Financial statements of JSW S.A. for 2012

3.1. Financial risk factors

The business conducted by the Company exposes it to the following financial risks: market risk (including: price risk, foreign exchange risk and cash flow risk related to changes in interest rates), credit risk and liquidity risk.

Financial risk management is performed at the Management Board level. The Company has departments that monitor its exposure to various kinds of financial risk.

1. Price risk

   The Company has no material investments in capital securities classified in the statement of financial position as available for sale or carried at fair value through profit or loss and therefore is not exposed to price risk related to changes in the prices of such investments.

2. Foreign exchange risk

   The Company is exposed to significant foreign exchange risk due to its foreign currency exposure which may affect the amounts of future cash flows and the financial result.

   The overriding objective of the Company's policy is to mitigate as much as possible the Company's FX risk arising from its foreign currency exposure and which results from the uncertainty as to the level of future cash flows and financial result due to changes of the exchange rate. The Company is exposed to a significant foreign exchange risk associated with the sales of products to domestic and international markets. In 2012, in order to mitigate the foreign exchange risk, JSW S.A. concluded FX forward transactions. The Company also makes small purchases of materials, services or investment assets in foreign currencies. This naturally mitigates some foreign exchange risk resulting from product sales transactions.

   The Company does not apply hedge accounting.

   Potential impact of an increase in the EUR/PLN exchange rate on net profit:

   	31 Dec 2012	31 Dec 2011
   % change	5.00%	5.00%
   Change in the value of financial assets:	11.2	3.5
   Change in the value of financial liabilities	(7.5)	(9.8)
   Impact on pre-tax profit	3.7	(6.3)
   Tax effect	(0.7)	1.2
   Impact on net profit	1.3	(5.1)

   
   Potential impact of a decrease in the EUR/PLN exchange rate on net profit:

   	31 Dec 2012	31 Dec 2011
   % change	(5%)	-5.00%
   Change in the value of financial assets:	(11.2)	(3.5)
   Change in the value of financial liabilities	7.5	9.8
   Impact on pre-tax profit	(3.7)	6.3
   Tax effect	0.7	(1.2)
   Impact on net profit	(3.0)	5.1

   Changes in exchange rates of currencies other than EUR do not have a material impact on JSW S.A.’s net profit.

3. Cash flow volatility risk caused by changes in interest rates

   The Company is exposed to the risk of changing cash flows caused by changing interest rates. This risk entails mainly a possible increase in the loan interest rate if the available credit facility is used and lower income from bank deposits and extended loans, interest on which is based on floating interest rates. In 2012, JSW S.A. did not use any external funding, but it had free cash invested in financial assets bearing interest at floating and fixed interest rates. Accordingly, the risk of changing cash flows is related to the change of interest rates on cash held.

   The Company does not use derivatives to hedge against interest rate risk. However in 2012, in order to minimize the adverse effect of the declining interest rates on the Company's performance, action was taken to maintain income on term deposits, i.e. before the announced interest rate decrease, term deposits maturing in over 3 months were concluded which may be terminated without waiving any interest.

   In 2012, the Company acquired registered variable rate cash bonds issued by Spółka Energetyczna Jastrzębie S.A. (“SEJ”), as described in Note 15. Moreover, the Company granted a floating rate loan to a subsidiary “Advicom” Sp. z o.o., which is described in Note 11.

   The tables below present the potential impact of a +/- 50 basis point change in interest rates on net profit.

   The impact of an interest rate increase on net profit:

   	31 Dec 2012	31 Dec 2011
   Volatility (+/-) in basis points	50bp	50bp
   Change in the value of financial assets:	12.9	13.7
   Change in the value of financial liabilities	-	-
   Impact on pre-tax profit	12.9	13.7
   Tax effect	(2.5)	(2.6)
   Impact on net profit	10.4	11.1

   Impact of an interest rate decrease on net profit:

   	31 Dec 2012	31 Dec 2011
   Volatility (+/-) in basis points	(50)bp	(50)bp
   Change in the value of financial assets:	(12.9)	(13.7)
   Change in the value of financial liabilities	-	-
   Impact on pre-tax profit	(12.9)	(13.7)
   Tax effect	2.5	2.6
   Impact on net profit	(10.4)	(11.1)

4. Credit risk

   Credit risk at JSW S.A. is concentrated in the following areas:

   • trade receivables,
   • cash and bank deposits,
   • derivatives,
   • debt securities and loans granted.
   Credit risk identified in trade receivables is related to their concentration and timely service. Compared to the most recent annual financial statements, there were changes in credit risk linked to receivables following from the introduction of a new coke sales policy, i.e. credit risk shifts from related entities (coking plants and Polski Koks S.A.) directly to JSW S.A. This change however did not cause any significant concentration of receivables. The ArcelorMittal Group and companies controlled by the State Treasury remain the principal buyers, responsible for respectively 31.55% and 11.33% of receivables as at 30 September 2011.

   Structure of trade receivables by customers, 2011-2012

   	31 Dec 2012	31 Dec 2011
   ArcelorMittal Group	31.55%	28.21%
   Companies controlled by the State Treasury	11.33%	20.01%
   Related entities	28.17%	35.76%
   Other entities	28.95%	16.02%

   In order to mitigate the risk of uncollectible receivables, the following security interest is established:

   • blank promissory notes,
   • sureties extended by companies with a strong position on the market.

   In the case of new customers or customers with an uncertain financial position, JSW S.A. makes the sale after the business partner has made a prepayment. In the case of some buyers using commercial credit, their trade receivables are covered by trade receivables insurance from insurance companies. The Company does not require any security interest from buyers with a strong market position, considering the strategic nature of the cooperation and the ability to assess their financial documents. Taking into account the above security interest and the history of cooperation, the risk of uncollectible receivables is deemed to be very low. As at 31 December 2012, the insurance covered 12.1% of JSW S.A.'s trade receivables; additionally, 31.6% receivables were secured through one of the aforementioned contractual securities.

   In order to minimize the risk associated with investing its financial resources, the Company reduced the number of financial institutions with which it cooperates to solely banks with an established market position. The banks selected for cooperation are evaluated on the basis of their equity value, investment ratings and solvency ratio. Based on those parameters, the maximum concentration limits are set in order to diversify the risk associated with the deposited funds. Within the framework of the concentration limits, the funds are deposited in those banks that offer the highest interest rates. The process of depositing available funds is monitored.

   Concentration of financial resources in banks:

   Bank	Rating	Rating organization	31 Dec 2012	31 Dec 2011
   A	A2	Moody's	22.4%	13.8%
   B	Baa2	Moody's	21.1%	0.0%
   C	A2	Moody's	16.0%	15.9%
   D*	A2	Moody`s	14.8%	23.8%
   E*	Aa2	Moody`s	13.4%	23.0%
   F	Baa1	Moody`s	6.8%	1.2%
   G	Baa1	Moody`s	3.1%	12.6%
   Others	-	-	2.4%	9.7%

   * 100% shareholder's rating
   Concentration limits take into account the funds originating from the Mining Plant Decomissioning Fund.
   Rating awarded solely on the basis of publicly available information about the bank

   In 2012, the Company acquired registered variable rate cash bonds issued by Spółka Energetyczna Jastrzębie S.A. (“”SEJ”), as described in Note 15. Moreover, the Company granted a floating rate loan to a subsidiary “Advicom” Sp. z o.o., which is described in Note 11.

   The Management Board of the Company does not see any risk associated with the settlement of the above amounts.

   According to the Company's assessment, the maximum exposure to credit risk on the final day of the reporting period is the full book value of trade receivables without the fair value of security accepted, cash and cash equivalents and financial assets in the form of bank term deposits.

5. Liquidity risk

   Prudent management of liquidity risk requires the Company, among others, to maintain an appropriate level of cash and an available credit facility. The Company regularly forecasts and monitors liquidity based on expected cash flows.

   JSW S.A. has an active overdraft facility limit of PLN 40 million in ING Bank Śląski. In 2012, the Company incurred no costs associated with the utilization of this facility.

   Taking into account the Company’s accumulated financial reserves and the level of liabilities, we may assume that the risk of losing financial liquidity is slight.

   The table below contains an analysis of the Company's financial liabilities in respective age groups, distributed according to time to contractual maturity on the final day of the reporting period. The amounts presented in the table represent undiscounted contractual cash flows. The balance to be repaid within 12 months is posted at book values, since the impact of discounting is not significant.

   	Under	From 1	From 2	Above	Total
   	.	up to 2 years	up to 5 years	5 years
   As at 31 Dec 2011
   Trade liabilities and other financial liabilities	882	18.6	3.3	-	903.9
   Financial derivatives (gross settled)	183.9	-	-	-	183.9
   Total	1,065.9	18.6	3.3	-	1,087.8
   As at 31 Dec 2012
   Trade liabilities and other financial liabilities	985.8	6.3	6.1	5.9	1,004.1
   Financial derivatives (gross settled)	149.9	-	-	-	149.9
   Total	1,135.7	6.3	6.1	5.9	1,154.0