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

4.2. Material factors relating to the Group’s development

The overriding strategic objective of the JSW S.A. Capital Group is to maximize its value for Shareholders in the long-term by optimally utilizing the existing potential and implementing development projects.

Currently, the work is in progress on updating the Operating Strategy of the Capital Group for 2010-2020 which would involve moving its timeframe to years 2012-2030. The main objectives of the update include:

• setting development directions for the Group in individual areas,
• identifying the possible efficient scenarios for building the value of the Group,
• identifying synergies within business areas.

The Group plans to focus on the most profitable key investment projects, continue to implement cost optimizing activities, benefit from the synergy effects between business areas and improve the opportunities resulting from the economies of scale of our operations.

All the production, development, investment and commercial measures taken by the Group in the coal segment are focused on maintaining its leadership position in coking coal production in the long-term in Central and Eastern Europe. Poland is the only country in this part of Europe that holds significant resources of coking coal. In this context, profitable operations may be carried out for at least 60 years. The fundamental conditions for achieving this objective are as follows:

• procuring the right extraction capacities in mines,
• obtaining competitive costs of production.

The major determinant for these actions is rooted in the difficult conditions of conducting mining activity entailing:

• mining works at a significant depth frequently deeper than 1000 meters,
• complicated tectonics of deposits,
• presence of natural hazards, frequently in tandem, especially methane, rock outburst, coal bump and temperature hazards.

To provide for the Group’s ability to function in the longer term it is necessary to continue actions to gain access to resources and to utilize new deposits to the appropriate extent and at the right pace. The Strategy calls for investments to be pursued in the long-term, while their financial outcomes will become visible in the more distant future. On account of the long period of investing in the mining industry, it is very important to commence investments with the appropriate lead time to guarantee timely execution.

In an effort to increase the Capital Group's value, action is taken to integrate the Capital Group's Coke Division. The purpose of this project is, among others, to optimize the trading and investment policies and to achieve synergy.

The activities of the Group in the power, renovation, transport and laboratory areas will focus on development of in-house infrastructure and resources base and satisfying the Group’s needs using the aforementioned sources. Currently, the work associated with the development of partial strategies for the individual business areas (power, transport, laboratory and renovation).

In the process of consolidating non-core businesses, the Group completed the incorporation process of its subsidiaries: JSU with Jastrzębska Agencja Turystyczną Sp. z o.o., as a result of which the Group now operates an insurance company named Jastrzębska Spółka Ubezpieczeniowa Spółka z ograniczoną odpowiedzialnością.

4.2.1. Description of events important for the Group’s development

The following events should be mentioned as being of material importance for the Capital Group’s development:

Integration Program

Execution of the “Integration Program” in the coking plants to deepen the integration through introduction of a new target coking segment operation model.

Pursuant to the decision adopted by the JSW S.A. Management Board on 14 December 2011 to introduce a personal union in certain Group companies, entailing joint management, as of 1 January 2012, the President of the Management Board of Koksownia Przyjaźń was appointed also to the position of the President of the Management Board of KK Zabrze.

Concessions obtained

On 21 June 2012 the Parent Company obtained a concession to mine hard coal and methane as an accompanying mineral in the Pawłowice 1 deposit until 31 December 2051. Coal in the Pawłowice 1 deposit will be mined through the Pniówek mine and will extend the life of the mine at least until 2051.

On 23 April 2012 the Parent Company obtained a concession to explore a hard coal deposit in the Pawłowice-Wschód area. This area is immediately adjacent to the Pawłowice 1 deposit. The testing work associated with surveying a new deposit are part of the actions to obtain new coal resources.

On 21 June 2012 the Parent Company obtained a decision from the Environmental Minister on the transfer of the concession in its favor to explore and survey natural gas and methane deposits from hard coal seams in the Ruptawa area. This area is immediately adjacent to the Bzie-Dębina 2-Zachód deposit.

On 22 January 2013 the Parent Company submitted an application to the Environmental Minister for a concession until 2030 to mine coal and methane through the Krupiński mine. The current concession expires at the end of 2015. After obtaining a new concession the mining area of the Krupiński mine will extend across the Suszec community and the cities of Orzesze and Żory with a surface area of 33.8 km2. It will be larger than the area covered by the current concession and will include land to the north and east of the current mining area.

The memorandum expired as of the end of June 2015. Obtaining a new concession will enable the Krupiński mine to utilize 10 coal seams in which the quantity of recoverable reserves (mineable) is estimated to be 48.8 million tons.

Merging of mines

On 1 January 2013, by the power of a decision made by the JSW S.A. Management Board, the Borynia-Zofiówka-Jastrzębie mine consisting of three integrated mines: Borynia, Zofiówka and Jas-Mos was formed. The mine merger process has been described in Item 1.3 of this report. Organizationally integrating these mines will make it possible to achieve synergies in the following scope:

• enhanced utilization of the deposit,
• enhanced utilization of production assets,
• greater opportunities to unify plant, machinery and materials,
• ability to coordinate employment policy,
• opportunities to share good design solutions as well as technical and organizational experience,
• headcount optimization in integrated organizational cells and gradual modification of the headcount structure as a result of natural attrition among employees working on the surface.

Moreover, integrating the systems for transporting winnings creates an opportunity to control the quantity and composition of the coal winnings funneled into the enrichment process in the various coal wash plants, thereby facilitating the achievement of the desired parameters in the coal offered for sale.

Modern technologies

The purchase of an automated longwall complex for the Pniówek mine will allow the mine to extract coal twice as fast, from walls with similar parameters; it is equipped with a two-line communication system and registers every event occurring in the wall ensuring appropriate reaction of the machinery and devices.

The completion and delivery, at WZK Victoria, of an investment project consisting of the installation of a cooling system and a system for removal of ammonia and hydrogen sulfide from coking gas, involving a comprehensive modernization of the Hydrocarbons Department.

This project resulted in the construction of one of the most modern systems for treatment of coking gas in Europe, producing coal derivatives of the highest quality. The project is co-financed by the European Union with funds of the European Regional Development Fund under the Infrastructure and Environment Program.

Group's Trading Procedure

In March 2012, in accordance with the JSW Group Commercial Procedure adopted by the JSW S.A. Management Board and the structuring of sales in the Group, implementation of the Schedule for Coke and Hydrocarbons Trading Integration in the JSW Group was commenced. In the existing contracts JSW S.A. steps in as the Seller and the Seller’s rights and obligations in the contracts will be executed by Polski Koks S.A. acting for and on behalf of JSW S.A. Accordingly, in 2012 commercial contracts were gradually transferred to JSW S.A. The key development direction in the trading policy is the implementation of a comprehensive management of product distribution within the Group.

Securing the customer chain

On 2 July 2012, a letter of intent was signed between the Group and ArcelorMittal Poland with a view to continue the long-lasting cooperation with respect to deliveries of coking coal, coke and coking gas and other products.

Other events

• Signing of the agreement to pursue shared economic and financial interest in accordance with the Code of the Capital Group, which involves mutual cooperation and joint agreement of the principles of financial settlements between JSW S.A., Koksownia Przyjaźń, KK Zabrze, WZK Victoria and Polski Koks S.A. with respect to the supply of coking coal and coke.
• Implementation of the incentive bonus for employees who exceed their output and preparation work plans – as part of the incentive system.
• Implementation of task bonuses for employees (with the exception of trainees and the employees covered by the Management by Objectives program).
• Extension of the system for development of managerial competence and continuation of the “Young Talents” program.
• Implementation of the Information Security Management System in the Parent Company.