Risks and opportunities

Risk description: the ability to conduct operations effectively may deteriorate if the Group unexpectedly loses key personnel in the organization and fails to attract new people.

Risk description: failure to maintain proper social dialogue may have a material adverse impact on the Group’s activities. The risk of no agreement with the trade unions on key issues pertaining to work conditions and remuneration may have negative impact on financial performance, and consequently of the Company's image among business partners.

Risk response: appointment of an Auxiliary Steering Committee in JSW made up of representatives of JSW Management Board trade unions. The Committee’s scope of operation covers opinion-giving and analytical activities in terms of how JSW operates currently and the dialogue conducted with the trade unions.

Risk description: materialization of the risk is nearly certain during the next quarter as a technical, organizational or human factor, and as a result of occurrence of an unexpected event due to technical and natural hazards involved in mining operations.

Risk response: improvement of work safety and minimizing the occurrence of accidents and hazards due to technical or natural factors through the delivery of periodic training on OHS and job instruction, constant supervision and control of performance of work in compliance with prevailing principles and regulations, employees are acquainted with instructions, technologies, technical designs etc., preventive measures are taken following work accidents, OHS workstation audits for positions that are the most exposed to hazards.

Risk description: in connection with the epidemiologic threat (SARS-CoV-2 virus) the probability of the occurrence of a threat is very high - threat to employee life and health, its impact on work organization, operations and, consequently, on financial performance.

Risk response: the Management Board adopts resolutions and issues directives to ensure the safety of the staff and mitigate the risk of the SARS-CoV-2 virus spreading. The key control mechanisms to minimize the consequences of the occurrence of risk have been rolled out and are in operation.

Risk description: the risk resulting from an undesirable image of the Group among various stakeholder groups due to negative media coverage, data leaks, conflicts of interest, environmental aspects, social unrest, large scale disasters, breach of safety rules and other events adversely affecting the Group’s image. Desisting from communicating before JSW obtains a negative image in the media may contribute to a temporary, albeit unfavorable impact on JSW’s image.

Risk response: appropriate communication with stakeholders, daily media coverage monitoring, active communication with the external community through social media, close cooperation with the Ministry of State Assets to unify the mining sector’s information policy and enhance its image and the Group’s internal communication.

Risk description: The Group’s business activity may prompt disputes with local communities concerning the areas in which the Group conducts or intends to conduct operations.

Risk response: appointing a team whose task is coordinating, monitoring and initiating CSR activities, appointing the ESG Research and Reporting Task Force in the organizational structure of the Management Board Office, having the JSW Management Board and Supervisory Board adopt the Regulations of JSW’s Activity in Promotion, Advertising, Representation, Sponsoring, Corporate Social Responsibility (CSR) and Charitable Activity (Donations), setting up the JSW Foundation, adopting the JSW Group’s Sustainable Development Strategy in 2021-2030, improving mutual relations and avoiding conflicts with the trade unions.

Risk description: the risk that the Group will not be viewed by investors as transparent and trustworthy. Such circumstances may contribute to a considerable decline in share value and loss of shareholder confidence.

Risk response: implementing a procedure to ensure proper performance of reporting duties, ongoing monitoring of publications and market opinions about the Group.

Risk description: the risk that the Group’s employees take actions inconsistent with corporate ethical standards or that defining, implementing and enforcing these standards will not be effective and consistent with the Group’s objectives.

Risk response: legal regulations and legal safeguards set forth in contracts with third parties and internal legal regulations make it possible to prevent employees / subcontractors from committing actions and omissions or violations of the law on behalf of the Group.

Risk description: given that the Group is a very large organization and very diverse in terms of the value and type of its assets, transactions and headcount, there is a risk of dishonest conduct of employees, which may lead to financial losses and harm the Group’s image.

Risk response: enhancing the level of protection, planned control and audit actions, universal legal regulations, phasing in the monitoring of documentation sent electronically from the Company outside the organization.

Risk description: there is a risk of loss, destruction, damage, modification and accidental disclosure of personal data to unauthorized persons stemming from a lack of awareness or intentional acts by employees, and also the disclosure of personal data by entities to whom personal data have been entrusted for processing. The violation of standards in the field of personal data protection laid out in GDPR and in the Personal Data Protection Act may precipitate high financial, operational and strategic consequences, and it may generate a large probability of adverse image-related consequences

Risk response: training courses to raise newly-hired employee awareness as regards the security of personal data processing and protection and ongoing verification of information by employees, update, implementation and execution of the Security Policy - Standards for Personal Data Protection in the Group, Information Security Policy in the JSW Group and directives regarding personal data protection, continuous analysis of organizational, physical and ICT safeguards.

Risk description: even though the level of the applied safeguards for data processing in IT systems and outside of such systems is high, there is a risk of a cyberattack on IT resources.

Risk response: strategy containing planned actions related to information security, conducting penetration tests and audits. A Cybersecurity Team has been appointed, the Information Security Policy in the JSW Group was implemented along with the attachment “OT Cybersecurity in the JSW Group”.

Risk description: an improper organizational structure may cause delays in the execution of business processes, limitations in internal and external communication, cause redundant performance of tasks or performance of tasks in isolation from business processes and protract the decision-making process.

Risk response: changes to the Group’s structure duly prepared legally and organizationally and the structure adjusted to current requirements and market trends trigger the materialization of consequences in the following categories: financial, operational and legal and regulatory categories.

Risk description: as a result of the numerous regulations implemented in the Group, there may be inconsistencies which could lead to impediments in the effective operation of the organization.

Risk response: verification and ongoing update of binding internal regulations, adherence to the Regulations for Establishing Internal Regulations in JSW.

Risk description: a downturn in global economies, in particular in the steel and power industries, or events causing a significant decline in demand for coal and coke, may have an adverse impact on the Group’s activity and financial performance and standing. The regulations and restrictions caused by the measures aimed at limiting the spreading of COVID-19 cause disruptions in the supply chain that may impact a number of areas of operations.The decline in demand for coal and coke or steel, or a rapid decline of prices in the market may result in a significant loss of the Group’s ability to generate profit.

Risk response: monitoring and analyzing trends on the global market for coal, coke and steel, expert studies drafted by research analysts and price trends and monitoring global price indices. At present, risk must be monitored to respond rapidly to events transpiring on the market; at the same time, the Group takes advantage of the available safeguards to mitigate financial and FX risk, etc. and it monitors the achievement of the Group’s objectives.

Risk description: the risk of reduction in coke supply is determined by the persisting threat related to the spread of the pandemic of the SARS-CoV-2 virus. Another deterioration in the epidemic situation makes it more likely that the pandemic will exert an impact on how the Group functions. Problems related to supply logistics affect the supply of coke. These problems may ensue from the renovation work on rail lines and the limited availability of rail cars, locomotives and the insufficient supply of means of road transport. There is also a risk of the quantity and quality of coke produced in the JSW KOKS coking plants being diminished, which results from the possibiliy of the availability of coal grades in JSW’s mines being limited.

Risk response: the Group’s Sales Procedure has been implemented and is used, sales reports and information on coke inventories in the Group are submitted to the Management Board.

Risk description: the imbalance between supply and demand has a substantial influence on achieving the Group’s strategic objectives, it makes it necessary to look for alternatives (e.g. overseas markets). The change in the qualitative parameters stemming from current production has a substantial impact on the tonnage offtaken by the Group’s business partners, while if these parameters are not stable, this could destabilize the demand and supply mix. Limitations in coke production triggered by problems on the steel market may exert a direct impact on the volume of coking coal that is offtaken, and hence a shortfall of complete coverage of the sales of the producted quantity of coal.

Risk response: limited ability to contribute to modifying the risk on account of the source of its origin that is independent of the group, monitoring of the global market for coal and coking coal, flexibility of production and sales aligned to market conditions; rational management of coal and coke inventories; monitoring of coal/coke quality parameters.

Risk description: the reduction of production capacities of blast furnace pig iron in Europe will materially and adversely affect the demand for coke. At the same time, there is a strong trend towards independence from external purchases of raw materials by steel producers who balance their in-house deliveries.

Risk response: detailed analysis of European and global sales markets - the purpose of current actions is to retain the current customers and an aggressive price policy focused on diversification of sales by acquiring new sales markets.

Risk description: steel production analyses refer to the stable share of blast furnace production in Asia, Europe and North America. The costs of raw materials and energy will drive the choice of steel production technologies applied in the long-term. Failure to keep pace with the technological changes in coke production will lead to a considerable loss of added value and will exert a significant impact on achieving the planned strategic and operational objectives.

Risk response: monitoring of the market in respect of technology changes and the level of steel production, clients’ requirements, the competition’s efforts, emphasizing the adaptation of coke’s quality to clients’ requirements, entering into long-term contracts, tapping into the synergy effect as a Group offering coke and coking coal and searching for new sales markets.

Risk description: the risk means that as a result of the advent of unforeseen mining and geological or market conditions, or unfavorable legal regulations, production will fall or costs will grow versus the assumptions accepted during production planning.

Risk response: monitoring and analysis of production ratios, forecasts concerning market conditions, current updating of production planning in connection with analysis of conditions existing in the areas where work is conducted, optimization of preparatory and mining operations, adaptation of internal regulations and procedures to applicable legal and regulatory rulings.

Risk description: estimates concerning coal resources inevitably entail a certain amount of errors and to some degree depend on the geological criteria used, which may ultimately prove to be imprecise. In addition, limited technical and organizational capabilities may impact the quantity and quality of extracted coal.

Risk response: updating production planning on an ongoing basis, monitoring and analyzing production ratios, adapting production to the economic conditions, optimizing preparatory and mining works, monitoring and analyzing working standards, standardizing machinery and equipment, analysis on an ongoing basis of the threats affecting the level of extraction.

Risk description: the materialization of risk is almost certain having regard for the high amount of machinery involved in the production process, with the consequence being the possibility of stoppage caused by a breakdown of machinery, the need to rebuild the machinery or the improper selection of technical solutions for the prevailing geological and mining conditions.

Risk response: supervision of the performance of the Technical and Economic Plan and contracts related to renovation, maintenance and checkup of machinery and equipment, monitoring of, and reporting on, the production process, supervision over the operation of machinery and equipment, supervision and control of agreements for the supply of machinery and mining equipment.

Risk description: the risk that production or its level will be disturbed as a result of improper production management, the application of inappropriate production technologies, bad employee management, higher level of natural hazards than projected resulting in decisions by the supervisory authorities imposing the complete or temporary discontinuation of production.

Risk response: monitoring of output indicators for the purposes of continuous updating of production plans, running production plans in line with investment plans, setting schedules for the performance of mining works, regular analysis of geological and mining conditions, optimization of preparatory and mining work, continuous improvement of management’s competence and staff’s qualifications.

Risk description: resources may not be available when they are needed or if they are available their extraction at a competitive cost in a given period may not be plausible. The Group may not be able to assess the geological structure of deposits, the quality of resources and/or the geological and engineering parameters of the rock mass precisely or it may do so erroneously in regions with prospects. The effectiveness of the process of acquiring and managing reserves may also be limited by amendments to the law.

Risk response: optimizing the portfolio of investment projects related to securing access to resources, updating and preparing technical designs for the mining of seams and parts of deposits giving consideration to the aspect involving technical and economic analysis, the conduct of testing work when doing exploration of the quality of the reserves and the geological and engineering conditions, efforts to plan and monitor undertakings, utilizing the opinions of experts and external advisors, execution of key projects in accordance with the developed and implemented methodology, strict supervision over the execution of key projects by Steering Committees.

Risk description: the volatility of prices for raw materials, foreign exchange rates, labor costs translate into movement (growth) in the prices of the products purchased. In the long-term, commodity prices are also influenced by personnel, transport, electricity costs, foreign currency exchange rate fluctuations and ever more difficult access to external sources of financing of operations. Price growth of commodities purchased relative to those assumed in the TEP may result in limited purchasing finance capabilities.

Risk response: monitoring, market analyses, the terms and conditions of contracts pertaining to supply of materials and equipment: the concluded contracts allow for negotiations of prices, payment terms and the so-called substitute purchases.

Risk description: the Group faces significant foreign exchange risk due to its foreign currency exposure which may affect the future cash flows and the financial result. Foreign exchange risk in the Group originates from the sale of its products: indexed to and denominated in USD and EUR.

Risk response: the JSW Group’s FX Risk Management Policy is in effect in the Group; the Financial Risk Committee (“KRF”) has been established. The Group hedges its exposure at the level of plans and contracts, by applying the hedging ratios adopted by the JSW Management Board; a system supporting foreign exchange risk management has been implemented, hedge accounting for cash flows has been implemented, the Group’s planned exposure is hedeged.

Risk description: The Group is exposed mainly to the risk of interest rate fluctuation in respect of the assets associated with the holding of investment certificates, cash and cash equivalents, deposits, loans and borrowings and lease liabilities. High inflation, strong wage pressure and the continuation of robust economic growth are factors that are conducive to the Monetary Policy Council continuing the series of interest rate hikes.

Risk response: ongoing analysis of the exposure to interest rate risk, the financial market risk and potential interest rate risk hedging measures resulting from the acquired financing; monitoring JSW’s overall net position, implementation of hedge accounting; implementation of the JSW Interest Rate Risk Management Policy , including the relevant procedure; ongoing analysis of market rate levels and market forecasts for interest rates. At present, JSW does not hedge interest rate risk with derivatives.

Risk description: credit risk for financial receivables in the Group focuses on the following areas: cash and bank term deposits, derivatives and financial receivables. Credit risk for financial receivables may arise from their concentration or impeded enforcement.

Risk response: pursuing a procedure for investing available cash and a procedure for FX risk management in the Group, the Policy for Investing Available Cash has been implemented according to which the Group invests its cash in banks with an established market position.

Risk description: as cash flow and the level of cash generated are highly dependent on coal and coke sale prices, and also in connection with the constantly high level of investment expenditures, the Group is exposed to liquidity risk in the case of considerable deterioration of market circumstances.

Risk response: maintaining the appropriate level of long-term funding sources, taking advantage of deferred payments to the Social Insurance Institution, amortization of financing under the agreements with PFR and the Consortium of Financial Institutions, liquidity monitoring, Liquidity Management Policy and procedure in the Group, daily monitoring of available cash for the upcoming month, updating the financial model and tools to forecast liquidity as part of the Liquidity Policy and procedure, liquidity forecasts.

Risk description: the major risks in M&A processes appear in the following areas: financial, organizational, operational, strategic, market, political and environmental / ecological risks stemming from the tenets of JSW’s Climate Policy for 2020-2030 along with the scenarios described for the switchover to a low-emission economy, they may potentially have a substantial influence on the Group’s market value and carrying value in the event of pursuing or finalizing misguided acquisition projects or committing significant errors when running these processes.

Risk response: the Group uses the support of external professional advisors. Ensuring technical and organizational conditions and the appropriate financial support to obtain the planned synergy effects contributing to growing value.

Risk description: risk associated with the Group failing to achieve its targets and objectives in its investment projects concerning development opportunities, or expansion into current and new markets. On top of investment projects related to the Group’s core business, i.e. extracting coal, the Group plans to develop its business in terms of producing mining machines and subassemblies, generating electricity and heat and producing hydrocarbons. This risk may be the consequence of the erroneously defined major strategic assumptions or badly estimated benefits and directions of growth.

Risk response: periodic analysis and update of the Group’s strategy, running and monitoring on an ongoing basis its project strategy accepted in 2018 according to the Project and Program Management Methodology in the Group, monitoring the market and analyzing potential business projects

Risk description: on account of the long-term cycle for the duration of key strategic projects, there is a possibility of deviation concerning execution deadlines, the physical investment and financial scope having regard for geological and mining conditions, the work done by external companies, changes in the projected macroeconomic factors, collapse of the market conditions for coal.

Risk response: implementation of a project management methodology along with the establishment of the appropriate project management structures, preparation of strategic project documentation considering all the possible identifiable aspects along with an economic analysis, periodic reports on the execution of the investment, constant supervision over project execution.

Risk description: the risk that the Group will not maximize its business results on account of sub-optimal resource allocation or the adoption of an inappropriate structure of business segments in the context of strategy execution.

Risk response: monitoring of the market concerning possible investment purchases, availability of services, innovative solutions, monitoring of the market and the situation caused by sudden broad-impact events and making fast decisions mitigating the impact of these events on the Group.

Risk description: risk associated with projections and planning entails the threat that the projections constituting the basis for making decisions on starting the investment projects planned by the Group will not materialize as a result of changes in the economic, legal or social environment.

Risk response: constant supervision over the execution of the Strategy, monthly control of budget performance, regular meetings between managers and the Management Board on the performance of tasks, periodic presentation concerning the achievement of individual strategic objectives during meetings of the JSW Supervisory Board’s Strategy and Development Committee, implementation and update of the JSW Group’s Strategy in 2020-2030 and procedures to coordinate efforts.

Risk description: risk of exposure to unprofitable, misguided or excessively risk investments and transactions on account of an improperly conducted assessment of potential transactions, comprehensive analysis at the pre-transaction phase or making erroneous transaction decisions during the various stages of the transaction in progress.

Risk response: support from reputable and experienced external advisors and experts in the transaction profitability analysis process, supervision over the processes by the Management Board and project teams.