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

4.2.1. Description of events significant for the Company’s development

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

Concessions obtained

On 21 June 2012 JSW S.A. 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 JSW S.A. 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 JSW S.A. obtained a decision from the Environmental Minister on the transfer of the concession in favor of JSW S.A. 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 Jastrzębska Spółka Węglowa S.A. 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 Management Board of Jastrzębska Spółka Węglowa S.A., 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 1.2 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 preparation 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.

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.

Integrated Management System at JSW S.A.

Jastrzębska Spółka Węglowa S.A. holds a certificate issued by an independent accredited certification declaring that the Company has introduced and applies the following management systems: quality (consistent with the requirements of the PN-EN ISO 9001:2009 standard), environment (consistent with the requirements of the PN-EN ISO 14001:2005 i 14001:2009 standard) and occupational health and safety (consistent with the requirements of the PN-N 18001:2004 standard) in the area of: extraction, preparation and sale of coal. All of the JSW S.A.s plants hold the relevant sub-certificates.

In an effort to effectively mitigate business risk, under the Mine Development Strategy in Jastrzębska Spółka Węglowa S.A. adopted by the Management Board and in order to ensure the fulfillment of the policy and goals of the Integrated Management System, the Information Security Management System was implemented in 2012. As one of the operational systems of the Integrated Management System, it incorporates, Information Classification, Risk Analysis and Evaluation and Risk Response Plan - in the area of information security, whose full documentation and archiving is done in DGA BPM (ISO-JSW) software. The system was implemented to apply the protection mechanisms corresponding to the business needs, to define the rules of proceeding with various information, estimate risk on the basis of the existing threats and to define acceptable risk levels. A certificate awarded in this system includes all the JSW S.A. mines and accordingly JSW S.A. is the only company in the Polish mining sector which has fully implemented the requirements of the international PN-ISO/IEC 27001:2007 standard.

Implementation of the Competence Development System

On 31 January 2012, the Management Board of Jastrzębska Spółka Węglowa S.A. made a decision to implement the Competence Development System in JSW S.A. and cover the management staff with this system. As a result of this decision, in H1 2012, competence evaluation covered 176 persons from the Mine Management and the Management Board Office. In H2 2012, the Competence Development System covered another 779 people, i.e. other Section Managers, Senior Foremen, Branch Managers and Branch Foremen. Implementation of the Competence Development System entailed development of a competence model with definitions and training of all the persons subject to competence assessment under the System. The competence assessment process was carried out for the first group in the period from April to June 2012 r, and for the second group from September to November 2012. The outcome of the competence assessment process for employees covered by the system was taken into account when developing and implementing training workshop plans for management competence training for management staff.

In 2012, JSW S.A. continued development activities for the management staff initiated in the past years. As part of these activities, soft and management competence training has been organized and carried out for selected employee groups (branch foremen, senior foremen, managers, young talent). In total, 260 persons attended competence enhancement workshops organized by the Human Resources Management Office. The assumption has been made for 2013 that this training and enhancement workshops program for the management will be continued.

Continued implementation of the management by objectives system

In 2012, the Company continued the implementation of the Management By Objectives system implemented in 2011, as a method to improve the Company's performance by aligning activities of selected employees with the strategic objectives of JSW S.A. Management By Objectives has encompasses the JSW S.A. management staff, from the Mine Director level to Key Section Managers and Office Directors and Team Managers at the Management Board Office, that is 186 persons. Compared to the previous year, the scope of positions covered by the Management by Objectives program was extended to include Mining work Managers, Chief Mechanical Engineers and Chief Electricians. Starting from 2012, it was decided that the reference period of the Management by Objectives program was a year.