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

4.2. Material factors relating to the Company’s development

The overriding strategic objective of JSW S.A. as a public company listed on the Warsaw Stock Exchange is to maximize its value for shareholders in the long-term by optimally utilizing the existing potential and implementing development projects.

Jastrzębska Spółka Węglowa S.A. is implementing the goals and clauses in the document entitled Mine Development Strategy in Jastrzębska Spółka Węglowa S.A. in 2010-2030 (“Strategy”) which is being updated on the date of this report. This document defines the strategic objectives whose achievement is crucial to attaining the overriding objective, as follows:

• strengthening its current leadership position on the European market for high quality hard coking coal,
• extracting semi-soft coking coal primarily for the Group’s internal needs to produce coke,
• maintaining its current position on the steam coal market,
• maximizing operating efficiency by optimizing the usage of resources,
• enhancing occupational health and safety,
• building its image as a credible business partner,
• enhancing corporate social responsibility, human capital development and care for the natural environment.

All the production, development, investment and commercial measures taken by JSW S.A. as presented in the Strategy 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, JSW S.A. may conduct profitable operations 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.

The extent of current and anticipated difficulties is significantly greater than anticipated 5-10 years ago.

One of the fundamental conditions for obtaining robust production results while operating in difficult mining conditions and having in mind the priority treatment of preserving the required level of occupational safety is to have modern equipment with a high level of engineering.

JSW S.A.’s mines have earmarked PLN 3 billion over the most recent eight years to procure modern machinery, plant and installations thereby achieving a high technical level of equipment. In subsequent years these efforts will be consistently continued to elevate the engineering level of the mines steadily. The priority is to modernize and develop underground transportation systems based on a suspension internal combustion rail transport system. Equally important projects involve the widespread implementation of automation systems and systems to monitor the operation of machinery and plant and to identify the movements of staff in particularly dangerous places. The positive assessment of the plough installation used for the first time in the Zofiówka mine, in a highly-advanced technology version, provides a justification for expanding the extent of remotely controlling technology processes.

The key element of the optimization of the Company's activity is the necessity to use technical assets more effectively, including among others more effective usage of employee work time.

The technical and organizational integration of the Borynia, Jas-Mos and Zofiówka mines is a project whose full implementation will accrue benefits in the Management Board’s opinion. As of 1 January 2013, in performance of the Mine Development Strategy in JSW S.A. mining plants for 2010-2030, the Company merged the Borynia-Zofiówka mine with the Jas-Mos mine into a three-section mine Borynia-Zofiówka-Jastrzębie. The anticipated results of integration are as follows:

• limiting production costs by adapting the technological capabilities of the various elements of the production process to the projected extraction capacities,
• improving the effectiveness of utilizing coal resources,
• optimizing the usage of human and technical resources,
• simplifying the organizational structure of mines.

The steady depletion of resources in the areas being mined means that the current life of mines in JSW S.A. is determined by the need to explore immediately ways of expanding the current resource base of orthocoking coal and to utilize optimally resources in the concession deposits of active mines.

To provide for the Company’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.

An important assumption in JSW S.A.’s Strategy is for the Company to create conditions to enhance the competitiveness of Polish coal by implementing investment projects, inclusive of long-term developmental projects. They include the following investment projects:

• opening up and preparing for the mining of resources at greater depths:
  • building the 1290 level in the Budryk mine,
  • building the 1080 level in Zofiówka section of the Borynia-Zofiówka-Jastrzębie mine,
  • building the 1000 level in the Pniówek mine,
• utilizing new coal deposits:
  • Bzie-Dębina 2 - Zachód and Bzie-Dębina 1 - Zachód,
  • Pawłowice 1 deposit.

Work is also pending to open parcels E and Zgoń and part of the Żory-Suszec deposit next to the Krupiński mine.

There is also a realistic chance to open and develop the Żory-Warszowice deposit located next to the Borynia Section of the Borynia-Zofiówka-Jastrzębie mine. The final scope of this undertaking will depend on the arrangements made with local self-government units.

These measures over the period until 2030 will provide for a stable level of profitability and financial liquidity, which will guarantee the Company’s development and a high ranking market position. Forecasting financial needs in later years will depend on the situation on the coking coal market, the level of coal prices and the earnings generated.

The high degree of progress in the work to implement the adopted strategic initiatives and the operating results achieved by the Company in 2012 form the grounds for positively assessing the Strategy.

Moreover, JSW S.A. is a parent company in the JSW Capital Group. 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.