RISK ANALYSIS

Risk Analysis - BHP Billiton Corporation and Rio Tinto Corporation

Risk Analysis - BHP Billiton Corporation and Rio Tinto Corporation

BHP Billiton

BHP Billiton is a global leader in the resource industry. The company is in the list of top commodity producers around the globe such as magnesium, aluminum, etc. The headquarter of BHP Billiton is located in Melbourne, Australia (Annual Report, 2012, pp. 5). The Group has two arms i.e. BHP Billiton Limited Group and the BHP Billiton Plc Group. In June 2011, the merger with Dual Listed Company (DLC) was completed.

Organizations are always exposed to risks because it is inherent in business activities they undertake. Some of the major risks company is facing are highlighted below:

Market Risks Risk that is common to all the companies operating in a market is known as market risk (Hubbard & O'Brien, 2012, pp. 118). It is nondiversifiable risk. Market risk is composed of other various types of risks, which are described below, in accordance with what BHP Billiton is exposed to. Price Risk BHP Billiton is exposed to price risk. The firm is exposed to price risk because the prices of commodities, minerals and oil are linked with the world market's equilibrium. Because of such relationship, prices are subject to higher volatility (Annual Report, 2012, pp. 7). The prices are subject to move adversely in commodities because of price shifts i.e. due to changes in industry variables, demographical factors, tariffs in the market, availability of substitutes and economic conditions prevailing in the market.

Exchange-rate or Currency risk BHP Billiton is dealing with a wide spectrum of customers across of globe. Therefore, the company is exposed to foreign-exchange currency risk. It can affect the financial results of the company negatively. Though, the company's major transactions are denominated in US dollar but still because of the company is operating in diverse regions, the operating costs has to be paid in the currency of what country it is operating in. The Australian dollar, South African rand, Chilean peso, Brazilian real and US dollar are the most important currencies that can influence the profitability of the company adversely.

Economic risk The risk of operating in a specific economy is economic risk. Because of current global recession and financial crisis that evolved in the year of 2008, company has been influenced negatively in a way of shrinking revenues. The revenues in European countries have been shrunk in the year of 2012 by 1.5 percent relative to the financial results in the fiscal year 2011 (Annual Report, 2012, pp. 7). Not only in the European countries, globally has the sales declined. The demand has been reduced in the China because of their adoption of strategic self-sufficient policy and investments for developing and enhancing their own commodity market. The sluggish demand has hampered the BHP Billiton's sales revenues.

Regulatory Risk Due to its increased operations in various geographic regions, the company is exposed toward legal & regulatory risk. The policies such as conditions or covenants related to contracts & agreements, ...