RU

INTEGRATED REPORT 2016

Financial risk management

29.1 Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital.

29.2 Categories of financial instruments

  Note 31 December 2016 31 December 2015
Financial assets      
Loan issued 6 188,762 -
Trade and other receivables 13 213,632 346,238
Other financial assets   68,267 67,599
Cash and cash equivalents 14 1,485,521 1,111,878
Restricted cash 14 - 200,000
       
Financial liabilities      
Borrowings 17 6,417,874 5,904,664
Bonds 18 584,907 584,668
Derivative financial liabilities 19 277,125 585,603
Trade and other payables 20 221,813 203,859

29.3 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. Market risk is the possibility that currency exchange rates, reduction in the prices of potash products and changes in interest rates will adversely affect the value of assets, liabilities or expected future cash flows. Overall risk management procedures adopted by the Group focus on the unpredictability of financial and commodity markets and seek to minimise potential adverse effects on the Group’s financial performance.

(a) Market risk

(i) Foreign exchange risk
Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is different from the functional currency of the companies of the Group.

The Group operates internationally and exports approximately 79% of potash fertilizers sales (2015: 82%). As a result the Group is exposed to foreign exchange risk arising from various currency exposures. Export sales are primarily denominated in US$ or Euro. The Group is exposed to the risk of significant RR/US$ and RR/Euro exchange rates fluctuations. The Group’s operating profit benefits from the weak exchange rate of the RR against the US$ and Euro, since all the Group major operating expenses are denominated in RR. The net profit suffers from the weak Rouble exchange rate mainly due to the foreign exchange differences on the Group’s loans which are predominantly denominated in USD.

For the year ended 31 December 2016, if during the year the RR had strengthened/weakened by 20% against the US$ and Euro with all other variables held constant, the foreign exchange loss for the year would have been US$ 815,925 lower/higher (31 December 2015: US$ 940,062 lower/higher), mainly as a result of foreign exchange gains/losses on the translation of US$ and Euro denominated trade receivables, cash in bank, deposits, foreign exchange losses/gains on the translation of US$ denominated borrowings and bonds issued and changes of fair value of derivative financial assets and liabilities.

(ii) Price risk
The Group is not exposed to commodity price risk, since the Group does not enter in any operations with financial instruments whose value is exposed to the value of commodities traded on the public market.

 (iii) Interest rate risk
The Group’s income and operating cash flows are exposed to market interest rates changes. The Group is exposed to fair value interest rate risk through market value fluctuations of interest bearing short- and long-term borrowings, whose interest rates comprise a fixed component. Borrowings issued at variable rates expose the Group to cash flow interest rate risk (Notes 17, 18). The objective of managing interest rate risk is to prevent losses due to adverse changes in market interest rates. The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, the renewal of existing positions and alternative financing.

For the year ended 31 December 2016, if LIBOR and ISDA rates on US$ denominated borrowings had been 200 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been           US$ 100,192 lower/higher (year ended 31 December 2015: post-tax profit for the year would have been US$ 85,842 lower/higher). For the year ended 31 December 2016, if MosPrime rates on RR denominated borrowings had been 1,500 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been US$ 45,799 higher/lower (year ended 31 December 2015: post-tax profit for the year would have been US$ 73,372 higher/lower).

The effect is mainly as a result of higher/lower interest expense on floating rate borrowings and changes in the fair value of derivative financial assets and liabilities with floating rates terms.

(b) Credit risk

Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Group. The objective of managing credit risk is to prevent losses of liquid funds deposited or invested in such counterparties. Financial assets, which potentially subject Group entities to credit risk, consist primarily of loan issued, trade receivables, other financial assets held to maturity, cash and bank deposits.

The maximum exposure to credit risk resulting from financial assets is equal to the carrying amount of the Group’s financial assets of US$ 1,956,182 (31 December 2015: US$ 1,725,715).

The Group is not exposed to significant concentrations of credit risk. As at 31 December 2016 the Group had 28 counterparties (31 December 2015: 52 counterparties), each of them having receivables balances above US$ 1,000. The total aggregate amount of these balances was US$ 181,529 (31 December 2015: US$ 320,612) or 85% of the total amount of financial trade and other receivables (31 December 2015: 89%). Cash and short-term deposits are placed in banks and financial institutions, which are considered at the time of deposit to have optimal balance between rate of return and risk of default. The Group has no other significant concentrations of credit risk.

Trade receivables are subject to a policy of active credit risk management which focuses on an assessment of ongoing credit evaluation and account monitoring procedures. The objective of the management of trade receivables is to sustain the growth and profitability of the Group by optimising asset utilisation while at the same time maintaining risk at an acceptable level.

The effective monitoring and controlling of credit risk is performed by the Group’s corporate treasury function. The credit quality of each new customer is analysed before the Group enters into contractual agreements. The credit quality of customers is assessed taking into account their financial position, past experience, country of origin and other factors. The management believes that the country of origin is one of the major factors affecting a customer’s credit quality and makes a corresponding analysis (Note 13). Most customers from developing countries are supplied on secured payment terms, including letters of credit or factoring arrangements. These terms include deliveries against opened letters of credit and arrangements with banks on non-recourse discounting of promissory notes received from customers. Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provision already recorded (Note 13).

The table below shows the credit quality of cash, cash equivalents, deposits and restricted cash balances neither past due nor impaired on the reporting date, based on the credit ratings of independent agencies as at 31 December 2016 and 2015, if otherwise not stated in table below:

Ratings – Moody's, Fitch, Standard&Poor's 31 December 2016 31 December 2015
From AAA / Aaa to A- / A3 255,146 155,572
From BBB+ / Baa1 to BBB- / Baa3 629,599 53,123
From BB+ / Ba1 to B- / B3 133,211 496,943
Unrated* 467,565 606,240
Total cash and cash equivalents, deposits and restricted cash not past due nor impaired 1,485,521 1,311,878

(c) Liquidity risk

In accordance with prudent liquidity risk management, the management of the Group aims to maintain sufficient cash in order to meet its obligations. Group treasury aims to maintain sufficient level of liquidity based on monthly cash flow budgets, which are prepared for the year ahead and continuously updated during the year.

Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the time remaining from the reporting to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows at spot rates.

As at 31 December 2016 Note Less than  1 year Between 1 and 5 years Over 5 years Total
Trade and other payables 20  221,813  -    -    221,813
Bank borrowings    2,149,567  5,050,662  79,925  7,280,154
Bonds    26,397  658,679  -    685,076
Finance lease liabilities    894  3,576  33,576  38,046
Derivative financial liabilities    146,923  114,248  -    261,171
Total    2,545,594  5,827,165  113,501  8,486,260
           
As at 31 December 2015 Note Less than  1 year Between 1 and 5 years Over 5 years Total
Trade and other payables 20 203,859 - - 203,859
Bank borrowings   2,591,286 3,858,044 337,422 6,786,752
Bonds   20,588 677,356 - 697,944
Finance lease liabilities   744 2,976 28,687 32,407
Derivative financial liabilities   218,468 321,713 - 540,181
Total   3,034,945 4,860,089 366,109 8,261,143

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