Risk and opportunities – managing impacts and relationships? 2010 Annual report This report is available online Visit www.riotinto.com/annualreport2010 Rio Tinto 2010 Annual Report Basic Materials United Kingdom/Australia globalsector leadership Striving for Risk management Managing risk effectively Rio Tinto recognises that risk is an integral component of its business, and that it is characterised by both threat and opportunity. The Group fosters a risk aware corporate culture in all decision making. Through skilled application of high quality, integrated risk analysis and management, we manage risk in order to enhance opportunities and reduce threats, and so sustain competitive advantage. Principal risks and uncertainties Risk factors Overview Rio Tinto’s business units and functions assess the potential economic and non economic consequences of their respective risks using a prede ned framework provided by the Group’s Risk policy and standard. Principal risks and uncertainties are identi ed when the Risk management committee, business unit or function determines that the potential consequences are of suf cient materiality to be considered signi cant at a Group level or where the risk triggers a succession of events that in total become material at a Group level. Once identi ed, each principal risk and uncertainty is reviewed by the relevant internal experts and the Risk management committee. The following describes all known principal risks and uncertainties that could materially affect Rio Tinto. There may be additional risks unknown to Rio Tinto and other risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialise individually or simultaneously, could signi cantly affect the Group’s business and nancial results. The risks outlined below omit detail on how each is managed and mitigated, or how some risks could result in either a positive (upside) or negative (downside) impact. An explanation of the Group’s process for managing these, and all other risks to which it is exposed, is given in the section entitled Risk management on page 24. The principal risks and uncertainties should be considered in connection with any forward looking statements in this document and the cautionary statement on the inside front cover. Performance Risk management overview The Group is committed to the effective management of risk through proactive, competent risk management. Effective risk management requires quality risk analysis to inform the decisions taken throughout the organisation. The responsibility for identifying and managing risks lies with Rio Tinto’s managers and business leaders. Risk analysis and management is applied to all facets of the business, by management at appropriate levels, following the principles set out in the Group’s Risk policy and standard. This standard sets out a uniform process that each area within the Group is required to follow in analysing and managing risk. The process re ects global leading practice and contains the minimum requirements to ensure consistency and quality across the Group. By providing an overall methodology and structure for the handling of risk within the organisation, the Group seeks to provide the board and senior management with a consistent, Group wide perspective of the key risks. Reports are submitted to the board twice per year and include assessment of the likelihood, and impact should risks materialise along with risk management initiatives. During the year, a review of the Group’s approach to managing risk resulted in the introduction of a new risk management committee and the appointment of a new head of Group risk. The risk management committee is chaired by the chief executive and reports to the Executive committee. The Group provides a central organisation to support the risk standard and wider process, see below. External Commodity prices and global demand for the Group’s products are expected to remain uncertain, which could affect the Group’s business. Commodity prices and demand for the Group’s products are cyclical and strongly in uenced by world economic conditions, particularly with respect to key customers, in the US and Asia (notably China). There is potential volatility in short to medium term commodity prices due to persistent economic imbalances. The Group’s normal policy is to sell its products at prevailing market prices and not to enter into price hedging arrangements. The recent improvement in commodity prices and demand for the Group’s products may not remain as strong, which would have an impact on Group revenues, earnings, cash ows, asset values and growth. The Group has signed agreements with almost 50 per cent of its iron ore customers in Asia for pricing on a quarterly basis. This is a shift away from the previous annual benchmark pricing. Sales are being made to other iron ore customers on the same basis. If a major economic downturn were to occur in China impacting the demand and price for iron ore or the Group’s other products, or if Chinese customers source such products from elsewhere, the Group’s business, nancial condition and prospects could be affected. The US dollar is the currency in which the great majority of the Group’s sales are determined. It is also the most appropriate currency for holding surplus cash, nancing its operations, and presenting its external and internal results. Although many costs are incurred in US dollars, signi cant costs are in uenced by the local currencies of the countries where the Group operates, principally the Australian dollar, Canadian dollar and Euro. The Group’s normal policy is to avoid hedging arrangements relating to changes in foreign exchange rates. Appreciation in the value of these currencies against the US dollar or prolonged periods of exchange rate volatility may adversely affect the Group’s business results. The Group has operations in jurisdictions with varying degrees of political, legal and commercial stability. Commercial instability in some jurisdictions can be in uenced by bribery and corruption in their various guises. Political and administrative change, policy reform, and changes in law or government regulation can result in expropriation, or nationalisation. Renegotiation or nulli cation of existing agreements, leases and permits; changes in scal policies (including increased taxes or royalty rates); changes in government ownership of operations; currency restrictions; increased regulation and signi cantly increased costs or impediments to operation are also possible consequences. Such consequences could have an adverse effect on the pro tability, the ability to nance or, in extreme cases, the viability of an operation. Political instability and uncertainty or government changes to the scal terms covering the Group’s operations may discourage future investments in certain jurisdictions. This may have an adverse impact on the Group’s ability to access new assets, potentially reducing future growth opportunities. Production, reserves and operations Continued growth in demand for the Group’s products in China could be affected by future developments in that country. Rio Tinto is exposed to uctuations in exchange rates that could affect its overall business results. Overview of Rio Tinto’s risk management process Board Executive committee Risk management committee Group risk Responsible for risk reports, providing risk support to operations, maintaining appropriate risk policy and standard and providing co-ordination of Group wide risk management activity Governance Risk owners Accountability and responsibility for effective risk identi cation and management Corporate oversight Provide risk insight and monitoring to key business decisions Functional business support Provide risk support, functional expertise and risk speci c standards Political, legal and commercial changes in the places where the Group operates could affect the Group’s reputation, future development opportunities, and/or the viability of its operations. Financial statements Health safety environment Legal and compliance Diamonds & Minerals Project development Technical evaluation Business evaluation Human resources Community disputes in the countries and territories in which the Group operates could affect the viability of its operations or its reputation. Group assurance Some of the Group’s current and potential operations are located in or near communities that may regard the operation as being detrimental to their environmental, economic or social circumstances. Community expectations are typically complex with the potential for multiple inconsistent stakeholder views that may be dif cult to resolve. Stakeholder opinion and community acceptance can be impacted by external events beyond the Group’s control, including events that may occur in related industries or similar operations outside of the Group and events relating to the local, regional or national affairs of the places where the Group operates. Furthermore our operations may be a focus for civil unrest or criminal activity. Community reaction could have an adverse impact on the cost, pro tability, and ability to nance or even the viability of an operation. Such events could lead to disputes with national or local governments or with local communities and give rise to reputational damage. If the Group’s operations are delayed or shut down as a result of political and community instability, its revenue growth may be constrained and the long term value of its business could be adversely impacted. www.riotinto.com 25 External affairs Community Exploration Aluminium Economics Group risk Additional information Insurance Corporate Security Iron Ore Finance Copper Energy 24 Rio Tinto 2010 Annual report pp 24-25 Rio Tinto have provided a clear report on their risk management processes and governance procedures. The table format on p25 is continued on the following pages and the subheadings include external, strategic, financial, operational and sustainable development risks. 42 Integrated thinking in reporting Other
