75 / 164
DIRECTORS’ REPORT
Annual Report 2015 75
Directors' report
30 June 2015
Operating and financial review (continued)
External factors affecting the Group's results
The Group operates in an uncertain economic environment and its performance is dependent upon the result of inexact
and incomplete information. As a consequence, the Group’s Board and management monitor these uncertainties and
mitigate the associated risk of adverse outcomes where possible. The following external factors are all capable of
having a material adverse effect on the business and will affect the prospects of the Group for future financial years.
Commodity prices
The Group’s operating revenues are sourced from the sale of commodities and precious metals that are priced by the
LME. The Group is not a price maker with respect to the commodities it sells and it is, and will remain, susceptible to
adverse price movements. By way of example, the average cash seller and settlement LME prices of zinc, copper and
nickel decreased by 10%, 18% and 21% respectively between July 2014 and June 2015. Between July 2013 and June
2014, these metals increased (decreased) by 16%, (1%) and 0% respectively. The Group’s Board and management
regularly review commodity prices in light of forecast trends and give consideration to hedging between 0% and 50% of
payable production.
Exchange rates
The Group is exposed to exchange rate risk on sales denominated in United States dollars ("USD") whilst its Australian
dollar ("AUD") functional currency is the currency of payment to the majority of its suppliers and employees. The
monthly average AUD/USD currency pair weakened from 0.9392 for the month of July 2014 to 0.7680 in June 2015. A
weaker AUD implies a higher AUD receipt of sales denominated in USD. The Group’s policy is to mitigate adverse
foreign exchange risk by transacting commodity hedges in AUD equivalent terms where possible.
Downstream processing markets
The price of sea freight, smelting and refining charges are market driven and vary throughout the year. These also
impact on the Group’s overall profitability.
Interest rates
Interest rate movements affect both returns on funds on deposit as well as the cost of borrowings. Furthermore, AUD
and USD interest rate differentials are intimately related to movements in the AUD/USD exchange rate.
Native Title
With regard to tenements in which the Group has an existing interest in, or will acquire an interest in the future, it is the
case that there are areas over which common law Native Title rights exist, or may be found to exist, which may preclude
or delay exploration, development or production activities. Specifically, at our Long Operation, a Federal Court
judgement determined that certain tenements are invalid insofar as they are inconsistent with the exercise of the Native
Title rights of the Aboriginal Native Title holders. An appeal on this determination has been heard by the Full Bench of
the Federal Court and the parties are awaiting release of the judgement. The Company will continue to monitor the
matter, in conjunction with other affected parties.
Other external factors and risks
• Operational performance including uncertain mine grades, seismicity ground support conditions, grade control, in fill
resource drilling, mill performance and experience of the workforce;
• Contained metal (tonnes and grades) are estimated annually and published in resource and reserve
statements, however actual production in terms of tonnes and grade often vary as the ore body can be
complex and inconsistent.
• Active underground mining operations can be subjected to varying degrees of seismicity. This natural
occurrence can represent significant safety, operational and financial risk. To mitigate this risk substantial
amounts of resources and technology are used in an attempt to predict and control seismicity.
• Exploration success or otherwise;
• Due to the nature of an ever depleting reserve/resource base, the ability to continually find or replace
reserves/resources presents a significant operational risk. Drill sites need to be continually mined (for
underground drilling) to enable effective exploration drilling.
• Operating costs including labour markets and productivity;
• Labour is one of the main cost drivers in the business and as such can materially impact the profitability of
an operation.
• Changes in market supply and demand of products;
Independence Group NL
10