21 Financial risk management

21.1 Financial risks

Financial and capital risk management strategy

The financial risks arising from the Group’s operations comprise market, liquidity and credit risk. These risks arise in the normal course of business and the Group manages its exposure to them in accordance with the Group’s portfolio risk management strategy. The objective of the strategy is to support the delivery of the Group’s financial targets, while protecting its future financial security and flexibility by taking advantage of the natural diversification provided by the scale, diversity and flexibility of the Group’s operations and activities.

A Cash Flow at Risk (CFaR) framework is used to measure the aggregate and diversified impact of financial risks upon the Group’s financial targets. The principal measurement of risk is CFaR measured on a portfolio basis, which is defined as the worst expected loss relative to projected business plan cash flows over a one-year horizon under normal market conditions at a confidence level of 90 per cent.

Market risk management

The Group’s activities expose it to market risks associated with movements in interest rates, foreign currencies and commodity prices. Under the strategy outlined above, the Group seeks to achieve financing costs, currency impacts, input costs and commodity prices on a floating or index basis. This strategy gives rise to a risk of variability in earnings, which is measured under the CFaR framework.

In executing the strategy, financial instruments are potentially employed in three distinct but related activities. The following table summarises these activities and the key risk management processes:


Activity		Key risk management processes

1 Risk mitigation

On an exception basis, hedging for the purposes of mitigating risk related to specific and significant expenditure on investments or capital projects will be executed if necessary to support the Group’s strategic objectives.		Execution of transactions within approved mandates.

2 Economic hedging of commodity sales, operating costs, short-term cash deposits and debt instruments

Where Group commodity production is sold to customers on pricing terms that deviate from the relevant index target and where a relevant derivatives market exists, financial instruments may be executed as an economic hedge to align the revenue price exposure with the index target and US dollars.		Measuring and reporting the exposure in customer commodity contracts and issued debt instruments.

Where debt is issued in a currency other than the US dollar and/or at a fixed interest rate, fair value and cash flow hedges may be executed to align the debt exposure with the Group’s functional currency of US dollars and/or to swap to a floating interest rate.		Executing hedging derivatives to align the total group exposure to the index target.

Where short-term cash deposits are held in a currency other than US dollars, derivative financial instruments may be executed to align the foreign exchange exposure to the Group’s functional currency of US dollars.		Execution of transactions within approved mandates.

3 Strategic financial transactions

Opportunistic transactions may be executed with financial instruments to capture value from perceived market over/under valuations.		Execution of transactions within approved mandates.

Primary responsibility for the identification and control of financial risks, including authorising and monitoring the use of financial instruments for the above activities and stipulating policy thereon, rests with the Financial Risk Management Committee under authority delegated by the Chief Executive Officer.

Interest rate risk

The Group is exposed to interest rate risk on its outstanding borrowings and short-term cash deposits from the possibility that changes in interest rates will affect future cash flows or the fair value of fixed interest rate financial instruments. Interest rate risk is managed as part of the portfolio risk management strategy.

The majority of the Group’s debt is issued at fixed interest rates. The Group has entered into interest rate swaps and cross currency interest rate swaps to convert most of its fixed interest rate exposure to floating US dollar interest rate exposure. As at 30 June 2019, 87 per cent of the Group’s borrowings were exposed to floating interest rates inclusive of the effect of swaps (2018: 89 per cent).

The fair value of interest rate swaps and cross currency interest rate swaps in hedge relationships used to hedge both interest rate and foreign currency risks are shown in the valuation hierarchy of this note.

Based on the net debt position as at 30 June 2019, taking into account interest rate swaps and cross currency interest rate swaps, it is estimated that a one percentage point increase in the US LIBOR interest rate will decrease the Group’s equity and profit after taxation by US$39 million (2018: decrease of US$54 million). This assumes the change in interest rates is effective from the beginning of the financial year and the fixed/floating mix and balances are constant over the year. However, interest rates and the net debt profile of the Group may not remain constant over the coming financial year and therefore such sensitivity analysis should be used with care.

Currency risk

The US dollar is the predominant functional currency within the Group and as a result, currency exposures arise from transactions and balances in currencies other than the US dollar. The Group’s potential currency exposures comprise:

•

translational exposure in respect of non-functional currency monetary items;

•

transactional exposure in respect of non-functional currency expenditure and revenues.

The Group’s foreign currency risk is managed as part of the portfolio risk management strategy.

Translational exposure in respect of non-functional currency monetary items

Monetary items, including financial assets and liabilities, denominated in currencies other than the functional currency of an operation are periodically restated to US dollar equivalents and the associated gain or loss is taken to the income statement. The exception is foreign exchange gains or losses on foreign currency denominated provisions for closure and rehabilitation at operating sites, which are capitalised in property, plant and equipment.

The Group has entered into cross currency interest rate swaps and foreign exchange forwards to convert its significant foreign currency exposures in respect of monetary items into US dollars. Changes in foreign exchange rates will therefore have an insignificant impact on equity and profit after tax.

The principal non-functional currencies to which the Group is exposed are the Australian dollar, the Euro, the Pound sterling and the Chilean peso; however, 82 per cent (2018: 88 per cent) of the Group’s net financial liabilities are denominated in US dollars. Based on the Group’s net financial assets and liabilities as at 30 June 2019, a weakening of the US dollar against these currencies (one cent strengthening in Australian dollar, one cent strengthening in Euro, one penny strengthening in Pound sterling and 10 pesos strengthening in Chilean peso), with all other variables held constant, would decrease the Group’s equity and profit after taxation by US$12 million (2018: decrease of US$10 million).

Transactional exposure in respect of non-functional currency expenditure and revenues

Certain operating and capital expenditure is incurred in currencies other than an operation’s functional currency. To a lesser extent, certain sales revenue is earned in currencies other than the functional currency of operations and certain exchange control restrictions may require that funds be maintained in currencies other than the functional currency of the operation. These currency risks are managed as part of the portfolio risk management strategy. The Group may enter into forward exchange contracts when required under this strategy.

Commodity price risk

The risk associated with commodity prices is managed as part of the portfolio risk management strategy. Contracts for the sale and physical delivery of commodities are executed whenever possible on a pricing basis intended to achieve a relevant index target. While substantially all of the Group’s commodity production is sold on market-based index pricing terms, derivatives may from time to time be used to align realised prices with the relevant index.

Financial instruments with commodity price risk comprise forward commodity and other derivative contracts with a net assets fair value of US$199 million (2018: US$210 million). Significant commodity price risk instruments within other derivative balances include derivatives embedded in physical commodity purchase and sales contracts of gas in Trinidad and Tobago with a net assets fair value of US$202 million (2018: US$216 million). These are included within other derivatives.

The potential effect on these derivatives’ fair values of using reasonably possible alternative assumptions in these models, based on a change in the most significant input, such as commodity prices, by a 10 per cent change with all other factors held constant, would increase or decrease profit after taxation by US$55 million (2018: US$9 million).

Provisionally priced commodity sales and purchases contracts

Provisionally priced sales or purchases volumes are those for which price finalisation, referenced to the relevant index, is outstanding at the reporting date. Provisional pricing mechanisms within these sales and purchases arrangements have the character of a commodity derivative. Trade receivables or payables under these contracts are carried at fair value through profit and loss. The Group’s exposure at 30 June 2019 to the impact of movements in commodity prices upon provisionally invoiced sales and purchases volumes was predominately around copper.

The Group had 277 thousand tonnes of copper exposure as at 30 June 2019 (2018: 356 thousand tonnes) that was provisionally priced. The final price of these sales and purchases volumes will be determined during the first half of FY2020. A 10 per cent change in the price of copper realised on the provisionally priced sales, with all other factors held constant, would increase or decrease profit after taxation by US$114 million (2018: US$178 million).

The relationship between commodity prices and foreign currencies is complex and movements in foreign exchange rates can impact commodity prices. The sensitivities should therefore be used with care.

Liquidity risk

Refer to note 19 ‘Net debt’ for details on the Group’s liquidity risk.

Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily from customer receivables) and from its financing activities, including deposits with banks and financial institutions, other short-term investments, interest rate and currency derivative contracts and other financial instruments.

Refer to note 8 ‘Trade and other receivables’ and note 19 ‘Net debt’ for details on the Group credit risk.

21.2 Recognition and measurement (following adoption of IFRS 9)

All financial assets and liabilities, other than derivatives, are initially recognised at the fair value of consideration paid or received, net of transaction costs as appropriate.

Financial assets are subsequently carried at fair value or amortised cost based on:

•

the Group’s purpose, or business model, for holding the financial asset;

•

whether the financial asset’s contractual terms give rise to cash flows that are solely payments of principal and interest.

The resulting financial statement classifications of financial assets can be summarised as follows:


Contractual cash flows	Business model	Category
Solely principal and interest	Hold in order to collect contractual cash flows	Amortised cost

Solely principal and interest	Hold in order to collect contractual cash flows and sell	Fair value through other comprehensive income

Solely principal and interest	Hold in order to sell	Fair value through profit or loss

Other	Any of those mentioned above	Fair value through profit or loss

Solely principal and interest refers to the Group receiving returns only for the time value of money and the credit risk of the counterparty for financial assets held. The main exceptions for the Group are provisionally priced receivables and derivatives.

The Group has the intention of collecting payment directly from its customers in most cases, however the Group also participates in receivables financing programs in respect of selected customers. Receivables in these portfolios are therefore held at fair value through profit or loss prior to sale to the financial institution.

With the exception of derivative contracts and provisionally priced trade payables, the Group’s financial liabilities are classified as subsequently measured at amortised cost.

The Group may in addition elect to designate certain financial assets or liabilities at fair value through profit or loss or to apply hedge accounting where they are not mandatorily held at fair value through profit or loss.

Derivatives are initially recognised at fair value on the date the contract is entered into and are subsequently remeasured at their fair value.

Fair value measurement

The carrying amount of financial assets and liabilities measured at fair value is principally calculated based on inputs other than quoted prices that are observable for these financial assets or liabilities, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices). Where no price information is available from a quoted market source, alternative market mechanisms or recent comparable transactions, fair value is estimated based on the Group’s views on relevant future prices, net of valuation allowances to accommodate liquidity, modelling and other risks implicit in such estimates.

The inputs used in fair value calculations are determined by the relevant segment or function. The functions support the assets and operate under a defined set of accountabilities authorised by the Executive Leadership Team. Movements in the fair value of financial assets and liabilities may be recognised through the income statement or in other comprehensive income.

For financial assets and liabilities carried at fair value, the Group uses the following to categorise the method used based on the lowest level input that is significant to the fair value measurement as a whole:


Fair value hierarchy	Level 1	Level 2	Level 3
Valuation method	Based on quoted prices (unadjusted) in active markets for identical financial assets and liabilities.	Based on inputs other than quoted prices included within Level 1 that are observable for the financial asset or liability, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices).	Based on inputs not observable in the market using appropriate valuation models, including discounted cash flow modelling.

21.3 Financial assets and liabilities

The financial assets and liabilities are presented by class in the table below at their carrying amounts.


	IFRS 13 Fair value hierarchy Level	IFRS 9 Classification⁽¹⁾	2019 US$M		2018 US$M
Fair value hierarchy⁽²⁾
Current cross currency and interest rate swaps	2	Fair value through profit or loss		15		12
Current other derivative contracts⁽³⁾	2,3	Fair value through profit or loss		57		170
Current other investments⁽⁴⁾	1,2	Fair value through profit or loss		15		18
Non-current cross currency and interest rate swaps	2	Fair value through profit or loss		739		396
Non-current other derivative contracts⁽³⁾	2,3	Fair value through profit or loss		180		195
Non-current investment in shares	3	Fair value through other comprehensive income		34		33
Non-current investment in shares	3	Fair value through profit or loss		6		–
Non-current other investments⁽⁴⁾⁽⁵⁾	1,2,3	Fair value through profit or loss		344		375

Total other financial assets				1,390		1,199
Cash and cash equivalents		Amortised cost		15,613		15,871
Trade and other receivables⁽⁶⁾		Amortised cost		1,929		1,799
Provisionally priced trade receivables⁽⁶⁾	2	Fair value through profit or loss		1,446		1,126
Loans to equity accounted investments		Amortised cost		33		13

Total financial assets				20,411		20,008

Non-financial assets				80,450		91,985

Total assets				100,861		111,993

Current cross currency and interest rate swaps	2	Fair value through profit or loss		63		121
Current other derivative contracts⁽³⁾	2,3	Fair value through profit or loss		64		17
Non-current cross currency and interest rate swaps	2	Fair value through profit or loss		895		1,092
Non-current other derivative contracts⁽³⁾	2,3	Fair value through profit or loss		1		1

Total other financial liabilities				1,023		1,231
Trade and other payables⁽⁷⁾		Amortised cost		6,283		5,414
Provisionally priced trade payables⁽⁷⁾	2	Fair value through profit or loss		277		377
Bank overdrafts and short-term borrowings⁽⁸⁾		Amortised cost		20		58
Bank loans⁽⁸⁾		Amortised cost		2,498		2,555
Notes and debentures⁽⁸⁾		Amortised cost		21,529		23,298
Finance leases		Amortised cost		715		802
Other⁽⁸⁾		Amortised cost		66		92

Total financial liabilities				32,411		33,827

Non-financial liabilities				16,626		17,496

Total liabilities				49,037		51,323

⁽¹⁾	For classifications under IAS 39 refer to note 38 ‘New and amended accounting standards and interpretations’.

⁽²⁾	All of the Group’s financial assets and financial liabilities recognised at fair value were valued using market observable inputs categorised as Level 2 with the exception of the specified items in the following footnotes.

⁽³⁾	Includes other derivative contracts of US$200 million (2018: US$213 million) categorised as Level 3. Significant items are derivatives embedded in physical commodity purchase and sales contracts of gas in Trinidad and Tobago with net assets fair value of US$202 million (2018: US$216 million).

⁽⁴⁾	Includes investments held by BHP Billiton Foundation which are restricted and not available for general use by the Group of US$309 million (2018: US$343 million) of which other investment (US Treasury Notes) of US$128 million categorised as Level 1 (2018: US$108 million).

⁽⁵⁾	Includes other investments of US$47 million (2018: US$47 million) categorised as Level 3.

⁽⁶⁾	Excludes input taxes of US$367 million (2018: US$338 million) included in other receivables. Refer to note 8 ‘Trade and other receivables’.

⁽⁷⁾	Excludes input taxes of US$162 million (2018: US$189 million) included in other payables. Refer to note 9 ‘Trade and other payables’.

⁽⁸⁾	All interest bearing liabilities, excluding finance leases, are unsecured.

The carrying amounts in the table above generally approximate to fair value. In the case of US$3,019 million (2018: US$3,019 million) of fixed rate debt not swapped to floating rate, the fair value at 30 June 2019 was US$3,757 million (2018: US$3,434 million).

For financial instruments that are carried at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period. There were no transfers between categories during the period.

For financial instruments not valued at fair value on a recurring basis, the Group uses a method that can be categorised as Level 2.

Offsetting financial assets and liabilities

The Group enters into money market deposits and derivative transactions under International Swaps and Derivatives Association master netting agreements that do not meet the criteria for offsetting, but allow for the related amounts to be set-off in certain circumstances. The amounts set out as cross currency and interest rate swaps in the table above represent the derivative financial assets and liabilities of the Group that may be subject to the above arrangements and are presented on a gross basis.

21.4 Derivatives and hedge accounting

The Group uses derivatives to hedge its exposure to certain market risks and may elect to apply hedge accounting.

Hedge accounting

Derivatives are included within financial assets or liabilities at fair value through profit or loss unless they are designated as effective hedging instruments. Financial instruments in this category are classified as current if they are expected to be settled within 12 months otherwise they are classified as non-current.

The Group uses derivatives to hedge its exposure to certain market risks and may elect to apply hedge accounting. Where hedge accounting is applied, at the start of the transaction, the Group documents the type of hedge, the relationship between the hedging instrument and hedged items and its risk management objective and strategy for undertaking various hedge transactions. The documentation also demonstrates that the hedge is expected to be effective.

The Group applies the following types of hedge accounting to its derivatives hedging the interest rate and currency risks in its notes and debentures:

•

Fair value hedges – the fair value gain or loss on interest rate and cross currency swaps relating to interest rate risk, together with the change in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognised immediately in the income statement.

If the hedge no longer meets the criteria for hedge accounting, the fair value adjustment on the note or debenture is amortised to the income statement over the period to maturity using a recalculated effective interest rate.

•

Cash flow hedges – changes in the fair value of cross currency interest rate swaps which hedge foreign currency cash flows on the notes and debentures are recognised directly in other comprehensive income and accumulated in the cash flow hedging reserve. To the extent a hedge is ineffective, changes in fair value are recognised immediately in the income statement.

When a hedging instrument expires, or is sold, terminated or exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is amortised to the income statement over the period to the hedged item’s maturity.

When hedged, the Group hedges the full notional value of notes or debentures. However, certain components of the fair value of derivatives are not permitted under IFRS 9 to be included in the hedge accounting above. Certain costs of hedging are permitted to be recognised in other comprehensive income. Any change in the fair value of a derivative that does not qualify for hedge accounting, or is ineffective in hedging the designated risk due to contractual differences between the hedged item and hedging instrument, is recognised immediately in the income statement.

The table below shows the carrying amounts of the Group’s notes and debentures by currency and the derivatives which hedge them:

•

The carrying amount of the notes and debentures includes foreign exchange remeasurement to period end rates and fair value adjustments when included in a fair value hedge.

•

The breakdown of the hedging derivatives includes remeasurement of foreign currency notional values at period end rates, fair value movements due to interest rate risk, foreign currency cash flows designated into cash flow hedges, costs of hedging recognised in other comprehensive income, ineffectiveness recognised in the income statement and accruals or prepayments.

•

The hedged value of notes and debentures includes their carrying amounts adjusted for the offsetting derivative fair value movements due to foreign currency and interest rate risk remeasurement.

Fair value of derivatives

2019

US$M

Carrying
amount of
notes and
debentures

Foreign
exchange
notional
at spot
rates

Interest
rate risk

Recognised
in cash flow
hedging
reserve

Recognised
in cost of
hedging
reserve

Recognised
in the
income
statement

Accrued
cash
flows

Total

Hedged
value of
notes and
debentures

B to G

A + B + C

USD

9,433

–

(253

)

–

111

(122

)

9,180

GBP

3,118

678

(517

)

(57

)

234

3,279

EUR

7,680

378

(566

)

(100

)

(119

)

7,492

CAD

594

175

(22

)

148

747

AUD

704

)

–

)

773

Total

21,529

1,304

(1,362

)

(163

)

106

251

204

21,471

2018

US$M

23,298

1,145

(633

)

(85

)

–

307

805

23,810

The weighted average interest rate payable is USD LIBOR + 2.3%. Refer to note 20 ‘Net finance costs’ for details of net finance costs for the year.

Movements in reserves relating to hedge accounting

The following table shows a reconciliation of the components of equity and an analysis of the movements in reserves for all hedges. For a description of these reserves, refer to note 16 ‘Other equity’.

2019

US$M

Cash flow hedging
reserve

Cost of hedging
reserve

Total

Gross

Tax

Net

Gross

Tax

Net

At the beginning of the financial year

(27

)

–

Impact of adoption of IFRS 9

176

(52

)

124

(176

)

(124

)

–

Add: Change in fair value of hedging instrument recognised in OCI

(327

)

(229

)

–

(229

)

Less: Reclassified from reserves to interest expense – recognised through OCI

229

(68

)

161

(20

)

211

At the end of the financial year

163

(49

)

114

(106

)

(74

)

Changes in interest bearing liabilities and related derivatives resulting from financing activities

The movement in the year in the Group’s interest bearing liabilities and related derivatives are as follows:


2019 US$M	Interest bearing liabilities															Derivatives (assets)/ liabilities
	Bank loans			Notes and debentures			Finance leases			Bank overdraft and short- term borrowings			Other			Cross currency and interest rate swaps			Total
At the beginning of the financial year		2,555			23,298			802			58			92			805
Proceeds from interest bearing liabilities		250			–			–			–			–			–			250
Settlements of debt related instruments		–			–			–			–			–			(160	)		(160	)
Repayment of interest bearing liabilities		(308	)		(2,198	)		(75	)		–			(23	)		–			(2,604	)

Change from Net financing cash flows		(58	)		(2,198	)		(75	)		–			(23	)		(160	)		(2,514	)

Other movements:
Interest rate impacts		–			729			–			–			–			(809	)
Foreign exchange impacts		–			(311	)		(11	)		–			–			319
Other interest bearing liabilities/derivative related changes		1			11			(1	)		(38	)		(3	)		49

At the end of the financial year		2,498			21,529			715			20			66			204


2018 US$M	Interest bearing liabilities															Derivatives (assets)/ liabilities
	Bank loans			Notes and debentures			Finance leases			Bank overdraft and short- term borrowings			Other			Cross currency and interest rate swaps			Total
At the beginning of the financial year		2,281			27,041			897			45			210			740
Proceeds from interest bearing liabilities		500			–			–			–			28			–			528
Settlements of debt related instruments		–			–			–			–			–			(218	)		(218	)
Repayment of interest bearing liabilities		(221	)		(3,736	)		(81	)		–			(150	)		–			(4,188	)

Change from Net financing cash flows		279			(3,736	)		(81	)		–			(122	)		(218	)		(3,878	)

Other movements:
Interest rate impacts		–			(353	)		–			–			–			329
Foreign exchange impacts		–			245			(9	)		–			–			(254	)
Other interest bearing liabilities/derivative related changes		(5	)		101			–			13			4			208
Liabilities transferred to held for sale		–			–			(5	)		–			–			–

At the end of the financial year		2,555			23,298			802			58			92			805