product substitution. Demand for Kumba’s products is influenced strongly by world economic growth, particularly in Europe and Asia (notably China). Kumba remains dependent on robust economic growth in China which, in turn, ensures substantial demand for iron ore.||Kumba’s exposure to China’s economic
fortunes and economic policies has increased.
Lower economic growth in China could have
a negative impact on Kumba’s revenues,
cash flows, profitability and asset values.
If commodity prices remain weak for a
sustained period, Kumba’s ability to deliver
growth in future years may be adversely
affected as growth projects may not be viable
at lower prices.
|Kumba manages this risk through constant monitoring of the markets in which it operates. This includes examining such aspects as economic growth, iron ore supply and demand, and the implications these have for spot price of iron ore and movements in the freight rate.|
Failure to meet production targets and/or project delivery times and costs.
|Kumba’s operations are subject to the risks
and hazards normally encountered in opencast
mining operations. These risks include
environmental hazards, such as unexpected
geological pressures and ground subsidence,
and operational risks relating to materials
handling, industrial accidents, blasting and
removing material from opencast pits. Mining
and beneficiation processes also rely on key
inputs, for example, fuel and electricity.
Appropriate insurance can provide protection from some, but not all, of the costs that may arise from unforeseen events.
Kumba seeks to develop new mining properties and expand its existing operations as a means of generating shareholder value. Unanticipated delays and complications with respect to the execution of projects along with an increasing demand for regulatory, environmental and social approvals may result in significant increases in construction costs and/or delays in construction.
|If any of these risks should materialise, such
an event could result in serious harm to
employees and contractors, delays or losses in
production, increased production costs and a
possible increase in liabilities.
Disruption to the supply of key inputs, or changes in their pricing, may have a material and adverse impact on the value of Kumba’s assets, costs, earnings and cash flows.
Failure to meet production targets could result in increased unit costs. The impact would be more pronounced at operations with high fixed costs.
Significant increases in construction costs and/or delays in construction could materially and adversely affect the economic viability of projects and consequently affect the value of Kumba’s assets, costs, earnings, cash flows and prospects.
|A number of strategies have been
implemented to mitigate this, including
management oversight of operational and
project performance through regular briefings,
increased effectiveness of procurement
activities through participation in the Anglo
American plc Supply Chain and other asset
optimisation business improvement initiatives
to reduce costs
Kumba has also established project delivery and management practices and capabilities to ensure project delivery ahead of schedule and below projected costs.
|Eugene van Staden, a process controller, performs an inspection of the rail line at Kolomela mine.|