Notes to the group financial statements

4	Financial risk management
	The group’s financial instruments expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and other price risks), credit risk and liquidity risk. The group may use derivative financial instruments to hedge certain risk exposures.

	The group’s financial instruments are set out below:

Figures in million (SA rand)	Loans and receivables	Available- for-sale financial assets	Held-to- maturity investments	Fair value through profit or loss	Financial liabilities at amortised cost
At 30 June 2010
Restricted cash	146	–	–	–	–
Restricted investments	–	–	410	1 332	–
Investments in financial assets	–	12	–	–	–
Trade and other receivables	741	–	–	–	–
Cash and cash equivalents	770	–	–	–	–
Borrowings	–	–	–	–	1 190
Trade and other payables	–	–	–	–	455
At 30 June 2009
Restricted cash	161	–	–	–	–
Restricted investments	–	–	1 640	–	–
Investments in financial assets	–	57	–	–	–
Trade and other receivables	693	–	–	–	–
Cash and cash equivalents	1 950	–	–	–	–
Borrowings	–	–	–	–	362
Trade and other payables	–	–	–	–	553

Figures in million (US Dollar)	Loans and receivables	Available- for-sale financial assets	Held-to- maturity investments	Fair value through profit or loss	Financial liabilities at amortised cost
At 30 June 2010
Restricted cash	19	–	–	–	–
Restricted investments	–	–	53	175	–
Investments in financial assets	–	2	–	–	–
Trade and other receivables	97	–	–	–	–
Cash and cash equivalents	101	–	–	–	–
Borrowings	–	–	–	–	156
Trade and other payables	–	–	–	–	59
At 30 June 2009
Restricted cash	21	–	–	–	–
Restricted investments	–	–	212	–	–
Investments in financial assets	–	7	–	–	–
Trade and other receivables	90	–	–	–	–
Cash and cash equivalents	253	–	–	–	–
Borrowings	–	–	–	–	47
Trade and other payables	–	–	–	–	71
Risk management is carried out by a central treasury department (group treasury) under policies approved by the board of directors. Group treasury identifies, evaluates and hedges certain selected financial risks in close co-operation with the group’s operating units. The board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity.

(a)	Market risk
	(i)	Foreign exchange risk
		The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar (US$). Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. Harmony’s revenues are sensitive to the R/US$ exchange rate as all revenues are generated by gold sales denominated in US$. Harmony generally does not enter into forward sales, derivatives or other hedging arrangements to establish exchange rates in advance for the sale of its future gold production.

		The group is exposed to foreign exchange risk arising from intercompany loans denominated in a currency other than the functional currency of that entity. Harmony generally does not enter into forward sales, derivatives or other hedging arrangements to manage this risk.

		Sensitivity analysis The group has reviewed its foreign currency exposure on financial assets and financial liabilities and has identified the following sensitivities for a 10% change in the exchange rate.

		SA rand			US dollar
		2009	2010	Figures in million	2010	2009
				A$ against US$
		11	9	Increase by ten percent	1	1
		(11)	(9)	Decrease by ten percent	(1)	(1)
		0.81	0.85	Closing rate	0.85	0.81
				Kina against A$
		130	226	Increase by ten percent	30	17
		(130)	(226)	Decrease by ten percent	(30)	(17)
		2.71	2.31	Closing rate	2.31	2.71

	(ii)	Other price risk
		The group is exposed to the risk of fluctuations in the fair value of the available-for-sale financial assets as a result of changes in market prices (other than changes in interest rates and foreign currencies). Harmony generally does not use any derivative instruments to manage this risk.

		Sensitivity analysis A one percent increase in the share price at the reporting date, with all other variables held constant, would have increased other comprehensive income by R13.4 million (US$1.8 million) (2009: R0.6 million; US$0.01 million); an equal change in the opposite direction would have decreased other comprehensive income by R13.4 million (US$1.8 million) (2009: R0.6 million; US$0.1 million). The analysis is performed on the same basis for 2009.

		Commodity price sensitivity The profitability of the group’s operations, and the cash flows generated by those operations, are affected by changes in the market price of gold. Harmony generally does not enter into forward sales, derivatives or other hedging arrangements to establish a price in advance for the sale of future gold production.

	(iii)	Cash flow and fair value Interest rate risk
		The group’s interest rate risk arises mainly from long-term borrowings. The group has variable interest rate borrowings. Variable rate borrowings expose the group to cash flow interest rate risk. The group has not entered into interest rate swap agreements.

		Sensitivity analysis A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) profit or loss before tax by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2009.

		SA rand			US dollar
		2009	2010	Figures in million	2010	2009
		4	12	Increase by 100 basis points	2	–
		(4)	(12)	Decrease by 100 basis points	(2)	–

(b)	Credit risk
	Credit risk is the risk that a counterparty may default or not meet its obligations timeously. Financial instruments, which subject the group to concentrations of credit risk, consist predominantly of restricted cash, restricted investments, trade and other receivables (excluding non-financial instruments) and cash and cash equivalents.

	Exposure to credit risk on trade and other receivables is monitored on a regular basis. The credit risk arising from restricted cash, cash and cash equivalents and restricted investments is managed by ensuring amounts are only invested with financial institutions of good credit quality. The group has policies that limit the amount of credit exposure to any one financial institution.

	Cash and cash equivalents and restricted cash
	Financial institutions’ credit rating by exposure:

		SA rand			US dollar
		2009	2010	Figures in million	2010	2009
				Credit rating
				South African operations
		711	437	AAA	57	92
		98	53	AA⁽¹⁾	7	13
		628	192	AA⁽¹⁾	25	81
		364	38	A+	5	47
		–	13	A	2	–
		1 801	733	Total South African operations	96	233
				International operations
		310	183	AA⁽¹⁾	24	40
		310	183	Total international operations	24	40
		2 111	916	Total cash and cash equivalents and restricted cash	120	273
				⁽¹⁾Includes restricted cash
		71	56	AA	7	9
		90	90	AA-	12	12
		161	146	Total restricted cash	19	21

	It is the policy of the group to renegotiate credit terms with long-standing customers who have a good credit history with the group. These customers are monitored on an ongoing basis to ensure that the customer remains within the renegotiated terms.

	The group’s maximum exposure to credit risk is represented by the carrying amount of all financial assets determined to be exposed to credit risk, amounting to R3 399 million (US$445.5 million) as at 30 June 2010 (2009: R4 445 million (US$575.8 million)).
(c)	Liquidity risk
	Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, and the availability of funding through an adequate amount of committed credit facilities.

	In the ordinary course of business, the group receives cash from its operations and is required to fund working capital and capital expenditure requirements. The cash is managed to ensure that surplus funds are invested in a manner to achieve market-related returns and to provide sufficient liquidity at the minimum risk. The group is able to actively source financing at competitive rates.

	The following are the contractual maturities of financial liabilities (including principle and interest payments):

		SA rand			US dollar
		More than 1 year	Current	Figures in million	Current	More than 1 year
				2010
		1 155	319	Borrowings^{(1; 2; 3)}	41	152
		–	455	Trade and other payables (excluding non-financial liabilities)	59	–
		1 155	774		100	152
				2009
		112	254	Borrowings^{(1; 2)}	33	15
		–	553	Trade and other payables (excluding non-financial liabilities)	71	–
		112	807		104	15

		⁽¹⁾	R160 million (US$21 million) is due between 0 to 6 months. (2009: nil).
		⁽²⁾	R155 million (US$20 million) is due between 6 to 12 months. (2009: R254 million (US$32.9 million)).
		⁽³⁾	R305 million (US$40 million) is due between 1 to 2 years. (2009: R36 million (US$4.6 million)).

(d)	Capital risk management
	The primary objective of managing the group’s capital is to ensure that there is sufficient capital available to support the funding requirements of the group, in a way that optimises the cost of capital and matches the current strategic business plan.

	The group manages and makes adjustments to the capital structure, which consists of debt and equity as and when borrowings mature or when funding is required. This may take the form of raising equity, market or bank debt or hybrids thereof. The group may also adjust the amount of dividends paid, sell assets to reduce debt or schedule projects to manage the capital structure.

	There were no changes to the group’s approach to capital management during the year.
(e)	Fair value determination
	Effective 1 July 2009, the group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
	1)	Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
	2)	Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
	3)	Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

	The following table presents the group’s assets and liabilities that are measured at fair value at 30 June 2010.

	Figures in million
Assets	Level 1	Level 2	Level 3
SA rand
Available-for-sale financial assets	–	2	10
Fair value through profit or loss	–	1 332	–
US dollar
Available-for-sale financial assets	–	–	2
Fair value through profit or loss	–	175	–

The following table presents the group’s assets and liabilities that are measured at fair value at 30 June 2009.

SA rand
Available-for-sale financial assets	–	48	9
US dollar
Available-for-sale financial assets	–	6	1

4

Financial risk management

(a)

Market risk

(i)

Foreign exchange risk

(ii)

Other price risk

(iii)

Cash flow and fair value Interest rate risk

(b)

Credit risk

(c)

Liquidity risk

(d)

Capital risk management

(e)

Fair value determination