Risk Management System

The business of Metalloinvest is associated with various risks. Metalloinvest has arranged a multi-level risk management system to identify, classify, assess possible consequences and to elabourate effective managerial decisions. This system provides for the risk management at the level of the Board of Directors and at the level of functional executives of production enterprises and structural units.

Individual and complex risks that have been duly identified are classified and ranged proceeding from their sufficiency, probability, duration and possible damage, and are subject to control in the course of Company's operational and strategic activities.

The Company conducts risk management through the implementation of a programme consisting of a scope of risk prevention activities, which are taken to reduce the probability of their occurrence, and a scope of risk consequences minimisation activities, which is aimed to reduce damage upon their occurrence.

Within the frames of risk management the Company singles out the following main groups of risks:

  MACROECONOMIC

RiskDescriptionMinimisation factors
Impact of global cycles of economic activityMetalloinvest supplies products primarily for the steel industry, the demand for which depends on the level of global economic activity. On the other hand, mining and smelting industry implies a capital-intensive production process requiring considerable investments. Sensitivity to industrial production paces and demand for considerable investments are the major risk factors that may negatively affect the Company's financial indicators and growth opportunities. At the moment the Company goes through the cyclical recession in the mining and smelting industry caused by the outrunning growth of supply due to a considerable volume of investments into the industry after the world financial recession, which resulted in the surplus of supply and slump in prices.Metalloinvest carefully studies the changes in the global environment and implements a flexible commercial policy, balanced policy to raise and utilise the funds, with a focus on the Company's internal development, maintenance of long-term partnership with the key consumers.
Risk of cost escalation for products manufacture and saleThe risk is associated with the measures of state regulation, political and economic conditions. Company's property, plant and equipment are located in the Russian Federation. Measures of economic and political pressure imposed on Russia by a number of Western countries due to the position of the Russia's political leaders in a number of foreign policy issues negatively affect the economic situation. In particular, economy growth changed for stagflation. Inflation rate increased from 6.5% following the results of 2013 to 11.4% as of the end of 2014. Moreover, ruble went through abrupt devaluation against the main world currencies, which caused the increase of expenses for foreign goods and services. Metalloinvest expects a considerable growth of prices for raw materials, materials and services in the nearest future.Metalloinvest develops and implements the activities aimed at reducing costs, improving the technologies and optimising commodity flows, inter alia, by means of import replacement.
Risk of price increase for energy resourcesElectricity and natural gas are the main energy resources the Company purchases from external manufacturers. Prices for energy resources are regulated by the state, and the prices for some of their positions already exceed the prices in some key regions of the world. It leads to the increased net cost of production and deterioration of Company's competitiveness at the world market.Metalloinvest concludes direct long-term contracts for supply of natural gas and electricity with Gazprom JSC and FGC UES JSC, and considers a possibility to develop its own generating capacities.
Risk of transport expenses increaseA railway tariff consists of the infrastructural, locomotive and rail car components. The first two tariff components are regulated by the state. Till 2017 the growth of railway tariffs by 4.5–10% will cause the cost increase of ready products transportation and, as a result thereof, reduction of business profitability. On the other hand, a considerable surplus of rail cars and vessels led to decrease in the rental rates, and their considerable growth is not expected in the mid-term prospect.Metalloinvest concludes long-term contracts with the most effective transport and shipping companies and optimises the process of products delivery to the consumer with the minimum costs.

  PRODUCTION

RiskDescriptionMinimisation factors
Risk of production process failure and accidentsMining and steelmaking productions are highly hazardous productions. An accident in the course of production implies downtime and increase in non-productive expenses. The Company accounts risks at all production levels, from mining and concentrate production to the output of high-quality rolled steel items.Metalloinvest conducts complex assessment of the influence of various risk factors on the production processes and reduction of product output. Metalloinvest applies complex industrial, production and environmental safety measures to prevent accidents. To maintain the satisfactory condition of production equipment, Metalloinvest conducts centralised work on planning, arrangement and performance of repair works, which is interrelated with the general programme of capital costs spent on technical re-equipment and production safety assurance. The Company also insures its risks of production shutdown, following the generally accepted industrial practice. The insurance programme covering the Company's production assets is represented by re-insurance companies with the A rating and by the leading insurance company with the AAA- rating.

  FINANCIAL

RiskDescriptionMinimisation factors
Currency riskCurrency risk is defined as a risk of financial losses as a result of unfavorable changes in the currency rates. The main source of such risk for Metalloinvest is its export activity. However, prices under some internal contracts also depend on the currency rates fluctuations, in spite of being denominated in rubles. In 2014, as a result of the existing geopolitical and economic situation, the exchange rate of USD to the national currency in the country increased from RUB 33-34/ USD 1 in the beginning to RUB 56-57/USD 1 in the end of the year.The Company conducts continuous monitoring of the possibilities for fixation (hedging) of currency risks. Some of occurring risks are covered by the credit portfolio of Metalloinvest with the balanced distribution of ruble and currency loans, which takes into consideration the Company's export activity and equipment purchase abroad.
Interest riskMetalloinvest is actively raising cash funds at the capital markets and in the form of bank loans. The cost of financing is determined by market conditions, changes in which may result in the increase in price for the processing of financial liabilities. Interest risk is defined as a risk of growth in the floating interest rates. Metalloinvest's credit portfolio is partially formed by loans with LIBOR and EURIBOR rates. Besides, there is a risk of loans refinancing at higher rates than the existing ones.The loans with floating rates make less than a third part of the credit portfolio of Metalloinvest. Metalloinvest conducts continuous monitoring of the possibilities for fixation (hedging) of currency risks. The Company reduces the refinancing risk due to preventive refinancing of loans on the beneficial conditions and prolongation of an average term of portfolio.
Credit riskCredit risk is defined as a risk of contractor's default on its obligations to Metalloinvest. Such risk occurs when selling goods with deferred payment, purchasing goods/services with advance settlements, in the course of settlements with the banks, and in the course of other operations where the contractor incurs an obligation to Metalloinvest.Metalloinvest has implemented a system of contractors' credit quality analysis, limitation of risk exposure, and calculation of total credit risk. The Company uses bank guarantees, non-recourse factoring and other instruments mitigating credit risk.
Risks associated with the fulfillment of terms and conditions of credit agreementsCreditors of Metalloinvest file a number of claims to the company and impose certain restrictions on the company's activities through the credit and other similar agreements. A failure to fulfill these conditions may result in a claim for immediate repayment of borrowed funds under the violated agreements and under all credit agreements in the portfolio.Metalloinvest has created a system of preventive control over the fulfillment of obligations under credit agreements, and tests the fulfillment of creditors' demands on a regular basis.

  INVESTMENT

RiskDescriptionMinimisation factors
Risk of value increase and delay of the investment projects implementationImplementation of investment projects in the mining sector is associated with the risk of increase in their value and terms of commissioning of primary and auxiliary equipment due to their extent, use of imported components and a significant part of project implementation participants.The Company thoroughly plans and controls the implementation of investment projects, actively works with the suppliers and contractors to minimise the estimated value, insures its losses associated with the extension in the terms of facility commissioning or completion of construction and assembly works (ALoP). The Company thoroughly plans and controls the implementation of investment projects, actively works with the suppliers and contractors to minimise the estimated value, insures its losses associated with the extension in the terms of facility commissioning or completion of construction and assembly works (ALoP).

  MARKET

RiskDescriptionMinimisation factors
Risk of product sales decrease caused by the slowdown in the China's economic growth paceChina's economic development produces a significant impact on the global demand for crude iron ore and metals. China's share in the world GDP, with consideration for the balance in purchasing power, makes 17%, while China produces 49% of rolled steel items of the world and consumes 58% of crude iron ore. Following the results of 2014 China's real GDP increased by 7.4%. According to the forecasts, GDP reduction of the country is expected in the mid-term prospect alongside with the transformation of the economic development model towards the increase in the share of service sector. China's government is implementing the measures to support the growth pace of its economy. In particular, the Bank of China is gradually decreasing its refinancing rate, reducing bank reserve requirements and other supporting measures.The Company diversifies its sales markets and minimises its dependence on Chinese consumers; furthermore, it develops the production of highly demanded products with the added value, primarily HBI. Metalloinvest develops relations with its customers, thus increasing the share of strategic long-term contracts in the sales portfolio.
Risk of prices decrease for Metalloinvest products characterised by sufficient volatilityIn 2014, the prices for crude iron ore decreased half as much, for metallised products —by 20–25%, for rolled steel — by 15–20%.Metalloinvest is focused on the production of high-quality products with the added value, investing in the extension of production of high-margin products, cost reduction and diversification of sales

  Others

  • legal risks —Metalloinvest intensifies the functions of internal control and audit to minimise the possibility to violate the laws, and consistently implements transparency and high ethics policy in the business environment to avoid violations in the commercial turnover;
  • risks of the capital outflow to other assets of Metalloinvest — the Company conducts a comprehensive work on optimising the ownership structure of subsidiaries and affiliates, improving their self-sufficiency and efficiency.

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