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GROUP – NOTES TO THE ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER
29. FINANCIAL INSTRUMENTS continued
Credit risk
Credit risk is the risk of financial loss to the group if a counterparty to a financial instrument fails to meet its contractual obligations. The group
limits its counterparty exposure arising from money market and derivative instruments by dealing only with well-established financial institutions
of high credit standing.
The group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded are
spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the board annually.
The group has established policies and guidelines that are followed for specific exposure limits when transacting in derivative financial instruments.
The carrying amount of the financial assets as set out above, represents the group’s maximum exposure to credit risk.
An analysis of the credit risk of these financial assets is provided under the individual notes specified above. The group does not hold any
collateral in respect of its financial assets subject to credit risk.
Liquidity risk
Liquidity risk is the risk that the group will be unable to meet its financial obligations as they become due. The group manages liquidity risk by
ensuring sufficient cash is available to meet expected operational expenses as well as sufficient cash resources and credit facilities to meet its
liabilities when due. The group’s credit facilities are detailed under note 9.
MATURITY PROFILE OF THE GROUP’S FINANCIAL INSTRUMENTS:
Rand million Notes Within 1 year 1 to 2 years
3 or
more years Total
2011
Financial assets
Investments held by the environmental trust 4 – – 568 568
Trade receivables 7 2,249 – – 2,249
Other receivables (excluding VAT and prepayments) 7 247 – 1 248
Cash and cash equivalents 8 4,742 – – 4,742
Derivative financial instruments 7 90 – – 90
Financial liabilities
Interest-bearing borrowings 9 (3,191) – – (3,191)
Trade payables 12 (1,672) – – (1,672)
Other payables 12 (2,870) – – (2,870)
Derivative financial instruments 12 (14) – – (14)
(419) – 569 150
2010
Financial assets
Investments held by the environmental trust 4 – – 372 372
Trade receivables 7 2,058 – – 2,058
Other receivables (excluding VAT and prepayments) 7 264 – 1 265
Cash and cash equivalents 8 4,855 – – 4,855
Derivative financial instruments 7 78 – – 78
Financial liabilities
Interest-bearing borrowings 9 – (3195) (3,195)
Trade payables 12 (1,595) – – (1,595)
Other payables 12 (1,510) – – (1,510)
Derivative financial instruments 12 (30) – – (30)
4,120 (3,195) 373 1,298
Market risk
Market risk includes currency risk, interest rate risk and other price risk.
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate in rands due to changes in foreign
exchange rates. The group undertakes transactions denominated in currencies other than the respective functional currencies of the entities
within the group. Through these transactions the group is exposed to currency risk.
Kumba’s iron ore export prices are determined in US dollars and the company negotiates iron ore prices in that currency with customers.
Currency movements of the US dollar against the rand therefore could have a significant effect on the financial position and results of Kumba.
The group undertakes transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise which may expose
it to economic or accounting losses. Treasury continues to sell 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
acts as a natural hedge for operating activities while major capital expenditure is hedged.
60 Kumba Iron Ore Limited