Notes to the consolidated financial statements 30 June 2022 (continued) 22 Financial risk management This note explains the Group's exposure to financial risks and how these risks could affect the Group's future financial performance. Financial instruments are held by the Group for various purposes, including: • Operational: Activities of the Group generate financial instruments which include cash, trade receivables and trade payables; • Financing: The Company may enter into debt instruments in order to finance both internal growth opportunities and acquire assets. Types of instruments used include syndicated and other bank loans and finance lease agreements. Surplus funds are held either at call or as short-term deposits; and • Risk management: The Group is exposed to commodity and foreign exchange risk which is overseen by management, under policies approved by the Board. Management identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. Financial instruments used by the Group to mitigate these risks include forward exchange contracts, commodity swaps and forward sales agreements. By holding these financial instruments, the Group exposes itself to risk. The Board reviews and agrees the Group's policies for managing each of these risks, which are summarised below: (a) Market risk (i) Foreign currency risk As the Group’s sales revenues for base metals are denominated in United States dollars (USD), and the majority of operating costs are denominated in Australian dollars (AUD), the Group’s cash flow is exposed to movements in the AUD:USD exchange rate. The Group may mitigate this risk through the use of derivative instruments, including, but not limited to, forward contracts denominated in AUD. Financial instruments denominated in USD and then converted into the functional currency (i.e. AUD) were as follows: 2022 $M 2021 $M Financial assets Cash and cash equivalents 195.2 114.8 Trade receivables 95.1 78.5 Net financial assets 290.3 193.3 The cash balance above only represents the cash held in the USD bank accounts at the reporting date as converted into AUD at the 30 June 2022 AUD:USD exchange rate of 0.6889 (2021: 0.7518). The remainder of the cash balance of $171.9 million (2021: $413.7 million) was held in AUD bank accounts and therefore not exposed to foreign currency risk. The trade receivables amounts represent the USD denominated trade debtors. All other receivables were denominated in AUD at the reporting date. The following table summarises the Group’s sensitivity of financial instruments held at 30 June 2022 to movements in the AUD:USD exchange rate, with all other variables held constant. Impact on post-tax profit Sensitivity of financial instruments to foreign currency movements 2022 $M 2021 $M Increase/decrease in foreign exchange rate Increase 5.0% (9.5) (6.2) Decrease 5.0% 10.5 6.8 Notes to the consolidated financial statements 30 June 2022 (continued) 22 Financial risk management (continued) (a) Market risk (continued) (ii) Commodity price risk The Group’s sales revenues are generated from the sale of nickel, copper and cobalt. Accordingly, the Group’s revenues, derivatives and trade receivables are exposed to commodity price risk fluctuations, primarily nickel, copper and cobalt. The markets for base metals are freely traded and can be volatile. As a relatively small producer, the Group has no ability to influence commodity prices. The Group mitigates this risk through derivative instruments, including, but not limited to, quotational period (QP) hedging, forward contracts and collar arrangements. Nickel Nickel concentrate sales have a price finalisation period of one to two months until the sale is finalised with the customer. It is the Board’s policy to undertake hedging for up to 100% of the expected QP price risk. This risk emerges between the time at which the Company receives provisional payment and the time the Company receives final payment for its product. The provisional payment is based on prices prevailing at the time of shipment, however the final price received is based on prices one or two months in the future, depending on the contractual arrangement. For production outside of the QP period, it is the Board’s policy to hedge between 0% and 50% of total nickel production tonnes. Copper Copper concentrate sales during the year had an average price finalisation period of up to three months from shipment date. It is the Board’s policy to hedge between 0% and 50% of total copper production tonnes. Diesel fuel It is the Board's policy to hedge up to 75% of forecast diesel fuel usage. Diesel fuel price comprises a number of components, including Singapore gasoil and various other costs such as shipping and insurance. The total of all costs represents the wholesale or Terminal Gate Price (TGP) of diesel. The Group only hedges the Singapore gasoil component of the diesel TGP, which represents approximately 40% of the total diesel price. At the reporting date, the carrying value of the financial instruments exposed to commodity price movements were as follows: Financial instruments exposed to commodity price movements 2022 $M 2021 $M Financial assets Trade receivables 12.3 65.1 Derivative financial instruments - commodity hedging contracts 49.0 - Derivative financial instruments - diesel hedging contracts - 2.8 Net exposure 61.3 67.9 The following table summarises the sensitivity of financial instruments held at 30 June 2022 to movements in the nickel price, with all other variables held constant. Trade receivables valuation uses a sensitivity analysis of 5.0% (2021: 5.0%) and a 20.0% (2021: 20.0%) sensitivity rates is used to value derivative contracts. Notes to the consolidated financial statements 30 June 2022 Notes to the consolidated financial statements 30 June 2022 128 — IGO ANNUAL REPORT 2022 IGO ANNUAL REPORT 2022 — 129
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