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Annual Report and Accounts 2011 / Strategy / Risk management at NWR 

Risk management at NWR

Risk management approach

NWR’s system of risk management ensures an effective approach to identifying risks and mitigating their impact on the achievement of company objectives. Risks are controlled and managed within the relevant operational areas in which they occur. It is the responsibility of every NWR entity to actively manage its own risks. Local management is responsible for identifying, assessing and mitigating risks with the support of risk managers, and to report to NWR’s Audit and Risk Management Committee on decisions made and actions taken. The Group’s Risk Management function is responsible for supervising this process, monitoring the key risks and managing them directly where relevant. This central risk management function is responsible for the implementation of appropriate structures and the co-ordination of risk management activities across the Group.

Risk management approach

Risk management approach

Risk identification

A consistent approach to risk identification is key to effective management. All risks are documented by the Group Risk Manager in the Group Risk Register. Updated regularly, this information includes the factors influencing the risks, the respective risk owners, potential impact and likelihood and the status of mitigation measures. At a subsidiary level, all relevant detailed information related to the specific risks is collated and maintained to ensure appropriate monitoring and mitigating action, where required.

Risk evaluation

We evaluate annually identified risks based on possible economic and non-economic impact and likelihood. The adequacy and effectiveness of internal controls are assessed as part of each evaluation. Risk response Based on the risk evaluation, the Group’s risk managers, in cooperation with relevant regional management teams formulate required responses and ensure that the right risk owners within the Group are involved in the development and implementation of necessary response measures. Examples of these responses are set out in detail below.

Risk reporting

All progress on risk identification, evaluation and response is documented and monitored by the Group Risk Manager in cooperation with the Entity Risk Managers, and is supervised by the Board with the assistance of the Audit and Risk Management Committee composed of Bessel Kok (Chairman), Hans-Jörg Rudloff, Steven Schuit and Barry Rourke.

Risk management update

On an ongoing basis, current activities and processes in the area of risk management are evaluated to identify any necessary implementation of new risk analysis and management measures. All implemented responses are regularly monitored and action is taken as necessary.

Further information on NWR’s approach to risk management can be found in the Corporate Governance section on page 60 onwards of this report and in the Group Risk Management Policy on our corporate website www.nwrgroup.eu

Principal risks and uncertainties

Set out below are the principal risks and uncertainties relating to the Group together with the primary source, the potential impact on the business and the mitigation measures.

Specific risk areas in 2011

In 2011, specific areas of risk that we focused on included:

Health and safety risks

NWR operates in some of the most demanding geological conditions for mining coal in the world, and thus safety remains a key priority. The tragic loss of five of our employees in 2011 again highlighted the importance of further understanding and mitigating challenging conditions in line with NWR’s long-term goal of minimising the risk of safety incidents. Following the two fatal accidents caused by rock bounces in July, NWR assessed the increased risk of rock bursts and implemented additional and stricter safety procedures to identify such risks at an early stage. Amongst these measures are the extension of protected zones, installation of new equipment to better identify increasing stress areas, and providing special and more specific personal protective gear for the workers mining in the more bounce-prone areas. In addition, we are working together with other international experts to analyse appropriate bounce prevention initiatives.

Economic environment uncertainty

We closely monitored the various European sovereign debt crises and the macro economic climate throughout 2011. As part of the business plan for 2012, NWR conducted scenario analysis, working on identifying and actively reducing its exposure to a possible severe crisis in the Eurozone and its potential knock-on effect on our business. Through identifying potential cost cutting and cash preserving measures as well as ensuring a strong balance sheet and debt optimisation, NWR is well prepared to take additional necessary steps forward to mitigate region-specific volatility.

Pricing risks

Coal and coke prices have been affected by various factors recently, among which are the changes in pricing dynamics, volatility in the world markets and the global economic downturn. Importantly, in 2011, NWR moved to quarterly coking coal pricing to align the business with international coal trends and move the risk exposure away from regional coking coal price development towards global price development.

Licensing risks

It is crucial for NWR to have a clear view of all the factors related to obtaining and keeping the required licences and permits for its operations. Our development project in Dębieńsko, where we broke ground in 2011, has increased adherence to international regulatory dynamics representing numerous licensing and regulatory challenges.

Market risks

Economic environment uncertainty

Source

The global economic situation remains subject to significantly abnormal levels of volatility based on historic performance and the economies of the CEE region are exposed to this unstable situation. The main factor directly influencing NWR is the Group’s exposure to the steel industry.

Impact

Worsening economic conditions globally and in the CEE region in which we operate have a significant negative impact on the steel industry, and thus may affect the demand for coal and coke products. This may in turn have a negative impact on NWR’s revenues.

Mitigation

We closely follow all economic developments, both worldwide and in the region, to ensure that we are prepared to take any necessary steps. NWR cooperates closely with its suppliers and customers to ensure flexibility and to minimise impact. Throughout and after the economic downturn of 2008/09, NWR developed increased structural efficiencies which resulted in greater operational flexibility to manage its investment schedule, costs and cash flow in order to improve resilience to challenging economic pressures. We have a prudent gearing policy, strong liquidity and a sound funding profile whereby there is no short-term need for refinancing given that the first maturing part of current financing occurs in 2015.

Pricing risks

Source

Volatility in the regional steel and energy markets affects both prices of our inputs as well as selling prices of our products.

Impact

A decrease in coal and coke prices may have a significant negative impact on NWR’s revenues. An increase in input prices can cause a significant increase in input costs. Both factors could adversely affect NWR’s financial performance.

Mitigation

We have long-term framework agreements in place with respect to sales volumes with customers and suppliers. These agreements, as well as the annual and quarterly price/supply agreements, are reviewed periodically, ensuring medium-term stability in sales levels of our products. On the input side, the benefits of the investments in efficiency and safety have increased, to a certain extent, our flexibility in operating costs and production.

Customer concentration risk

Source

A substantial proportion of NWR’s coal and coke is sold to a small number of customers.

Impact

Volatility in the steel and energy markets could cause a significant decrease in demand for coal and coke or even a loss of specific customers for NWR. The loss of one or more significant customers, or the inability to collect payments from such customers, could have a disproportionate effect on our financial results and performance.

Mitigation

Our long-term framework contracts ensure a reasonable level of predictability and security on our future ability to sell the produced coal and coke. Renegotiation of quarterly and annual contracts ensures that we continue to have mutually convenient sales agreements in place in terms of pricing and quality. This is crucial for good long-term relationships with our customers, to whom we provide a complete and reliable service including product blending and transportation. In addition, we regularly monitor our markets for potential new customers and sales opportunities.

Currency fluctuation risk

Source

Our activities take place in different countries, resulting in sales and costs in various currencies, mainly the Euro, Czech Koruna and Polish Zloty. Fluctuations in the respective exchange rates of these currencies can affect the Group in a variety of ways.

Impact

As our costs are largely in Czech Korunas, while revenues are a mixture of Czech Korunas and Euros, our financial results can be significantly affected by the appreciation of the Czech Koruna versus the Euro. Changes in the exchange rate of the Polish Zloty may also have a significant effect on our development projects in Poland.

Mitigation

NWR actively manages exposure to currency fluctuations by applying various financial instruments such as FX forwards and structured FX collars. The time horizon of these instruments matches the forecasted and contracted exposure as close as possible. (Reference: Financial Review page 30 onwards.)

Interest rate volatility

Source

Our activities are financed by a mixture of floating rate debt and fixed rate bonds with different maturities. Volatility in interest rates can affect the Company in a variety of ways.

Impact

Increases in mainly Euribor interest rates may have a significant effect on the cost of our existing floating rate debt finance.

Mitigation

NWR has entered into various financial instruments such as interest rate swaps to decrease the exposure to interest rate volatility. The time horizon of these instruments matches the maturities of the Group’s debt and thus offers an appropriate mix of exposure to fixed/ floating interest rates in the short-term. In the longer term, the Group is fully hedged against interest rate risk.

Strategic risks

Managing our future growth profile

Source

While NWR has a significant reserves base, it requires new reserves and development opportunities in order to maintain and develop its future growth profile. As part of these long-term development projects, NWR also needs to develop hard coal reserves in its existing mining areas.

Impact

If NWR is not able to acquire and develop growth opportunities, it is limited in creating long-term value for its shareholders.

Mitigation NWR currently has three organic growth projects, Dębieńsko, Morcinek and Frenštát, with Dębieńsko being the most prominent. (Reference: Growth page 22; Development projects page 48 onwards.)

NWR applies stringent policies in the preparation and management of all its development projects, conducting detailed feasibility studies and hiring world-class experts and contractors for mine development projects.

NWR has built a solid and stable foundation for its business, from which it is well positioned to take advantage of regional acquisition opportunities to strengthen its position. NWR continues to see the long-term rationale of consolidation in the region with Poland as its primary target, and continues to monitor the market for potential investment opportunities.

Operational risks

Geological conditions

Source

NWR’s mining operations are among the deepest coal mines in the world with an average depth of around 1,000 meters. The geological conditions are subject to unpredictable events that can significantly impact these operations.

Impact

Geological conditions at these depths may lead to increased operational risks and potential disruptions to production due to unforeseen occurrences, resulting in a need to change mine plans in order to access other less hazardous strata.

Mitigation

We have invested significantly in state-of-the-art mining technology, and continuously monitor its performance and analyse the geological conditions in and around our mining areas.

Health and safety risks

Source

The industry within which NWR operates is both hazardous and exceptionally challenging in terms of the underground conditions, leading to a physically demanding working environment for our employees.

Impact Failure to ensure effective health and safety procedures as well as the inability to properly respond to health and safety issues can result in fatal accidents, injuries, production disruption, reputational damage and fines.

Mitigation

NWR regards health and safety as a priority and is committed to long-term continuous improvement of its safety performance, ensuring that appropriate and proactive measures are taken on safety issues. We have significant experience of preventing and dealing with mining accidents and have mining rescue units on standby at all mining locations at all times. To ensure the best possible safety environment for employees, we continue to invest in safety improvements each year by way of mining equipment, protective gear renewal, investment and regular training. Additionally, NWR utilises modern mining techniques and rigorous processes to prevent and manage those safety risks which cannot be avoided.

Lack of qualified workforce

Source

NWR needs to attract and retain sufficient skilled employees to meet its operational needs.

Impact

If NWR is unable to attract and retain new skilled employees, as well as maintaining appropriately trained current employees, operational inefficiencies and a potential inability to fully capture the Company’s growth potential could arise.

Mitigation

NWR aims to attract and retain a younger workforce through a number of initiatives including liaison with local education institutes and programmes, apprentice schemes and the hiring of college graduates. The importance of training and developing its current employees plays an integral part in NWR’s operations, with continuous training forming an embedded part of our corporate culture. Comprehensive training is also provided in conjunction with equipment manufacturers.

In addition, employees are entitled to receive a number of above-standard benefits pursuant to the Collective Agreement, signed by OKD’s senior management, and the relevant trade unions for the period 2010–2012. The main benefits provided to mining employees include contributions to supplementary pensions, insurance schemes, contributions to life insurance and rehabilitation care, as well as a range of performance and loyalty-related bonus arrangements. Monthly targets such as the amount extracted and the progress of development works determine performance-related remuneration. Mining employees are compensated periodically according to their performance; miners receive their performance bonuses monthly; whilst management receive yearly bonus payments.

Social and environmental risks

Environment-related risks

Source

NWR’s operations affect the environment in many ways. Inadequate preventative and remedial actions could lead to environmental damage being caused by our activities and fossil fuels contribute to greenhouse gas emissions during both extraction and end use.

Impact

NWR’s activities can cause material damage to communities near its operations, the surrounding environment and the broader ecology, as well as adversely impacting our corporate reputation.

Mitigation

Management of the environmental impact of operations and activities is critical to minimising damage to the environment. We apply best-practice operating and mining processes that reduce the effect on the environment. In cases where the Company cannot avoid some environmental impact, we continue to focus on the reclamation of land affected by our work, coordinating activities with local organisations and governments to ensure appropriate rehabilitation. (Reference: Sustainability Report 2011).

Impact on communities

Source

NWR is the third largest private employer in the Czech Republic and interacts directly with local stakeholders on a number of levels. Consequently, there is a heightened sensitivity locally to any potential social or economic impact that results from our actions.

Impact

Inadequate response to local and regional stakeholders’ needs and initiatives may adversely impact the Company’s corporate reputation. Such an impact may influence our ability to further develop our operations.

Mitigation

NWR maintains meaningful and open relationships with local governments, organisations and its trade unions. We contribute to the development of the communities near our operations at all levels and aim to minimise any possible negative impact our operations may have on these communities.

Legal and regulation risks

Licensing risks

Source

The ability to obtain, prolong and renew licenses and permits is a vital issue for us and qualification for appropriate permits may become more onerous in the future depending on any regulatory changes. Cross-border (Czech Republic-Poland) developments may increase the regulatory burden upon the Company.

Impact

Domestic and international laws and regulations and possible changes may therefore limit NWR in its activities or constrain profitability.

Mitigation

We are in close contact with local, regional and national government bodies in the Czech Republic and Poland, and actively cooperate in developing a sustainable business model that takes into account the needs and requirements of the regions in which we operate. NWR monitors political, regulatory and social developments closely and maintains regular dialogue with local, regional and national governments to ensure compliance with all relevant current and future laws and regulations in the industry.