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.

Industry Risks

Risk Description Risk Mitigation
Risks related to changes of the global mineral fertiliser market 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 Group’s performance.
  • Pursuing a vertical integration strategy to increase the Group’s 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 Group’s 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 regions.
  • Diversifying sales markets in order to promptly redistribute product flows and sales across 66 countries
  • Diversifying the product portfolio to reduce the Group’s 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 Group’s 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 Group’s 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 government’s priorities and accelerated increases in gas prices to European levels.
  • The Russian government’s 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 Company’s other units.
Potash. Uralkali is Russia’s 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 10%.  
  • 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 Group’s expenses. Increases in the cost of railway transportation or leasing of railcars, sea freight or cargo transshipment may materially impair the Group’s 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 Group’s 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.

Operating Risks

Risk Description Risk Mitigation
Failures and unscheduled production shutdowns Failures and unscheduled production shutdowns may cause higher repair costs and lower operating results.
  • Acron 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 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-intensive part of the Group’s 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
  • Talitsky mine’s CAR/EAR are insured by a pool of Russian and international insurance companies.

Social and Environmental Risks

Risk Description Risk Mitigation
Personnel 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 Group’s 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.
Environmental risks There are risks related to the potential adverse environmental effects 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 to avoid accidents and reduce emissions
  • Ongoing environmental monitoring and disclosure of information about environmental efforts
  • The Group insures its civil liability as the owner of hazardous production facilities and obtains extended insurance risk coverage, including for environmental risks.

Financial Risksи

Risk Description Risk Mitigation
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 Group’s 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)
  • Using multiple sources of financing
  • Signing facility agreements with different repayment periods
  • Diversifying the Group’s debt portfolio by type of interest rate, including both adjustable and fixed rate loans
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 debt portfolio and revenues are denominated mainly in U.S. dollars. For that reason, the Group achieves natural exchange equilibrium between income and debt.  
Liquidity risks The Group’s aggressive investment programme requires significant financial resources. Difficulties with debt financing may lead to the Company’s 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)  

Legal Risks

Risk Description Risk Mitigation
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.
Risks 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.  

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