29th Apr 2010 16:00
29 April 2010
Eurasian Natural Resources Corporation PLC
Publication of 2009 Annual Report and Accounts
London - Eurasian Natural Resources Corporation PLC ('ENRC' or 'the Group') has today published on the Group's website, www.enrc.com, its Annual Report and Accounts in respect of the year ended 31 December 2009 ('2009 Annual Report and Accounts') together with the Notice of Annual General Meeting 2010 to be held on 9 June 2010.
In accordance with LR 9.6.1, ENRC has also today submitted two copies of the following documents:
- 2009 Annual Report and Accounts; and
- Notice of Annual General Meeting 2010,
to the United Kingdom Listing Authority ('UKLA'), and they will shortly be available for inspection at the UKLA's Document Viewing Facility situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
United Kingdom
Tel. No: +44 (0) 20 7066 1000.
In compliance with the requirements of Rule 6.3.5 of the Disclosure Rules and Transparency Rules ('DTR 6.3.5') of the United Kingdom's Financial Services Authority ('FSA'), the following information is extracted from the 2009 Annual Report and Accounts and should be read in conjunction with ENRC's Preliminary Results Announcement issued on 24 March 2010. 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 ('RIS'). This material has been included solely for the purpose of complying with DTR 6.3.5 and is not a substitute for reading the full 2009 Annual Report and Accounts and page numbers and cross-references in the extracted information set out in the Appendices to this announcement refer to page numbers and cross-references in the 2009 Annual Report and Accounts.
A hard copy version of the 2009 Annual Report and Accounts together with the Notice of Annual General Meeting 2010 and Form of Proxy will be sent to those shareholders on the share register as at 21 April 2010.
In accordance with the requirements of DTR 6.3.5: (i) Appendix A to this announcement contains the Statement of Directors' Responsibilities extracted from page 56 of the 2009 Annual Report and Accounts; and (ii) Appendix B to this announcement contains the statement on Risk Management, a description of the principal risks and uncertainties affecting the Group, extracted from pages 14 to 19 of the 2009 Annual Report and Accounts.
- ENDS -
For further information, please contact:
|
|
|
|
|
ENRC: Investor Relations |
Mounissa Chodieva |
+44 (0) 20 7389 1879 |
|
|
James S Johnson |
+44 (0) 20 7389 1862 |
|
|
Marianna Adams |
+44 (0) 20 7389 1886 |
|
|
|
|
|
ENRC: Press Relations |
Julia Kalcheva |
+44 (0) 20 7389 1861 |
|
|
|
|
|
ENRC: Company Secretariat |
Victoria Penrice |
+44 (0) 20 7389 1440 |
|
|
|
|
|
M: Communications |
Hugh Morrison |
+44 (0) 20 7153 1534 |
|
|
Edward Orlebar |
+44 (0) 20 7153 1523 |
|
|
Elly Williamson |
+44 (0) 20 7153 1539 |
About ENRC
ENRC is a leading diversified natural resources group, performing integrated mining, processing, energy, logistics and marketing operations. The operations of the Group comprise: the mining and processing of chrome, manganese and iron ore; the smelting of ferroalloys; the production of iron ore pellets; the mining and processing of bauxite for the extraction of alumina and the production of aluminium; coal extraction and electricity generation; the transportation and sales of the Group's products; and, the production of copper and cobalt. ENRC's production assets are largely located in the Republic of Kazakhstan; other assets, notably the Other Non-ferrous Division, are mainly located in Africa. In 2009, the Group accounted for approximately 3% of Kazakhstan's GDP. The Group currently sells the majority of its products to Russia, China, Japan, Western Europe and the United States. The Group's entities in 2009 employed approximately 70,300 (2008: 67,600) people. For the year ended 31 December 2009, the Group had revenue of US$3,831 million (2008: US$6,823 million) and profit attributable to equity shareholders of US$1,045 million (2008: US$2,642 million). ENRC has six key Divisions: Ferroalloys, Iron Ore, Alumina and Aluminium, Energy, Logistics and Other Non-ferrous. ENRC is a UK company with its registered office in London. ENRC's shares are quoted on the London Stock Exchange ('LSE') and the Kazakhstan Stock Exchange ('KASE').
Forward-looking statement
This announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms 'believes', 'estimates', 'plans', 'projects', 'anticipates', 'expects', 'intends', 'may', 'will', or 'should' or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include matters that are not historical facts or are statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial condition, liquidity, prospects, growth, strategies, and the industries in which the Group operates. Forward-looking statements are based on current plans, estimates and projections, and therefore too much reliance should not be placed upon them. Such statements are subject to risks and uncertainties, most of which are difficult to predict and generally beyond the Group's control. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. The Group cautions you that forward-looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the Group's actual results of operations, financial condition and liquidity and the development of the industry in which the Group operates may materially differ from those made in, or suggested by, the forward-looking statements contained in this announcement. In addition, even if the Group's results of operations, financial condition and liquidity and the development of the industry in which the Group operates are consistent with the forward-looking statements contained in this announcement, those results or developments may not be indicative of results or developments in future periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations, changes in business strategy, political and economic uncertainty. Subject to the requirements of the Prospectus Rules and the Listing Rules or any applicable law or regulation, the Group expressly disclaims any obligation or undertaking publicly to review or confirm analysts' expectations or estimates or to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
APPENDIX A - CORPORATE GOVERNANCE: STATEMENT OF DIRECTORS' RESPONSIBILITIES
The following statement is extracted from page 56 of the 2009 Annual Report and Accounts.
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union, and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing these financial statements, the Directors are required to:
·; select suitable accounting policies and then apply them consistently;
·; make judgements and accounting estimates that are reasonable and prudent;
·; state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the consolidated and parent company financial statements respectively; and
·; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on pages 04 and 05 confirm that, to the best of their knowledge:
·; the consolidated financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;
·; the parent company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
·; the Directors' Report and Business Review include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
APPENDIX B - BUSINESS REVIEW: RISK MANAGEMENT
The following statement is extracted from pages 14 to 19 of the 2009 Annual Report and Accounts but excludes graphs included to illustrate this section in the 2009 Annual Report and Accounts.
The Board is responsible for the Group's systems of Risk Management and Internal Control and for reviewing their effectiveness in operation. Further details are presented in the Corporate Governance Report on pages 48 to 50.
Effective systems of Internal Control:
·; play a key role in the management of risks that are significant to the fulfilment of the Group's business objectives;
·; contribute to safeguarding the shareholders' interests and the Group's assets;
·; facilitate the effectiveness and efficiency of operations;
·; help ensure the reliability of internal and external reporting; and
·; assist compliance with laws and regulations.
Key business risks and the responses by executive management
This section sets out the key business risks being faced by the Group. Key business risks are those risks which have a high overall impact and likelihood risk rating in terms of the potential to adversely affect the Group's ability to achieve its objectives. This section also includes a description of the ways in which executive management have responded to these risks.
Risks to the achievement of strategic objectives
Slowdown in the growth of the economies of key customers
The Group's sales of products from some divisions continue to be predominantly to customers based in Russia and China, as set out in the table below.
The GDP of the Russian economy contracted by about 8% in 2009 as a whole but grew in the last two quarters of the year. In 2010 growth is expected to be around 3%.The Chinese economy sustained a high rate of GDP growth in 2009 of almost 9%. A number of forecasters believe that broadly this level of growth can be maintained for the medium term. The significant slowdown in the global economy as a whole and the consequential impact on the export-led growth of the economies with which the Group trades brought about a decrease in demand for the Group's products and also created downward pressure on sales prices. The Group, however, was able to leverage its geographic proximity to the growth market of China and in so doing mitigate the impact of the economic global slowdown as can be seen in the preceding table which shows an increased proportion of sales to China in 2009. Market conditions progressively improved throughout 2009 and are now much better than those experienced at the beginning of the year. Our confidence in the outlook for ENRC in 2010 is considerably stronger in relation to both the sustainability of growth in Chinese domestic demand, and to the growth prospects of the mature economies of Japan, Europe and the USA. We believe that there will continue to be commodity price volatility as a result of high levels of economic uncertainty and concern about the overall speed of global recovery. The medium to longer term fundamentals for commodities remain strong and the outlook is for China and the emerging economies to be the leaders on the road to sustainable recovery.
Response to the slowdown in the growth of the economies of key Customers
Management responded rapidly and decisively to the severe reduction in demand for the Group's products in late 2008 and early 2009 by:
• cutting ferroalloys, iron ore and energy production to match customer demand;
• reducing inventories and actively concentrating on receivables;
• re-evaluating capital expenditure; and
• focusing on the control of costs in the face of significant pressure on product prices.
Progressively during 2009 management was able to advance production levels across those businesses and by the end of 2009 production had been restored to approximately full available capacity.
We remain positive on the medium- and long-term growth prospects for the metal-intensive and export growth of the Chinese and Russian economies, with the particular benefit to ENRC of its strategic location. In addition there is significant sustained growth in the demand for industrial metals elsewhere in the industrializing world which, as with China and Russia, is based on their demographics, urbanisation and infrastructure requirements. The prospects for ENRC in all of these markets are enhanced by structural capacity shortages, notably in China, and supply constraints that are expected to emerge with a global economic recovery. The Group, with its tier one assets and the advantage of low cost production, is well positioned to seize opportunities in China and Russia and elsewhere in the world whilst benefiting from the progressive improvement in the stability of its long-term contract customer base.
Country risks
The Group's businesses could be adversely affected by any new regulations which are introduced by the Governments of the key countries in which the Group operates and trades, such as:
• controls on imports, exports and sales prices;
• terms of mining and other licences;
• restrictions on foreign ownership of assets;
• restrictions on the remittance of funds; and
• new forms or rates of taxation, duties and royalties.
These risks are most relevant in relation to Kazakhstan, which continues to be the Group's principal country of operation, but also, to a lesser extent, Russia, China and the DRC.
In addition, any increased requirements relating to regulatory, environmental and social approvals, in countries in which the Group has mining or production activities, could result in significant delays in the construction of new investment projects, and may adversely impact the economics of those projects, the expansion of existing operations and the financial results of the Group's operations.
Response to country risks
Senior management of the Group's operations in Kazakhstan are engaged in an active dialogue with the Government of the Republic of Kazakhstan and with local authorities in many regions and towns within Kazakhstan, as well as directly with the Group's workforce, to fully reflect the Group's responsibilities to these stakeholders.
The Government of the Republic of Kazakhstan is also a significant shareholder in the Group and two representatives of the Government are non-executive Directors and attend Board meetings.
Through these different types of engagement with the Government of the Republic of Kazakhstan the Group is able to anticipate likely changes in regulations and to put in place plans to respond to changes whenever they may arise.
In DRC the management of the Group's businesses have met with key Government officials at both national and regional level, including those responsible for mining. Management plan to establish effective working relationships with these officials and keep them informed about our plans for investment and for the development of the businesses. These relationships are going to be based on a mutual desire to improve the economy of the countries whilst at the same time developing the natural resources opportunities which are available in the areas to the benefit of the local communities and the Group.
Integration of acquired businesses
Some of our future growth will stem from acquisitions. There are numerous risks which may be encountered in business combinations, and we may not be able to successfully integrate acquired businesses which could negatively impact our financial condition and results of operations.
Response to risks in the integration of acquired businesses
The Group has formed a Mergers and Acquisitions Committee, which is a sub-committee of the Board, to oversee all acquisition activity including the agreement of acquisition targets, setting policies for due diligence activity and overseeing the process of due diligence, acquisition and subsequent integration into the Group.
The committee has received delegated authority from the Board to finalise and execute acquisitions following Board approval. The committee is chaired by an independent non-executive Director and includes two other non-executive members of the Board.
The Group also increased the number, seniority and experience of the in-house mergers and acquisitions team during 2009 and continues to employ external advice to supplement the in-house expertise. A strategic projects finance team has also been established in London. For each acquisition which the Group has made and for all prospective acquisitions a member of the Group's senior management team is appointed to take responsibility for the integration of the acquired business.
The Group has gained valuable experience in the acquisition and ongoing integration of CAMEC and this will be applied to all future acquisitions, including Chambishi. Many of the management team involved in the ongoing CAMEC integration will also be responsible for the delivery of the Chambishi integration plan.
CAMEC acquisition
The Group acquired CAMEC in November 2009. CAMEC operates principally in the DRC, where it mines copper and cobalt and processes the ore in a company in which the State owned Gécamines is a minority 30% partner.
The assimilation and integration of acquired businesses requires significant time and effort on the part of the Group's senior management. Integration of new businesses, particularly in emerging markets, can be difficult, and potential problems may include, but would not be limited to:
·; Compliance with local and international regulations;
·; Harmonisation of corporate culture differences;
·; Alignment of HR policies and remuneration bases;
·; Operating in a new geographical environment and in new commodity markets;
·; Roll-out of financial reporting procedures and unification of accounting policies;
·; Controlling acquired assets; and
·; Dealing with legacy issues.
Response to risks in the integration and management of the CAMEC businesses
The Group has engaged a Chief Executive Officer for ENRC in Africa, with extensive experience of mining in Africa, to manage the integration of Camec. He is being supported by a senior member of the Group's Mergers and Acquisitions team who was involved in the due diligence process prior to acquisition.
Human resource talent pool
The Group's growth and future success depend significantly upon its continued ability to attract, retain and motivate employees and key members of management and to adequately resource a wide range of development projects. Failure to adequately maintain the quality of the Group's Human Resource pool could have an adverse impact on those projects or on existing operations. Despite the recent volatility in commodity prices and consequential impact on growth prospects in the industry there still exists an increasing demand for skilled personnel and contractors across a range of disciplines.
Response to human resource talent pool risks
We have continued to provide stimulating and challenging opportunities for all employees and this is attractive for both existing and prospective employees. The Group is committed to the recruitment of experienced staff across the Group, in London, Africa, Kazakhstan and in other countries in which the Group operates. In Kazakhstan the Group has developed a Succession Planning policy, a Talent Management Programme as well as planning to develop a Corporate Health Management Roadmap in 2010. Further details of the Group's commitment to the welfare, health and personal development of its employees is set out in detail in the Sustainability Review on pages 36 to 40.
Capital projects
The Group's mining operations are capital intensive. The development and exploitation of mineral reserves and the acquisition of machinery and equipment require substantial capital expenditure. Capital projects are subject to a number of risks:
• the project, whilst meeting the Group's hurdle rate for investment, may not be the most appropriate way to increase shareholder value;
• the assumptions about future commodity prices, on which the economic case for the investment was based, may prove to be too optimistic;
• planned funding for the project may not be available when required.
• the resources required to complete the project may not be available in the right volume or at the right quality or price;
• the implementation of the project may prove to be more complex or technically difficult than originally envisaged and, in extreme cases, may not be possible to complete; and
• the project may be completed but may be delivered late and/or at a significantly higher cost than planned.
Response to capital project risks
The Group has adopted policies and procedures which need to be applied before a capital project may obtain approval to proceed. In particular the technical and economic aspects of each significant project are subject to a detailed feasibility review and those projects that pass this review are then subject to further assessment by management.
All existing projects are subject to scrutiny by management at a quarterly review meeting to ensure that the bases and assumptions, on which the project was originally approved, continue to hold. The Group has recently re-evaluated both expansionary and sustaining projects, as described in the section on Capital Expenditure on pages 34 to 35.
The Group has engaged external advisors to assist in the development of an effective investment appraisal methodology which will include a systematic way of assessing the potential future value of each proposed project against alternative uses of the funding.
Risks to the achievement of operational objectives
Maintaining cost competitiveness
Information on the unit costs of the Group's divisions in the years ended 31 December 2008 and 2009 is set out in the Financial Review on pages 29 to 35.
In Q4 2008 the Group significantly reduced production volumes, notably in the Ferroalloys and Iron Ore Divisions, to a level which was consistent with expectations of sales. Capacity utilisation was progressively restored through 2009. By Q4 2009, production volumes in the Ferroalloys and Iron Ore Divisions in Kazakhstan had been restored to effectively full available capacity.
These changes in production volumes led, in the early parts of 2009, to increased operating costs per tonne of product at existing operations, as well as impacting the costs and schedules of investment projects. Whilst reduced production volumes during 2008 and 2009 were a specific risk to the Group's ability to operate a cost competitive business there continue to be other operational risks to the Group's ability to maintain its cost advantage over competitors. The Group acquires a significant amount of goods and services from suppliers, contractors and other third parties for operational and capital expenditure purposes. In making these acquisitions the Group has the risk that goods or services may not be acquired on the most economical terms from suppliers and contractors.
Response to the risk of maintaining cost competitiveness
The Group's businesses remain relatively low cost typically occupying the lower third of the cost curve. This remains a key advantage that we are focused on maintaining and, where possible, reinforcing, through the downturn and beyond. Crucial to our success is that our businesses remain underpinned by the security of our logistics and low cost energy supply.
During 2009 the Group experienced a reduction in raw material input costs and many other costs of production and distribution, part of which related to the approximately 25% devaluation of the tenge against the US dollar in February 2009. In addition the Group entered into constructive discussions with employees to avoid compulsory redundancies but offset this by securing agreements on greater labour flexibility in terms of reduced working hours and lower levels of remuneration. As production returned to near-capacity levels, employment conditions were restored to pre-crisis levels.
During 2009 domestic consumer price inflation ('CPI') in Kazakhstan was 6.2%. Whilst the Group's businesses remain relatively low cost, cost control, and thus competitiveness, continues to be an area of great importance for the Group and one which will continue to be the subject of significant management focus throughout 2010.
The Audit Committee have formally approved a manual of Group Procurement policies which formalise earlier locally developed Policy Documents and control procedures to mitigate the risk of uneconomic procurement. These policies and procedures were rolled out to relevant employees in Kazakhstan and Russia during 2009 and will be rolled out in Africa in 2010.
In addition the Group engaged Boston Consulting Group during 2009 to carry out a wide ranging review of the Group's procurement procedures and to make recommendations for improvements. These recommendations, and a re-emphasis of the need to improve management's monitoring of compliance with the implementation of the Group Procurement procedures, will be the subject of training workshops in Kazakhstan during 2010.
Unexpected natural and operational catastrophes
Our operational processes and locations may be subject to operational accidents. Our operations may also be subject to unexpected natural catastrophes such as earthquakes and flooding. Existing insurance arrangements may not provide cover for all of the costs that may arise from such events. The impact of these events could lead to disruptions in production and loss of facilities adversely affecting our financial results.
Response to the risk of unexpected natural and operational catastrophes
We commissioned external consultants to complete a detailed review of the adequacy of the Group's insurance cover in Kazakhstan in terms of the value of insurable assets and also to undertake risk surveys of our Kazakhstani operations and advise on the implementation of more effective contingency plans to mitigate the potential impact of these risks.
In August 2009 the Group improved the insurance coverage and policy limits of the Group's Kazakhstani assets, in advance of the receipt of the reports from the external consultants. In March 2010 the Group implemented a new insurance programme based on significantly enhanced assets values, coverage and terms.
During 2010 the Group's operations will respond to the recommendations made by consultants in the risk surveys and the terms of the new insurance programme will be extended to the Group's operations outside Kazakhstan.
Risks to the achievement of compliance objectives
The Group is subject to laws and regulations in all the jurisdictions in which it operates and is committed to ensuring effective compliance with all its obligations; further details on the Group's approach to compliance is set out in the Corporate Governance section on pages 41 to 56.
Health, safety, environmental exposure and regulations
The nature of the industry in which we operate means our activities are highly regulated by health, safety and environmental laws. As regulatory standards and expectations are constantly developing, we may be exposed to increased compliance costs and unforeseen environmental remediation expenses.
Response to risks related to health, safety, environmental exposure and regulations
This is covered in the Sustainability Review which is set out on pages 36 to 40.
Taxation
The Group is subject to taxation in the jurisdictions in which it operates. There are inherent risks associated with the complexities of tax laws and regulations, potential differences in interpretation of the applicable legislation and continuous changes to tax laws and regimes. Cross border transactions also represent inherent risks as a result of being subject to different national tax rules which are not necessarily harmonised. An example of such inherent risk exposure is cross-border inter company transfer pricing.
Response to taxation risks
The Group management is committed to ensuring compliance with the tax requirements in every jurisdiction in which the Group operates and to both minimising and managing risks associated with taxation. The Group is also committed to building and maintaining good and constructive working relationships with the tax authorities in all countries in which the Group is subject to taxation.
In order to facilitate this approach the Group is developing its in-house team and seeking the advice of independent external consultants in complex and specialist areas.
Risks to the achievement of financial objectives
Commodity price
The Group generates most of its revenue from the sale of commodities, primarily ferrochrome, chrome ore, iron ore, alumina and aluminium. From November 2009 the Group will also generate revenue from sales of copper and cobalt as a result of the acquisition of CAMEC and Chambishi.
Historically, the prices for these products have been volatile and have fluctuated widely in response to changes in supply and demand, market uncertainty, the performance of the global or regional economies and cyclicality in industries that purchase these products. This was particularly evident in the last quarter of 2008 and first quarter of 2009 when prices fell substantially. At the peak price in mid 2008 HC FeCr was selling at a benchmark price of US$2.04 per lb of chrome but then fell as low as US$0.69 per lb of chrome in the second quarter of 2009 before recovering to US$1.03 per lb of chrome in the fourth quarter of 2009.
These external factors and the volatility of the commodity markets make it difficult to estimate future prices. A substantial or extended decline in commodity prices would materially and adversely affect the Group's business and the financial results and cash flows of operations. However, the cost base of the ferroalloy industry has systematically increased as a result of increased energy and reductant costs whilst also suffering from the impact of currency appreciation. This has meant that the Group, due to its low cost base and integrated structure, is in an advantageous position relative to its peers.
Response to commodity price risks
The Group monitors market prices, global sales volumes and internal levels of inventory of key commodities to help inform production and sales planning decisions and avoid surplus inventory.
The management of the Sales and Marketing business produce regular forecasts of the sales volumes and prices for each of the Group's commodities and discuss and agree appropriate production and distribution plans with the management of the Group's operating companies on a regular basis in order to optimise revenue and meet customer needs.
The Group does not hedge its exposure to the risk of fluctuations in the prices of its commodity products.
Credit default of key customers
The impact of the current economic downturn has been to place increased financial pressure on the Group's customers and on their ability to pay amounts due to the Group in accordance with agreed terms of trade. At the same time the Group's traditional markets for obtaining credit insurance have significantly reduced. With a high concentration of sales to a small number of customers in our main divisions this is a significant risk for us.
Response to the risk of a credit default by key customers
The Group's response to the risk of a credit default by key customers has been to:
• maintain close relationships with all its key customers but also to develop new customer relationships in Russia, China and elsewhere to diversify customer default risk;
• obtain credit insurance, where insurance cover is available, or letters of credit against the risk of default by major customers;
• review credit limits and payment terms for all major customers; and
• regularly monitor compliance with these terms and report periodically to the Chief Financial Officer on any developments in the amounts receivable from customers and average days outstanding.
Financial counterparty default
At 31 December 2009 the amounts invested with financial institutions were US$1,006 million. In making these investments the Group runs the risk that a counterparty may default on the repayment of the invested funds when they fall due.
A number of financial institutions have been in default since the start of the global financial crisis but the Group had no exposure to these institutions and has not made any losses from its dealings with financial counterparties.
Response to financial counterparty default risk
To minimise the risk of the default of a financial counterparty with which the Group has invested funds strict criteria for investment have been adopted and were approved by the Board in December 2008. Investments may only be made with counterparties which are included on our Permitted Investment list. Individual counterparty exposure limits are based on published credit ratings or where these are not available, by an internal assessment of the counterparty's financial strength.
On a regular basis the Group Treasury Committee reviews the credit ratings of all approved counterparties and may propose adjustments to the maximum credit limits. Any changes to credit limits require the approval of the Chief Financial Officer.
A consolidated counterparty exposure report is recalculated on a weekly basis and a monthly report is produced by the Group Treasurer for review by the Chief Financial Officer and is also included in the Treasury report for each Board meeting.
Foreign exchange rate exposure
The presentational currency of the Group is the US dollar and the majority of sales are US dollar denominated. However, significant costs which are incurred in Kazakhstan are denominated in the Kazakhstani tenge and the Group has operational exposures to other foreign currencies.
Response to foreign exchange rate risks
The Group considers the exposure to the Kazakhstani tenge to be an ongoing economic risk. Although there were hedges in place in 2009 that were transacted in 2007, the Group is not currently entering into new contracts to actively hedge this exposure. Management review economic exposures on a regular basis.
Related Shares:
ENRC.L