Kumba Annual Report 2003

Pure risks are identified and risk awareness is promoted at all business units and at the corporate centre. The group insures against losses arising from catastrophic events which include fire, flood, explosion, earthquake and machinery breakdown, and business interruption from these events.

Kumba accepts internal insurance deductibles that vary in line with the nature of the risk, and insures a further layer with captive insurance companies through whom the group thereafter purchases cover from local and international third-party insurance companies. An aggregate limit also exists.

The group renews its insurance annually on 1 July. Placement of cover has become more difficult with significantly higher premiums due to a substantial hardening of the insurance market, particularly in relation to mining assets.

Credit risk in relation to:

trading activities are low due to a high proportion of term supply arrangements with long-standing clients, mitigated further where dictated by customer creditworthiness or country risk assessment, through a combination of confirmed letters of credit and credit risk insurance. Kumba’s bad debt write-offs are negligible.
counter-party exposures arising from money market investments, foreign currency, interest rate and zinc price hedging operations are controlled by dealing only with financial institutions of high credit standing. The credit exposure to any one counter-party is managed by setting transaction limits.

Exchange rate exposure on loans and capital expenditure is fully covered. Hedging of expected net foreign currency receipts from exports less trading imports is undertaken on a limited shorter-term forward basis. Variations to this policy are subject to board approval.

At year-end Kumba had a currency forward sales book of US$8 million at an average rate of R7,71 to a US dollar spread out until November 2003.

Interest rate risks are addressed by maintaining a mix of fixed and floating rate loan facilities, with 71% of term loans financed on a fixed basis at year-end. The group actively manages the ratio of fixed to floating rates in the light of interest rate expectations and the risk profile of projects.

Liquidity risk is managed by maintaining a high proportion of net debt in longer-term facilities and substantial standby bank facilities as more fully reported on in the discussion of our financial structure in financial review.

Price hedging is undertaken on a limited scale in respect of zinc metal for which an international hedging market is accessible. Hedging of the US dollar zinc price and corresponding exchange rate exposure during the year resulted in an average price of R7 475/tonne being realised compared with an average market price of R6 949/tonne. Prices for other commodities are established on commercial terms with customers and suppliers, other than the 6,25Mtpa of iron ore supplied by Sishen mine at its cost of production, to the steel mills of Iscor. The Thabazimbi iron ore and Tshikondeni coking coal mines are contracted to sell their full production to Iscor. The total costs of running the captive mines and capital expenditure incurred, are recovered from Iscor. A management fee of 3% is added to these costs.

Technology risks are addressed as follows:

Annual audits are conducted to review the security of SAP R3 as our main business system and standard operating procedures exist.
Disaster recovery programmes are in place for this and all other major systems.
Process technology risk, in general, is low.
Internally developed technology is protected by patents, where appropriate.

ENABLING ENHANCED DECISION-MAKING THROUGH GREATER INSIGHT INTO RISKS AND THEIR IMPACT


HIGH-LEVEL BUSINESS RISKS
			Probability
Risk		Impact	of occurence	Control measures

•	Impact of continued rand	High	High	•	Sustained focus on continuous improvement
	strength combined with soft			•	Specific cost reduction initiatives of 2% per annum
	commodity prices				in real terms to protect margins
•	Erosion of margins as a result
	of increased cost trends
•	Interests of key shareholders	High	High	•	Pursue maximum value release initiatives and focus
	may affect optimum value				on operational excellence in the best interests of
	release for the group				the group and all its stakeholders
•	Financing of growth	High	Medium	•	Capital allocation linked to project prioritisation
	opportunities			•	Strategic equity partners for major projects
				•	Capital raising
•	Compliance with mining	High	Medium	•	Anchor empowerment agreement with the
	charter/scorecard				Tiso Kgalagadi consortium
				•	Agreement with Eyesizwe Coal on development of
					Kalbasfontein
				•	Empowerment framework developed to facilitate
					equity/asset based ownership transactions
				•	Programme for compliance with mining legislation
•	Achieving the ramp-up schedule	High	Medium	•	Best available resources committed and technology
	of the heavy minerals smelter				applied to the smelter phase
	phase of Ticor SA			•	Ramp-up of first furnace and targeted
					commissioning of second furnace on schedule
•	Plant breakdown or bottlenecks	Medium	Medium	•	Continuous constructive engagement between
	in the logistics chain affecting				Kumba and Transnet on operational efficiency and
	the group’s iron ore exports				infrastructure expansion
	which account for 73% of net			•	New port equipment currently being installed with
	operating income				Kumba Technology participation
				•	Record export shipments for the past two years
					achieved
•	Prevalence of HIV/AIDS	Medium	Medium	•	Corporate AIDS strategy in place, including
					awareness campaign, knowledge/attitude/practices
					studies, know-your-status campaigns
				•	Two pilot sites have been identified for
					administering anti-retroviral treatment (ART) of
					infected employees

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