Annual Report 2007 - Antofagasta plc

Financial Review continuedFINANCIAL REVIEWOre reserve and mineral resource estimationThe Group’s ore reserve and mineral resourceestimates are subject to a number of assumptions,including the price of commodities, production costsand recovery rates. Fluctuations in these variablesmay result in lower grade reserves being deemeduneconomic, and may ultimately lead to a reduction inreserves. A significant reduction could have a negativeimpact on the Group’s results, financial position andprospects.Mining operations and new projectsThe strong commodity cycle and large numbers ofprojects being developed in the resources industryhas led to increased demand for supplies, equipment,skilled personnel and contractors. This has resulted in,and could continue to result in, increased capital andoperating costs, which may impact the development ofnew projects, the expansion of existing operations, theresults of those operations and the Group’s financialcondition and prospects.Mining operations and project developments arealso subject to a number of circumstances not whollywithin the Group’s control, including damage to orbreakdown of equipment or infrastructure, naturaldisasters, unexpected geological variations andindustrial actions. Appropriate insurance can provideprotection from some, but not all, of the costs thatmay arise from unforeseen events.Failure to meet production targets may also resultin increased unit costs, particularly where operationshave a high level of fixed costs.Increasing regulatory and environmental approvalsand litigation could result in significant delays inconstruction and/or increases in construction costs.These events could materially and adversely affecta project’s economics or its successful completionand the Group’s earnings and cash flows. Similarly,withdrawal or variation of permits already granted andlitigation could affect production or costs at existingoperations, the results of these operations and theGroup’s financial condition and prospects.Decommissioning and restorationCosts associated with the decommissioning andrestoration of mine sites are estimated on the basisof a formal closure plan and are subject to regularformal review. Estimates may, however, beinsufficient, further issues may be identified orchanges in regulatory standards may occur. Anyunderestimated or unidentified costs will affectearnings and cash flows.AcquisitionsDifficulties may be experienced in successfullyintegrating acquired businesses, and the full benefits,cost savings or synergies identified at the time ofacquisition may not be achieved.Political environmentThe Group could be affected by any political orregulatory developments in any of the countries andjurisdictions in which it operates, including controlson imports, exports and prices, expropriation of assets,or new forms or rates of taxation and royalties.Health, safety and environmentThe Group operates in an industry that is subjectto numerous health, safety and environmental lawsand regulations as well as community expectations.Developments in regulatory standards andexpectations could result in increased costsand/or litigation, which could impact on earningsand cash flows.Critical accounting judgements and key sourcesof estimation uncertaintyDetermining many of the amounts included in thefinancial statements involves the use of judgementand/or estimation based on management’s bestknowledge of the relevant facts and circumstances,having regard to prior experience, but actual resultsmay differ from the amounts included in the financialstatements. Changes in judgements or the assumptionsunderlying estimates could result in a significantimpact on the financial statements. Details of principalaccounting policies are set out in Note 2 to the34Antofagasta plc Annual Report and Financial Statements 2007