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GLN - 2013 Annual Report of Glencore Xstrata plc
GLENCORE XSTRATA 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
18 March 2014
Glencore Xstrata plc
2013 Annual Report of Glencore Xstrata plc ("Glencore" or the "Company")
Glencore has today:
posted its Annual Report for the year ended 31 December 2013 ("2013 Annual Report")
on its website: www.glencorexstrata.com as required by DTR 6.3.5 R (3); and
submitted to the UK National Storage Mechanism, a copy of its 2013 Annual Report in
accordance with LR 9.6.1 R.
The 2013 Annual Report will shortly be available for inspection on the National Storage
Mechanism www.hemscott.com/nsm.do.
The Appendix to this announcement contains the following additional information which has been
extracted from the 2013 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 4 March 2014 (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 2013 Annual Report.
Page and note references in the text below refer to page numbers and notes in the 2013 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 18 - 31 of the 2013 Annual Report.
Managing risks and uncertainties in a manner that allows us to pursue business opportunities and
create shareholder value is a continuous challenge. Identifying, quantifying and managing risk is
complex and challenging. Risks can arise from factors and events outside of our control or from
operational and management activities.
Our risk management framework identifies and manages risk in a way that is supportive of our
strategic objectives of opportunistically deploying capital, while protecting our future financial
security and flexibility. Our approach towards risk management is underpinned by our
understanding of the risks that we are exposed to, our risk appetite and how our risks change over
time.
The Board and its Audit Committee are responsible for maintaining our risk management
framework and internal control processes and policies. The Board assesses and approves our
overall risk appetite, monitors our risk exposure and sets the group-wide limits, which are annually
reviewed. The purpose of our management of risks is to ensure that an appropriate balance is
maintained between the levels of risk assumed and expected return, while ensuring that fast,
highly commercial decision-making remains unhindered. The significant shareholdings held by a
number of key staff has created a strong culture around attitudes towards risks, which is further
supplemented with prescriptive norms where necessary.
During 2013, the acquisitions of Xstrata and Viterra did not significantly impact our risk profile as
the operations and associated risks and uncertainties acquired were consistent with the Group's
existing activities.
Competitive, economic, political, legal, regulatory, social, business and financial risks and
uncertainties all have the potential to significantly impact our business. Our principal risks, which
have been assessed according to materiality and likelihood, are detailed below. 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, results of
operations, financial condition and/or prospects. These principal risks and uncertainties should be
considered in connection with any forward looking statements in this document and the cautionary
statement.
EXTERNAL
Fluctuations in expected volumes of supply or demand for the commodities in which the
Group operates
The Group is dependent on the expected volumes of supply or demand for commodities in which
the Group is active, which can vary over time based on changes in resource availability,
government policies and regulation, costs of production, global and regional economic conditions,
demand in end markets for products in which the commodities are used, technological
developments, including 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.
IMPACT: Fluctuations in the volume of each commodity produced or marketed by the Group could
materially impact the Group's business, results of operations and earnings. These fluctuations
could result in a reduction or increase in the income generated in respect of the volumes handled
by the Group's marketing activities, or a reduction or increase in the volume and/or margin in
respect of commodities produced by the Group's industrial assets.
MITIGATION: The risk of fluctuations in demand for the commodities in which the Group markets
is managed by maintaining a diversified portfolio of commodities to market, reducing the impact of
movement in any one commodity market. Individual commodities, even apparently closely linked
products such as barley and wheat, have their own demand cycles reducing over-reliance on any
single product.
Fluctuations of commodity prices
The revenue and earnings of the Group's industrial asset activities and, to a lesser extent, its
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 and related
industry cycles and production costs in major producing countries.
IMPACT: Fluctuations in the price of commodities produced or marketed could materially impact
the Group's business, results of operations and earnings. The impacts that fluctuating commodity
prices have on the Group's business differ between its marketing activities and industrial activities.
Marketing activities: In a market environment in which prices for a particular commodity are higher
on average, the premiums/margins that the Group generates in its physical marketing operations
relating to such commodity as a result of geographical, time and quality imbalances tend to be
higher. The Group also generally benefits from fluctuating market prices, rather than long periods
of stable prices, as it seeks to physically arbitrage such resulting price differentials. As prices of
commodities rise, the Group generally has higher working capital financing requirements over the
same quantity of commodities in question. During periods of falling commodity prices, the opposite
applies in that the Group will require less working capital financing for its marketing activities.
Industrial activities: Higher prices will be particularly favourable to the profitability of the Group in
respect of those commodities which the Group produces at its industrial assets or are produced by
its associated companies and other investees. Similarly, low prices will negatively impact the
Group's industrial activities and could result in such activities incurring losses. A significant
downturn in the price of commodities generally results in a decline in the Group's profitability
during such a period and could potentially result in a devaluation of inventories and impairments.
Although the impact of a downturn on commodity prices affects the Group's marketing and
industrial activities differently, the negative impact on its industrial activities is generally greater, as
the profitability in the industrial activities is more directly exposed to price risk due to its higher
level of fixed costs, while the Group's marketing activities are ordinarily substantially hedged in
respect of price risk and principally operate a service-like margin-based model.
MITIGATION: The risk of fluctuations in commodity prices is managed by maintaining a diversified
portfolio of commodities, reducing the impact of movement to any individual commodity price. In
addition, the Group continuously reviews and looks to optimise its asset portfolio to ensure it is
sufficiently cost effective and efficient and a substantial portion of our inventory is either under
contract for sale at a pre-determined price or hedged through futures and options on commodity
exchanges or with highly rated counterparties. Therefore, at any one time, the commodity price
risk is restricted to a small proportion of the working capital balance.
Fluctuation in currency exchange rates
The vast majority of the Group's transactions are denominated in US dollars, while operating costs
are spread across several different countries the currencies of which fluctuate against the in US
dollar.
IMPACT: The vast majority of transactions undertaken by both the Group's marketing and
industrial activities are denominated in US dollars. However, the Group is exposed to fluctuations
in currency exchange rates:
- Through its industrial assets, because a large proportion of these assets are denominated in the
currency of the country in which each asset is located, the largest of such currency exposures
being to the Australian dollar, the Canadian dollar, the euro, the Kazakhstani tenge, the Chilean
peso, the Norwegian kroner, the South African rand, the Argentine peso, the Colombian peso and
the Peruvian sol;
- Through the costs of the Group's global office network, which are denominated largely in the
currency of the country in which each office is located, the largest of such currency exposures
being to the Swiss franc, the Australian dollar, the Canadian dollar, the South African rand, the
British pound and the euro; and
- Through its marketing activities, although only a small minority of purchases or sale transactions
are denominated in currencies other than US dollars.
Foreign exchange rates have seen significant fluctuation in recent years and a depreciation in the
value of the US dollar against one or more of the currencies in which the Group incurs significant
costs will therefore, to the extent it has not been hedged, result in an increase in the cost of these
operations in US dollar terms and could adversely affect the Group's financial results.
MITIGATION: The Group manages the risk of fluctuating currency exchanges rates by operating in
a number of different geographies and by hedging specific future non-US dollar denominated
commodity purchase or sale commitments.
Geopolitical risk
The Group operates and owns assets in a large number of geographic regions and countries some
of which are categorised as developing, complex and having unstable political or social climates
and, as a result, is exposed to a wide range of political, economic, regulatory and tax
environments. These environments are subject to change in a manner that may be materially
adverse for the Group, including changes to government policies and regulations governing
industrial production, foreign investment, price controls, import and export controls, tariffs,
subsidies, income and other forms of taxation (including policies relating to the granting of
advance rulings on taxation matters), nationalisation or expropriation of property, repatriation of
income, royalties, the environment and health and safety.
IMPACT: The geopolitical risks associated with operating in a large number of regions and
countries, if realised, could affect the Group's ability to manage or retain interests in its industrial
activities and could have a material adverse effect on the profitability, ability to finance or, in
extreme cases, viability of one or more of its industrial assets. Although the Group's industrial
assets are geographically diversified across various countries, disruptions in certain of its industrial
operations at any given time could have a material adverse effect on the Group.
MITIGATION: Geopolitical risk is managed through geographical diversification of commodities
and operations, continuous monitoring and dialogue through and with the Group's network of field
offices and a commitment to engage proactively with employees and the communities in which it
operates, in order to maintain and improve its licence to operate.
Compliance with laws and regulations
As a diversified production, sourcing, marketing and distribution company conducting complex
transactions globally, the Group is exposed to and subject to extensive laws and regulations
governing various matters. These include laws and regulations relating to bribery and corruption,
taxation, anti-trust, financial markets regulation, environmental protection, management and use of
hazardous substances and explosives, management of natural resources, licences over resources
owned by various governments, exploration, development of projects, production and postclosure
reclamation, the employment of expatriates, labour and occupational health and safety standards,
and historic and cultural preservation.
IMPACT: These laws and regulations may allow governmental authorities and private parties to
bring lawsuits based upon damages to property and injury to persons resulting from the
environmental, health and safety and other impacts of the Group's past and current operations,
and could lead to the imposition of substantial fines, penalties, other civil or criminal sanctions, the
curtailment or cessation of operations, orders to pay compensation, orders to remedy the effects of
violations and/or orders to take preventative steps against possible future violations. Moreover, the
costs associated with compliance with these laws and regulations are substantial. Any changes to
these laws or regulations or more stringent enforcement or restrictive interpretation of current laws
and regulations could cause additional expenditure (including capital expenditure) to be incurred or
impose restrictions on or suspensions of the Group's operations and delays in the development of
its properties. In addition, obtaining the necessary governmental permits can be a particularly
complex and time-consuming process and may involve costly undertakings. The duration and
success of permit applications are contingent on many factors, including those outside the Group's
control. Failure to obtain or renew a necessary permit could mean that such companies would be
unable to proceed with the development or continued operation of a mine or project, which, in turn,
may have a material adverse effect on the Group's business, results of operations, financial
condition and prospects.
MITIGATION: The Group is committed to complying with or exceeding the laws, regulations and
best practice guidelines applicable to its operations and products in the jurisdictions in which it
operates and through continuous monitoring of legislative requirements and engagement with
government and regulators, it strives to ensure full compliance.
Liquidity risk
The Group's failure to obtain funds could limit its ability to engage in desired activities and grow its
business.
Liquidity, or ready access to funds, is essential to the Group's businesses. Liquidity risk is the risk
that the Group is unable to meet its payment obligations when due, or that it is unable, on an
ongoing basis, to borrow funds in the market on an unsecured or secured basis at an acceptable
price to fund actual or proposed commitments. While the Group adjusts its minimum internal
liquidity targets in response to changes in market conditions, these minimum internal liquidity
targets may be breached due to circumstances it is unable to control, such as general market
disruptions, sharp increases in the prices of commodities or an operational problem that affects its
suppliers or customers or itself.
IMPACT: A lack of liquidity may mean that the Group will not have funds available to maintain or
increase its marketing activities and industrial activities.
Marketing activities: The Group's marketing activities employ significant amounts of working
capital to fund purchases of commodities for future delivery to its end customers, to meet margin
requirements under derivative contracts and to fund the acquisition and maintenance of certain
transport and storage assets which complement its marketing activities. Any inability to fund these
amounts of working capital may prevent the Group from maintaining its historic levels of marketing
activity or from increasing such levels in the future.
Industrial activities: The Group's industrial activities are capital intensive and the continued
funding of such activities is critical to maintain its ownership interests in its industrial assets, to
maintain production levels in periods when net operating cash flow is negative or insufficient to
cover capital expenditures, to increase production levels in the future in accordance with its
business plans and to grow its industrial activities through the acquisition of new assets. Any
inability to fund these operating and capital expenditure requirements may prevent the Group from
maintaining or growing its industrial activities' production output.
MITIGATION: The Group operates a policy of liquidity risk management, whereby it seeks to
maintain (via a minimum prescribed level) sufficient cash and cash equivalents and other sources
of committed funding available to meet anticipated and unanticipated funding needs.
MARKETING ACTIVITIES
Arbitrage opportunities
The Group's marketing activities are dependent, in part, on its ability to identify and take
advantage of arbitrage opportunities.
IMPACT: Many of the physical commodity markets in which the Group operates are fragmented or
periodically volatile. As a result, discrepancies generally arise in respect of the prices at which the
commodities can be bought or sold in different forms, geographic locations or time periods, taking
into account the numerous relevant pricing factors, including freight and product quality. These
pricing discrepancies can present the Group with arbitrage opportunities whereby the Group is
able to generate profit by sourcing, transporting, blending, storing or otherwise processing the
relevant commodities. Profitability of the Group's marketing activities is, in large part, dependent
on its ability to identify and exploit such arbitrage opportunities. A lack of such opportunities, for
example due to a prolonged period of pricing stability in a particular market, or an inability to take
advantage of such opportunities when they present themselves, because of, for example, a
shortage of liquidity or an inability to access required logistics assets or other operational
constraints, could adversely impact the Group's business, results of operations and financial
condition.
MITIGATION: The Group mitigates the risk of an inability to take advantage of arbitrage
opportunities or lack thereof by maintaining a diversified portfolio of products and through
informational advantages the Group enjoys via its global network, its sizeable market share and
logistics capabilities in many commodities enabling it to move quickly in response to arbitrage
opportunities afforded by fluctuations and disequilibrium in commodity markets.
Hedging strategy
The Group's hedging strategy may not always be effective, does not require all risks to be hedged
and may leave an exposure to basis risk.
IMPACT: The Group's marketing activities involve a significant number of purchase and sale
transactions across multiple commodities. To the extent the Group purchases a commodity from a
supplier and does not immediately have a matching contract to sell the commodity to a customer;
a downturn in the price of the commodity could result in losses to the Group. Conversely, to the
extent the Group agrees to sell a commodity to a customer and does not immediately have a
matching contract to acquire the commodity from a supplier, an increase in the price of the
commodity could result in losses to the Group, as it then seeks to acquire the underlying
commodity in a rising market. In the event of disruptions in the commodity exchanges or markets
on which the Group engages in hedging transactions, the Group's ability to manage commodity
price risk may be adversely affected and this could in turn materially adversely affect its business,
financial condition and results of operations.
In addition, there are no traded or bilateral derivative markets for certain commodities that the
Group purchases and sells, which limits the Group's ability to fully hedge its exposure to price
fluctuations for these commodities.
MITIGATION: In order to mitigate the risks in its marketing activities related to commodity price
fluctuations and potential losses, the Group has a policy, at any given time, of hedging
substantially all of its marketing inventory not already contracted for sale at pre-determined prices
through futures and swap commodity derivative contracts, either on commodities' exchanges or in
the over-the counter market.
In instances where there are no traded or bilateral derivative markets for certain commodities, the
Group's ability to hedge its commodity exposure is limited to forward contracts for the physical
delivery of a commodity or futures and swap contracts for a different, but seemingly related,
commodity.
Counterparty credit and performance risk
The Group, in particular via its marketing activities, is subject to non-performance risk by its
suppliers, customers and hedging counterparties.
IMPACT: Non-performance by the Group's suppliers, customers and hedging counterparties may
occur in a range of situations, such as:
- A significant increase in commodity prices could result in suppliers being unwilling to honour their
contractual commitments to sell commodities to the Group at preagreed prices;
- A significant reduction in commodity prices could result in customers being unwilling or unable to
honour their contractual commitments to purchase commodities from the Group at pre-agreed
prices;
- Customers may take delivery of commodities from the Group and then find themselves unable to
honour their payment obligations due to financial distress or any other reasons; and
- Hedging counterparties may find themselves unable to honour their contractual commitment due
to financial distress or other reasons.
Non-performance by a counterparty could have an adverse impact on the Group, results of
operations and financial condition, including by creating an unintended, unmatched commodity
price exposure.
In addition, financial assets consisting principally of cash and cash equivalents, marketable
securities, receivables and advances, derivative instruments and long-term advances and loans
could potentially expose the Group to concentrations of credit risk.
MITIGATION: The Group seeks to reduce the risk of customer nonperformance by requiring credit
support from creditworthy financial institutions including making extensive use of credit
enhancement products, such as letters of credit, insurance policies and bank guarantees, where
appropriate, and by imposing limits on open accounts extended. Whilst these limits are believed
appropriate based on current levels of perceived risk, there is a possibility that a protracted difficult
economic environment would negatively impact the quality of these exposures. In addition, mark-
to-market exposures in relation to hedging contracts are regularly and substantially collateralised
(primarily with cash) pursuant to margin arrangements put in place with such hedge
counterparties.
The Group actively monitors the credit quality of its counterparties, including the risk of non-
performance by suppliers and customers alike, through internal reviews, strong relationships and
industry experience and a credit scoring process which includes, where available, public credit
ratings.
Risk management policies and procedures
Identifying, quantifying and managing risk is complex and challenging and although it is the
Group's policy and practice to identify and, where appropriate and practical, actively manage such
risks to support its objectives in managing its capital and future financial security and flexibility, the
Group's policies and procedures may not adequately identify, monitor and quantify risk.
IMPACT: The Group's marketing activities are exposed to commodity price, foreign exchange,
interest rate, counterparty (including credit), operational, regulatory and other risks. The Group has
devoted significant resources to developing and implementing policies and procedures to manage
these risks and expects to continue to do so in the future. Nonetheless, the Group's policies and
procedures to identify, monitor and manage risks have not been fully effective in the past and may
not be fully effective in the future. Some of the Group's methods of monitoring and managing risk
are based on historical market behaviour that may not be an accurate predictor of future market
behaviour. Other risk management methods depend on evaluation of information relating to
markets, suppliers, customers and other matters that are publicly available or otherwise accessible
by the Group. This information may not in all cases be accurate, complete, up-to-date or properly
evaluated. Management of operational, legal and regulatory risk requires, among other things,
policies and procedures to properly record and verify a large number of transactions and events,
and these policies and procedures may not be fully effective in doing so.
Failure to mitigate all risks associated with the Group's business could have a material adverse
effect on the Group's business, results of operations and financial condition.
MITIGATION: The Group uses, among other techniques, Value-at-Risk, or VaR, as a key market
risk measurement technique for its marketing activities. VaR does not purport to represent actual
gains or losses in fair value on earnings to be incurred by the Group, nor does the Group expect
that VaR results are indicative of future market movements or representative of any actual impact
on its future results. VaR has certain limitations; notably, the use of historical data as a proxy for
estimating future events, market illiquidity risks and tail risks. While the Group recognises these
limitations and continuously refines its VaR analysis, there can be no assurance that its VaR
analysis will be an effective risk management methodology. Management of counterparty non-
payment risk is mitigated by substantial use of credit enhancement products, including letters of
credit, insurance and bank guarantees. Please refer to the Financial review for further explanation
on the use of VaR.
Supply of commodities from third parties
The Group purchases a portion of the physical commodities sold by its marketing activities from its
controlled industrial operations and associates. The remainder of the commodities sourced by its
marketing operations are purchased from third party suppliers and entities in which the Group has
a minority stake (excluding associates). The Group expects to continue to source commodities
from such third parties in the future. The Group is potentially exposed to both price and supply
risks with respect to commodities sourced from third parties and entities in which it holds a minority
stake. The Group is reliant on third parties to source the majority of the commodities purchased by
its marketing operations.
IMPACT: Any disruptions in the supply of product by factors such as weather and other natural
disasters, unexpected maintenance problems, collapse or damage to mines, labour disruptions
and changes in laws and regulations could adversely affect the Group's margins. The Group's
business, results of operations, financial condition and prospects could be materially adversely
impacted if it is unable to continue to source required volumes of commodities from its suppliers on
reasonable terms or at all.
MITIGATION: The Group sources product from a large range of suppliers (industrial assets and
third parties) and is not reliant on any one supplier to satisfy its performance. This enables the
Group to source alternative product in the event of supply disruption. The Group benefits from
investments in numerous communities and shared ownership with local entities that helps to
mitigate against some country specific risks.
Freight, storage, infrastructure and logistics support
The Group's marketing activities require access to significant amounts of freight, storage,
infrastructure and logistics support and it is exposed to increases in the costs thereof. In addition,
the Group often competes with other producers, purchasers or marketers of commodities or other
products for limited storage and berthing facilities at ports and freight terminals, which can result in
delays in loading or unloading the Group's products and expose the Group to significant delivery
interruptions.
IMPACT: Increases in the costs of freight, storage, infrastructure and logistics support or limitations
or interruptions in the supply chain which impedes the Group's ability to deliver its products on
time, could adversely affect the Group's business, results of operations or financial condition.
MITIGATION: The risk of disruptions to or limitations of freight, storage, infrastructure and logistics
support is mitigated through the Group's market position, global reach and its longstanding
relationships with third party suppliers of freight. These give the Group an advantage in ensuring
its commodity transport needs are met along with its investments in storage and logistic assets
such as vessels, oil terminals and tank farms, metals and other warehouses and grain silos.
INDUSTRIAL ACTIVITIES
Non-controlling stakes, joint ventures and strategic partnerships or agreements
Some of the Group's industrial assets are held through non-controlling stakes or joint ventures and
strategic partnership arrangements.
IMPACT: The Group does not control a number of its industrial investments. Although the Group
has various structures in place which seek to protect its position where it does not exercise control,
the boards of these companies may:
- Have economic or business interests or goals that are inconsistent with or are opposed to those
of the Group;
- Exercise veto rights or take shareholders' decisions so as to block actions that the Group
believes to be in its best interests and/or in the best interests of all shareholders;
- Take action contrary to the Group's policies or objectives with respect to investments or
commercial arrangements; or
- As a result of financial or other difficulties be unable or unwilling to fulfil their obligations under
any joint venture or other agreement, such as contributing capital to expansion or maintenance
projects. Improper management or ineffective policies, procedures or controls of a non-controlled
entity could adversely affect the business, results of operations and financial condition of the
relevant investment and, therefore, of the Group.
MITIGATION: Where projects and operations are controlled and managed by the Group's co-
investors or where control is shared on an equal basis, the Group actively participates in the
governance structures of the co-managed operation to ensure, where possible, with the Group's
policies and/or objectives.
Project development
The Group has a number of significant expansions planned for its existing operations and plans for
certain new projects, the development of which is exposed to a number of risks outside of its
control such as technical uncertainties, infrastructure constraints, cost overruns, insufficient labour
skills or resources and delays in permitting or other regulatory matters.
IMPACT: Any future upward revisions in estimated project costs, delays in completing planned
expansions, cost overruns, suspension of current projects or other operational difficulties after
commissioning, may have a material adverse effect on the Group's business, results of operations,
financial condition or prospects, in turn requiring the Group to consider delaying discretionary
expenditures, including capital expenditures, or suspending or altering the scope of one or more of
its development projects.
MITIGATION: Project development risks are mitigated and managed through the Group's
continuous project status evaluation and reporting processes, the significant focus of such being
appropriate approval processes and transparent and timely reporting of costs and progress
relative to plan. Significant projects are regularly audited against the project plan and reporting
processes.
Operating risks and hazards
The Group's industrial activities are subject to numerous operating risks and hazards normally
associated with the development and operation of natural resource projects, many of which are
beyond the Group's control. These operating risks and hazards include unanticipated variations in
grade and other geological problems, seismic activity, climatic conditions such as flooding or
drought, metallurgical and other processing problems, technical failures, unavailability of materials
and equipment, interruptions to power supplies, industrial actions or disputes, industrial accidents,
labour force disruptions, unanticipated logistical and transportation constraints, tribal action or
political protests, force majeure factors, environmental hazards, fire, explosions, vandalism and
crime.
IMPACT: These risks and hazards could result in damage to, or destruction of, properties or
production facilities, may cause production to be reduced or to cease at those properties or
production facilities, may result in a decrease in the quality of the products, personal injury or
death, environmental damage, business interruption and legal liability and may result in actual
production differing from estimates of production.
The realisation of such operating risks and hazards and the costs associated with them could
materially adversely affect the Group's business, results of operations and financial condition,
including by requiring significant capital and operating expenditures to abate the risk or hazard,
restore the Group or third party property, compensate third parties for any loss and/or pay fines or
damages.
MITIGATION: Operating risks and hazards are managed through the Group's continuous
assessment, reporting and communication of the risks that affect its business through its annual
risk review processes and updates to its risk register. In addition, risk is mitigated somewhat
through geographic and multiple project diversification.
Title to the land, resource tenure and extraction rights
The Group has industrial investments in certain countries where title to land and rights in respect
of land and resources (including indigenous title) has not been and may not always be clear,
creating the potential for disputes over resource development. Title to the Group's mining and
hydrocarbon rights may be challenged or impugned, and title insurance may not generally be
available. In many cases, the government of the country in which a particular asset is located is
the sole authority able to grant such rights and, in some cases, may have limited infrastructure and
limited resources which may constrain the Group's ability to ensure that it has obtained secure title
to individual exploration licences or extraction rights.
IMPACT: Any dispute, relating to a material industrial asset, could disrupt or delay relevant mining,
processing or other projects and/or impede the Group's ability to develop new industrial properties,
which may have a material adverse effect on the Group's business, results of operations and
financial condition.
MITIGATION: Title and tenure risks are managed through geographical diversification of
commodities and operations, continuous monitoring and dialogue through and with the Group's
network of local offices and a commitment to engage proactively with employees, governments
and the communities in which the Group operates to maintain and better its licence to operate.
Availability of infrastructure
The production, processing and product delivery capabilities of the Group's industrial assets rely
on their infrastructure being adequate and remaining available.
IMPACT: The mining, drilling, processing, development and exploration activities of the industrial
assets in which the Group holds an interest depend on adequate infrastructure. Certain of these
assets are located in areas that are sparsely populated and difficult to access. Reliable roads,
power sources, transport infrastructure and water supplies are essential for the conduct of these
operations and the availability and cost of these utilities and infrastructure affect capital and
operating costs and therefore the Group's ability to maintain expected levels of production and
results of operations. Unusual weather or other natural phenomena, sabotage or other interference
in the maintenance or provision of such infrastructure could impact the development of a project,
reduce production volumes, increase extraction or exploration costs or delay the transportation of
raw materials to the mines and projects and commodities to end customers. Any such issues
arising in respect of the infrastructure supporting or on the Group's sites could have a material
adverse effect on the Group's business, results of operations, financial condition and prospects.
MITIGATION: Availability of infrastructure risk is mitigated through long-term supply agreements
and the continuous monitoring through the Group's network of local offices, and a commitment to
engage proactively with governments and the communities in which the Group operates to
maintain and improve its licence to operate. In addition, where appropriate, we establish back-up
sources of power.
Cost control
As commodity prices are outside of the Group's control, the competitiveness and sustainable long-
term profitability of its industrial asset portfolio depends significantly on its ability to closely manage
costs and maintain a broad spectrum of low-cost, efficient operations. Costs associated with the
operation of the Group's industrial assets can be broadly categorised into labour costs and other
on-site expenses, including power and equipment costs.
IMPACT: Production costs are heavily influenced by the extent of ongoing development required,
ore grades, mine planning, processing technology, logistics, energy and supply costs and the
impact of exchange rate fluctuations on costs of operations. All of the Group's industrial assets
are, to varying degrees, affected by increases in costs for labour and fuel. Unit production costs
are also significantly affected by production volumes and therefore production levels are frequently
a key factor in determining the overall cost competitiveness of the Group's industrial activities. Any
increase in input costs will adversely affect the Group's results of operations and financial
condition.
MITIGATION: Maintaining costs and, where possible, lowering them is supported by the Group's
continuous reporting on these measures, coupled with the inclusion of certain cost control
evaluation measures in assessing management performance. In addition, risk is mitigated
somewhat through geographic and multiple project diversification.
Resources and reserves
The Group's stated mineral, coal and hydrocarbon reserves, resources and mineralised potential
are only estimates and the anticipated volumes or grades may not be achieved.
IMPACT: Actual reserves, resources or mineralised potential may not conform to geological,
metallurgical or other expectations, and the volume and grade of ore or product recovered may be
below the estimated levels. Lower market prices, increased production costs, reduced recovery
rates and other factors may render the Group's reserves, resources or mineralised potential
uneconomical to exploit and may result in revision of its reserve estimates from time to time. If the
Group's actual mineral, coal and hydrocarbon reserves and resources are less than current
estimates or if the Group fails to develop its resource base through the realisation of identified or
new mineral potential, the Group's business, results of operations and financial condition may be
materially and adversely affected.
The Group updates annually the quantity and quality of the estimated proven and probable
reserves to reflect extraction, additional drilling and other available data in accordance with
internationally recognised reporting frameworks, including JORC, SAMREC and PRMS.
Environmental hazards
The processes and chemicals used in the Group's extraction and production methods, as well as
its shipping and storage activities, are subject to environmental hazards.
IMPACT: Where the Group holds or has interests in industrial activities, these assets are generally
subject to environmental hazards as a result of the processes and chemicals used in traditional
extraction, production, storage, disposal and transportation methods. Environmental hazards may
exist on the Group's owned or leased properties or at those of the industrial activities in which it
holds an interest, or may be encountered while its products are in transit. The storage of tailings at
the Group's industrial assets may present a risk to the environment, property and persons, where
there remains a risk of leakage from or failure of the Group's tailings dams, as well as theft and
vandalism during the operating life of the assets or after closure.
Additionally, the Group conducts oil exploration and drilling activities and also stores and
transports crude oil and oil products around the world. Damage to exploration or drilling
equipment, a vessel carrying oil or a facility where oil is stored could lead to a spill, causing
environmental damage with significant clean-up or remediation costs.
The Group may be liable for losses associated with environmental hazards, have its licences and
permits withdrawn or suspended or may be forced to undertake extensive remedial clean-up
action or to pay for government-ordered remedial clean-up actions, even in cases where such
hazards have been caused by any previous or subsequent owners or operators of the property, by
any past or present owners of adjacent properties, by independent third party contractors providing
services to the Group or by acts of vandalism by trespassers. Any such losses, withdrawals,
suspensions, actions or payments may have a material adverse effect on the Group's business,
results of operations and financial condition.
MITIGATION: Compliance with international and local regulations and standards, protecting our
people, communities and the environment from harm and our operations from business
interruptions are top priorities for the Group. The Group's operating procedures and those of its
partners in relation to owned tankers conform to industry best practise working under the
guidelines of the International Maritime Organisation (IMO), relevant Flag States and top tier
Classification societies. Tankers chartered from third parties are required to meet strict vetting
inspection requirements in line with OCIMF (Oil Companies International Marine Forum) and the
Group's own standards. The Group's oil exploration activities engage best industry practises and
procedures and utilise first class drilling contractors with proven expertise and experience.
Additionally, wide-spread and comprehensive insurance cover is actively procured, to reduce the
financial impact of operational risks, property damage, business interruption and environmental
liabilities to the extent possible.
SUSTAINABLE DEVELOPMENT
Emissions and climate change regulation
The Group's global presence exposes it to a number of jurisdictions in which regulations or laws
have been or are being considered to limit or reduce emissions. The likely effect of these changes
will be to increase the cost for fossil fuels, impose levies for emissions in excess of certain
permitted levels and increase administrative costs for monitoring and reporting.
IMPACT: Increasing regulation of greenhouse gas emissions, including the progressive
introduction of carbon emissions trading mechanisms and tighter emission reduction targets is
likely to raise production, transportation and administrative costs. In addition, regulation of
greenhouse gas emissions in the jurisdictions of the Group's major customers and in relation to
international shipping could also have a material adverse effect on the demand for some of the
Group's products.
MITIGATION: The Group, through its sustainability programme, strives to ensure emissions and
climate change issues are identified, understood and effectively managed and monitored in order
to meet international best practice standards and ensure regulatory compliance.
Community relations
The continued success of the Group's existing operations and its future projects are in part
dependent upon broad support and a healthy relationship with the respective local communities.
IMPACT: If it is perceived that the Group is not respecting or advancing the economic and social
progress and safety of the communities in which it operates, the Group's reputation and
shareholder value could be damaged, which could have a negative impact on its ‘‘social licence to
operate'', its ability to secure access to new resources and its financial performance. The
consequences of negative community reaction could also have a material adverse impact on the
cost, profitability, ability to finance or even the viability of an operation. Such events could lead to
disputes with national or local governments or with local communities or any other stakeholders
and give rise to material reputational damage. If the Group's operations are delayed or shut down
as a result of political and community instability, its earnings may be constrained and the long-term
value of its business could be adversely impacted. Even in cases where no action adverse to the
Group is actually taken, the uncertainty associated with such political or community instability
could negatively impact the perceived value of the Group's assets and industrial investments and,
consequently, have a material adverse effect on the Group's financial condition.
MITIGATION: The Group believes that the best way to manage these vital relationships is to
adhere to the principles of open dialogue and co-operation and in doing so, it engages with local
communities to present and demonstrate the positive contribution to socioeconomic development
of the Group's local operations and ensure that appropriate measures are taken to prevent or
mitigate possible adverse effects on them, along with the regular reporting of such.
Employees
The maintenance of positive employee and union relations and the ability to attract and retain
skilled workers are key to the success of the Group.
IMPACT: Some of the Group's employees, as well as employees in non-controlled industrial
investments, are represented by labour unions under various collective labour agreements. The
Group or the industrial investments in which it holds an interest 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 at its facilities in the future, and any
strike or other work stoppage could have a material adverse effect on the Group's business,
results of operations and financial condition.
MITIGATION: The success of the Group's business is also dependent on its ability to attract and
retain highly effective marketing and logistics personnel as well as highly qualified and skilled
engineers and other industrial, technical and project experts to operate its industrial activities in
locations experiencing political or civil unrest, or in which they may be exposed to other hazardous
conditions. The Group may not be able to attract and retain such qualified personnel and this could
have a material adverse effect on the Group's business, results of operations and financial
condition. The Group understands that one of the key factors in its success is a good and
trustworthy relationship with its people. This priority is reflected in the principles of its corporate
practice and its 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.
Health, safety and environment
The Group's operations are subject to health, safety and environmental regulations and legislation
along with complying with the Group's corporate sustainability framework.
IMPACT: New or amended environmental, health and safety legislation or regulations may result in
increased operating costs or, in the event of non-compliance or accidents or incidents causing
personal injury or death or property or environmental damage at or to the Group's mines, smelters,
refineries, concentrators, drill rigs or related facilities (such as logistics and storage facilities) or
surrounding areas may result in significant losses, interruptions in production, expensive litigation,
imposition of penalties and sanctions or suspension or revocation of permits and licences, even in
cases where such hazards have been caused by any previous or subsequent owners or operators
of the property, by any past or present owners of adjacent properties, by independent third party
contractors providing services to the Group or by acts of vandalism by trespassers. Any such
losses, withdrawals, suspensions, actions or payments may have a material adverse effect on the
Group's business, results of operations and financial condition.
MITIGATION: The Group's approach to sustainability and our expectations of our employees, our
contractors and our business partners are outlined in the Glencore Xstrata Corporate Practice
(GCP). GCP underpins our approach towards societal, environmental and compliance indicators,
providing clear guidance on the standards we expect all our operations to achieve.
Through the reporting function within GCP, our Board receives regular updates and has a detailed
oversight on how our business is performing across all of the sustainability indicators.
RELATED PARTY TRANSACTIONS
The following has been extracted from page 193 of the 2013 Annual Report.
In the normal course of business, Glencore enters into various arm's length transactions with
related parties (including Xstrata pre-acquisition and Century), 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 and associates. Glencore entered into
the following transactions with its associates:
US $ million 2013 2012
Sales(1) 1,863 1,661
Purchases(2) (4,365) (10,244)
Interest income(3) 24 24
Interest expense - (1)
Agency income(4) 33 95
(1) Includes pre-acquisition sales to Xstrata which comprise 28% of the balance (2012: 52%).
(2) Includes pre-acquisition purchases from Xstrata which comprise 84% of the balance
(2012:89%).
(3) Includes pre-acquisition interest income from Xstrata which comprise 7% of the balance
(2012:19%).
(4) Includes pre-acquisition agency income from Xstrata which comprise 91% of the balance
(2012:93%).
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 $7 million (2012: $7 million). There were no
other long-term benefits or share based payments provided to key management personnel (2012:
$Nil). Further details on remuneration of Directors are set out in the Directors' remuneration report
on page 92.
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 114 of the 2013 Annual Report.
These responsibilities are for the full 2013 Annual Report and not the extracted information
presented in this announcement or otherwise.
"We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with International Financial Reporting
standards and interpretations as adopted by the European Union, International Financial Reporting
Standards and interpretations as issued by the International Accounting Standards Board and the
Companies (Jersey) Law 1991, give a true and fair view of the assets, liabilities, financial position
and profit of the Group and the undertakings included in the consolidation taken as a whole;
- the management report, which is incorporated in the Strategic Report, includes a fair review of
the development and performance of the business and the position of the Group and the
undertakings included in the consolidation taken as a whole, together with a description of the
principal risks and uncertainties they face; and
- the Annual Report and accounts, taken as a whole, are fair and balanced and understandable
and provide the information necessary for shareholders to assess the performance, strategy and
business model of the Company.
Anthony Hayward Ivan Glasenberg
Interim Chairman Chief Executive Officer"
For further information, please contact:
Investor enquiries:
Paul Smith Martin Fewings Elisa Morniroli
t: +41 (0) 41 709 2487 t: +41 (0) 41 709 2880 t: +41 (0) 41 709 2818
m: +41 (0) 79 947 1348 m: +41 (0) 79 737 5642 m: +41 (0) 79 833 0508
e: e: e:
paul.smith@glencore.com martin.fewings@glencore.com elisa.morniroli@glencore.com
Media enquiries:
Charles Watenphul
t: +41 (0) 41 709 2462
m: +41 (0) 79 904 3320
e:
charles.watenphul@glencore.com
Company Secretarial enquiries:
John Burton Nicola Barrett
t: +41 (0) 41 709 2619 t: +41 (0) 41 709 2755
m: +41 (0) 79 944 5434 m: +41 (0) 79 735 3916
e: john.burton@glencore.com e: nicola.barrett@glencore.com
Sponsor
Absa Bank Limited (acting through its Corporate and Investment Banking Division)
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