Skip to main content

Principal risks and uncertainties

Understanding our key risks and developing appropriate responses to those risks is crucial to Anglo American's success

The Group is exposed to a variety of risks and uncertainties which can have a financial or reputational impact on the Group and which may also impact the achievement of social, economic and environmental objectives. These risks include strategic, commercial, operational, compliance and financial risks. The principal risks and uncertainties facing the Group have been categorised into headline risk areas. The Group's approach to risk management is set out in the corporate governance section.

The key headline risks identified for 2009, potential impacts on the Group and the mitigation strategies are summarised below:

Key headline risks

Commodity prices

Commodity prices are determined primarily by international markets and global supply and demand. Fluctuations in commodity prices give rise to commodity price risk across the Group. Historically, such prices have been subject to substantial variation and in 2008 there was a very significant reduction in commodity prices, particularly during the second half of the year. The impact of such volatility can result in material and adverse movement in the Group's operating results, asset values, revenues and cash flows. If the global economic environment remains weak for the medium to long term, the ability of the Group to deliver growth in future years may be adversely affected.

Other potential consequences of a sustained reduction in commodity prices include the inability to complete black economic empowerment (BEE) transactions in South Africa as BEE partners may not be able to finance their investments or require a restructuring of their investments.

Due to the diversified nature of the Group, the general policy is not to engage in commodity price hedging. The Group manages this risk through constant monitoring of the markets in which it operates and continuous review of capital expenditure programmes to ensure they reflect market conditions. A continuous focus on operating expenditure is also an important method of mitigating this risk.

Liquidity and counterparty risk

The Group is exposed to liquidity risk arising from the need to finance its ongoing operations and growth. If the Group is unable to obtain sufficient credit due to banking and capital market conditions, the Group may not be able to raise sufficient funds to develop new projects, fund acquisitions or meet the Group's ongoing financing needs and as a result operating results, revenues, cash flows or financial condition may be adversely affected.

The Group is also exposed to counterparty risk from customers or holders of cash that could result in financial losses should those counterparties become unable to meet their obligations to the Group. Cash deposits and other financial instruments, including trade receivables due from third parties, give rise to counterparty credit risk.

The Group has an experienced Treasury operations team who are responsible for managing the funding requirements of the Group and managing liquidity risk. The Treasury department also has a role to play in managing counterparty risk, particularly with banks where Anglo American places cash deposits. The Treasury operations of our joint ventures and associates, including De Beers, are independently managed and may expose the Group to liquidity and other financial risks.

Currency risk

Because of the global nature of its business, the Group is exposed to currency risk where transactions are not conducted in US dollars or where assets and liabilities are not US dollar denominated. Fluctuations in the exchange rates of the most important currencies influencing operating costs and asset valuations (the South African rand, Chilean peso, Brazilian real, Australian dollar, euro and pound sterling) may adversely affect financial results to a material extent. The Group's foreign exchange hedging is limited to debt instruments and capital expenditure on major projects.

Sensitivity analysis in respect of currency and commodity prices
Set out below is the impact on underlying earnings of a 10% fluctuation in some of the Group's commodity prices and exchange rates:
Commodity currency Average price/rate(1) 10% sensitivity US$ million(2)
Platinum $1,585/oz(3) 144
Palladium $355/oz(3) 22
Coal $120/t(4) 349
Copper 315 c/lb(5)(6) 275
Nickel 953 c/lb(5) 50
Zinc 85 c/lb(5) 45
Iron ore $88/t(7) 88
ZAR/USD 8.27 279
AUD/USD 1.17 110
CLP/USD 524 45
GBP/USD 0.54 14
‘oz' denotes ounces, ‘t' denotes tonnes, ‘c' denotes US cents, ‘lb' denotes pounds.
Excludes the effect of any hedging activities. Stated after tax at marginal rate. Sensitivities are the average of the positive and negative and reflect the impact of a 10% change in the average prices received and exchange rates during 2008. Increases in commodity prices increase underlying earnings and vice versa. A strengthening of the rand, pound sterling, Australian dollar and Chilean peso relative to the US dollar reduces underlying earnings and vice versa.
Source: Johnson Matthey.
Average price represents RSA-API 4 index. Sensitivity reflects the impact of a 10% change in the average price across the entire Anglo Coal product portfolio.
Being the average LME price. Sensitivity reflects the impact of a 10% change in the average price received.
Copper sensitivity excludes the impact of provisionally priced copper from 2007. At 31 December 2008 there were 145,066 tonnes of provisionally priced copper sales, marked at 139 c/lb (2007: 140,137 tonnes, marked at 302 c/lb).
Average price represents average iron ore export price achieved. Sensitivity reflects the impact of a 10% change in the average price across lump and fine.


As the Group is unable to control the market price at which the commodities it produces are sold (except for any forward sales or derivative contracts), it is possible that significantly higher future inflation in the countries in which Anglo American operates may result in an increase in future operational costs without a concurrent depreciation of the local currency against the dollar or an increase in the dollar price of the applicable commodities. Cost inflation in the mining sector is more apparent during periods of high commodity prices as demand can exceed supply. In addition, any lag in the reduction of input costs against falls in commodity prices will have a negative impact on profit margins and financial results.

The Group monitors costs very closely and the introduction of initiatives such as Asset Optimisation and ‘One Anglo' Supply Chain are designed to minimise costs.

Safety, health and the environment

Mining is a hazardous industry and is highly regulated by safety, health and environmental laws. Failure to provide a safe working environment may result in government authorities forcing closure of mines on a temporary or permanent basis or refusing mining right applications. The failure to achieve the required high levels of safety management can result in harm to the Group's employees and the communities near the mines, harm to the environment, fines and penalties, liability to employees and third parties for injury, impairment of the Group's reputation, industrial action or inability to recruit and retain skilled employees. Changes in laws, regulations or community expectations can result in increased compliance and remediation costs.

The Group recognises that the HIV/AIDs epidemic in sub-Saharan Africa is a significant threat to economic growth and development in that region. There is a risk that the recruitment and retention of skilled people is not possible as planned to meet growth aspirations. Anglo American provides anti-retroviral therapy to employees with HIV/AIDS and also undertakes education and awareness programmes to help prevent employees and their families becoming infected or spreading infection.

Other health risks to employees include noise induced hearing loss, occupational lung diseases and tuberculosis. The Group provides occupational health services to employees and continues to implement measures to limit the incidence and severity of such diseases.

Anglo American is a large user of energy and one of the key commodities it produces is coal. Various regulatory measures aimed at reducing greenhouse gas emissions and improving energy efficiency may affect Anglo Americans operations and customer demand for products over time. Assessments of the potential future impact of climate change regulation are uncertain, particularly if inconsistent regulations are adopted in the various geographies in which Anglo American operates.

Anglo American sets a very high priority on safety, health and the environment and invests considerable resources in seeking to improve the safety performance of the Group's operations, as well as in research and development to minimise impact on the environment and improve energy efficiency. The Group is constantly reviewing practices to improve safety performance and works closely with unions and governments, striving to produce a safer mining industry.

Political, legal and regulatory

The Group's businesses may be affected by political or regulatory developments in any of the countries and jurisdictions in which the Group operates, including changes to fiscal regimes or other regulatory regimes which may result in restrictions on the export of currency, expropriation of assets, imposition of royalties and requirements for local ownership or beneficiation. Political instability can also result in civil unrest, nullification of existing agreements or mining leases and permits. Any of these threats may adversely affect the Group's operations or the results of those operations. The Group has no control over changes in local market interest rates or political acts which may deprive the Group of the economic benefits of ownership of its assets.

In January 2008, Minera Loma de Níquel (MLdN) was notified of the intention of the Venezuelan Ministry of Basic Industries and Mining (MIBAM) to cancel 13 of its exploration and exploitation concessions due to MLdN’s alleged failure to fulfil certain conditions of the concessions. Further details are provided in the Base Metals overview section.

The Group actively monitors regulatory and political developments on a continuous basis.

Supplier risk

The inability to obtain, in a timely manner, strategic consumables, raw materials, mining and processing equipment could have an adverse impact on results of operations and the Group's financial condition. The strong commodity cycle witnessed in recent years increased demand for such supplies, resulting in periods when supplies were not always available to meet demand when required or cost increases above normal inflation rates materialised. Any interruption to the Group's supplies or increase in costs adversely affects the Group's financial position and future performance. Anglo American has limited influence over manufacturers and suppliers but takes a proactive approach to developing relationships with critical suppliers and improving the effectiveness of the Group's purchasing leverage through the ‘One Anglo' Supply Chain initiative.


Mining contractors are used at a number of the Group's operations to mine and deliver ore to processing plants, for example. In periods of high commodity prices, demand for contractors may exceed supply resulting in increased costs or lack of availability of key contractors. Disruption of operations or increased costs can occur should there be disputes with contractors or unavailability of certain skills.

Reserves and resources

The Group's mineral resources and ore reserves are subject to a number of assumptions, including the price of commodities, production costs and recovery rates. Fluctuations in these variables may have an impact on the long term financial condition and prospects of the Group.

The Group's policy on reporting of ore reserves and mineral resources is expanded within Ore Reserves and Mineral Resources estimates.


Exploration and development are speculative activities with no guarantee of success, but they are necessary for future growth. Failure to discover new reserves of sufficient magnitude could adversely affect future results and the Group's financial condition.

Anglo American invests considerable sums each year through its Exploration division in resource discovery and development to reserves.

Event risk

Damage to or breakdown of a physical asset, including risk of fire, explosion or natural catastrophe, can result in a loss of assets and subsequent financial losses. The Group's operations are exposed to natural risks such as earthquake, extreme weather conditions, failure of mining pit slopes and tailing dam walls, fires and explosion.

Specialist consultants are engaged to analyse such event risks on a rotational basis and provide recommendations for management action to prevent or limit the effects of such a loss. In addition, the Group seeks to purchase insurance to protect against the financial consequences of catastrophic event, subject to the availability and cost of such insurance.


The ability to recruit, develop and retain appropriate skills for the Group is made difficult by global competition for skilled labour particularly in periods of high commodity prices. The failure to retain skilled employees or to recruit new staff may lead to increased costs, interruptions to existing operations and delay in new projects.

A number of strategies are implemented to mitigate this risk including attention to an appropriate suite of reward and benefit structures and ongoing refinement of Anglo American as an attractive employee proposition.

Employees in the key countries where Anglo American operates are unionised and the risk of strike or other industrial relations disputes may have an adverse affect on the results of operations. Anglo American mitigates this risk through a process of constructive dialogue with trade unions and the maintenance of effective working relationships.

Operational performance and project delivery

Failure to meet production targets can result in increased unit costs, which are pronounced at operations with higher levels of fixed costs. Unit costs may exceed forecasts, adversely affecting performance and the results of operations.

Failure to meet project delivery times and costs could have a negative effect on operational performance and lead to increased costs or reductions in revenue and profitability.

Increasing regulatory, environmental and social approvals can result in significant increases in construction costs and/or significant delays in construction. These increases could materially and adversely affect the economics of a project, the Group's asset values, costs, revenues, earnings and cash flows.

A number of strategies have been implemented to mitigate these risks including management oversight of operating performance and project delivery through regular executive management briefings, increased effectiveness of procurement activities and business improvement initiatives to reduce unit costs and improve delivery of capital projects.


The Group has undertaken a number of acquisitions in the recent past, including the Minas-Rio project in Brazil. With any such transaction there is the risk that any benefits or synergies identified at the time of acquisition may not be achieved as a result of changing or incorrect assumptions or materially different market conditions, resulting in adverse affects on financial performance, production volumes or product quality. Furthermore, the Group could find itself liable for past acts or omissions of the acquired business without any adequate right of redress.

Rigorous guidelines are applied to the evaluation and execution of all acquisitions that require the approval of the Investment Committee and, subject to size, the Board.


Inadequate supporting facilities, services and installations (water, power, transportation, etc.) may affect the sustainability and growth of the business, leading to a loss of competitiveness, market share and reputation of the Group. The ongoing power generation situation in South Africa, which escalated during the early part of 2008, is a good example of this risk but this is not the only country where reliable supply of power is a key issue. Anglo American's approach to addressing this risk is to work jointly on developing sustainable solutions to these problems with suppliers of infrastructure services and facilities.

Community relations

The Group operates in several countries where ownership of rights in respect of land and resources is uncertain and where disputes in relation to ownership or other community matters may arise. These disputes are not always predictable and may cause disruption to projects or operations. The Group's operations can have an impact on local communities, including the need, from time to time, to relocate communities or infrastructure networks such as railways and utility services. Failure to manage relationships with local communities, government and non-government organisations may adversely affect the Group's reputation as well as its ability to bring projects into production.

The Group has developed a process to enable its business units to effectively manage relationships with communities and actively seeks engagement with all affected communities impacted by the Group's operations.

Joint venture relationships

Some of the Group's operations are controlled and managed by joint venture partners, associates or by other companies. Management of non-controlled assets may not comply with the Group's standards, for example, on safety, health and environment. This may lead to higher costs, lower production and have a negative bearing on operational results, asset values or the Group's reputation.

Anglo American seeks to mitigate this risk by way of a thorough evaluation process before committing to any joint venture and implementation of ongoing governance processes in existing joint ventures.

Critical accounting judgements and key sources of estimation and uncertainty

In the course of preparing financial statements, management necessarily makes judgements and estimates that can have a significant impact on the financial statements. The most critical of these relate to estimation of the useful economic life of assets and ore reserves, impairment of assets, restoration, rehabilitation and environmental costs and retirement benefits. These are detailed below. The use of inaccurate assumptions in calculations for any of these estimates could result in a significant impact on financial results.

Useful economic lives of assets and ore reserves estimates

The Group's mining properties, classified within tangible assets, are depreciated over the respective life of the mine using the unit of production (UOP) method based on proven and probable reserves. When determining ore reserves, assumptions that were valid at the time of estimation may change when new information becomes available. Any changes could affect prospective depreciation rates and asset carrying values.

The calculation of the UOP rate of amortisation could be impacted to the extent that actual production in the future is different from current forecast production based on proven and probable mineral reserves.

Factors which could impact useful economic lives of assets and ore reserve estimates include:

  • changes to proven and probable mineral reserves;
  • the grade of mineral reserves varying significantly from time to time;
  • differences between actual commodity prices and commodity price assumptions used in the estimation of mineral reserves;
  • renewal of mining licences;
  • unforeseen operational issues at mine sites; and
  • adverse changes in capital, operating, mining, processing and reclamation costs, discount rates and foreign exchange rates used to determine mineral reserves.

The majority of other tangible assets are depreciated on a straight line basis over their useful economic lives. Management reviews the appropriateness of assets' useful economic lives at least annually and any changes could affect prospective depreciation rates and asset carrying values.

Impairment of assets

The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash generating unit (CGU). The recoverable amount of an asset, or CGU, is measured as the higher of fair value less costs to sell and value in use.

Management necessarily applies its judgement in allocating assets that do not generate independent cash flows to appropriate CGUs, and also in estimating the timing and value of underlying cash flows within the value in use calculation. Subsequent changes to the CGU allocation or to the timing of or assumptions used to determine cash flows could impact the carrying value of the respective assets.

Restoration, rehabilitation and environmental costs

Provision is made, based on net present values, for restoration, rehabilitation and environmental costs as soon as the obligation arises. Costs incurred at the start of each project are capitalised and charged to the income statement over the life of the project through depreciation of the asset and the unwinding of the discount on the provision. Costs for restoration of subsequent site damage are provided at net present value and charged against profits as extraction progresses. Environmental costs are estimated using either the work of external consultants or internal experts. Management uses its judgement and experience to provide for and amortise these estimated costs over the life of the mine.

Retirement benefits

The expected costs of providing pensions and post retirement benefits under defined benefit arrangements relating to employee service during the period are charged to the income statement. Any actuarial gains and losses, which can arise from differences between expected and actual outcomes or changes in actuarial assumptions, are recognised immediately in the Consolidated Statement of Recognised Income and Expense.

Assumptions in respect of the expected costs are set after consultation with qualified actuaries. While management believes the assumptions used are appropriate, a change in the assumptions used would impact the earnings of the Group going forward.

Special items

Operating special items are those that management considers, by virtue of their size or incidence, should be disclosed separately to ensure that the financial information also allows an understanding of the underlying performance of the business. The determination as to which items should be disclosed separately requires a degree of judgement.

Back to the top