| 16. | Financial risk management |
In the normal course of its operations, the group is exposed to gold price, currency, interest rate, liquidity and credit risks. In order to manage these risks, the group may enter into transactions which make use of on-balance sheet derivatives. The group does not acquire, hold or issue derivatives for trading purposes. The group has developed a risk management process to facilitate, control and monitor these risks. The board has approved and monitors this risk management process, inclusive of documented treasury policies, counterparty limits, controlling and reporting structures.
Controlling risk in the group
The treasury committee is responsible for treasury financial risk management activities within the group. The treasury committee reviews and recommends to the board all treasury counterparties, limits, instruments and any hedge strategies. At least two members of the treasury committee need to be present for a decision to be made, one of whom needs to be an executive director. The group treasury function operates a 3 tier matrix for all counterparties based on two credit ratings per financial institution. This matrix sets out the maximum amount to be invested with each counterparty dependent upon credit ratings, with a minimum A- credit rating requirement, unless otherwise approved by the audit committee. Any deviations to the policy are reported to the audit committee, who may also grant specific dispensations.
Approximately 10% of the cash for the group was held with the group’s principal bankers at year end with the remainder held with twelve other financial institutions, in line with the treasury policy. The treasury committee is responsible for managing the investment of group funds, currency exposure, liquidity and credit risk. The treasury committee adheres to the treasury risk management policy and counterparty limits and provides regular reports to the board.
The financial risk management objectives of the group are defined as follows:
• Safeguarding the group core earnings stream from its major assets through the effective control and management of gold price risk, foreign exchange risk, interest rate risk and credit risk;
• Effective and efficient usage of credit facilities in both the short and long term through the adoption of reliable liquidity management planning and procedures;
• Ensuring that investment and any hedging transactions are undertaken with creditworthy counterparties; and
• Ensuring that all contracts and agreements related to risk management activities are coordinated consistently throughout the group and comply where necessary with all relevant regulatory and statutory requirements.
The group continues to hold material TVA receivable balances in Mali and in the DRC. While management continue to pursue recovery of the TVA in cash, it is recognized that in practice given the continued absence of payment, the TVA may only be recovered through the tax offset mechanism set out in the establishment conventions in Mali. Management reports the TVA position and movements on a quarterly basis to the audit committee.
Refer to “PART I. Item 3. Key Information. D. Risk Factors” in the Annual Report on Form 20-F for details on the group’s risk factors.
Foreign currency and commodity price risk
In the normal course of business, the group enters into transactions denominated in foreign currencies (primarily euro, South African rand and Communauté Financière Africaine franc). As a result, the group is subject to exposure from fluctuations in foreign currency exchange rates. In general, the group does not enter into any material derivatives to manage these currency risks and no significant positions were held in 2017 and 2016. Generally, the group does not hedge its exposure to gold price fluctuation risk and gold was sold at market spot prices in 2017 and 2016. Gold sales are made in US dollars and do not expose the group to any currency fluctuation risk. However, during periods of capital expenditure or loan finance, the company may use forward contracts or options to reduce the exposure to price movements, while maintaining significant exposure to spot prices. These derivatives may establish a fixed price for a portion of future production while the group maintains the ability to benefit from increases in the spot gold price for the majority of future gold production. The group is also exposed to fluctuations in the price of consumables, such as fuel, steel, rubber, cyanide and lime, mainly due to changes in the price of oil, as well as fluctuations in exchange rates.
| $000 | | Dec 31, 2017 | | Dec 31, 2016 | |
| Level of exposure of foreign currency risk | | | | | | | |
| Carrying value of foreign currency balances | | | | | | | |
| Cash and cash equivalents includes balances denominated in: | | | | | | | |
| • Communauté Financi?re Africaine franc (CFA) | | | 676 | | | 1,289 | |
| • Euro (EUR) | | | 2,170 | | | 2,222 | |
| • South African rand (ZAR) | | | 1,217 | | | 166 | |
| • British pound (GBP) | | | 702 | | | 277 | |
| Trade and other receivables includes balances dominated in: | | | | | | | |
| • Communauté Financi?re Africaine franc (CFA) | | | 19,165 | | | 6,886 | |
| • South African rand (ZAR) | | | - | | | 89 | |
| • Euro (EUR) | | | 7,546 | | | 4,806 | |
| • British pound (GBP) | | | 46 | | | 2 | |
| Trade and other payables includes balances dominated in: | | | | | | | |
| • Communauté Financi?re Africaine franc (CFA) | | | (37,067) | | | (4,525) | |
| • Euro (EUR) | | | (321) | | | (486) | |
| • South African rand (ZAR) | | | (1,296) | | | (868) | |
| • British pound (GBP) | | | (742) | | | (898) | |
The group’s exposure to foreign currency arises where a company holds monetary assets and liabilities denominated in a currency different to the functional currency of the holder of the instrument which is the US dollar. The following table shows the impact of a 10% change in the US dollar on profit and equity arising as a result of the revaluation of the group’s foreign currency financial instruments. The TVA balance in Kibali is denominated in CDF and while not a financial instrument under IFRS 7, a movement of 10% in the year end rate would have an effect of $11.9 million on the receivable shown in the ‘Investments in joint ventures’ in the consolidated statement of financial position.
| | | Closing exchange
rate | | Effect of 10%
strengthening of $
on net earnings
and equity $000 | |
| At December 31, 2017 | | | | | | | |
| Euro (EUR) | | | 0.8347 | | | 940 | |
| Communauté Financi?re Africaine franc (CFA) | | | 547.53 | | | (1,723) | |
| South African rand (ZAR) | | | 12.36 | | | (8) | |
| British pound (GBP) | | | 0.74 | | | 1 | |
| At December 31, 2016 | | | | | | | |
| Euro (EUR) | | | 0.9490 | | | 654 | |
| Communauté Financi?re Africaine franc (CFA) | | | 623.30 | | | 365 | |
| South African rand (ZAR) | | | 13.65 | | | (61) | |
| British pound (GBP) | | | 0.81 | | | (62) | |
The sensitivities are based on financial assets and liabilities held at December 31, where balances were not denominated in the functional currency of the group. The sensitivities do not take into account the group’s sales and costs and the results of the sensitivities could change due to other factors such as changes in the value of financial assets and liabilities as a result of non-foreign exchange influenced factors.
Interest rate and liquidity risk
Fluctuations in interest rates impact on the value of short term cash investments and interest payable on financing activities (including long term loans), giving rise to interest rate risk. In the ordinary course of business, the group receives cash from its operations and is required to fund working capital and capital expenditure requirements.
The group generally enters into variable interest bearing borrowings. This cash is managed to ensure surplus funds are invested in a manner to achieve maximum returns while minimizing risks. The group has in the past been able to actively source financing through public offerings, shareholder loans and third party loans.
The company maintains a $400.0 million unsecured revolving credit facility with HSBC and a syndicate of banks which matures in December 2022 and is at present undrawn. Based on the company’s current cash resources and available facilities, projected operating cash flows and capital expenditure, we are confident the company will be able to meet its obligations at the present gold price.
The facility, if drawn, bears interest at LIBOR plus 1.5%, at the lower end of the leverage grid and includes financial covenants in respect of EBIT, EBITDA, net finance charges, tangible net worth, total debt, debt cover and interest cover.
| Maturity date | | Amount $000 | | Effective rate
for the year % | |
| Cash and cash equivalents: | | | | | | | |
| All less than 90 days as from December 31, 2017 | | | 719,808 | | | 0.9029 | % |
The other financial instruments of the group that are not included in the tables above are non-interest bearing and are therefore not subject to interest rate risk.
Concentration of credit risk
The group’s cash balances do not give rise to a concentration of credit risk because it deals with a variety of major financial institutions. Its receivables and loans are regularly monitored and assessed. Receivables are impaired when it is probable that amounts outstanding are not recoverable as set out in the accounting policy note for receivables. Gold bullion, the group’s principal product, is produced in Mali and Côte d’Ivoire (and in the case of its joint ventures in DRC and Mali). The gold produced is sold through the largest accredited gold refinery in the world. Credit risk is further managed by regularly reviewing the financial statements of the refinery. The group is further not exposed to significant credit risk on gold sales, as cash is received within a few days of the sale taking place. While not financial assets under IFRS 7, included in receivables is $114.4 million (2016: $89.4 million) (refer to note 7) relating to indirect taxes owing to Loulo and Gounkoto by the State of Mali, which are denominated in CFA, which holds some credit risk for the group. The legally binding mining conventions in Mali permit offsetting of other corporate taxes against approved unpaid TVA. A further $70.2 million (2016: $64.9 million) is held within the underlying statement of financial position of the equity accounted Kibali joint venture which is considered recoverable given the history of receipts and receipts obtained during the year and absence of significant disputed items, albeit receipts remain slow and uncertainty exists as to the timing of recovery.
Capital risk management
The group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, buyback shares, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt (net cash) divided by total capital. Net debt is calculated as total borrowings (including borrowings and trade and other payables, as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus net debt (net cash).
| $000 | | Dec 31, 2017 | | | Dec 31, 2016 | |
| Capital risk management | | | | | | | | |
| Trade and other payables | | | (149,288) | | | | (127,377) | |
| Less: cash and cash equivalents | | | 719,808 | | | | 516,301 | |
| Net position | | | 570,520 | | | | 388,924 | |
| Total equity | | | 3,992,269 | | | | 3,751,957 | |
| Total capital | | | 3,421,749 | | | | 3,363,033 | |
| Gearing ratio | | | 0% | | | | 0% | |
Maturity analysis
The following table analyses the group’s financial liabilities into the relevant maturity groupings based on the remaining period from the statement of financial position to the contractual maturity date. As the amounts disclosed in the table are the contractual undiscounted cash flows, these balances will not necessarily correspond with the amounts disclosed in the statement of financial position.
| $000 | | Trade and
other payables | | Borrowings | | Other financial
liabilities | |
| At December 31, 2017 | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| Within 1 year on demand | | | 134,662 | | | - | | | - | |
| Later than 1 year and no later than 5 years | | | - | | | - | | | - | |
| After 5 years | | | - | | | - | | | 2,765 | |
| Total | | | 134,662 | | | - | | | 2,765 | |
| | | | | | | | | | | |
| At December 31, 2016 | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| Within 1 year on demand | | | 106,548 | | | - | | | - | |
| Later than 1 year and no later than 5 years | | | - | | | - | | | - | |
| After 5 years | | | - | | | - | | | 2,765 | |
| Total | | | 106,548 | | | - | | | 2,765 | |
