BROADENING OUR HORIZONS - Arrium

OneSteel Annual Report 2011Finance &Risk management38OneSteel manages its exposure to key financial risks, includinginterest rate and currency risk, in accordance with its financial riskmanagement policy. The objective of the policy is to support thedelivery of the Group’s financial targets whilst protecting futurefinancial security.Debt managementOneSteel is committed to maintaining an investment–grade profilefor its debt. The targeted range for debt considered appropriate innormal circumstances is 30% to 40%, on a net debt/net debt plusequity basis, including derivatives. The Board would prefer to be ator below the bottom of this target range given the current difficultexternal environment. OneSteel’s statutory gearing level at the endof June 2011 was 27.7%. OneSteel’s core debt facilities at the end ofJune 2011 comprised $2,252 million of syndicated loans provided bya group of banks, with tranches expiring from 2012 to 2016, $297million of bilaterals expiring in 2013 to 2015, and $630 million of USprivately placed debt, with tranches expiring from 2011 to 2023. Atthe end of June 2011, drawn debt was $1,935 million.Financial reporting control assuranceThe company executes a risk–based process for assessing theeffectiveness of internal controls. The control focused financialreporting process includes:• Identifying and analysing the key financial processes• Assessing the inherent and residual risk of each key financialprocess• Identifying key financial controls where a risk gap indicatessignificant reliance on internal controls• Performing Control Self Assessment tests of key financialcontrols and Stewardship reviews on a monthly basis.This process is based on:• AS/NZS ISO 31000:2009/COSO Risk–based identification of keyfinancial controls• The company’s internal auditors’ verification of the effectivenessof key financial controls• Divisional risk owner/management sign–off to support the ChiefExecutive Officer and Chief Financial Officer sign–offs.The objective of OneSteel’s financial risk policy is to support the delivery ofthe group’s financial targets whilst protecting future financial SecurityInterest rate managementOneSteel’s objective when managing interest rate risk is to minimiseinterest expense while ensuring that an appropriate level offlexibility exists to accommodate changes in funding requirements.To achieve this, OneSteel uses a mix of “fixed” and “floating”interest rate instruments where “fixed” is defined as 12 monthsor longer. Further information regarding OneSteel’s interest ratemanagement can be found in Note 32 to the Financial Statementson page 114.Foreign exchange exposureThe main sources of foreign exchange risk include:• Sale of commodity goods and steel product in export markets(predominantly in US dollars)• Inventory purchases in foreign currency• Purchase of commodity inputs• Capital expenditure purchase of services in foreign currency.The Group requires all business units to use forward currencycontracts to minimise their currency exposures.OneSteel also has foreign currency exposure arising from its USprivate debt placement. Some of this debt has been hedged using aseries of cross–currency interest rate swaps and foreign exchangeswaps. The remaining portion of unswapped debt is used to fundinvestments in the US businesses.OneSteel also has exposure to foreign exchange translation riskin relation to New Zealand dollar–denominated and US dollar–denominated assets and liabilities.These relate to its 50.3% share in Steel & Tube Holdings andinvestments in offshore businesses including Moly-Cop andAltaSteel. For the US, Canadian and South American businesses, theGroup has considerable natural hedging in place.Risk factors relating to OneSteelOneSteel has an established business risk profiling system foridentifying, assessing, monitoring and managing material risk. Thesystem is based on AS/NZS ISO 31000:2009/COSO, and providesongoing risk management that is capable of responding promptlyto emerging and evolving risks. The company’s risk managementsystem includes comprehensive practices that help ensure that:• Key risks are identified and mitigating strategies are put in place• Management systems are monitored and reviewed to achievehigh standards of performance and compliance in areas such assafety and environment• Capital expenditure above a certain threshold obtains priorBoard approval• Internal control weaknesses are identified and reported monthlythrough the outstanding audit issues scorecard until they areremediated and closed• Financial exposures are controlled, including the use ofderivatives• Business transactions are properly authorised and executed.Internal and external auditOneSteel’s Internal Audit, Control and Risk (IACR) function is headedby a full–time General Manager, with the execution of the internalaudit function outsourced. The internal audit program is aimed atproviding assurance to the management and the Board over theeffectiveness of the company’s enterprise risk management systemcomprising business risk management, compliance and controlassurance, and the effectiveness of its implementation. Our internalaudit function works with the company’s IACR function and externalauditor, KPMG, to minimise any duplication of effort and to maximiseknowledge sharing between the assurance providers.