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

4.1.2. Risk factors associated with the legal environment

Difficulty in obtaining or renewing licenses and concluding mining usufruct contracts within the required deadlines

The Company's key business relies on the effective power of its licenses, its compliance with the terms of those licenses and its capacity to obtain new licenses. Granting of a new mining license or extension of a current license requires certain requirements prescribed by the law to be met. The granting or extension of a license may be refused if the intended activity violates environmental requirements, is contrary to purpose of the real property or is a threat to its safety or is a threat to defense and security of the state or its citizens.

The Company consults with local government bodies regarding the opening of coal resources in deposits adjacent to the mines. A mining license is granted based on a local zoning plan and if there is no zoning plan – based on the study of zoning conditions and directions. New licenses may be obtained on certain conditions, which include changes to local zoning plans which allow for the possibility of coal mining. Life expectancy of mines may be reduced significantly if new deposits are not opened.

If the Company's licenses are canceled or if new licenses or extensions are not granted to the Company, JSW S.A. may be unable to fully utilize its identified mineral deposits, which may have a material adverse effect on the Company's performance and business outlook.

The Company may be subject to a higher excise tax on coal gas after 31 October 2013

Pursuant to Directive 2003/96/EC, coal gas classified in the combined nomenclature under code CN 2705 is also subject to excise tax. At the same time, this directive gives the power to implement a total or partial exemption or discount on the level of taxation applied to the products under code CN 2705 (including coking gas and coal gas) under the condition that they are used for heating purposes. The excise tax law contemplates an exemption from excise tax for other gaseous fuels for the duration of the natural gas exemption, i.e. until 31 October 2013 or until the time when the percentage of natural gas in energy consumption in Poland reaches 25%. On 30 January 2013, a draft act amending the excise tax act was published. In the coming months, interministerial agreements and consultations will take place in which the final wording of the new regulations governing the taxation of gas with excise tax will be adopted. The proposed wording of the regulations contain numerous exclusions, e.g. use for heating purposes in the electricity generation process and for co-generation of heat and electricity, which applies to the methane drainage gas sold by JSW S.A. In light of the above, the risk of excise tax occurs only if the gas is sold for liquefaction, but the proposed wording shifts this risk to the buyer, raising the prices by the excise tax amount. Nevertheless, until the final wording of the regulations is determined, we cannot rule out that adverse changes are introduced potentially burdening the Company with the excise tax.

The Company may be obligated to remedy mining damages or reclaim mining sites to a greater extent than planned

According to the Geological and Mining Law, the Company is obligated to repair mining damages and it may be obligated to reinstate land to its previous state from before commencing mining activity. Any and all changes to the law that would make these requirements more stringent may lead to higher costs of reclamation and repairing damages.

The Company may be subject to more stringent environmental protection standards and legal regulations

 

In its operations the Company gives consideration to the consequences of its operations’ environmental impact. The Company’s operations are conducted in compliance with the binding environmental protection regulations. The Company holds the required environmental permits and meets all the conditions they specify; it monitors the compliance between these actions and the terms and conditions of the permits. These permits concern emissions and noise pollution, water and sewage management as well as waste management, including extraction waste.

The legal regulations applicable to the environment and the usage of natural resources are subject to constant change and the trend over the most recent years has been toward making the binding standards more stringent, which may exert an adverse impact on the Company’s operations. Changes to the environmental protection law may force the Company to adapt to new requirements (e.g. adjusting the technologies used by the Company to curtail atmospheric emissions or changes to how waste is managed or water and sewage management), inclusive of obtaining new permits, or changes to the conditions of the current permits held by the Company’s mines which may drive up the Company’s operating expenses.

The Company strives to limit risk by constantly overseeing environmental protection legal requirements and making the necessary investments to meet all environmental requirements. These actions create great opportunities to lower the level of risk and the costs of adaptation in the Company’s environmental operations and to new conditions.

The Company may be forced to adjust its operations to the EU Climate Policy

One of the priorities of the European Union is to prevent climate change, among others through limiting the consumption of natural energy resources, introducing modern and efficient energy generation technologies, limiting carbon dioxide emissions, reducing energy consumption and increasing the importance of renewable energy generation. In order to achieve these objectives, the European Union has introduced a package under the name of “3x20% by 2020”. As the recent years has shown, the European Commission is very consistent in implementing these goals and it is highly probable that all the future decisions referring to those matters will make the binding standards of consumption, efficiency and quality of energy even more stringent.

JSW S.A. may be obligated to remit property tax on underground mine workings or equipment (facilities) located in underground mine workings

On 13 September 2011 the Constitutional Tribunal pronounced a judgment unambiguously precluding underground mine workings (tunnel costs) from property tax and making the tax on plant and facilities located in these underground mine workings dependent on their classification as structures within the meaning of Construction Law. In light of the judgment of the Constitutional Tribunal and the decisions made in all the cases pending before the Voivodship Administrative Court in Gliwice (“WSA Gliwice”), which were favorable to JSW S.A., the only doubts are related to the taxation of property, plant and equipment located at the bottom of the mine (in underground workings) and the possibility that JSW S.A. may have a duty of paying liabilities for this. Nevertheless, the rationale for those decisions is challenged by the Local Government Appeal Court in Katowice Local Government Board of Appeals in Bielsko-Biała, which filed cassation complaints with the Supreme Court of Administration against all the judgments which were favorable to JSW S.A.

On account of opinions according to which the infrastructure situated at the bottom of the mine in underground workings, just like underground mine workings (tunnel costs) should not be subject to property tax, the Company has not included this infrastructure in tax declarations since 2009.

In assessing the risk linked to the further court proceeding resulting in the possibility subjecting to taxation some of the property, plant and equipment located in these workings, JSW S.A. has revalued the liabilities and provisions recognized in the ledgers for prospective disputes with the Townships. Nevertheless, despite the favorable decisions made by WSA Gliwice and the judgment of the Constitutional Tribunal, the Townships continue the proceedings to enforce the funds under the issued tax decisions.

Implementation of a mineral tax

The financial performance of JSW S.A. may deteriorate if additional new encumbrances (taxes, fees) are imposed on the extraction of coal.

The factor with significant effect on the Company's financial results is the financial risk described in Item 3.9 of this report.