Risks and opportunities

The ability to operate effectively may deteriorate if the Group unexpectedly loses people holding key jobs within the organisation and fails to replace them.

Opportunities and activities undertaken to minimise the risk: carrying on an active HR policy intended to limit the risk associated with losing human resources, high qualification requirements for candidates for Management Board members and top executives, planning and preparing successors for key jobs.

Trade unions play an important role in the hard coal mining industry, shaping the pay policy and renegotiating it through protests. Trade unions are particularly strong given the size of the workforce in the sector and its strategic impact on the economy.

Opportunities and control mechanisms: appointment of a Supporting Steering Committee at JSW, composed of JSW Management Board representatives and trade union representatives.

This risk will almost certainly materialise within the next quarter as a technical, organisational or human factor and as a result of an unforeseen event stemming from technical and natural hazards related to mining operations.

Opportunities and activities undertaken to minimise the risk: improvements in occupational safety, minimising the occurrence of accidents and hazards caused by technical or natural factors by conducting periodic training on occupational health and safety and job-specific instructions, continuous oversight and control of compliance of work with existing regulations, employees learn about instructions, technologies, technical projects, etc.; job audits as regards occupational health and safety for the most exposed jobs.

This risk is associated with an unfavourable image of the Group being portrayed among various stakeholder groups due to negative media messaging, data leaks, conflicts of interest, environmental aspects, social unrest, mass disasters, breaches of safety rules and other events having an adverse impact on the assessment of the Group.

Opportunities and activities undertaken to minimise the risk: appropriate communication with stakeholders, daily media monitoring, active communication with the surroundings, close cooperation with the Ministry intended to smooth out the mining industry's information policy and improve its image, communication within the company.

The Group's economic activities may lead to disputes with local communities in areas where the Group operates or intends to operate.

Opportunities and activities undertaken to minimise the risk: appointment of CSR Team, development of the Group's Code of Ethics and appointment of an ethics ombudsman, coordinating, monitoring and initiating CSR initiatives, formation of JSW Foundation. Adoption of JSW Group's Sustainable Development Strategy 2017-2020, which makes it possible to build mutual trust and transparency in external relations. Engaging in dialogue with local communities and local governments, improving mutual relations and avoiding conflicts with communities make it possible to maintain the Company's operational continuity and implement its strategy.

This is a risk that the Company would not be perceived by investors as transparent and trustworthy. This situation may lead to a substantial decline in share price and a loss of shareholders' trust.

Opportunities and control mechanisms: implementing a procedure intended to ensure that information obligations resulting from laws regulating trade in JSW's securities on the regulated market are fulfilled correctly, on-going monitoring of publications and market opinions about the Group. Maintaining a positive image for the Company among capital market participants by reducing the time necessary for information to be exchanged in contacts with the Company's stakeholders; adapting appropriate communication tools for contacts with the capital market.

Awareness of personal liability, reporting system, document workflow standards and sanctions for failure to discharge duties reduce the risk of unethical conduct.

Opportunities and control mechanisms: legal regulations and protections incorporated in contracts with external entities, internal legal regulations create an opportunity to prevent undesired behaviour or breaches of law by employees/subcontractors on behalf of the Company or its subsidiaries, whether as a result of acting in good or bad faith. The Code of Ethics for Internal Control Employees and Internal Audit Employees, the Group's Code of Ethics, employee responsibilities and liability included in the Work Code and Work Regulations in place at the JSW Management Board Office and in Entities' Organisational Regulations are currently in place at the Group.

Due to the fact that the Group is a very large organisation, highly varied in terms of values and types of assets, executed transactions and number of employees, there is a risk of dishonest actions by employees, e.g.: fraud, document forgery, which could generate financial losses or reputation damage for the Group.

Opportunities and activities undertaken to minimise the risk: increasing the level of protection, planned control and audit tasks, common legal regulations.

There is a risk of loss, destruction, damage, modification or accidental disclosure of personal data to unauthorised persons. There is also a risk of breaching personal data protection resulting from ignorance or intentional acts by employees.

Opportunities and activities undertaken to minimise the risk: preventing the loss and unauthorised disclosure of personal data by implementing a Security Policy - Rules for Personal Data Protection at JSW Group, training to raise awareness of security in processing personal data for employees, continuous analysis of organisational safeguards.

There is a risk of a cyberattack on information resources.

Opportunities and control mechanisms: a strategy containing planned activities with regard to information security, penetration tests, comprehensive activities by subsidiary JSW IT Systems aimed at protecting IT systems against hacking and socio-technical attacks provide an opportunity to ensure the security of IT resources. Works are under-way on implementing an Information Security Policy - ICT Security at the Group and on updating the Group's Framework Information Security Policy.

An improper organisational structure may lead to delays in performing business processes, introduce restrictions in internal and external communication, redundant tasks, performance of tasks unrelated to business processes and an extended decision-making process.

Opportunities and control mechanisms: changes in the Group's structure are appropriately prepared in legal and organisational terms, and the structure is adapted to the existing requirements and market trends. In order to establish consistent and transparent operating procedures and standards for the Group, JSW Group's Code was drafted, along with JSW Group's Corporate Governance Regulations.

As a result of numerous regulations introduced at the Group, there is a chance of inconsistencies appearing that could cause difficulties in effectively managing the organisation.

Opportunities and control mechanisms: verification and on-going updating of existing internal regulations, employees are required to report on an on-going basis any irregularities in the management system, update of scopes of activities, consistency of the management system and observance of internal regulations create an opportunity for employee conduct that is competent and consistent with the Company's objectives and strategy.

The production capacities of coking batteries are dependent on a range of factors that are beyond the Group's control. Production forecasts contain a certain unavoidable element of uncertainty. Estimated levels of coke production are regularly verified based on new information therefore they can be expected to change. If the actual use of the Group's coke production capacities turns out to be lower than estimated, this may have a negative impact on operating results and financial situation.

Opportunities and activities undertaken to minimise the risk: respecting the Group's Sales Procedure, weekly sales reports submitted to the Management Board and information on coke inventories at the Group.

A global economic downturn, especially in the steel and energy industries, could lead to a major decline in demand for coal and coke and have a negative impact on the Group's operations, results and financial situation. The risk of economic slowdown is currently widespread due to the difficult situation on the steel market, extinguishing blast furnaces, which could possibly lead to a reduction in production capacities at coking plants.

Opportunities and control mechanisms: monitoring and analysing global trends on the coal, coke and steel markets, monitoring global index prices, the prices of coal produced by Polish mines and the level of coal imports.

An oversupply of coal, coke and steel on global markets may result in a considerable decline in prices, which may have a substantial unfavourable impact on the Group's operations, results and financial situation. Due to the mutual links between the industries, a down-turn (lack of demand) on the coke and steel market directly has an impact on results generated on the coal market. An expansion of local competitors may also be a threat due to an increase in domestic volume of coal and coke obtained at much lower production costs or the influx of cheap coal and coke from abroad.

Opportunities and activities undertaken to minimise the risk: flexibility of production and sales depending on market conditions, monitoring quality parameters of coal/coke, rational management of coal and coke inventories will make it possible to minimise the impact of changes in the level and structure of demand on business and financial strategy.

A reduction in the production capacities for blast-furnace pig iron in Europe may significantly and unfavourably impact demand for coke. At the same time, there is a strong tendency for steel markets toward becoming independent from external purchases of raw materials by expanding their coke production capacities. The likelihood of this risk materialising is viewed as major because of the difficult situation on the steel market.

Opportunities and activities undertaken to minimise the risk: detailed analysis of European and global sales markets, diversification of sales markets, search for new sales directions, including overseas markets.

Analyses of steel production show a stable share of blast-furnace production in Asia, Europe and South America. The blast-furnace process will continue to be the dominating steelmaking technique. In the long term, the cost of raw materials and energy will have a decisive say on which steelmaking technologies are used. Failing to keep up with technological changes in coke production will lead to a substantial loss of added value and have a considerable impact on achieving the planned objectives.

Opportunities and activities undertaken to minimise the risk: monitoring how the quality of coke is adapted to customer requirements, executing multiannual contracts, use of synergies as a Group offering coke and coking coal, searching for new sales markets, monitoring the market in terms of technological changes and the level of steel production, customer requirements and competitors' actions.

Estimates concerning coal resources invariably contain a certain level of uncertainty and to a certain degree depend on geological criteria that may ultimately prove to be imprecise. Moreover, limited technical and organisational capacities may have an impact on the quantity and quality of extracted coal.

Opportunities and activities undertaken to minimise the risk: on-going updating of production planning, monitoring and analysing production indicators, optimising preparatory and exploitation works, implementing production plans, adapting internal regulations to existing legal and regulatory settings.

This risk will almost certainly materialise due to a high presence of machinery in the production process, increasing the likelihood of down-time due to machine failure, necessity to re-build machinery or inappropriate selection of technical solutions for the existing geological and mining conditions.

Opportunities and activities undertaken to minimise the risk: supervising the performance of contracts related to repairs, servicing and maintenance of machinery and equipment, monitoring and reporting on the production process, oversight system for the operation of machinery and equipment, monitoring warehouse stock levels and deadlines for delivery of machinery and equipment prevent production down-time caused by machinery and equipment down-time and make it possible to effectively use the machine park.

The risk that production or production levels will be distorted due to improper management of production, use of inappropriate production technologies, wrong employee management, greater than predicted natural hazards as a result of which supervisory organs may completely or temporarily suspend production.

Opportunities and activities undertaken to minimise the risk: monitoring and analysing production indicators in order to update production planning on an on-going basis, conducting production planning in parallel to investment plans, scheduling essential mining works, systematic analysis of geological and mining conditions, optimising preparatory and exploitation works, continuously raising management's competences and raising the professional competences of employees make it possible to reach expected production levels, while minimising the impact of geological conditions and technical and organisational constraints.

Resources might not be available when needed or if available their extraction might not be possible at a competitive cost at that time. The Group might not be able to precisely evaluate or might incorrectly evaluate the geological structure of deposits, quality of resources and/or geological and engineering parameters of rock mass in prospective areas, which may have an unfavourable impact on its profitability and financial situation. The efficiency of the deposit acquisition and management process may also be limited due to legal changes. The materialisation of this risk may significantly reduce the scope of the Group's operations.

Opportunities and activities undertaken to minimise the risk: optimising the investment project portfolio to secure access to resources, updating and developing technical projects for exploitation of mine levels and parts of deposits taking into account aspects of technical and economic analysis, conducting research works to identify the quality of resources and geological and engineering conditions, securing financing for strategic projects create an opportunity to acquire and economically manage attractive coal resources, ensuring JSW Group's uninterrupted operations.

This is a risk that due to environmental factors and in the presence of an epidemic, the health and life of JSW's employees might be under threat. The Company might be forced to limit its activities, which may have an adverse impact on its financial situation or its image.

Opportunities and activities undertaken to minimise the risk: to minimise the effects of this risk, a crisis group has been appointed with the aim of ensuring the continuity of operational processes and protecting the mines. Activities are designed for specific mine units or specialist personnel, and essential personnel numbers are defined. Controls of sanitary conditions have been ramped up to prevent the spread of coronavirus. Disinfection agents, protective masks, biological protection suits have been purchased. If an employee has coronavirus symptoms, he or she will be sent to isolation tens put up in front of each mine. He or she will be looked after by medical staff. Dispatch employees will announce every day, after each shift, the number of employees with higher body temperature, number of people referred to the temporary tents, where they will undergo an interview, and the number of people with a suspected infection. An information campaign is under-way on how to proceed in the light of this threat (posters, emails, information over internal radios). Third parties have also been prohibited from entering JSW's premises. Mobile service stations have been set up for them. Employees also have the option of working remotely (outside their place of residence).

Changes in the prices of commodities, exchange rates, cost of labour result in a change (increase) in the prices of purchased goods. Appropriate provisions in supply contracts help in reducing the risk of high variability of commodity market prices. Contracts with suppliers ensure that supplies are at constant prices throughout the entire contractual term. In the long term, the likelihood of commodity price hikes increases due to the market situation.

Opportunities and activities undertaken to minimise the risk: market analysis, contractual terms concerning supplies state that the Ordering Party may withdraw from performing 50% of the contract without contractual penalties for the Group. Executed contracts make it possible to negotiate prices, payment deadlines and substitute purchases, thus protecting cash flows against higher commodity prices.

The Group is exposed to significant currency risk due to its currency exposure, which may have an impact on the level of cash flows and financial results. The main source of currency risk is product sales: indexed and denominated in USD and EUR.

Opportunities and activities undertaken to minimise the risk: the Group has a Currency Risk Management Policy, and a Currency Risk Committee is appointed. The Group hedges its exposure at the level of plans and contracts, using the hedging coefficients approved by JSW's Management Board.

The Group is currently mainly exposed to interest rate risk with regard to its assets related to the purchase of investment certificates and deposits and cash. The Group is also exposed to interest rate risk on its loan in USD and, to a lesser degree, on its lease and loan liabilities.

Opportunities and activities undertaken to minimise the risk: implementing JSW's Interest Rate Risk Management Policy together with a procedure, the Exante system has been expanded to include a module to handle the interest rate risk management process, on-going analysis of market rates and market forecasts for interest rates. Implementing hedge accounting for interest rates with regard to assets related to the purchase of investment certificates and deposits and cash.

Credit risk concerning the Group's financial receivables is focused in the following areas: cash and bank deposits, derivative instruments and financial receivables. Credit risk concerning financial receivables may result from their concentration or difficulties in recovery.

Opportunities and activities undertaken to minimise the risk: implementing a procedure and policy to allocate free cash, procedure for managing JSW Group's currency risk, ensuring effective performance of tasks concerning the allocation of free cash while ensuring a secure return on capital, together with interest, creates an opportunity to effectively manage receivables from cash allocations and settlement of derivative transactions.

Due to a strong dependence of cash flows and the amount of generated cash on the sales prices for coal and coke as well as a continuously high level of investment expenditures, if the Group's market situation significantly deteriorates, it would be exposed to the risk of losing liquidity. The Group intends to maintain a proper financing structure by having an appropriate level of long-term financing sources.

Opportunities and activities undertaken to minimise the risk: liquidity monitoring - JSW Group's policy and procedure for managing liquidity, daily monitoring of available funds on a monthly basis, update of liquidity forecasting tools create an opportunity to maintain liquidity and manage working capital.

The main risks of M&A processes are in the following areas: financial, organisational, operational, strategic, market and political. They may potentially have a considerable impact on market and balance sheet value.

Opportunities and control mechanisms: ensuring technical and organisational conditions as well as financial, strategic, market and political support create an opportunity for effective mergers and acquisitions, contributing to growth in JSW's market and balance sheet value. On-going supervision over JSW Group's integration processes, oversight of projects being implemented in line with the implemented methodology make it possible to obtain the expected synergy effects out of integration with newly-acquired entities.

There is a considerable risk of failing to achieve the assumptions and objectives in the Group's investment projects as regards development and expansion into existing and new markets. This risk may materialise due to incorrectly defined key strategic assumptions, wrongly estimated benefits and development conditions in the Strategy.

Opportunities and control activities: monitoring the market and analysing potential business undertakings, conducting and on-going monitoring of strategic projects in line with JSW Group's Project and Program Management Methodology.

Given the multiannual cycle of a key strategic project, there is a possibility of delays, divergences from the asset and financial schedule due to geological and mining conditions, performance of work by extremal firms, changes in forecast macroeconomic factors, a down-turn on the coal market.

Opportunities and activities undertaken to minimise the risk: implementing a project management methodology together with the appointment of appropriate project management units, preparing strategic project documentation that takes into account all identifiable organisational, technical and economic, environmental and social aspects, along with an economic analysis, periodic reports on investments, continuous oversight of projects are an opportunity to precisely define the project's structure, its implementation and impact on strategic objectives.

The risk that the Group will not maximise the results of its activities due to a non-optimal allocation of resources or the definition of an incorrect business segment structure in the context of the strategy.

Opportunities and activities undertaken to minimise the risk: monitoring the market for potential investment purchases, availability of innovative services, solutions for hard coal mining, monitoring specific investment projects that support strategic objectives.