Improving Risk Management
In today’s world, where new challenges are constantly arising, an important condition for the successful development of any company is the ability to manage its risks, in particular, identify them, take measures to mitigate them, and have a clear action plan in case of risk occurrence. Such work should be carried out in the company on a systematic basis and at all levels, with the understanding that decisions in the field of risk management should be carefully thought out and balanced as much as possible.
An effective risk management and internal control system remains one of the Company’s priorities. As part of these activities, at all levels, measures are taken to reduce the likelihood of negative consequences that may result from certain events. In 2016, the Company continued its risk management activities as part of COSO ERM, an integrated risk management concept, and ISO 31000 Standard.
Key risk factors
This section describes only the major and most significant risk factors, which may have a considerable impact on the financial and operating performance of Uralkali. All estimates and forecasts contained herein should only be viewed taking these risks into account.
Other risks, of which Uralkali is unaware or which are not currently deemed significant, may become material in the future and have a considerable adverse effect on the Group’s commercial, financial and operating performance.
The Integrated Report does not aim to give an exhaustive description of all risks that may impact the Company. Uralkali will disclose any necessary information in a timely manner according to the applicable laws.
Our risk management approach is based on an understanding of our current risk exposure, risk probability and impact, appetite and dynamics.
Activities completed in 2016
Further introduction of a corruption prevention system and a compliance system at foreign subsidiaries.
Further integration of risk management in operational management.
Improvement of the internal control system in the foreign trader’s work.
Plans for 2017
Further monitoring of risk management practices and their implementation in the Company’s operations.
Completing introduction of corruption prevention policies and procedures in key foreign subsidiaries.
Further improvement of the risk management and internal control system inthe foreign trader’s work, as well as foreign subsidiaries of Uralkali Group, and foreign investment management, including partial automation of internal controls.
|I.||STRATEGIC RISKS||1. Failure to meet targets set for investment projects|
|2. Change in the supply and demand balance on the main potash markets|
|II.||OPERATING RISKS||3. Reduction in production/capacity|
|4. Lack of qualified employees|
|5. Non-fulfilment of obligations by contractors or suppliers|
|6. Expenditure increase|
|III.||FINANCIAL RISKS||7. Inflation and currency fluctuations|
|IV.||ENVIRONMENTAL RISKS||8. Environmental risks and risks related to mining operations|
|9. Risks related to the incidents at Berezniki-1 and Solikamsk-2|
|10. Non-compliance with environmental and health and safety regulations|
|V.||MARKETING RISKS||11. Potash demand decline|
|12. Potash price decrease|
|13. Loss of market share on specific markets|
|14. Lack of specific products|
|VI.||POLITICAL AND LEGAL RISKS||15. Risks, connected with the licensing of use of natural resources|
|16. Political and regulatory risks|
|17. Compliance with applicable legislation and internal policies|
|Risk||Description||Risk level||Dynamics||Comments||Risk minimisation measures|
|Failure to meet targets set for investment projects||Expansion CAPEX, costs associated with productivity increase and other investment costs of Uralkali are an important part of the Company’s expenditure budget. There are risks that investment projects’ timeframes and budgets will be exceeded, and risks that the projects’ technical parameters will not be achieved, or risks of project termination taking into account current factors and forecasts.||
|Change in the supply and demand balance on the main potash markets||Change in the supply and demand balance on the main potash markets, inter alia, because of a decrease in demand and price of potash due to both political and economic factors, may have a negative impact on the Company’s operations. The desire of potash producers to achieve high capacity utilisation in the context of insufficient demand can lead to potash oversupply and thereby to a reduction in global prices. All this may affect revenues and result in a decrease in the Company’s profits.||
||The demand for potash on major sales markets does not match the level of supply, which leads to price reduction, a decrease in the Company’s revenues and affects the ability to meet assumed obligations.|
|Reduction in production/capacity||External and internal factors, including accidents, downtime, a general decline in potash demand, can affect potash production.||
||Production capacity decreased in connection with the accident at Solikamsk-2.|
|Lack of qualified employees||The Company’s business implies in-depth professional training and high qualification of its employees, in particular, in the field of production, mining, geology. Uralkali may face the difficulty of attracting and retaining staff with sufficient qualifications and the need for additional time and material resources to train and develop its employees. All this can negatively affect the Company’s timely achievement of its goals.||
||In the context of the planned launch and development of a number of mining projects in the Perm and neighbouring regions by other companies in the coming years, retention of qualified personnel is becoming one of the main tasks for the Company.|
|Non-fulfilment of obligations by contractors or suppliers||The failure of key partners, relations with whom are strategically important, to meet their contractual obligations may adversely affect Uralkali’s performance.||
||The Company’s activities depend on monopolistic energy suppliers and the Russian railways. In the context of macroeconomic instability, suppliers and contractors can raise the price of their products and services. Timely fulfilment by suppliers, contractors and buyers of their obligations related to the implementation of the Company’s investment projects is critical in order to ensure compliance with deadlines within the approved financial investments.|
|Expenditure increase||Production costs may increase due to the wearand- tear of production equipment, utilisation of obsolete technologies, inefficient spending on operating activities or energy appreciation.||
||The Company is implementing programmes to increase productivity and reduce operating expenditures.|
|Inflation and currency fluctuations||Inflation processes and currency fluctuations, as a result of which the Company’s costs increase due to the rise in price of materials, resources and services used (for example, transportation services), may lead to a decrease in the Company’s net profit.||
||Part of the Company’s loan portfolio consists of loans with floating interest rates and is denominated in foreign currency. The bulk of the Company’s expenses are denominated in roubles, while the main export revenues are denominated in US dollars.||The Company minimizes the risks of currency fluctuations and the risk of a significant increase in the floating interest rate by hedging its interest and currency risks.|
|Environmental risks and risks related to mining operations||Uralkali’s activities related to the extraction of minerals and production are subject to risks associated with the geological structure of the Verkhnekamskoye field, and exploration, extraction and processing of minerals. The risks include possible flooding, fires and other accidents that can lead to unforeseen costs and a general decline in the efficiency of the Company’s operations.||
||Given unpredictable natural factors associated with mining, the Company takes a conservative approach to mitigating environmental risks.|
|Risks related to the incidents at Berezniki-1 and Solikamsk-2||The flooding of Berezniki-1 in October 2006 as well as an accident at Solikamsk-2 in 2014 had a significant impact on the size of mineral reserves and may lead to additional costs, losses and obligations.||
||The Company adheres to its safety and social responsibility policies and adopts a conservative approach.||The Company follows its social responsibility policy, under which it maintains a constructive and consistent relationship with state authorities to respond to any issues in a timely manner.|
|Non-compliance with environmental and health and safety regulations||Uralkali’s operations and the use of its property are governed by various environmental and health and safety laws and regulations. Additional costs and obligations may be incurred by compliance with these laws and regulations.||
||The Company pays considerable attention to the problems of industrial safety, defining the life and health of people as the most important value and making HSE assurance its main task.|
|Potash demand decline||Changes in the supply and demand balance on the main potash markets, due to both political and economic factors, may have a negative impact on the Company’s operations.||
||The growth in demand for potassium chloride does not match the level of supply on the markets. The fall in potash prices in mid-2016 had a significant impact on the Company’s revenue and created a need for cost adjustment.|
|Potash price decrease||Producers’ pursuit of high capacity utilisation together with insufficient demand may result in excess supply and a subsequent drop in global potash prices, reducing the Company’s revenue and profit.||
||In connection with macroeconomic and geopolitical instability, the growth in potash demand does not match the level of supply on the markets, which affects the selling price.|
|Loss of market share on specific markets||Competitors’ activities, commissioning of new production facilities and other events may lead to the loss or reduction of the Company’s share on one or more sales markets. The loss or reduction of its share on specific markets can lead to a decrease in revenue and deterioration of the Company’s financial performance.||
||↔ When the growth in potash demand does not match the level of supply on the markets, the level of competition may increase.||The Company’s management monitors all key markets and is developing a marketing strategy to promote potash.|
|Lack of specific products||With its production capacity fully utilised, the Company may face a deficit of a particular product for a specific market.||
||Emergencies, as well as possible changes in investment decisions as a result of certain factors, can lead to a deficit of a certain product and the inability to meet the existing demand.||The Company retains a flexible production strategy, increasing or decreasing production volumes depending on current demand and market forecasts.|
|POLITICAL AND LEGAL RISKS|
|Risks, connected with the licensing of use of natural resources||
||In 2016, the Company extended the validity of key licenses for a longer period.|
|Political and regulatory risks||
||Uralkali is registered in Russia and operates in a number of developing markets that are exposed to higher risks than more developed markets, including legal, economic and political risks, i.e. rapidly changing legislation and legal practice.|
|Compliance with applicable legislation and internal policies||Uralkali is subject to the laws of Russia and other countries of operations, including anti-monopoly ones. Claims, including anti-monopoly claims, may create additional costs for the Company.||
||Uralkali is subject to special state regulations in various jurisdictions. Due to macroeconomic instability, regulators can increase their requirements.||The Company continuously improves its internal control system in order to ensure compliance of its activities with the requirements of applicable law, including anti-monopoly legislation.|