IGO Annual Report 2016

Annual Report 2016 39

DIRECTORS’ REPORT

Directors' report

30 June 2016

(continued)

Operating and financial review (continued)

External factors affecting the Group's results (continued)

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 0.8188 for the 2015 financial year to 0.7272 for the year ended 30

June 2016. 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 ruling by

a single Judge, which 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, was overturned on appeal by the Full Bench of the Federal

Court. An application for Special Leave to appeal to the High Court has been lodged by the Native Title holders however

no date has yet been set for the hearing. The Company will continue to monitor the matter, in conjunction with other

affected parties.

Exposure to economic, environmental and social sustainability risks

The Company has material exposure to economic, environmental and social sustainability risks, including exposure to

base metal and foreign exchange market fluctuations and changes in environmental regulatory legislation.

The Company employs suitably qualified personnel to assist with the management of its exposure to environmental and

social sustainability risks, including appropriate health and safety personnel, as well as heritage and environmental

experts. These risks are discussed in more detail in the Company's Sustainability Report which can be found on the

Company's website.

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;

• Any change in the supply or demand impacts on the ability to generate revenues and hence the profitability

of an operation.

• Changes in government taxation legislation;

Independence Group NL