JSW SA - Jastrzębska Spółka Węglowa SA

The Group’s coal production volume is subject to operational determinants and events beyond its control, which may disrupt its operations and affect the production volumes in the various mines in different periods. Mining activity is above all subject to the influence exerted by mining determinants, which include among others:

• difficult geological conditions such as disruptions to the continuity of deposits characterized by volatility and irregularity that may curtail the effectiveness of mining longwall parcels to a greater extent than anticipated;
• level of natural hazards higher than forecast which may lessen the ability to mine individual longwalls;
• mine accidents, fires, explosions and methane combustion, coal dust explosions, methane and rock outbursts and rock falls and collapses;
• failures of machinery and equipment used in mining and processing.

Even though the Group has taken a multitude of measures to enhance safety these risks may grow in particular in conjunction with mining at deeper levels in the Group’s mines. Moreover, the events and determinants that may affect production volume and in particular cost growth should include changes to the legal regulations concerning the coal industry.

The Group’s key business relies on the effective power of its concessions, its compliance with the terms of those concessions and its capacity to obtain new concessions. Granting of a new mining concession or extension of a current concession requires certain requirements prescribed by the law to be met. The granting or extension of a concession may be refused if the intended activity violates environmental requirements, is contrary to purpose of the real property or is a threat to its safety or is a threat to defense and security of the state or its citizens. The Group consults with local government bodies regarding the opening of coal resources in deposits adjacent to the mines. A mining concession is granted following a reconciliation with a local zoning plan and if there is no zoning plan – based on the study of zoning conditions and directions. New concessions may be obtained on certain conditions, which include among others the introduction of provisions to local zoning plans which allow for the possibility of coal mining, in particular the removal of all provisions that may indicate non-compliance of the intended mining operations with the designation or manner of land use specified in the previous planning documents or obtaining a decision from the Regional Director for Environmental Protection with a favorable approach to the intended investment project. Life expectancy of mines may be reduced significantly if new deposits are not opened. If JSW’s concessions are canceled or if new concessions or extensions are not granted to JSW, the Group may be unable to fully utilize its mineral resources and identified mineral deposits, which may have a material adverse effect on the Group’s performance and business outlook. The deposit sampling system adopted by the Group, the production quality control system, the monitoring of the latest technological solutions and the execution of major projects ensure that the Group is able to react to changes in a flexible manner, albeit within the boundaries of available financial resources. The quality of coal in a deposit and at all stages of production and sales is controlled, monitored and evaluated in compliance with the applicable standards, implemented procedures, executed contracts and applicable laws.

The coal mining technologies applied by the Group involve the use of highly specialized machinery and equipment manufactured by only a handful companies in the world. The implementation of the investment plans may involve the need to acquire new specialized mining machinery. Due to the global concentration of manufacturers of such machinery and equipment, there is a risk of unforeseen price increases or the unavailability of the required machinery or equipment, which might entail an increase in costs or cause delays in the implementation of the development strategy. Inspections, maintenance and modernization work also call for substantial financial expenditures. Such work may involve delays or an inability to complete it as a result of unforeseen factors beyond the Group’s control.

Actions taken in the area of risk minimization include: monitoring and analysis of output indicators for the purposes of continuous updating of production plans; implementation of production plans in line with investment plans; adoption of schedules for the performance of mining works; regular analysis of geological and mining conditions existing in the areas where work is underway; continuous improvement of management’s competence and staff’s professional qualifications; review and adaptation of internal regulations and procedures to generally applicable legal and regulatory solutions.

The factors determining this risk are above all: limited technical and organizational capabilities, the application of inappropriate production technologies, improper specification of the timing of supplies of materials, plant and spare parts, unexpected changes in coal and steel market conditions, poor allocation of human resources, failure to stick to the deadlines for purchase orders under the prevailing legal and regulatory limitations. Considering the above, it is necessary to align the production level to changes in demand in the supply chain by doing the following: regularly verifying market changes and needs, forecasting market demand, monitoring and analyzing production metrics, monitoring warehouse levels and monitoring the dates of supplies of plant and machinery, optimizing preparatory and mining work to check headcount when determining the ongoing production needs, analyzing and constantly enhancing management skills, enhancing staff skills, running production plans based on investment plans to select the right plant and machinery depending on the conditions present in a given deposit.

This risk is about the business and financial strategy being based on cooperation with a relatively low number of customers and the inability of enforcing payments from them.

The considerable downturn in the economy, especially in the steel and coke industries, may have a material and adverse impact on the Group’s operations, its results and financial position. Furthermore, if one or more of the Group’s major buyers cuts back on the volume of coal or coke purchased or fails to extend supply contracts, this could have a material and adverse impact on the Group’s operations, results and financial position. Moreover, timely payments hinge upon many factors beyond the Group’s control. The Group, among other actions taken, monitors the performance of coal sales agreements, performs reporting of payments for deliveries (debt collection), applies contractual provisions about contract performance security, reviews and assesses its customers’ financial statements within the JSW Group’s Procedure to Secure Payment and Collect Receivables and its Sales Procedure.

Production capacities of the coke oven batteries may be affected by a number of factors remaining outside of the Group’s control. These forecasts inevitably contain some level of uncertainty and to this extent they rely on economic and technical assumptions made, which in the end may prove to be imprecise. As a result, estimates concerning coke production are regularly checked on the basis of new information; as a result, one should expect that they may change. If the actual utilization of coke production capacity by the Group is lower than the current estimates, then this may adversely affect the Group’s outlook and value as well as its performance and financial standing.

The capacity utilization ratio of global crude steel producers in 2017 ranged between 74.3% and 69.5%. In December 2017, it was 69.5%, i.e. 1.9% more compared to December of the previous year.

Due to the insufficient allocation of financial resources resulting from the competition between the priorities adopted by the Group, it is possible that certain strategic investments may fail.

Risks are prevented from materializing through constant supervision over the implementation of investment schedules, with particular focus on cash flows from investment activity and optimization of the investment project portfolio. It is a matter of significance to work out and implement new methods of funding the execution of investment projects (external funding of investment projects, establishment of a Closed-End Investment Fund and acquisition of long-term debt financing).

Some of the contracts entered into by the Group for the sale of coal and coke provide for product delivery service to a specific venue. In transport and forwarding, the Group cooperates with external companies, which generates the following risks: unavailability of rolling stock that may result in limited ability to deliver products and contractual penalties; limited throughput capacity of rail lines connected to renovations of infrastructure curtailing the ability to deliver products on a timely basis; failures and constraints in logistics processes that may generate additional costs. In order to mitigate this risk, the Group cooperates with many carriers, constantly monitors logistics companies and actively seeks the most efficient logistics solutions in consultation with its customers.

The mines operate their own loading equipment sufficient to effect shipments of their output. However, their storage capacities are limited albeit predictable, which entails the need to lease external storage yards on a temporary basis. Moreover, they are exposed to a risk of limited availability of proper types of railway wagons and limited ship loading capacities in seaports.

The development of railway transport and transshipment infrastructure faces the following barriers: traditionally low storage yard parameters – limited loading and unloading capacities, shortages of transshipment equipment, high costs of access to railway infrastructure.

Actions taken to minimize these risks include continuous monitoring of coal storage capacities in mine storage yards. Long-term agreements have been signed to ensure access to storage yards and quays in seaports.

In the bituminous coal sector, trade unions play an important role in shaping the remuneration policy. The position held by trade unions is particularly strong on account of the headcount in the sector and its strategic influence over the functioning of the economy. JSW’s failure to maintain proper employee relations may exert a material and adverse impact on the operational outlook, performance and financial position. There are 122 trade union organizations operating in the Group. The total number of trade union members, since an employee may be affiliated with several unions, exceeds the number of the Group’s employees and as at 31 December 2017 it was 31,780, which means that the union membership ratio is 120.1%.