Risks and risks mitigation strategy
Acron’s activity is associated with risks that can affect its operating and financial performance. Mitigating the effects of such risks is a key task for the Company’s Board of Directors and the Managing Board.
As part of the risk management system, the Board of Directors and the Managing Board:
- Analyse and evaluate existing and potential risks
- Develop and implement measures to mitigate the effects of risks
- Elaborate and implement plans for crisis management and recovery
Historically, the major risks with the greatest impact on the Group’s activity have been the ones related to purchasing phosphate and potash inputs, global market trends and financing. Acron Group’s long-term development strategy is aimed at mitigating the influence of these risks on the Group’s business, ensuring stability and creating the foundation for continuing growth and improvement in the Company’s competitive position.
The year 2013 was a critical period for the Group. The first stage of the Oleniy Ruchey mine was commissioned in December 2012, and by mid-2013 the Group achieved complete phosphate independence. This vertical integration strategy has already delivered tangible results, mitigating one of the most critical risks related to phosphate supply for complex fertiliser production. In 2014, apatite concentrate output was 891,000 tonnes; 718,000 tonnes were used for internal consumption and NWPC sold the rest to other fertiliser producers in Russia. Following the launch of the second stage (the underground mine), Acron Group will become a major phosphate supplier, further diversifying its product portfolio. In addition to mitigating supply risks, the Oleniy Ruchey project also decreases the effect of end product price fluctuations on the Group’s performance.
|Risks related to changes of the global mineral
||Decline in the macroeconomic situation, insufficient
increase in demand (which depends, among other things, on government
subsidies, yield and grain prices, current and forecasted fertiliser
inventory) or excess increase in production capacity may cause significant
price fluctuation for fertilisers and inputs and may
have a material effect on the Groups performance.
- Pursuing a vertical integration strategy to increase the Groups
long-term competitive advantages
- Signing long-term contracts with major fertiliser consumers in key
markets (Brazil, United States, China) to allocate 30 50% of certain
products in advance
- Selling through wholly owned trading and distribution companies
|Risks related to seasonal fluctuation in demand for
the Groups key products
||Seasonal fluctuations in fertiliser application
depend on weather and climate conditions. Abnormal climate phenomena such as
droughts and floods may have a significant effect on demand in certain
- Diversifying sales markets in order to promptly redistribute
product flows and sales across 66 countries
- Diversifying the product portfolio to reduce the Groups
dependence on agricultural market dynamics
- Advanced warehouse facilities at production sites and in key sales
markets (Russia, China) smooth out seasonal fluctuations in sales
|Risks related to price variance and changes to the
terms for purchasing key inputs
||Acron Groups Russian production facilities are
supplied with key inputs and services 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. Increased raw material and services prices result in
higher production costs and decreased profit.
- Creating own phosphate and potash raw material base; since
mid-2013, the Groups Russian production facilities receive all their raw
materials from wholly-owned phosphate assets.
- Signing long-term contracts
||Natural gas. In 2013,
the Russian government resolved to freeze gas prices for industrial consumers
until mid-2015. According to Ministry of Economic Development, starting in
mid-2015, prices are expected to increase 7.5%. Since the gas price is
regulated by the government instead of market mechanisms, over the long term
there are risks associated with changes in the Russian governments
priorities and accelerated increases in gas prices to European levels.||
- The Russian governments decision to freeze tariffs for goods and
services provided by natural monopolies mitigates the risk of immediate gas
price increases in the short term.
- Improving the efficiency of ammonia production will further reduce
gas consumption. With end of construction and start of the test-run in 2015,
the new 700,000-tpa Ammonia-4 unit at Acron (Veliky Novgorod) will use less
natural gas than any of the Companys other units.
||Potash. Uralkali is
Russias sole potash supplier. Without competition, the supplier may abuse
its monopoly position, leading to higher prices and manipulation of supply
volume. Since 1 January 2015, railway transportation tariffs have increased
- Acron Group is building its own potash facility as part of its
vertical integration strategy.
- Acron (Veliky Novgorod) and Dorogobuzh have long-term contracts
with Uralkali for necessary potash supplies through the end of 2017
||The cost of transportation services is a significant part of the Groups expenses. Increases in the
cost of railway transportation or leasing of railcars, sea freight or cargo
transshipment may materially impair the Groups financial position or weaken
its competitive strength.||
- Railway transportation tariffs were frozen in 2014 along with the
tariffs of other natural monopolies.
- Further indexation of railway transportation tariffs will be
controlled by the government, so the risk of higher rail charges is finite.
- The Group cooperates with a number of railway operators on a
competitive basis in order to reduce the cost of leasing a railcar fleet.
- Acron Groups logistics segment comprises three port terminals,
warehouse facilities, own railcar fleet and a railway operator.
- Freight expenses are offset by forming shiploads of optimum size
and using own warehouses, terminals and trading companies.
|Failures and unscheduled production
||Failures and unscheduled production shutdowns may
cause higher repair costs and lower operating results.
Group makes sizeable annual investments in required engineering, upgrades and
replacement of outdated equipment and construction of modern, safe facilities
- The industrial
safety and process control divisions ensure engineering supervision and
ammonia operations at Acron (Veliky Novgorod) and Dorogobuzh are fully
insured with reliable insurance companies because they are the most hazardous
and cost-intensive part of the Groups operations. Recovery costs associated
with a failure would be covered by insurance
|Technical risks related to the 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 require additional costs.
By thoroughly elaborating investment projects
and hiring highly skilled personnel, the Group can
meet deadlines and successfully commission new production capacity
Purchasing modern equipment from leading
global manufacturers and selecting highly qualified contractors
mines CAR/EAR are insured by a pool of Russian and international insurance
Social and Environmental Risks
||Scarcity of highly skilled personnel and conflicts
with trade unions may cause an increase in expenditures on professional
training and expose the Group to the risk of strikes.
The Fair Work Programme regulates the Groups
social obligations to employees.
- The career development programme includes advanced professional
training courses and corporate training to ensure that Group personnel have
the necessary qualifications for hi-tech operations.
||There are risks related to the potential adverse
environmental effects of the Groups operations caused by accidents and
changes to environmental legislation, which may entail additional liabilities
equipment and commissioning environmentally safe facilities to avoid
accidents and reduce emissions
- Ongoing environmental monitoring and disclosure of information about
Group insures its civil liability as the owner of hazardous production
facilities and obtains extended insurance risk coverage, including for
|Risks related to changes to interest rates
||Due to the economic conditions at the end of 2014,
Russian banks increased their interest rates for new facilities granted to
legal entities. Refinancing may weaken the Groups financial standing.
- Signed a
5-year pre-export loan facility for up to USD 525 mn in 2014 with a club of
European banks led by Société Générale (with the interest
rate linked to Libor)
multiple sources of financing
facility agreements with different repayment periods
the Groups debt portfolio by type of interest rate, including both adjustable
and fixed rate loans
||Most of the Groups 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 Groups financial performance.
Acron Groups debt portfolio and revenues are
denominated mainly in U.S. dollars. For that reason, the Group achieves
natural exchange equilibrium between income and debt.
||The Groups aggressive investment programme requires
significant financial resources. Difficulties with debt financing may lead to
the Companys failure to repay its liabilities on time.
The Group uses a variety of credit instruments
to optimise its debt portfolio: bond issues, debt financing under favourable
terms by major banks, trade financing, including ECA-covered
Maintaining a certain volume of undisbursed
loan limits with creditor banks for immediate funding if needed
Monetising financial investments: in 2014, the
Group sold part of its stake in Uralkali for RUB 4.1 billion (a portion of
the stake was sold in 2013 for RUB 5.5 billion)
|Risks related to changes in
||Changes in Russian and
international laws may create additional liabilities and limitations for the
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
|Risks related to changes in
standards for licensing the Groups core business
||Acron Group operates under a
variety of licences related to its core business.
The corresponding licence
agreements mandate the subsoil users 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
Group monitors performance of its licence agreements on an ongoing basis and
makes every effort to prevent violations.