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GLN: 2018 Annual Report Of Glencore PLC
Glencore plc
(Incorporated in Jersey under the Companies (Jersey) Law 1991)
(Registration number 107710)
JSE Share Code: GLN
LSE Share Code: GLEN
HKSE Share Code: 805HK
ISIN: JE00B4T3BW64
Baar, Switzerland
01 March 2019
2018 Annual Report of Glencore plc
Glencore plc (“Glencore” or the “Company”) has today:
published its Annual Report for the year ended 31 December 2018 on its
website www.glencore.com as required by DTR 6.3.5 R (3); and
submitted a copy of the Annual Report to the UK National Storage Mechanism
in accordance with LR 9.6.1 R.
The 2018 Annual Report will shortly be available for inspection on the
National Storage Mechanism: www.morningstar.co.uk/uk/NSM
Glencore will hold its 2019 Annual General Meeting in Zug on 9 May 2019.
Further details will be available in the notice of meeting, which will be
released in March 2019.
The Appendix to this announcement contains the following additional
information which has been extracted from the 2018 Annual Report for the
purposes of compliance with DTR 6.3.5 only:
a description of principal risks and uncertainties;
a note on related party transactions; and
the Directors' Responsibilities Statement.
The Appendix should be read in conjunction with Glencore's Preliminary
Results Announcement issued on 20 February 2019 (including the notice on
forward looking statements at the end of that announcement). Together these
constitute the material required by DTR 6.3.5 to be communicated to the media
in unedited full text through a Regulatory Information Service. This
announcement should be read in conjunction with and is not a substitute for
reading the full 2018 Annual Report.
Page and note references in the text below refer to page numbers and notes in
the 2018 Annual Report and terms defined in that document have the same
meanings in these extracts.
APPENDIX
Glencore’s Principal risks and uncertainties
The following has been extracted from pages 24 - 35 of the 2018 Annual
Report:
Our risk management framework identifies and manages risk in a way that is
supportive of our strategic priorities of opportunistically deploying
capital, while protecting our future financial security and flexibility. Our
approach towards risk management is framed by our ongoing understanding of
the risks that we are exposed to, our risk appetite and how these risks
change over time.
The Board assesses and approves our overall risk appetite, monitors our risk
exposure and sets the Group-wide limits, which are reviewed on an ongoing
basis. This process is supported by the Audit and HSEC Committees, whose
roles include evaluating and monitoring the risks inherent in their
respective areas as described on pages 104–106.
The current assessment of our principal risks, according to exposure and
impact, is detailed on the following pages. In accordance with UK Financial
Reporting Council guidance, we define a principal risk as a risk or
combination of risks that could seriously affect the performance, future
prospects or reputation of Glencore. These include those risks which would
threaten the business model, future performance, solvency or liquidity of the
Group. We look at risk appetite from the context of severity of the
consequences should the risk materialise, factors influencing the risk and
the Company’s ability to mitigate it.
The commentary on the risks in this section should be read in conjunction
with the explanatory text under Understanding the information on risks which
is set out on page 26.
The natural diversification of our portfolio of commodities, geographies,
currencies, assets and liabilities is a source of mitigation for some of the
risks we face. In addition, through our governance processes and our
proactive management approach we seek to mitigate, where possible, the
impacts of certain risks should they materialise. In particular:
• Our liquidity risk management policy requires us to maintain (via a $3
billion minimum prescribed level) sufficient cash and cash equivalents
and other sources of committed funding available to meet anticipated
and unanticipated funding needs, including ensuring that the quantum of
bonds maturing in any one year does not exceed some $3 billion;
• Making use of credit enhancement products, such as letters of credit,
insurance policies and bank guarantees and imposing limits on open
accounts extended; and
• Our management of marketing risk, including daily analysis of Group
value at risk (VaR).
Changes in principal risks
We believe that our principal risks have remained the same although our
assessment of their possible negative effect and the scale of impact has
altered. In particular we believe that geopolitical and compliance impacts
have increased.
Also, pressure for divestment from coal and coal producing companies
continues to grow. In formulating a more focused set of risks, we have (i)
combined “Reductions in commodity prices” and “Fluctuations in supply of or
demand for commodities” into “Supply, demand
and prices of commodities”; and (ii) incorporated “Skills availability and
retention” into “Operating”.
2018 developments
Highest impact risks
Significant changes were:
1. Supply, demand and prices of commodities: there has been considerable
volatility in commodity prices over the past 12 months. Any significant
downturn in the current commodity price environment, especially in
copper, coal or zinc would have a severe drag on our financial
performance.
Additionally, the potential effects of new trade barriers could reduce
demand for certain of our commodities or restrict our supplies. As a
result, this continues to be the Group’s foremost risk.
2. Currency exchange rates: 2018 reflected a generally stronger US dollar
versus producer country currencies. While beneficial over the short
term to our locally denominated operating costs, this can be indicative
of challenges in world economic conditions and resulting risks to
commodities’ demand and prices. Additionally, rates can change for
reasons unlinked to commodities, which could result in mismatched
impact of pricing and currency movements, resulting in income
volatility.
3. Geopolitical, permits and licences to operate: this risk has become
more prominent in 2018, particularly in light of the various
developments in the DRC.
4. Laws and enforcement: the DOJ investigation has considerably heightened
the importance of this risk, together with other relevant examples,
including sanctions imposition by US authorities.
5. Liquidity: while our net debt and net funding are relatively stable,
and cash flow coverage is healthy, we remain cognisant that access to
credit is vital and that debt markets can be volatile.
6. Cyber: actual and attempted attacks on organisations continued to be
prevalent. Over time, we have invested in our security platforms and
data protection, and we continue to develop our approach and responses
to this evolving risk.
7. Health, Safety, Environment: a serious failure in HSE management could
result in an emergency or catastrophe within the business, which could
result in injuries or fatalities and also impact employees safety,
production and Glencore’s reputation. In particular, catastrophic
hazards such as tailings dam failures and collapses of pit walls or
underground structures represent significant unquantifiable risks.
Despite our efforts, our safety performance, particularly as to
fatalities, continues to be challenging, mainly reflecting the location
and nature of many of our operations.
In response to the above challenges, capital expenditure remains at
controllable levels and initiatives continue to ensure we operate at optimal
working capital levels. The Group is committed to maintaining a strong
BBB/Baa investment grade rating balance sheet, which should support growth
and shareholder returns regardless of the commodity price environment, noting
also the additional principal risks which the Group faces.
Longer-term viability
In accordance with the requirements of the UK Corporate Governance Code, the
Board has assessed the prospects of the Group’s viability over the four-year
period from 1 January 2019. This period is consistent with the Group’s
established annual business planning and forecasting processes and cycle,
which is subject to review and approval each year by the Board.
The four-year plan considers Glencore’s adjusted EBITDA, capital expenditure,
funds from operations (FFO) and net debt, and the key financial ratios of net
debt to adjusted EBITDA and FFO to net debt over the forecast years and
incorporates stress tests to simulate the potential impacts of exposure to
the Group’s principal risks and uncertainties.
These scenarios included:
A prolonged downturn in the price and demand of commodities most
impacting Glencore’s operations
Foreign exchange movements to which the Group is exposed as a result of
its global operations
An increase in costs associated with open regulatory investigations and
adverse geopolitical developments
Consideration of the potential impact of adverse movements in macro-
economic assumptions and their effect on certain key financial KPIs and
ratios which could increase the Group’s access to or cost of funding
The scenarios were assessed taking into account current risk appetite and any
mitigating actions Glencore could take, as required, in response to the
potential realisation of any of the stressed scenarios.
Based on the results of the related analysis, the Directors have a reasonable
expectation that the Group will be able to continue in operation and meet its
liabilities as they fall due over the four-year period of this assessment.
They also believe that the review period of four years is appropriate having
regard to the Group’s business model, strategy, principal risks and
uncertainties, and viability.
Understanding the information on risks
There are many risks and uncertainties which have the potential to
significantly impact our business, including competitive, economic,
political, legal, regulatory, sustainability and financial risk. The order in
which these risks and uncertainties appear does not necessarily reflect the
likelihood of their occurrence or the relative magnitude of their potential
material adverse effect on our business.
We have sought to provide examples of specific risks. However, in every case
these do not attempt to be an exhaustive list. These principal risks and
uncertainties should be considered in connection with any forward looking
statements in this document as explained on page 237.
Identifying, quantifying and managing risk is complex and challenging.
Although it is our policy to identify and, where appropriate and practical,
actively manage risk, our policies and procedures may not adequately
identify, monitor and quantify all risks.
This section describes our attempts to manage, balance or offset risk. Risk
is, however, by its very nature uncertain and inevitably events may lead to
our policies and procedures not having a material mitigating effect on the
negative impacts of the occurrence of a particular event.
Our scenario planning and stress testing may accordingly prove to be
optimistic, particularly in situations where material negative events occur
in close proximity. Since many risks are connected, our analysis should be
read against all risks to which it may be relevant.
In this section, we have sought to update our explanations, reflecting our
current outlook. Mostly this entails emphasising certain risks more strongly
than other risks rather than the elimination of, or creation of, risks.
Certain investors may also be familiar with the risk factors that are
published in the Group debt or equity prospectuses or listing documents.
These provide in part some differing descriptions of our principal risks.
A recent example is available on our website at: glencore.com/who-we-
are/governance
In addition, more information on our risks is available in the relevant
sections of our website.
To provide for concise text:
Where we hold minority interests in certain businesses, although these
entities are not generally subsidiaries, the interests are mostly taken
as being referred to in analysing these risks, and “business” refers to
these and any business of the Group
Where we refer to natural hazards, events of nature or similar
phraseology we are referring to matters such as earthquake, flood,
severe weather and other natural phenomena
Where we refer to “mitigation” we do not intend to suggest that we
eliminate the risk, but rather it shows the Group’s attempt to reduce
or manage the risk. Our mitigation of risks will usually include the
taking out of insurance where it is customary and economic to do so
This section should be read as a whole – often commentary in one
section is relevant to other risks
“commodity/ies” will usually refer to those commodities which the Group
produces or sells
“law” includes regulation of any type
“risk” includes uncertainty and hazard and together with “material
adverse effect on the business” should be understood as a negative
change which can seriously affect the performance, future prospects or
reputation of the Group. These include those risks which would threaten
the business model, future performance, reputation, solvency or
liquidity of the Group
A reference to a note is a note to the 2018 financial statements
A reference to the sustainability report is our 2018 sustainability
report to be published in April 2019
EXTERNAL RISKS
1. Supply, demand and prices of commodities
Risk movement in 2018 - Stable
Risk appetite - Low. Outside of the inherent risk of commodity prices on
unmined reserves/resources, flat price exposure on extracted or trading
related positions is to be hedged, when possible. Additionally, we seek to
ensure this risk is minimised through scale of operations and diversity of
product.
Risk description - The revenue and earnings of substantial parts of our
industrial activities and, to a lesser extent, our marketing activities, are
dependent upon prevailing commodity prices. Commodity prices are influenced
by a number of external factors, including the supply of and demand for
commodities, speculative activities by market participants, global political
and economic conditions, related industry cycles and production costs in
major producing countries.
We are dependent on the expected volumes of supply or demand for commodities
which can vary for many reasons, such as competitor supply policies, changes
in resource availability, government policies and regulation, costs of
production, global and regional economic conditions and demand in end markets
for products in which the commodities are used.
These reasons also include technological developments, e.g. commodity
substitutions, fluctuations in global production capacity, global and
regional weather conditions, natural disasters and diseases, all of which
impact global markets and demand for commodities. Furthermore, changes in
expected supply and demand conditions impact the expected future prices (and
thus the price curve) of each commodity.
Comments/impacts to the Group - A significant downturn in the price of
commodities generally results in a decline in our cash flow and
profitability, and could potentially result in impairment and balance sheet
constraints. It is especially harmful to profitability in the industrial
activities, which are more directly exposed to price risk due to the higher
level of fixed costs. Government policy decisions can be very important, e.g.
in reducing the demand for coal or increasing its pricing (via carbon taxes)
– see Climate change below.
New or improved energy production or technologies can also reduce the demand
for some commodities such as coal. Major decisions by governments can also
lead to lower growth of some countries or regions, such as US/China trade
decisions and Brexit.
Any adverse economic developments, particularly impacting China and fast
growing developing countries, could lead to reductions in demand for, and
consequently price reductions of, commodities.
Future demand for certain commodities might decline (e.g. fossil fuels),
whereas others might increase (such as copper, cobalt, and nickel for their
use in electric vehicles and batteries), taking into consideration the
“greening” of the global economy.
This risk is currently prevalent in various commodities, such as steel, coal
and oil. In particular, many analysts believe that demand for coal will
reduce sooner than previously expected due to significant cost reductions in
renewable and alternate capacity.
The dependence of the Group (especially our industrial business) on commodity
prices, supply and demand of commodities, make this the Group’s foremost
risk. See the Chief Executive Officer’s review on page 4 and the financial
review on page 52.
Mitigating factors - Achieving operational efficiencies and enhanced focus on
cost control.
Diversification of our portfolio of commodities, geographies, currencies,
assets and liabilities. Maintaining a global portfolio of customers and
contracts.
Preparing for shifts in commodity demand by putting a special focus on the
parts of the business that will potentially grow with the anticipated
increase of electric vehicles and battery production and closely monitor
fossil fuel (particularly thermal coal) demands.
See the Chief Executive Officer’s review on page 4 and the financial review
on page 52.
2. Currency exchange rates
Risk movement in 2018 - Stable
Risk appetite - Low. Where possible foreign exchange (“FX”) exposure to non-
operating foreign exchange risk are to be hedged.
Risk description - The vast majority of our transactions are denominated in
U.S. dollars, while operating costs are spread across many different
countries, the currencies of which fluctuate against the U.S. dollar. A
depreciation in the value of the U.S. dollar against one or more of these
currencies will result in an increase in the cost base of the relevant
operations in U.S. dollar terms.
The main currency exchange rate exposure is through our industrial assets, as
a large proportion of the costs incurred by these operations is denominated
in the currency of the country in which each asset is located. The largest of
these exposures are to the currencies listed on page 62.
Comments/impacts to the Group - Currency fluctuations tend to move in inverse
correlation to commodity prices and supply and demand fundamentals as noted
above, such that decreases in commodity prices are generally associated with
increases in the U.S. dollar relative to local producer currencies and vice
versa. If this occurs then it is detrimental to us through higher equivalent
U.S. dollar operating costs at the relevant operations. This negative,
however, would usually be offset to some extent by the increases in commodity
prices which had influenced this change.
Mitigating factors - The FX inverse correlation described above usually
provides a natural partial FX hedge for the industrial business. In respect
of commodity purchase and sale transactions denominated in currencies other
than U.S. dollars, the Group’s policy is usually to hedge the specific future
commitment through a forward exchange contract. From time to time, the Group
may hedge a portion of its currency exposures and requirements in an attempt
to limit any adverse effect of exchange rate fluctuations.
3. Geopolitical, permits and licences to operate
Risk movement in 2018 - Increase
Risk appetite - High. We operate in countries with less developed political
and regulatory regimes. To be considered a truly diversified commodities
group, operations in these jurisdictions are required.
Risk description - We operate and own assets in a large number of geographic
regions and countries, some of which are categorised as developing, complex
or having unstable political or social climates. As a result, we are exposed
to a wide range of political, economic, regulatory, social and tax
environments. The Group transacts business in locations where it is exposed
to a risk of overt or effective expropriation – resource nationalism
continues to be a challenging issue in many countries. Our operations may
also be affected by political and economic instability, including terrorism,
civil disorder, violent crime, war and social unrest.
Increased scrutiny by governments and tax authorities in pursuit of perceived
aggressive tax structuring by multinational companies has elevated potential
tax exposures for the Group.
The terms attaching to any permit or licence to operate may be onerous and
obtaining these and other approvals, which may be revoked, can be
particularly difficult. Furthermore, in certain countries title to land and
rights and permits in respect of resources are not always clear or may be
challenged.
Adverse actions by governments and others can result in operational/project
delays or loss of permits or licences to operate.
The suspension or loss of our permits or licences to operate could have a
material adverse effect on the Group and could also preclude Glencore from
participating in bids and tenders for future business and projects, therefore
affecting the Group’s long-term viability.
Our licences to operate through mining rights are dependent on a number of
factors, including compliance with regulations. It also depends on
constructive relationships with a wide and diverse range of stakeholders.
Comments/impacts to the Group - Policies or laws in the countries in which we
do business may change in a manner that may be adverse for us, even those
with stable political environments e.g. many governments have sought
additional sources of revenue by increasing rates of taxation, royalties or
resource rent taxes or may increase sustainability obligations.
We have no control over changes to policies, laws and taxes.
In 2018 our operations have been subject to significant tax increases in the
DRC (see below) and Zambia. Some other tax authorities have taken a tougher
approach to engaging with the Group which has in some cases led to
litigation. See also 4 below.
The continued operation of our existing assets and future plans are in part
dependent upon broad support, our “social licence to operate”, and a healthy
relationship with the respective local communities – see further Community
Relations and Operating risks concerning workforce disputes.
In July 2018, a New DRC Mining Code came into effect. The New DRC Mining Code
introduced amongst other measures (1) a cap on a Company’s ability to
repatriate excess capital earned above its initial investment amount; (2)
significantly higher taxes and royalties; and (3) potential state ownership
in certain projects of up to 10%.
Mitigating factors - The Group’s industrial assets are diversified across
various countries.
Also, the Group continues to actively engage with governmental authorities in
light of upcoming changes and developments in legislation and enforcement
policies.
See map on pages 2 - 3 which sets out our global operational footprint.
We endeavour to design and execute our projects according to high legal,
ethical, social, and human rights standards, and to ensure that our presence
in host countries leaves a positive lasting legacy (see sustainability risks
below). This commitment is essential to effectively manage these risks and to
maintain our permits and licences to operate.
The Group has an active engagement strategy with the governments, regulators
and other stakeholders within the countries in which it operates or intends
to operate. Through, strong relationships with stakeholders we endeavour to
secure and maintain our licences to operate.
In 2018, we also published our third Payments to Governments report. This
detailed total government contributions in 2017 of over $4 billion. It also
set out details of payments on a project by project basis. We also continue
to be an active member of the Extractive Industries Transparency Initiative
(EITI).
4. Laws and enforcement
Risk movement in 2018 - Increase
Risk appetite - Medium. The Group maintains programmes which seek to ensure
that we comply with or exceed the laws and external requirements applicable
to our operations and products.
However, some of our industrial activities are located in countries that are
categorised as developing, complex or having political or social climates
and/or where corruption is generally understood to exist.
Risk description - We are exposed to extensive laws including those relating
to bribery and corruption, sanctions, taxation, anti-trust, financial markets
regulation, environmental protection, use of hazardous substances, product
safety and dangerous goods regulations, development of natural resources,
licences over resources, exploration, production and post-closure
reclamation, employment of labour and occupational health and safety
standards.
The legal system and dispute resolution mechanisms in some countries may be
uncertain so that we may be unable to enforce our understanding of our
rights. Successful lawsuits based upon damage resulting from operations could
lead to the imposition of substantial penalties, the cessation of operations,
compensation and remedial and/or preventative orders. Moreover, the costs
associated with legal compliance, including regulatory permits, are
substantial and increasing. Any changes to these laws or their more stringent
enforcement or restrictive interpretation could cause additional significant
expenditure to be incurred or cause suspensions of operations and delays in
the development of industrial assets. Failure to obtain or renew a necessary
permit or the occurrence of other disputes could mean that we would be unable
to proceed with the development or continued operation of an asset and/or
impede our ability to develop new industrial properties.
As a diversified sourcing, marketing and distribution company conducting
complex transactions globally, we are exposed to the risks of fraud,
corruption, sanctions breaches and other unlawful activities both internally
and externally. Our marketing operations are large in scale, which may make
fraudulent or accidental transactions difficult to detect.
In addition, some of our industrial activities are located in countries,
where corruption is generally seen. Corruption and sanctions risks remain
highly relevant for businesses operating in international markets as shown by
recent regulatory enforcement actions both inside and outside the resources
sector.
Comments/impacts to the Group – During the year:
1) Following the designation by the US Government (“USG”) of Dan Gertler
and affiliated companies as Specially Designated Nationals (SDNs),
thereby imposing blocking sanctions on them and companies owned 50% or
more by them, the Group had to consider whether it was able to satisfy
contractual obligations to make royalty and pas-de-porte payments in
respect of KCC and Mutanda. Following litigation processes and
negotiations, these obligations are now being satisfied other than in
US dollars and without the involvement of US persons, which Glencore
believes appropriately addresses all applicable sanctions regulations.
2) United Company Rusal plc was designated by the USG as a SDN, which led
to Mr Glasenberg resigning from his position as a director of Rusal and
required careful monitoring of the trading relationship with Rusal.
3) A dispute between Katanga Mining Limited (“KML”) and La Generales des
Carrieres et des Mines (“Gecamines”) led to a $5.6 billion
recapitalisation of KCC and additional settlement costs totalling $248
million, see note 33 of the financial statements.
4) On 3 July 2018, a subsidiary received a subpoena from the US Department
of Justice (DOJ) to produce documents and other records with respect to
compliance by the Group with the Foreign Corrupt Practices Act and US
money laundering statutes. The requested documents related to our
business in Nigeria, the DRC and Venezuela from 2007.
In the event that the DOJ investigation identifies wrong doing, the
costs to the Group, whether by way of legal fees, penalties, ongoing
monitoring, reputational or otherwise, could be material.
5) The Ontario Securities Commission (“OSC”) approved a settlement
pursuant to which KML, a subsidiary, acknowledged that it had (i)
misstated its financial position and results; (ii) failed to maintain
adequate disclosure and internal controls; (iii) failed to disclose
material weaknesses in its internal controls; and (iv) failed to
adequately describe the heightened risks associated with its operating
environment, specifically the elevated risk of corruption in the DRC
and its reliance on individuals and entities associated with Dan
Gertler. Adverse findings were also made against certain of its former
directors and officers (“FDOs”).
KML agreed to make voluntary payments to the OSC totalling C$30m and to
submit to a review by an independent consultant of its metal
accounting. The FDOs have been subjected to fines and costs orders and
director and officer bans of up to C$2.5m and six years.
6) In December 2018, investigations were commenced relating to
transactions in Brazil with Petrobras by a number of trading companies,
including Glencore.
7) Other investigations concerning Glencore which commenced during the
year include an investigation by PRC authorities into shipments of lead
materials into China.
8) See Risk 3 concerning adverse tax matters.
Mitigating factors - We seek to ensure compliance through our commitment to
complying with or exceeding the laws and external requirements applicable to
our operations and products and through monitoring of legislative
requirements, engagement with government and regulators, and compliance with
the terms of permits and licences.
We seek to mitigate the risk of breaching applicable laws and external
requirements through our risk management framework which is described on page
104. The Group has dedicated Legal and Compliance resources in place and
internal policies, procedures and control with compliance to assist Group
businesses. Furthermore, the Group conducts training and awareness, with
active monitoring. However, there can be no assurance that such policies,
procedures and controls will adequately protect the Group against fraud,
corruption, sanctions breaches or other unlawful activities.
In response to the heightened risks, the Board has established a committee
that focuses on monitoring ethics and compliance, and seeking to ensure that
business practices are aligned with the Company’s culture, see page 100.
5. Liquidity
Risk movement in 2018 – Stable
Risk appetite - Low. It is the Group’s policy to operate a BBB rating or
above balance sheet and to ensure that a minimum level of cash and/or
committed funding is available at any given time.
Risk description - Our failure to access funds (liquidity) would severely
limit our ability to engage in desired activities.
Liquidity risk is the risk that we are unable to meet our payment obligations
when due, or are unable, on an ongoing basis, to borrow funds in the market
at an acceptable price to fund our commitments. While we adjust our minimum
internal liquidity threshold from time to time in response to changes in
market conditions, this minimum internal liquidity target may be breached due
to circumstances we are unable to control, such as general market
disruptions, sharp movements in commodity prices or an operational problem
that affects our suppliers, customers or ourselves.
Comments/impacts to the Group - A lack of liquidity may mean that we will not
have sufficient funds available for our marketing and industrial activities,
both of which employ substantial amounts of capital. If we do not have funds
available for these activities then they will decrease.
This is particularly the case during the current period when the US Federal
Reserve and European Central Bank are adopting tighter monetary policies,
which could lead to the credit markets contracting and becoming more
expensive.
Note 26 details our financial and capital risk management including liquidity
risk.
Note 28 details the fair value of our financial assets and liabilities.
Mitigating factors - In light of the Group’s extensive funding activities,
maintaining investment grade credit rating status is a financial priority.
The Group’s credit ratings are currently Baa2 (positive outlook) from Moody’s
and BBB+ (stable outlook) from Standard & Poor’s. Glencore’s publicly stated
objective, as part of its overall financial policy package, is to seek and
maintain strong Baa/BBB credit ratings from Moody’s and Standard & Poor’s
respectively. In support of this, Glencore targets a maximum 2x Net
debt/Adjusted EBITDA ratio through the cycle, augmented by an upper Net debt
cap of ~$16 billion. This financial policy facilitates access to funds, even
in periods of market volatility.
The Financial Review on page 52 sets out the Group’s Net Funding and Net Debt
in 2018. However, it should be noted that the credit ratings agencies apply a
haircut to the value of our RMI, such that their calculated net debt is
higher.
We remain cognisant that access to credit is vital and that market conditions
can change rapidly. As such, we have over the years reduced our bond
portfolio significantly and optimised our bond debt maturity profile to no
more than c.$3 billion of bonds maturing per annum.
As at 31 December 2018, the Group had available undrawn committed credit
facilities and cash amounting to $10.2 billion (31 December 2017: $12.8
billion), comfortably ahead of our $3 billion minimum prescribed level.
BUSINESS RISKS
6. Counterparty credit and performance
Risk movement in 2018 – Stable
Risk appetite - Low. Where possible, credit exposure is covered through
credit mitigation products.
Risk description - Financial assets consisting principally of receivables and
advances, derivative instruments and long-term advances and loans can expose
us to concentrations of credit risk..
Furthermore, we are subject to non-performance risk by our suppliers,
customers and hedging counterparties, in particular via our marketing
activities.
Comments/impacts to the Group - Non-performance by suppliers, customers and
hedging counterparties may occur and cause losses in a range of situations,
such as:
A significant increase in commodity prices resulting in suppliers being
unwilling to honour their contractual commitments to sell commodities
at pre-agreed prices
A significant reduction in commodity prices resulting in customers
being unwilling or unable to honour their contractual commitments to
purchase commodities at pre-agreed prices
Suppliers subject to prepayment or hedging counterparties may find
themselves unable to honour their contractual obligations due to
financial distress or other reasons
Mitigating factors - We monitor the credit quality of our counterparties and
seek to reduce the risk of customer non-performance by requiring credit
support from creditworthy financial institutions including making extensive
use of credit enhancement products, such as letters of credit, bank
guarantees and insurance policies. Specific credit risk policy rules apply to
open account risk with an established threshold for referral of credit
positions by departments to central management. In addition, note 26 details
our financial and capital risk management approach.
7. Operating
Risk movement in 2018 – Stable
Risk appetite - Low. It is the Company’s strategic objective to focus on its
people and to conduct safe, reliable and efficient operations.
Risk description - Our industrial activities are subject to numerous risks
and hazards normally associated with the initiation, development, operation
and/or expansion of natural resource projects, many of which are beyond our
control. These include unanticipated variations in grade and other geological
problems (so that anticipated or stated reserves, may not conform to
expectations). Other examples include natural hazards, processing problems,
technical malfunctions, unavailability of materials and equipment,
unreliability and/or constraints of infrastructure, industrial accidents,
labour force challenges, disasters, protests, force majeure factors, cost
overruns, delays in permitting or other regulatory matters, vandalism and
crime.
The maintenance of positive employee and union relations and the ability to
attract and retain skilled workers, including senior management, are key to
our success. This attraction and retention of highly qualified and skilled
personnel can be challenging, especially, but not only, in locations
experiencing political or civil unrest, or in which they may be exposed to
other hazardous conditions.
Comments/impacts to the Group - The development and operating of assets may
lead to future upward revisions in estimated costs, delays or other
operational difficulties or damage to properties or facilities. This may
cause production to be reduced or to cease and may further result in personal
injury or death, third party damage or loss or require greater infrastructure
spending. Also, the realisation of these risks could require significant
additional capital and operating expenditures.
Some of the Group’s interests in industrial assets do not constitute
controlling stakes. Although the Group has various structures in place which
seek to protect its position where it does not exercise control, these other
shareholders may have interests or goals that are inconsistent with ours.
They may take action contrary to the Group’s interests or be unable or
unwilling to fulfil their obligations.
Infrastructure availability remains a key risk, e.g. availability of
continuous high-voltage power to our copper operations in the Democratic
Republic of Congo. We are continuing to monitor the progress of long-term
power solutions via the Inga dam refurbishment.
Many employees, especially at the Group’s industrial activities, are
represented by labour unions under various collective labour agreements.
Their employing company may not be able to satisfactorily renegotiate its
collective labour agreements when they expire and may face tougher
negotiations or higher wage demands than would be the case for non-unionised
labour. In addition, existing labour agreements may not prevent a strike or
work stoppage.
Mitigating factors - Development and operating risks and hazards are managed
through our continuous project status evaluation and reporting processes and
ongoing assessment, reporting and communication of the risks that affect our
operations along with updates to the risk register.
We publish quarterly our production results and annually our assessment of
reserves and resources based on available drilling and other data sources.
Conversion of resources to reserves and, eventually, reserves to production
is an ongoing process that takes into account technical and operational
challenges, economics of the particular commodities concerned and the impact
on the communities in which we operate.
Local cost control measures are complemented by global procurement that
leverages our scale to seek to achieve favourable terms on high-consumption
materials such as fuel, explosives and tyres.
Details of the significant impairments recorded during the year are contained
in note 6. Deterioration in the price outlook or operating difficulties may
result in additional impairments.
One of the key factors in our success is a good and trustworthy relationship
with our people. This priority is reflected in the principles of our
sustainability programme and related guidance, which require regular, open,
fair and respectful communication, zero tolerance for human rights
violations, fair remuneration and, above all, a safe working environment, as
outlined on our website at: glencore.com/careers/our-culture and in the Our
People section on page 47.
8. Cyber
Risk movement in 2018 – Stable
Risk appetite - Low. Where possible, cyber exposure risks are mitigated
through layered cyber security, proactive monitoring and routine penetration
testing to confirm security of systems.
Risk description - Cyber risks for firms have increased significantly in
recent years owing in part to the proliferation of new digital technologies,
increasing degree of connectivity and a material increase in monetisation of
cyber-crime.
A cyber security breach, incident or failure of Glencore’s IT systems could
disrupt our businesses, put employees at risk, result in the disclosure of
confidential information, damage our reputation and create significant
financial and legal exposures.
Although Glencore invests heavily to monitor, maintain and regularly upgrade
its systems, processes and networks, absolute security is not possible.
Comments/impacts to the Group - Our activities depend on technology for
industrial production, efficient operations, environmental management, health
and safety, communications, transaction processing and risk management.
We recognise that the increasing convergence of IT and Operational Technology
(OT) networks will create new risks and demand additional management time and
focus. We also depend on third parties in long supply chains that are exposed
to the same cyber risks but which are largely outside our control.
On 25 May 2018, the General Data Protection Regulation (GDPR) came into force
across the European Union (EU) and the European Economic Area (EEA) which
required us to verify that our systems and processes are compliant.
Our IT security monitoring platforms frequently detect attempts to breach our
networks and systems. During 2018, none of these events resulted in a
material breach of our IT environment nor resulted in a material business
impact.
Mitigating factors - We have invested in global IT security platforms in
order to proactively monitor and manage our cyber risks. We conduct routine
third party penetration tests to independently confirm the security of our IT
systems and we seek to enhance monitoring of our Operational Technology (OT)
platforms. We publish security standards and educate our employees in order
to raise awareness of cyber security threats.
We have started a programme to evaluate the cyber security posture of third
parties that hold materially sensitive information about Glencore.
Our IT Security Council sets the global cyber security strategy, conducts
regular risk assessments and designs cyber security solutions that seek to
defend against emerging malware, virus, vulnerabilities and other cyber
threats. Our Cyber Defence Centre is responsible for day-to-day monitoring of
cyber vulnerabilities across the world and driving remediation of threats.
We have an incident response team that is responsible for coordinating the
response in the event of a major cyber incident.
SUSTAINABILITY RISKS
9. Climate change
Risk movement in 2018 – Increase
Risk appetite - High. Our business involves producing and consuming fossil
fuels along with processing minerals which inevitably entails emitting
harmful emissions.
Risk description - Climate change is a material issue that affects our
business and creates both risks and opportunities. As a significant producer
and consumer of energy products, energy is a key input and cost to our
business as well as being a material source of our carbon emissions.
Proposals for a transition to a low-carbon economy and its associated public
policy development, may increase costs for fossil fuels, impose levies for
emissions and increase costs for monitoring and reporting and to reduce
demand for our energy products. Third parties, including potential or actual
investors, may also introduce policies adverse to the Company due to its
interest in fossil fuels.
A number of national governments have already introduced, or are
contemplating the introduction of regulatory responses to greenhouse gas
emissions. This includes countries where we have assets such as Australia,
Canada and Chile, as well as customer markets such as China, India and
Europe.
Climate change may increase physical risks to our industrial assets, largely
driven from water related risks such as flooding or water scarcity.
Comments/impacts to the Group - Many developed countries are pledging to stop
using fossil fuels (specifically coal) in power generation. In December 2018,
global investors collectively representing $11.5tn have set out their
requirements to investee power companies to set out transition plans
consistent with the goal of the Paris Agreement. They also expect explicit
time lines and commitments for the rapid elimination of coal use by utilities
in EU and OECD countries by 2030.
As a result of these factors, some other market participants and analysts
have a more bearish view (some strongly so) in relation to coal and oil and
believe that many fossil fuel assets could become “stranded”, i.e. no longer
capable of operating for an economic return with the capital invested being
irretrievably lost. Some investors may not invest in our shares or divest
their holdings due to our significant operations in fossil fuels.
This is particularly relevant for us as the world’s largest producer of
seaborne thermal coal and a significant marketer of fossil fuels. We are one
of the major producers of key metals (including copper, cobalt, nickel) that
are currently essential for electric vehicles and the transition to a low-
carbon economy, although technological change may over time reduce their
requirement.
Mitigating factors - Through our sustainability programme, we strive to
ensure emissions and climate change issues are identified, understood and
monitored in order to meet international best practice standards and ensure
regulatory compliance.
We openly and transparently disclose our energy and carbon emissions
footprint. This supports our identification, understanding and monitoring of
emissions and climate change issues.
We seek to manage our coal business tightly around cash generation, including
ensuring that ongoing/further investment has relatively quick cost pay-backs
so as to mitigate “stranded-assets” risk.
We review and analyse high-level climate change trends, including regulatory
compliance and physical and reputational impacts for our operating regions.
We monitor revisions to energy and carbon scenarios and their potential
impact on our business.
Following engagement with investor signatories of the Climate Action 100+
initiative, we have furthered our commitment to a low-carbon economy, amongst
others by limiting our coal production capacity broadly to current levels.
Please refer to pages 20–21 for further details.
Our internal, cross-function and multi-commodity working group, led by our
Chairman, co-ordinates our understanding and planning for the effects of
climate change on our business, as well as the steps we need to put in place
to meet our group-wide carbon emission intensity reduction target of 5% on
2016 levels by 2020. We are continuing to invest in a range of emission
reduction projects.
We participate in a wide range of public policy discussions on carbon and
energy issues and seek to ensure that there is a balanced debate with regard
to the ongoing use of fossil fuels.
Further information is available at glencore.com/sustainability/climate-
change
10. Community relations and human rights
Risk movement in 2018 – Stable
Risk appetite - Low. It is our policy to ensure we proactively engage with
local communities to maintain our social licence to operate.
Risk description - Our operations have a significant effect on our workforce,
and surrounding communities and on society as a whole. We recognise the
contribution our business activities make to the national and local economies
in which we operate. As a result, the continued success of our existing
operations and our future projects are in part dependent on broad support and
a healthy relationship with the communities surrounding our operations as
well as our ability to promote diversified and resilient local economies.
Comments/impacts to the Group - A perception that we are not respecting human
rights or generating local sustainable benefits could have a negative impact
on our “social licence to operate”, our ability to secure access to new
resources and our financial performance. The consequences of adverse
community reaction or allegations of human rights incidents could also have a
material adverse impact on the cost, profitability, ability to finance or
even the viability of an operation and the safety and security of our
workforce and assets. Locally based events could escalate to disputes with
regional and national governments as well as with other stakeholders and
potentially result in reputational damage and social instability that may
affect the perceived and real value of our assets..
Mitigating factors - We take a proactive and strategic approach to our
stakeholder and community engagement. We support the advancement of the
interests of both our host communities and our assets. We take a cross-
functional approach to understanding and managing our socio-economic
contributions to deliver shared value while managing our impact on society.
We uphold and respect the human rights of our people and our local
communities. Where we may cause adverse impacts on our stakeholders, we seek
to apply relevant international standards to understand, control and mitigate
the impact. We also seek to apply the Voluntary Principles on Security and
Human Rights in regions where there is a high risk to human rights.
We seek to make our grievance mechanisms available to the community members
impacted by our operations. We review all complaints received and take
actions when necessary to address the issues raised.
Further information is available on our website at:
glencore.com/sustainability/community-and-human-rights
11. Health, safety, environment
Risk movement in 2018 – Increase
Risk appetite - Low. It is our policy to ensure we comply with or exceed the
health, safety and environmental laws and external requirements applicable to
our operations and products.
Risk description - We are committed to ensuring the safety and wellbeing of
our people and the communities and environment around us. Catastrophic events
that take place in the natural resource sector can have disastrous impacts on
workers, communities, the environment and corporate reputation, as well as a
substantial financial cost.
The success of our business is dependent on a safe and healthy workforce.
Managing risks to the safety and health of our people is essential for their
long-term wellbeing. It also helps us to maintain our productivity and reduce
the likelihood of workplace compensation claims.
Our operations at assets around the world can have direct and indirect
impacts on the environment. Our ability to manage and mitigate these impacts
may result in the loss of our operating licences as well as affecting future
projects and acquisitions.
Our operations are often sited close to communities with limited healthcare.
Local health services might be in the early stages of development, or local
authorities may not have the resources to cope with the scale of need.
Comments/impacts to the Group – Our diversity, in terms of geographical
locations, working conditions, organisational cultures and workforce, means
that we need to take a local approach to transforming attitudes towards
catastrophic hazard management, including safety and health practices as well
as resolving environmental challenges.
Environmental, safety and health regulations may result in increased costs
or, in the event of non-compliance or incidents causing injury or death or
other damage at or to our facilities or surrounding areas may result in
significant losses. These include, those arising from (1) interruptions in
production, litigation and imposition of penalties and sanctions and (2)
having licences and permits withdrawn or suspended while being forced to
undertake extensive remedial clean-up action or to pay for government-ordered
remedial clean-up actions.
Liability may also arise from the actions of any previous or subsequent
owners or operators of the property, by any past or present owners of
adjacent properties, or by third parties.
A number of our assets are in regions with poor approaches towards personal
safety, little or no access to health facilities, and poor working
conditions, organisational cultures and workforce. As a result, we need to
take a flexible local approach to transforming our workforces’ safety and
health attitudes and culture.
We recognise the contribution a healthy community makes towards the
robustness of our production processes. Community members are often our
employees, contractors, procurement partners and service providers. We work
with local authorities, local community representatives and other partners,
such as NGOs, to help to overcome major public health issues in the regions
where we work, such as HIV/AIDS, malaria and tuberculosis.
We regret that we recorded thirteen fatalities at our operations in 2018.
Mitigating factors – Our approach to sustainability and our expectations of
our workers and our business partners are outlined in our sustainability
framework. This underpins our approach towards social, environmental, safety
and compliance indicators, providing clear guidance on the standards we
expect all our operations to achieve. Through the reporting function within
the programme, our Board and senior management receive regular updates and
have a detailed oversight on how our business is performing across all of the
sustainability indicators.
We monitor catastrophic risks, in particular, across our portfolio and
operate emergency response programmes.
Compliance with international and local regulations and standards is a
requirement.
We remain focused on the significant risks facing our industry arising from
operational catastrophes such as the tailings dam collapses in Canada (Mount
Polley) and in Brazil (Samarco and Brumadinho) in the last five years, and
mine wall collapses at our operations in DRC and Colombia. Tailing dams in
particular remain a significant risk and will be a greater area of focus via
our dam safety assurance programme, regular surveillance/inspections and
verification of all corrective actions taken. We seek to learn from these
events, and proactively assess our exposure to similar incidents and
implement measures to avoid these.
Considerable ongoing investment continues in the Group’s SafeWork health and
safety programme.
See also the Sustainability review on page 36 and the HSEC Committee report
on page 112.
Further details will also be published in our 2018 sustainability report.
Related Party Transactions
The following has been extracted from page 207 of the 2018 Annual Report.
In the normal course of business, Glencore enters into various arm’s length
transactions with related parties, including fixed price commitments to sell
and to purchase commodities, forward sale and purchase contracts, agency
agreements and management service agreements. Outstanding balances at period
end are unsecured and settlement occurs in cash (see notes 11, 13 and 24).
There have been no guarantees provided or received for any related party
receivables or payables.
All transactions between Glencore and its subsidiaries are eliminated on
consolidation along with any unrealised profits and losses between its
subsidiaries, associates and joint ventures. In 2018, sales and purchases
with associates and joint ventures amounted to $1,690 million (2017: $1,859
million) and $5,744 million (2017: $7,485 million) respectively.
Remuneration of key management personnel
Glencore’s key management personnel are the members of the Board of
Directors, CEO, CFO and the heads of the operating segments. The remuneration
of Directors and other members of key management personnel recognised in the
consolidated statement of income including salaries and other current
employee benefits amounted to $22 million (2017: $22 million). There were no
other long-term benefits or share-based payments to key management personnel
(2017: $Nil). Further details on remuneration of Directors are set out in the
Directors’ remuneration report on page 113.
Statement of Directors’ responsibilities
The following responsibility statement is repeated here solely for the
purpose of complying with DTR 6.3.5. This statement relates to and is
extracted from page 121 of the 2018 Annual Report.
The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for the
Company for each financial year.
The financial statements are prepared in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board and International Financial Reporting Standards as adopted
for use in the European Union (together “IFRS”). The financial statements are
required by law to be properly prepared in accordance with the Companies
(Jersey) Law 1991. International Accounting Standard 1 requires that
financial statements present fairly for each financial year the Company’s
financial position, financial performance and cash flows. This requires the
faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the International
Accounting Standards Board’s “Framework for the preparation and presentation
of financial statements”.
In virtually all circumstances,a fair presentation will be achieved by
compliance with all applicable IFRSs. However, the Directors are also
required to:
Properly select and apply accounting policies
Present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information
Provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions on
the entity’s financial position and financial performance
Make an assessment of the Company’s ability to continue as a going
concern
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with
the Companies (Jersey) Law 1991. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities. The Directors are
responsible for the maintenance and integrity of the corporate and financial
information included on the Company’s website. The legislation governing the
preparation and dissemination of the Company’s financial statements may
differ from legislation in other jurisdictions.
Signed on behalf of the Board
John Burton
Company Secretary
1 March 2019
For further information please contact:
Investors
Martin Fewings t: +41 41 709 m: +41 79 737 martin.fewings@glencore.com
Ash Lazenby 2880
t: +41 41 709 5642
m: +41 79 543 ash.lazenby@glencore.com
Media 2714 3804
Charles Watenphul t: +41 41 709 24 m: +41 79 904 33 charles.watenphul@glencore.com
62 20
Company Secretarial
John Burton t:+41 41 709 m: +41 79 944 john.burton@glencore.com
Nicola Leigh 2619 41 709
t:+41 5434
m: +41 79 735 nicola.leigh@glencore.com
Lionel Mateo 2755 +41 41 7093916 +41 79 152lionel.mateo@glencore.com
t: m:
2847 0905
www.glencore.com
Glencore LEI: 2138002658CPO9NBH955
Notes for Editors
Glencore is one of the world’s largest global diversified natural resource companies
and a major producer and marketer of more than 90 commodities. The Group's operations
comprise around 150 mining and metallurgical sites, oil production assets and
agricultural facilities.
With a strong footprint in both established and emerging regions for natural
resources, Glencore's industrial and marketing activities are supported by a global
network of more than 90 offices located in over 50 countries.
Glencore's customers are industrial consumers, such as those in the automotive, steel,
power generation, oil and food processing sectors. We also provide financing,
logistics and other services to producers and consumers of commodities. Glencore's
companies employ around 158,000 people, including contractors.
Glencore is proud to be a member of the Voluntary Principles on Security and Human
Rights and the International Council on Mining and Metals. We are an active
participant in the Extractive Industries Transparency Initiative.
www.facebook.com/Glencore
www.flickr.com/photos/glencore
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www.linkedin.com/company/8518
www.slideshare.net/glencore
www.twitter.com/glencore
www.youtube.com/glencorevideos
Disclaimer
The companies in which Glencore plc directly and indirectly has an interest are separate and
distinct legal entities. In this document, “Glencore”, “Glencore group” and “Group” are used for
convenience only where references are made to Glencore plc and its subsidiaries in general. These
collective expressions are used for ease of reference only and do not imply any other
relationship between the companies. Likewise, the words “we”, “us” and “our” are also used to
refer collectively to members of the Group or to those who work for them. These expressions are
also used where no useful purpose is served by identifying the particular company or companies.
Sponsor
Absa Bank Limited (acting through its Corporate and Investment Banking Division)
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