Risk and hazards

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: 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 prepared appropriately from the legal and organizational point of view and the structure adapted to the current requirements and market trends, operating Regulations for Establishing Internal Regulations in JSW.

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: internal legal regulations as well as employee duties and responsibilities set out in the Labor Code and Working Regulations make it possible to prevent committing actions and omissions or violations of the law.

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: 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.

Risk response: training courses to raise newly-hired employee awareness as regards the security of personal data processing, implementation of the Security Policy - Standards for Personal Data Protection in the Group, continuous analysis of organizational, physical and ICT safeguards.

Risk description: there is a threat caused by the line of the State policy that will be adopted in response to EU Directives. In accordance with the announcements of the government’s representatives, coal is to remain Poland’s primary energy fuel until 2050. By the same token, coking coal is a key raw material used in steel production.

Risk response: lobbying activity and petitioning to legislative institutions for changes aimed at streamlining the operation of the mining industry.

Risk description: possible risk materialization in a longer time horizon. On 2 February 2021 the government adopted the paper “Poland’s Energy Policy until 2040".The current geopolitical situation related to the armed conflict in Ukraine means that the government's efforts will be directed toward strengthening domestic coal mining and ensuring energy security based on fossil fuels.

Risk response: a government document for the energy industry - Poland’s Energy Policy Until 2040, participating in industry consultations regarding legislative amendments designed to increase energy security, monitoring the work related to regulatory changes regarding the power sector.

Risk description: 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. A downturn in the economy, in the steel and power industries, may have an adverse impact on the Group’s operations, its results and financial position. The armed conflict in Ukraine, sanctions imposed on Russia over raw material imports and rising inflation are raising the risk of an economic slowdown.

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. To respond rapidly to events on the market, the available safeguards to mitigate financial and FX risk, etc. are applied and the achievement of the Group’s objectives is monitored.

Risk description: the risk of a reduction in the supply of coke is determined by problems with supply logistics, which may result from increased demand for shipments due to the disruption of raw material supply chains as a consequence of the armed conflict in Ukraine. The ongoing hostilities could result in damage to production and transportation infrastructure, as well as economic sanctions imposed on Russia, which could disrupt the supply of raw materials from Ukraine and Russia and increase the demand for raw materials supplied to Europe from other directions. There is also a risk of a reduction in the quantity and quality of the coke produced at JSW KOKS coking plants due to the possible reduction in the availability of coal at JSW's mines.

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: risk of an adverse impact being exerted by changes to the level and structure of demand / supply of the Group’s products on attaining its business and financial strategy. Limitations on coke production due to problems in the steel market, may have a direct impact on the volume of coking coal offtaken, and thus the lack of full coverage of the sales of the produced coal. The armed conflict in Ukraine, sanctions imposed on Russia are raising the risk of an economic slowdown and negative impact on the supply in the product markets.

Risk response: limited ability to influence the change of the risk due to its source, which is independent of the Group, monitoring the global coal, coke and steel market, flexibility of production and sales aligned to market conditions, rational management of coal and coke inventories.

Risk description: risk of loss of market as a result of reduction of demand for coke caused by lower steel production. The changes in the steelmaking technology announced under the “Green Deal Policy” may affect the reduction of blast furnace pig iron production in favor of alternative technologies. The conflict in Ukraine, sanctions on raw material imports from Russia, and rising energy costs could affect the competitiveness of European steelmaking and lead to a reduction in pig iron production capacity in Europe in favor of imports.

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: the restrictions on CO₂ emissions announced by steel companies under the “Green Deal Policy” will force changes in technology. The costs and availability of raw materials and energy will drive the choice of steel production technologies applied in the long-term. The armed conflict in Ukraine (sanctions on energy imports from Russia) could affect energy costs and a revision of environmental targets in the EU. Failure to keep pace with the technological changes in coke production may 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 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 produced 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, ongoing analysis of threats.

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.

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 and natural risks, optimization of preparatory and mining work, 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, 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, execution and strict supervision over the execution of key projects by Steering Committees.

Risk description: risk of problems with receiving or renewing concessions for coal mining and extracting methane as an accompanying mineral or with executing mining usufruct agreements by the set deadlines. If the Group’s concessions are canceled or if new concessions or extensions are not granted to the Group, the Group may be unable to fully utilize its resources and identified mineral deposits, which may have a material adverse effect on the Group’s performance and business outlook.

Risk response: development of a technical and economic design based on the deposit resources and development of the environmental impact documentation for the project; active participation in the formal process; ongoing monitoring of environment, legal regulations; constant cooperation with local government units and contact with the local community in the process of applying for the concession.

Risk description: risk of limited availability of proper types of railway wagons and limited ship loading capacities in seaports. In view of the armed conflict in Ukraine and the prioritization of coal shipments to the commercial power industry and households, there is a risk that companies might have problems with performing their obligations. The inability to store coke during downturns makes it necessary to reduce production and brings about the loss of a portion of revenue from hydrocarbons; the lack of suitable wagons can make it difficult or temporarily impossible to perform the contracts.

Risk response: possessing own loading facilities sufficient to carry out shipments of products, executing overseas shipments through 3 Polish ports, concluding agreements with external storage facilities, carrying out activities related to diversification of rail carriers, ongoing monitoring of coal storage capacities at mine sites, monitoring of the rail freight market.

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: 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. The conflict in Ukraine and its further escalation may lead to an increase in hacking and social engineering attacks on the Group's IT resources.

Risk response: ensuring security and conducting monitoring related to cybersecurity, ensuring compliance with internal regulations on ICT security, analyzing and processing information from monitoring systems. The Information Security Policy in the JSW Group was implemented along with the attachment OT Cybersecurity in the JSW Group. Permanent monitoring of the network and ICT infrastructure.

Risk description: risk of incidents and threats as a result of occurrence of an unexpected event due to technical and natural hazards involved in mining operations or organizational or human factors.

Risk response: improvement of work safety and minimizing the occurrence of accidents and hazards due to technical, organizational, human and natural factors in connection with conducted mining operations 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: the number of SARS-CoV-2 cases among the Group employees can affect the work organization and thus influence the operations and, consequently, the financial result.

Risk response: the number of COVID-19 cases among the Group employees and in Poland, as well as the recommendations and restrictions being implemented in the country, are being monitored.

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: coordinating, monitoring and initiating CSR activities, adoption of 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, engaging in dialog with the local community and local governments.

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. The armed conflict in Ukraine has driven up prices for steel and metallurgy products, food, fuel, explosives, etc. Gas prices and freight from China have risen in a way not seen before. Increases in the prices of purchased products relative to the TEP may result in a reduction in the purchase financing 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. A provision providing for the possibility of changing the contract price in line with changes in market prices has been introduced into the contracts most exposed to price fluctuations.

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 Group operates the JSW Group’s FX Risk Management Policy; the Financial Risk Committee 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 hedged.

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. As inflationary pressures persist, interest rate hikes are expected to continue in Poland and around the world.

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 forecasts for interest rates.

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, implementation of the FX Risk Management Policy. In order to minimize the risk associated with investing its financial resources, the Group reduced the number of financial institutions with which it cooperates solely to banks with an established market position.

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

Risk response: 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.

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 building 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, 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 strategic assumptions.

Risk response: periodic analysis and update of the Group’s strategy, running projects in accordance with the Procedure for Drafting and Monitoring the Long-Term Plan (Strategy) and the Technical and Economic Plan in the Group, analyzing potential business projects, ensuring technical and organizational conditions and investment funds for the implementation of development 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: 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, periodic presentation (in the form of reports) concerning the achievement of individual strategic objectives during meetings of the JSW Supervisory Board’s Strategy and Development Committee, implementation of the JSW Group’s Strategy in 2020-2030 and permanent mechanisms for its updating 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 as well as risks related to the current and future geopolitical situation that are difficult to mitigate.

Risk response: conducting comprehensive due diligence analyses, valuations, additional research and analysis with the support from renowned, experienced external advisors and experts, proper selection of advisors in the ongoing strategic processes, supervision over the processes from the Management Board, competent departments and project teams.

Risk description: failure to secure adequate financial resources for the implementation of state-of-the-art technologies may result in losing market position due to increased production costs, higher indirect costs, reduced efficiency and quality of production in relation to market expectations. Insufficient involvement of staff in development, invention and rationalization.

Risk response: permanent cooperation with universities, institutes, Polish mining companies and manufacturers of machinery and equipment used in the production process, engaging in dialog with consultants, analyzing, testing and implementing technical and technological solutions, developing renewable energy sources and hydrogen use, monitoring of activities and adjusting procedures in the field of invention and rationalization, and following the Methodology for Conducting Programs and Projects in the Group.

Risk description: risk associated with failure to achieve the expected synergies, integration and joint implementation of projects and ventures with the acquired entities. The risk of lack of cooperation and implementation of joint projects related to the Group’s operations, as well as lack of or insufficient development of cooperation with the Group’s entities in the areas of operations and R&D and innovation is an important issue.

Risk response: ongoing monitoring of projects and undertakings carried out by entities cooperating with the Company, in particular, supervision over implementation of the R&D&I Policy in the Group and projects run in line with the adopted methodology, ongoing supervision of the integration processes within the Group.