Annual Report 2012

Risks

Risk management – a key part of our development strategy.

Acron’s activity is associated with risks which can affect its operating and financial performance. Mitigating their effect is a key task for the Board of Directors and the Managing Board.

The risk management system introduced by the Board of Directors and the Managing Board includes:

  • Analysis and evaluation of existing and potential risks;
  • Developing and implementing measures to mitigate the effects of risks;
  • Elaborating and implementing plans for crisis management and recovery.

Historically the Group’s major risks have been related to purchasing phosphate and potash inputs, global market trends and financing. Acron Group’s development strategy is primarily aimed at mitigating the influence of these risks on the Company’s business, ensuring stability and creating the foundation for continuing growth and improvement in the Company’s competitive position.

Major risks and risk mitigation

Risks related to purchase of key raw materials: apatite concentrate and potash

 

Risks stemming from the global mineral fertiliser market

 

Financial risks related to debt servicing

         
Risk mitigation   Risk mitigation   Risk mitigation
         
 

Creating a phosphate and potash raw material base do decrease dependence on raw material prices and ensure sustainable supply.

 

Diversification of sales markets, increased sales on premium markets with high demand.

Diversified product portfolio.

 

Monetisation of non-core assets.

Diversification of sources of financing.

The Group’s major achievement in 2012 is eliminating the major risk factor associated with phosphate input supplies for complex fertilisers thanks to commissioning of the Oleniy Ruchey mine in December. Starting in the middle of 2013, Acron (Veliky Novgorod) and Dorogobuzh will receive all of their apatite concentrate from Group’s own source. Moreover, the Group has signed a contract with Apatit to process the Oleniy Ruchey ore if Acron needs additional volumes of apatite concentrate.

Risks Description Risk mitigation
Industry risks

Risks related to changes in the global mineral fertiliser market

Decline in macroeconomic situation, significant fertiliser price fluctuation, oversupply on several sales markets can have a material effect on the Group’s performance.

  • Diversification of sales markets in order to quickly redistribute commodity flows: sales in 60 countries.
  • Sales through wholly owned trading and distribution companies.
  • Adjustment of the product portfolio in response to demand. New 350,000 tpa urea unit was launched in 2012. Aggregate capacity has now reached 800,000 tpa.

Risks related to change of price and key input purchase terms

Higher prices for key raw materials result in higher prime costs and eat into profits. Acron Group’s Russian production facilities are supplied with natural gas and potash by companies that are monopolies or dominate their markets; this situation increases the Group’s exposure to risks related to uncontrolled price hikes and manipulation of raw material prices and supplies.

  • Creation of own phosphate and potash raw material base. In December 2012, the Oleniy Ruchey mine started shipping apatite concentrate. It is expected that by the end of 1H 2013 the Group’s Russian production facilities will receive all their raw materials from wholly owned sources.
  • Negotiating with current suppliers, signing long-term contracts.

Natural gas. Russian government policy is to gradually raise gas prices to netback export prices (less export charges and transportation). However, the deadline for this transition remains indefinite and the difference in gas prices for Russian and international producers (European and others) is still significant.

  • Execution of long-term gas supply contracts with Gazprom subsidiaries at state regulated prices.
  • Improvement of the efficiency of ammonia production in order to reduce gas consumption rate.

Potash (supplier – Uralkali). Domestic prices in Russia for this type of raw material are regularly adjusted upward to the export price level. Contract prices are reviewed on a quarterly basis and could change in either direction.

  • In 2012, the Group raised funds and commenced building the Talitsky mine. It is expected that the Group will be able to meet its potash needs and enter the raw material supply market after the Talitsky mine commissioning.
  • The Group signed a 5-year contract with Uralkali to ensure required potash supplies.
Operating risks

Technical risks

Failures and unscheduled equipment shutdowns may cause higher repair costs and lower operating results.

  • Acron Group annually makes sizeable investments in required engineering, revamping and replacing outdated equipment and constructing modern, safe facilities.
  • The industrial safety and process control divisions ensure required engineering supervision and occupational safety.
  • The ammonia operations at Acron (Veliky Novgorod) and Dorogobuzh are fully insured with reliable insurance companies because they are the most hazardous and cost-demanding part of the Group’s operations. Cost associated with a failure would be covered by insurance.

Risks related to investment programme

Acron Group is implementing several investment projects simultaneously to construct new production assets and develop mineral deposits. Engineering complexities in the course of construction and lack of personnel resources may significantly delay completion of the projects or entail additional costs.

  • Thorough elaboration of investment projects and highly skilled personnel ensure that the Group can meet deadlines and successfully commission new production capacity. In 2012, the Oleniy Ruchey mine and Urea-1000 construction were both successfully completed and production commenced.
  • Purchase of modern equipment from leading global manufacturers and selection of highly qualified contractors.
  • The Talitsky mine’s CAR/EAR are insured by a pool of Russian and international insurance companies.
Social and environmental risks

Personnel risks

Scarce resources of highly skilled personnel and conflicts with trade unions may cause an increase in expenditures on professional training and expose the Group to risks of strikes and lock-outs.

  • The Fair Work Programme regulates the Group’s social obligations to employees.
  • The career development programme includes advanced professional training courses and corporate training which ensure that Group’s personnel have necessary qualifications for hi-tech operations.

Environmental risks

There are certain risks associated with the potential adverse environmental effect of the Group’s operations caused by accidents and changes to environmental legislation, which may entail additional liabilities and expenditures.

  • Upgrading equipment and commissioning environmentally safe facilities allows the Group to avoid accidents and reduce emissions.
  • Ongoing environmental monitoring and disclosure of information about environmental efforts.
  • The Group insures its civil liability as an owner of hazardous production facilities and obtains extended insurance risk coverage, including for environmental risks.
Financial risks

Currency risks

Most of the Group’s revenues and committed loans are denominated in foreign currency, while its expenditures are primarily in roubles. As a result, exchange rate fluctuations have a material effect on the Group’s financial performance.

  • Acron Group’s loan portfolio and revenues are denominated mainly in US dollars. For that reason, the Group achieves a natural exchange equilibrium between income and debt.
  • The Group additionally uses hedging instruments for currency rsiks (currency swaps).

Risks related to debt financing and interest rates changes

The Group’s aggressive investment programme requires significant financial resources. Difficulties with debt financing and higher interest rates on current and future loans and borrowings may have an adverse effect on the Group’s financial performance.

  • The Group uses a variety of credit instruments to optimise itsl oan portfolio: bond issues, debt financing under favourable terms by major banks, trade financing, including ECA‑covered transaction, and hedging of currency and interest risks.
  • In 2012, the Group obtained debt financing in the amount of RUB 12.8 billion from three banks to construct the Talitsky mine. As a result, investors received 38.05% shares of Verkhnekamsk Potash Company, which is running the project.
Legal risks

Risks related to changes in legislation

Changes in Russian and international laws may create additional liabilities and limitations for the Group’s operation.

  • In order to mitigate potential legal risks, the Group closely monitors all amendments to applicable laws, engages highly experienced legal professionals and continually improves its corporate procedures.

Risk related to changes in standards for licensing the Group’s core business

Acron Group operates under a variety of licences related to its core business.

The corresponding licence agreements mandate the subsoil user’s actions and timeline. Licence requirements are related mainly to drafting design documentation, obtaining government approvals, commencing certain operations (exploration, extraction, processing) and ensuring compliance with industrial and environmental safety requirements. Any violation of licence agreements may result in licenses being withdrawn.

  • The Group monitors performance of its licence agreements on an ongoing basis and makes every effort to prevent violations. The Oleniy Ruchey and the Talitsky projects are being managed in full compliance with the terms and conditions of the licence agreements.

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