Risk Management

The margins in Noble Resources’ physical commodity trading business’ are partly driven by the underlying commodity prices because often, marketing and offtake fees are set as a percentage of the notional value of the underlying transaction.

We have several long-term marketing and offtake contracts in our portfolio and these tend to be “long” commodity price risk.

Basis risks or the inherent risk a trader takes when hedging a position by taking a contrary position in a derivative of the asset, such as a futures contract, may arise from imperfect hedges of physical versus paper positions.

Certain commodities are subject to high degrees of illiquidity and are not subject to normal market risk measures.

How do we manage these risks?

The Risk Department and our commodity trading desks have continuous discussions with weekly minuted Risk meetings.

Measures of Risk we use:

1. Value at Risk (VaR), a standard measure in all trading businesses, is a statistical measure of one day of potential loss within a business or trading book’s liquid positions. This controls the potential for excessive losses from oversized positions.
2. Maximum Drawdown Limit is a stop trading limit should a business or trading book’s cumulative loss exceed a certain amount. This ensures that any loss-making activity receives a full strategic review in the event of actual losses.
3. Earnings at Risk, this is a stressed shock to all positions, not just those suitable for VaR, so covers the less liquid portion of our commodity portfolio.
4. Cashflow at Risk, this is a statistical measure of the potential for margin calls for financial markets transactions used to hedge or take commodity price risk. This measure ensures that financial market activities will not result in an inappropriate cash outflow due to a margin call.

These measures are augmented with Authorised Trading Mandates with annual reviews for all of our employees who have the ability to take trading positions in commodities. The Authorised Trading Mandates clearly define the employee’s individual responsibilities and levels of authority to take positions.

We also have a New Product Approval Process pursuant to which all new trading products or underlying commodities require a full approval from all support functions to ensure operational capability.

Where appropriate Noble Resources will enter into transactions to mitigate commodity price risk, for example physical contracts that offset the risk such as a forward sale to a counterparty or a financial market transaction.

Most of Noble Resources’ assets consists of accounts receivable, prepays, financings to suppliers or customers and contract valuations.

Should a counterparty default on a loan repayment or fail to deliver or take receipt of products or volumes Noble Resources has sold or bought, a loss might need to be taken if the product cannot be recovered or a price move has resulted in a higher replacement cost for the contract.

How do we manage these risks?

All counterparties receive a full credit analysis from the Risk Department that assigns an internal credit rating based on quantitative financial strength and a qualitative assessment of business strength.

On the basis of this rating, credit limits are approved within delegated authorities. The larger the limit, the longer the tenor and the riskier the counterparty, the higher the authority required.

All exposures are managed within portfolio limits that cover different dimensions of the exposures at a portfolio level – credit ratings; transaction tenors; business units; geographical.

All limits and excesses to these limits as well as late payments are reported within a dedicated counterparty risk management system.

Risk Officers have dedicated portfolio coverage by Business Unit to ensure continuous communication on new and existing credit positions.

Monthly minuted Risk meetings cover portfolio reviews, discussions about deteriorating credits and approvals of larger transactions or risks.

Where appropriate Noble Resources will either receive letters of credit or other forms of bank documentation, additional physical security over plant, equipment, inventory or other assets or buy credit insurance to mitigate against these risks.

Product in transit or in storage can be subject to volume and quality loss or even theft. These losses can be partial as well as total such as vessel sinking. This would lead to a loss versus the original purchase cost.

How do we manage these risks?

All service providers to the supply chain that transport or store Noble Resources’ goods receive a review and approval from our Operations Department to ensure competence, suitability and compliance.

We cover all inventory and supply chain risk with insurance from highly rated international insurance companies.

By following well-established logistics processes, our Operations Department ensures full knowledge of the status of all of Noble Resources’ inventory at all times.

Any losses are fully reviewed to ensure we continuously improve our processes.

We transact in various jurisdictions that have developing or unstable political, legal and regulatory regimes in place.

Policy changes could lead to, amongst other risks, expropriation or have a significant impact on the ability and cost to import and export products. These changes could also impact overall regional or even global underlying product prices.

How do we manage these risks?

Many geo-political risks are captured by the risk management of other risk factors such as counterparty approvals, geographic credit portfolio limits or individual supply chain service provider approvals.

We have geographic based limits to capture the aggregate of credit, inventory, equity and other investment exposures and cash balances that are reviewed at the monthly minuted Risk meeting.

Noble Resources’ Risk Department has an early warning indicator system that alerts the Business Units to any significant changes in financial market or economic indicators for the countries where we do business.

Where appropriate we may enter into insurance contracts to mitigate these risks.