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Note 18. Contributed Equity And ReservesNote 20. Key Management Personnel

NOTE 19. FINANCIAL INSTRUMENTS

(a) Financial Risk Management Objectives and Policies

The Group’s management of financial risk is aimed at ensuring net cash flows are sufficient to:

  • meet all its financial commitments; and
  • maintain the capacity to fund corporate growth activities

The Group monitors its forecast financial position on a regular basis.

Market, liquidity and credit risk (including foreign exchange, commodity price and interest rate risk) arise in the normal course of the Group’s business. These risks are managed under Board approved directives which underpin treasury practices and processes. The Group’s principal financial instruments comprise interest bearing debt, cash and short-term deposits and available for sale financial assets. Other financial instruments include trade receivables and trade payables, which arise directly from operations.

The Group’s forecast financial risk position with respect to key financial objectives and compliance with treasury practice is regularly reported to the Board.

(b) Market Risk

(i) Foreign Exchange Risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures.

Foreign exchange risk arises from future commitments, assets and liabilities that are denominated in a currency that is not the functional currency of the relevant Group company.

The Group’s borrowings and deposits are largely denominated in US dollars. Currently there are no foreign exchange hedge programmes in place. However, the Group treasury function manages the purchase of foreign currency to meet operational requirements.

The financial instruments exposed to movements in the Australian dollar are as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Financial assets
Cash and cash equivalents3.80.6
Trade and other receivables3.22.0
Available-for-sale financial assets26.020.7
33.023.3
Financial liabilities
Trade and other payables(9.3)(9.0)
Net exposure23.714.3

The financial instruments exposed to movements in the Namibian dollar are as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Financial assets
Cash and cash equivalents6.16.2
Trade and other receivables17.213.2
23.319.4
Financial liabilities
Trade and other payables(31.8)(27.9)
Net exposure(8.5)(8.5)
The following table summarises the sensitivity of financial instruments held at balance date to movements in the exchange rate of the Australian dollar to the US dollar and the Namibian dollar to the US dollar, with all other variables held constant. The 5% sensitivity is based on reasonably possible changes, over a financial year, using the observed range of actual historical rates for the preceding five year period.
IMPACT ON PROFIT/LOSS
CONSOLIDATED
IMPACT ON EQUITY
CONSOLIDATED
2011
US$M
2010
US$M
2011
US$M
2010
US$M
Post-Tax Gain/(Loss)
AUD/USD +5% (2010: +5%)(0.1)(0.2)0.90.7
AUD/USD -5% (2010: -5%)0.10.2(1.0)(0.8)
NAD/USD +5% (2010: +5%)(0.3)(0.3)--
NAD/USD -5% (2010: -5%)0.30.3--

(ii) Interest Rate Risk

Interest rate risk is the risk that the Group’s financial position will be adversely affected by movements in interest rates that will increase the cost of floating rate debt or opportunity losses that may arise on fixed rate borrowings in a falling interest rate environment. Interest rate risk on cash and short-term deposits is not considered to be a material risk due to the short-term nature of these financial instruments.

The Group’s main interest rate risk arises from long-term debt. Floating rate debt exposes the Group to cash flow interest rate risk and fixed rate debt exposes the Group to fair value interest rate risk. All other financial assets and liabilities in the form of receivables, investments in shares, payables and provisions, are non interest bearing.

The Group currently does not engage in any hedging or derivative transactions to manage interest rate risk.

The floating rate financial instruments exposed to interest rates movements are as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Financial assets
Cash and cash equivalents117.4347.9
117.4347.9
Financial liabilities
Interest-bearing liabilities(152.7)(192.5)
Net exposure(35.3)155.4

The following table summarises the cash flow sensitivity of cash and cash equivalent financial instruments held at balance sheet date following a movement in LIBOR, with all other variables held constant. The sensitivity is based on reasonably possible changes over a financial year, using the observed range of actual historical rates for the preceding five year period. The sensitivity analysis below excludes impact on borrowing costs arising from interest bearing liabilities as these are capitalised as part of long-term qualifying development projects.

IMPACT ON PROFIT/LOSS
CONSOLIDATED
2011
US$M
2010
US$M
Post-Tax Gain/(Loss)
LIBOR +1% (2010: +1%)(0.2)1.0
LIBOR -0.1% (2010: -0.3%)-(0.3)

(iii) Market Price Risk

Price risk is the risk that the Group's financial position will be adversely affected by movements in the market value of its available-for-sale financial assets.

The financial instruments exposed to movements in market value are as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Financial assets
Other financial assets41.835.7

The following table summarises the sensitivity of financial instruments held at balance date to movements in the market price of available-for-sale financial instruments, with all other variables held constant. The 25% sensitivity is based on reasonable possible changes, over a financial year, using the observed range of actual historical prices for 2011 and 2010.

IMPACT ON EQUITY
CONSOLIDATED
2011
US$M
2010
US$M
Post-tax impact on reserve
Market price +25% (2010: +25%)7.36.2
Market price -25% (2010: -25%)(7.3)(6.2)

(c) Liquidity Risk

The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet the Group’s financial commitments in a timely and cost effective manner.

The Group treasury function continually reviews the Group’s liquidity position including cash flow forecasts to determine the forecast liquidity position and maintain appropriate liquidity levels. Sensitivity analysis is conducted on a range of pricing and market assumptions to ensure the Group has the ability to meet repayment commitments. This enables the Group to manage cash flows on a long-term basis and provides the flexibility to pursue a range of funding alternatives if necessary. Note 16 details the repayment obligations in respect of the amount of the facilities.

The maturity analysis of payables at the reporting date was as follows:

Payables maturity analysis
2011Total
US$M
<1 year
US$M
1-2 years
US$M
2-3 years
US$M
>3 years
US$M
Consolidated
Trade and other payables69.769.7---
Loans and borrowings777.746.1363.529.9338.2
Interest payable85.531.425.512.915.7
Total payables932.9147.2389.042.8353.9
2010
Consolidated
Trade and other payables63.463.4---
Loans and borrowings759.915.2320.9360.962.9
Interest payable84.634.926.919.63.2
Total payables907.9113.5347.8380.566.1

(d) Credit Risk

Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that will result in a financial loss to the Group. The carrying amount of financial assets represents the maximum credit exposure. The Group trades only with recognised, credit worthy third parties. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant.

The maximum exposure to credit risk at the reporting date was as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Current
Cash and cash equivalents*117.4347.9
Trade receivables-14.2
Other receivables – other entities20.519.0
137.9381.1
Non Current
Other receivables – other entities1.50.3
Total139.4381.4

* The Group’s maximum deposit with a single financial institution represents 25% of cash and cash equivalents.

The ageing of receivables at the reporting date was as follows:

Receivables ageing analysis
2011Total
US$M
Current
US$M
<1 year
US$M
1-2 years
US$M
>2 years
US$M
Consolidated
Trade receivables-----
Other receivables22.020.51.5--
Total receivables22.020.51.5--
2010
Consolidated
Trade receivables14.214.2---
Other receivables19.319.00.3--
Total receivables33.533.20.3--

No receivables are past due or impaired.

(e) Financial Instruments Measured at Fair Value

The Group uses various methods in estimating the fair value of a financial instrument. The methods comprise:

Level 1 – the fair value is calculated using quoted prices in active markets.

Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).

Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data.

The fair value of the financial instruments as well as the methods used to estimate the fair value are summarised in the table below:

Year ended 30 June 2011Year ended 30 June 2010
Quoted market price (Level 1)
US$M
Valuation technique-market observable inputs (Level 2)
US$M
Valuation technique - non market observable inputs (Level 3)
US$M
Total
US$M
Quoted market price (Level 1)
US$M
Valuation technique-market observable inputs (Level 2)
US$M
Valuation technique - non market observable inputs (Level 3)
US$M
Total
US$M
Consolidated Financial assets
Available-for-sale investments
Listed investments40.8--40.832.2--32.2
Unlisted investments--1.01.0--3.53.5
40.8-1.041.832.2-3.535.7

Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. The fair value of the listed equity investments are based on quoted market prices.

For financial instruments not quoted in active markets, the Group uses valuation techniques such as present value techniques, comparison to similar instruments for which market observable prices exist and other relevant models used by market participants. These valuation techniques use both observable and unobservable market inputs.

The fair value of unlisted debt and equity securities, as well as other investments that do not have an active market, are based on latest private share placement price before 30 June 2011.

Reconciliation for Level 3 Fair Value MovementsCONSOLIDATED
2011
US$M
2010
US$M
Opening balance3.53.9
Other comprehensive income-0.4
Additions0.5-
Disposals(3.0)(0.8)
Closing balance1.03.5
Total gain or loss stated in the table above for assets held at the end of the period--

(f) Capital Management

When managing capital, management’s objective is to ensure adequate cash resources to meet the Company’s commitments are maintained, as well as to maintain optimal returns to shareholders through ensuring the lowest cost of capital available to the entity.

The Company utilises a combination of debt, equity and convertible bonds to provide the cash resources required. Management review the capital structure from time to time as appropriate.

The Group treasury function is responsible for the Group’s capital management, including management of the long-term debt and cash as part of the capital structure. This involves the use of corporate forecasting models which enable analysis of the Group’s financial position including cash flow forecasts to determine the future capital management requirements. To ensure sufficient funding for operational expenditure and growth activities, a range of assumptions are modelled so as to provide the flexibility in determining the Group’s optimal future capital structure.

Group treasury monitors gearing and compliances with various contractual financial covenants. The Company’s project finance facility is subject to various financial undertakings including a negative pledge, debt service coverage ratio, loan life coverage ratio and project life coverage ratio. At the time of reporting, the Company was in compliance with all of the facility’s financial undertakings.

CONSOLIDATED
2011
US$M
2010
US$M
Total borrowings719.7730.1
Less cash and cash equivalents(117.4)(347.9)
Net debt602.3382.2
Total equity1,768.11,474.6
Total capital2,370.41,856.8
Gearing Ratio25%21%

(g) Fair Value of Financial Assets and Financial Liabilities Carried at Amortised Cost

The fair value representing the mark to market of a financial asset or a financial liability is the amount at which the asset could be exchanged or liability settled in a current transaction between willing parties after allowing for transaction costs.

The fair values of cash and cash equivalents, trade and other receivables and trade and other payables approximate to their carrying values, as a result of their short maturity or because they carry floating rates of interest.

The fair value of the debt component of the convertible bonds has been determined using a valuation technique based on the quoted market price of the convertible bonds.

All financial assets and liabilities where the fair value does not approximate to the carrying value are as follows:

CONSOLIDATED
2011
US$M
2010
US$M
Carrying amountFair valueCarrying amountFair value
Convertible bonds – debt component583.1566.1554.3538.7

(h) Commodity Price Risk

Uranium is not traded in any significant volume on global commodity exchanges. The Group has customer sales contracts in place for delivery over the period 2011 to 2020.

The contracted selling price is determined by a formula which references common industry published prices for spot and term contracts and is subject to an escalating floor price and also escalating ceiling prices.

© 2011Paladin Energy Ltd
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