Management Board Report on the activity of the JSW S.A. Capital Group for 2012

3.4. Evaluation of factors and unusual events affecting the Group’s operations and result

The Group's operations and results are influenced by several external factors, including primarily demand for and supply of coal as well as its market prices, FX rates and costs of production (such as costs of employee benefits, consumption of materials and energy and costs of third party services). There also exist other specific factors which in the Group's opinion affected the operating results in the past and which according to the Group's predictions may influence its results in the coming years.

The Group’s results were affected primarily by external factors such as:

• global processes taking place in the global economy,
• downturn in the coal and steel markets,
• decline in demand for the Group’s core products, i.e. coking coal, steam coal and coke,
• decrease in market prices,
• increase in coal and coke inventories,
• foreign exchange rates,
• costs directly affecting the Group’s production, such as consumption of materials and energy, costs of third party services and employee benefits.

In the period under discussion, a significant factor affecting the Group’s result is related to the settlement of two legal disputes of material importance. One of them concerns tax proceedings conducted alternately by the Mayor of Dąbrowa Górnicza, the Local Government Board of Appeals in Katowice and the Voivodship Administrative Court in Gliwice in the matter of property tax on coking batteries in which Koksownia Przyjaźń received a positive ruling. The tax authority of second instance issued a decision acknowledging correctness of the methodology applied by Koksownia Przyjaźń in calculating tax on coking batteries, following which in Q3 2012 the PLN 21.2 million provision for property tax was dissolved. Another factor is related to the delivery of the judgment by the Court of Arbitration at the Polish Chamber of Commerce in Warsaw in the case between Kombinat Koksochemiczny Zabrze S.A. and Zarmen regarding construction works, as a result of which the financial result of Kombinat Koksochemiczny Zabrze S.A. was burdened with a liability of PLN 31.8 million.

The main determinants affecting the mines' production capacity include the following:

• difficult conditions of conducting mining operations; mining work is performed at large depths frequently exceeding 1,000 meters and the tectonics of the deposits is complex,
• natural hazards which are inherent to such conditions, including in particular hazards related to methane, outbursts, crumps and climate,
• priority of ensuring safe work conditions in JSW S.A.'s mines which is reflected in the application of comprehensive actions and prophylactic work aiming at reducing risks associated with the occurrence of natural threats.

The scale of current and expected difficulties is much greater than it was foreseen 5-10 years ago.

In 2012, the volumes of production in the Group’s distinct mines were different, depending on the encountered difficulties associated with natural hazards and mining and geological conditions in the areas of operation and preparation for mining. Production shortages in some of the mines were more than offset by surplus production in the Group’s other mines. Furthermore, in October 2012, a 24-hour strike organized by the trade unions was held, reducing the volume of production by 53 thousand tons and generating estimated losses of approximately PLN 17 million.