Glencore : 2020 Annual Report of Glencore plc

2020 Annual Report of Glencore plc

Released : 11/03/2021 10:54

RNS Number : 9536R Glencore PLC

11 March 2021

Baar, Switzerland 11 March 2021

2020 Annual Report of Glencore plc

Glencore plc ("Glencore" or the "Company") has today:

· published its Annual Report for the year ended 31 December 2020 ("Annual Report") on its websitewww.glencore.com as required by DTR 4.1.3 R and

6.3.5 R; and

· submitted a copy of the Annual Report to the Financial Conduct Authority's (FCA) National Storage Mechanism in accordance with LR 9.6.1 R.

The Annual Report will shortly be available for inspection on the FCA's National Storage Mechanism:

fca.org.uk/markets/primary-markets/regulatory-disclosures/national-storage-mechanism

Glencore will hold its 2021 Annual General Meeting on 29 April 2021. Further details will be available in the notice of meeting, which will be released later this month.

The Appendix to this announcement contains the following additional information which has been extracted from the Annual Report for the purposes of compliance with DTR 4.1.12 R and 6.3.5 R only:

• · a description of principal risks and uncertainties;

• · a note on related party transactions; and

• · the Directors' Responsibilities Statement.

The Appendix should be read in conjunction with Glencore's Preliminary Results Announcement issued on 16 February 2021 (including the notice on forward looking statements at the end of that announcement). Together these constitute the material required by DTR 4.1.12 R and 6.3.5 R to be communicated to the media in unedited full text through a Regulatory Information Service. This announcement should be read in conjunction with and is not a substitute for reading the full Annual Report.

Page and note references in the text below refer to page numbers and notes in the Annual Report and terms defined in that document have the same meanings in these extracts.

For further information please contact:

Investors

Martin Fewings t: [phone] m: [phone]

Media

Charles Watenphul	t: [phone]	m: [phone]	[e-mail]
Company Secretarial
John Burton	t: [phone]	m: [phone]	[e-mail]
Nicola Leigh	t: [phone]	m: [phone]	[e-mail]
Lionel Mateo	t: [phone]	m: [phone]	[e-mail]
www.glencore.com

Glencore LEI: 2138002658CPO9NBH955

Notes for Editors

Glencore is one of the world's largest global diversified natural resource companies and a major producer and marketer of more than 60 responsibly-sourced commodities that advance everyday life. The Group's operations comprise around 150 mining and metallurgical sites and oil production assets.

With a strong footprint in over 35 countries in both established and emerging regions for natural resources, Glencore's industrial activities are supported by a global network ofmore than 30 marketing offices. Glencore's customers are industrial consumers, such as those in the automotive, steel, power generation, battery manufacturing and oil sectors. We also provide financing, logistics and other services to producers and consumers of commodities. Glencore's companies employ around 145,000 people, including contractors.

Glencore is proud to be a member of the Voluntary Principles on Security and Human Rights and the International Council on Mining and Metals. We are an active participant in the Extractive Industries Transparency Initiative. Our ambition is to be a net zero total emissions company by 2050.

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APPENDIX

Glencore's Risk Management section

The following has been extracted from pages 70 to 84 of the Annual Report:

Risk management is one of the core responsibilities of the Group's leadership and it is central to our decision-making processes. The Group's leadership fundamental duties as to risk management are:

• · making a robust assessment of emerging and principal risks

• · monitoring risk management and internal controls

• · promoting a risk aware culture

The Board also assesses and approves our overall risk appetite and monitors our risk exposure. This process is supported by the Audit, HSEC and ECC Committees, whose roles include evaluating and monitoring the risks inherent in their respective areas as described below and to whom the Group's applicable corporate functions (Risk Management, Compliance, Legal, HSEC, Sustainable Development, HR and IT) report.

Effective risk management is crucial in helping the Group achieve its objectives of preserving its overall financial strength for the benefit of all stakeholders, and safeguarding its ability to continue as a going concern, while generating sustainable long-term returns.

The Board, through the ECC and HSEC Committees, reviews and determines the appropriate level of risk management oversight for the Group's material JVs. We ensure that our material risk management programmes are implemented at all JVs that we operate. In other JVs, we seek to influence our JV partners to adopt our commitment to responsible business practices and implement appropriate programmes in respect of their main business risks.

RISK MANAGEMENT FRAMEWORK

Our Group functions support senior management and those with responsibilities for risk within the business in the development and maintenance of an appropriate institutional risk culture mitigating risk across the Group, as appropriate.

INDUSTRIAL RISK MANAGEMENT

We believe that every employee should be accountable for the risks related to their role. As a result, we encourage our employees to escalate risks (not limited to hazards), whether potential or realised, to their immediate supervisors. This enables risks to be tackled and mitigated at an early stage by the team with the relevant level of expertise.

Led by the Head of Industrial Assets and the Industrial Leads across each commodity department, management teams at each industrial operation are responsible for implementing processes that identify, assess and manage risk.

The risks that may impact on business objectives and plans are maintained in business risk registers. They include strategic, compliance, operational and reporting risks.

HSEC & SUSTAINABILITY RISK MANAGEMENT

These risk management processes are managed at asset level, with the support and guidance from the central Sustainability and HSEC and HR teams, and subject to the leadership and oversight of the HSEC Committee.

The Group's internal HSEC Audit programme focuses on catastrophic risks, assessing and monitoring compliance with leading practices.

Further information is provided in the report from the HSEC Committee on page 96 and will be published in the Group's sustainability report for 2020.

MARKETING RISK (MR) MANAGEMENT

Glencore's marketing activities are exposed to a variety of risks, such as commodity price, basis, volatility, foreign exchange, interest rate, credit and performance, liquidity and regulatory. Glencore devotes significant resources to developing and implementing policies and procedures to identify, monitor and manage these risks.

Glencore's MR is managed at an individual, business and central level. Initial responsibility for risk management is provided by the businesses in accordance with and complementing their commercial decision-making. A support, challenge and verification role is provided by the central MR function headed by the Chief Risk Officer (CRO) via its daily risk reporting and analysis which is split by market and credit risk.

The MR function monitors and analyses the large transactional flows across many locations using its timely and comprehensive transaction recording, ongoing reporting of the transactions and resultant exposures, which provides all encompassing positional reporting, and continually assessing universal counterparty credit exposure.

The MR team provides a wide array of daily and weekly reporting. For example, daily risk reports showing Group Value at Risk (VaR) and various other stress tests and analysis are distributed to the CEO, CFO and CRO. Additionally, business risk summaries showing positional exposure and other relevant metrics, together with potential margin call requirements, are also circulated daily. The MR function strives to enhance its stress and scenario testing as well asimprove measures to capture risk exposure within the specific areas of the business, e.g. within metals, concentrate treatment and refining charges are analysed.

The Group continues to make extensive use of credit enhancement tools, seeking letters of credit, insurance cover, discounting and other means of reducing credit risk from counterparts. In addition, mark-to-market exposures in relation to hedging contracts are regularly and substantially collateralised (primarily with cash) pursuant to margining agreements in place with such hedge counterparts.

The Group-wide Credit Risk Policy governs higher levels of credit risk exposure, with an established threshold for referral of credit decisions by business heads to the CFO and the CEO (relating to unsecured amounts in excess of $75 million with BBB

(or equivalent) or lower rated counterparts). At lower levels of materiality, decisions may be taken by the business heads where key strategic transactions or established relationships, together with credit analysis, suggest that some level of open account exposure may be warranted.

LEGAL AND COMPLIANCE

For legal and compliance risk, see Ethics and Compliance section pages 38 - 43, and laws and enforcement risk pages 76 - 77.

INTERNAL AUDIT

Glencore's Internal Audit function reports directly to the Audit Committee. Its role is to evaluate and improve the effectiveness of business risk management, control, and business governance processes.

A risk-based audit approach is applied in order to focus on high-risk areas during the audit process. It involves discussions with management on key risk areas identified in the Group's budgeting process, emerging risks, operational changes, new investments and capital projects. Internal Audit reviews these areas of potential risk, and suggests controls to mitigate exposures identified.

In recognition of the need to conduct assurance on the global Covid-19 related response across our operations, Corporate HSEC worked with Internal Audit to develop a remote audit program, which was implemented in May 2020.

The Audit Committee considers and approves the risk-based Internal Audit plan, areas of audit focus and resources and is regularly updated on audits performed and relevant findings, as well as the progress on implementing the actions arising. In particular, the Committee considers Internal Audit's main conclusions, its KPIs and the effectiveness and timeliness of management's responses to its findings. The Audit Committee has concluded that the Internal Audit function remains effective.

VAR

The Group monitors its commodity price risk exposure by using a VaR computation assessing "open" commodity positions which are subject to price risks. VaR is one of the risk measurement techniques the Group uses to monitor and limit its primary market exposure related to its physical marketing exposures and related derivative positions. VaR estimates the potential loss in value of open positions that could occur as a result of adverse market movements over a defined time horizon, given a specific level of confidence. The methodology is a statistically defined, probability based approach that takes into account market volatilities, as well as risk diversification benefits by recognising offsetting positions and correlations between commodities and markets. In this way, risks can be compared across all markets and commodities and risk exposures can be aggregated to derive a single risk value.

Last year, the Board approved the Audit Committee's recommendation of a one day, 95% VaR limit of $100 million, consistent with the previous year. This limit is subject to review and approval on an annual basis. It was temporarily increased to $120 million to reflect the exceptional trading conditions in oil markets during part of Q2 2020. The purpose of this Group limit is to assist senior management in controlling the Group's overall risk profile, within this tolerance threshold. During the year Glencore's reported average daily VaR was approximately $39 million, with an observed high of $102 million and a low of $14 million.

There were no breaches in the limit during the year.

The Group remains aware of the extent of coverage of risk exposures and their limitations. In addition, VaR does not purport to represent actual gains or losses in fair value on earnings to be incurred by the Group, nor are these VaR results considered indicative of future market movements or representative of any actual impact on its future results. VaR remains viewed in the context of its limitations; notably, the use of historical data as a proxy for estimating future events, market illiquidity risks and risks associated with longer time horizons as well as tail risks. Recognising these limitations, the Group complements and refines this risk analysis through the use of stress and scenario analysis. The Group regularly back-tests its VaR to establish adequacy of accuracy and to facilitate analysis of significant differences, if any.

The Board has again approved the Audit Committee's recommendation of a one day, 95% VaR limit of $100 million for 2021.

PRINCIPAL RISKS AND UNCERTAINTIES

Glencore is exposed to a variety of risks that can have an impact on our business and prospects, future performance, financial position, liquidity, asset values, growth potential, sustainable development, reputation and licence to operate. Our principal risks and uncertainties are highly dynamic and our assessment and our responses to them are critical to our future business and prospects.

In accordance with UK Financial Reporting Council guidance, we define a principal risk as a risk or combination of risks that could seriously affect the performance, future prospects or reputation of Glencore. These include those risks which would threaten the business model, future performance, solvency or liquidity of the Group.

We define an emerging risk as a risk that has not yet occurred but is at an early stage of becoming known and/or coming into being and expected to grow greatly in significance in the longer term.

The Board mandates its ECC, HSEC and Audit Committees to identify, assess and monitor the principal and emerging risks relevant to their respective remits. These Committees usually meet five times a year and are always followed by a meeting of the Board to review and discuss their work.

The assessment of our principal risks, according to exposure and impact, is detailed on the following pages.

The commentary on the risks in this section should be read in conjunction with the explanatory text under Understanding our risks information which is set out below.

EVOLUTION IN PRINCIPAL RISKS

Impact of Covid-19

Globally, Covid-19 has resulted in immense operational disruptions. Challenges for Glencore have included safeguarding the health and safety of employees, government enforced shut downs, strained supply chains, liquidity constraints, counterparty financial strains and abrupt shifts to remote working. Covid-19's impact on us has been uneven. Key mining regions such as Australia and Canada have been relatively unimpacted, while Peru, Colombia and South Africa suffered significantly more disruption.

The continued high incidence of Covid-19 at the date of this report make the outlook over the short-term uncertain and, notably for various energy based business (coal and oil producing companies), given the continued acceleration and momentum surrounding decarbonisation, highly more uncertain over themedium to longer term.

Consistent with the prior year, there are 11 principal risks for the Group, of which, the 6 most significant and potentially posing a material and adverse effect on the Group are:

• 1. supply, demand and prices of commodities,

• 2. geopolitical, permits and licences to operate,

• 3. laws and enforcement,

• 4. health, safety, environment, including catastrophic hazards,

• 5. liquidity, and

• 6. climate change risks.

Further details on each risk is set out on the following pages.

LONGER-TERM VIABILITY

In accordance with the requirements of the UK Corporate Governance Code, the Board has assessed the prospects of the Group's viability over the four-year period from 1 January 2021. This period is consistent with the Group's established annual business planning and forecasting processes and cycle, which is subject to review and approval each year by the Board.

The Board also assessed the medium- and long-term impact of climate change on the outlook for our commodity businesses, under a range of possible scenarios, as set out on page 18. Such impacts are uncertain, being particularly dependent on long- term changes in the energy mix related to power generation and transportation, as well as consumption efficiencies, behavioural change and co-ordinated implementation of government policy and regulation frameworks, which will materially fall outside the four-year period selected for assessment of longer term viability. This analysis, however, indicates stable or improving opportunities across the portfolio in the Current Pathway scenario. In the Rapid Transformation and Radical Transition scenarios, we project significant coal demand decline over the longer term, more than compensated however (from a financial perspective) by materially stronger demand for battery and new energy infrastructure required metals.

The Board has considered the potential risks arising from Brexit and determined there to be no material impact on longer-term viability.

The four-year plan considers Glencore's Adjusted EBITDA, capital expenditure, funds from operations (FFO) and Net debt, and the key financial ratios of Net debt to adjusted EBITDA and FFO to Net debt over the forecast years and incorporates stress tests to simulate the potential impacts of exposure to the Group's principal risks and uncertainties.

For the 2021-24 plan these scenarios included:

• · a prolonged downturn in the price and demand of commodities most impacting Glencore's operations. Prices and FX over Q2 2020 (lowest average quarter in 2020, accounting for Covid-19) are assumed to prevail for the outlook period to 2024;

• · foreign exchange movements to which the Group is exposed as a result of its global operations;

• · adverse consequences resulting from an increased regulatory environment;

• · actions at the Group's disposal to mitigate the adverse impacts of the above, principally the ability to defer or cancel capital expenditure, to manage the working capital cycle and to reduce or stop distributions to shareholders; and

• · consideration of the potential impact of adverse movements in macroeconomic assumptions and their effect on the above key financial KPIs and ratios which could increase the Group's access to or cost of funding.

The scenarios were assessed taking into account current risk appetite and any mitigating actions Glencore could take, as required, in response to the potential realisation of any of the stressed scenarios.

Based on the results of the related analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the four-year period of this assessment. They also believe that the review period of four years is appropriate having regard to the Group's business model, strategy, principal risks and uncertainties, and viability.

Understanding our risks information

There are many risks and uncertainties which have the potential to significantly impact our business. The order in which these risks and uncertainties appear does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their potential material adverse effect on our business.

We have sought to provide examples of specific risks. However, in every case these do not attempt to be an exhaustive list.

These principal risks and uncertainties should be considered in connection with any forward looking statements in this document as explained on page 244. Identifying, quantifying and managing risk is complex and challenging. Although it is our policy to identify and, where appropriate and practical, actively manage risk, our policies and procedures may not adequately identify, monitor and quantify all risks.

This section describes our attempts to manage, balance or offset risk. Risk is, however, by its very nature uncertain and inevitably events may lead to our policies and procedures not having a material mitigating effect on the negative impacts of the occurrence of a particular event. Our scenario planning and stress testing may accordingly prove to be optimistic, particularly in situations where material negative events occur in close proximity. Since many risks are connected, our analysis should be read against all risks to which it may be relevant.

In this section, we have sought to update our explanations, reflecting our current outlook. Mostly this entails emphasising certain risks more strongly than other risks rather than the elimination of, or creation of, risks. Certain investors may also be familiar with the risk factors that are published in the Group debt or equity prospectuses or listing documents. These provide in part some differing descriptions of our principal risks.

A recent example is available on our website at: glencore.com/ who-we-are/governance

In addition, more information on our risks is available in the relevant sections of our website. To provide for concise text:

• · where we hold minority interests in certain businesses, although these entities are not generally subsidiaries and would not usually be subject to the Group's operational control, these interests should be assumed to be subject to these risks. "Business" refers to these and any business of the Group

• · where we refer to natural hazards, events of nature or similar phraseology we are referring to matters such as earthquake, flood, severe weather and other natural phenomena

• · where we refer to "mitigation" we do not intend to suggest that we eliminate the risk, but rather it refers to the Group's attempt to reduce or manage the risk. Our mitigation of risks will usually include the taking out of insurance where it is customary and economic to do so

• · this section should be read as a whole - often commentary in one section is relevant to other risks

• · "commodity/ies" will usually refer to those commodities which the Group produces or sells

• · "law" includes regulation of any type

• · "risk" includes uncertainty and hazard and together with "material adverse effect on the business" should be understood as a negative change