In order to identify, classify and assess potential risks and make effective management decisions, Metalloinvest has put in place a multi-level risk management framework, covering the Board of Directors, the Management Board and the managers of production facilities and business units.
Recognising the importance of an effective corporate risk management system, in 2016, the Company’s management placed special emphasis on managing operational risks and establishing an internal control function covering both the preparation of the Company’s financial statements and its operational processes. In 2016, the Company launched to the process of updating its Corporate Risk Management Framework, approved in 2015. The new version of the Corporate Risk Management and Internal Control Framework Standard will lay the foundation for the further enhancement of the internal control function in 2017 and its formalisation.
Today, the Company can state with confidence that thanks to its Corporate Risk Management and Internal Control Framework (CRMF), Metalloinvest’s risk management process has become an integral part of the Company’s day-to-day management, operational processes in annual and strategic planning, and year-round performance assessments.
| Process participant | Key functions |
|---|---|
| Audit Committee |
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| Management Board |
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| Risk Committee |
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| Heads of Department. Risk Managers |
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| Internal Control and Risk Management Department |
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| Internal Audit Department |
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Key risks
In 2016, the Company’s corporate risk portfolio included over 100 items, including 15 key items that Metalloinvest kept track of and updated regularly to reflect changes in the business environment.
The Company’s key risks were identified based on a comprehensive assessment of their total financial impact with a focus on interdependencies and stress scenario modelling deliverables. In 2016, the key risks affecting the Company included:
Product pricing risks
Risk factors
Fall in demand, excess supply
Impact on the Company
Significant fluctuations in global prices for the Company’s core products may affect the Company’s revenue and margins
Risk management activities
Long-term technical upgrade with a focus on customers, sales market diversification, tapping into new markets, monitoring of residual risks coming from diversification and FX, potential decline in procurement costs
FX risk
Risk factors
Threat of sanctions, contraction of the Russian economy, influence of the European economy, central bank policy, regulatory changes
Impact on the Company
Foreign exchange rates changes
Risk management activities
- Approval of the FX risk assessment method
- Valuation of foreign currency assets and liabilities of controlled companies and their subsidiaries
Political risk (sanctions)
Risk factors
Geopolitical conflicts that may result in the Company being put on the sanctions lists, supply of products to sanctioned persons (including those added to the sanctions list after contracts were signed)
Impact on the Company
Limitation of the Company’s operations due to sanctions imposed on individuals and legal entities
Risk management activities
Low risk manageability, monitoring
Feedstock and materials procurement risks
Risk factors
Macroeconomic factors
Impact on the Company
Significant fluctuations of prices for feedstock and materials procured
Risk management activities
- Ferroalloy market monitoring
- Monitoring of current prices for petroleum, oil and lubricants
- Priority purchase of materials and equipment from manufacturers under direct contracts or at a specialised exchange
- Maintaining an optimal inventory level
- Review of complaints management processes for untimely deliveries
- Supplier pool diversification
Legislative / governmental changes
Risk factors
Current state of the national economy, human factor, decision-making errors, and lobbying
Impact on the Company
Governmental decisions directly affecting the Company’s operations
Risk management activities
Low risk manageability, monitoring
Defaults under loan agreements
Risk factors
Breach of obligations and terms and conditions under the Company’s loan agreements and bonds (distribution, encumbrances on assets, disposals and investments, reorganisation and change of control, bankruptcy, legal claims, financial covenants, payment and information obligations, sanctions)
Impact on the Company
Loan acceleration due to breach of provisions (cross-default) of loan documentation
Risk management activities
- Compliance with the terms and conditions and limitations of loan documentation
- Documentation review / approval by the compliance unit (Credit Risks)
Corporate governance deficiencies, departure of key personnel
Risk factors
Overlapping functions, insufficient competencies, regulation gaps, high transaction costs
Impact on the Company
The Company’s corporate governance system is not consistent with its strategic goals
Risk management activities
Reorganisation of the management company, transfer of service functions to a shared services centre, business processes automation
Information security. New risk
Risk factors
- Targeted and criminal nature of threats to information security
- Inadequacy of existing information security tools
- Tougher regulatory requirements
- Lack of qualified personnel
- Lack of awareness of or deliberate violation by employees of established information security requirements
Impact on the Company
- Computer attacks by intruders; violation of information security as a result of employee actions / omissions
- Non-compliance with legal requirements on information security
Risk management activities
Execution of the priority protection plan relating to the information infrastructure of the automated process control system of the entities controlled by the Company
Risks related to ERP launch. New risk
Risk factors
- Project management deficiencies, errors in cost estimates and scope of work, funding cuts, project team personnel turnover
- Insufficient resources
Impact on the Company
- Failure to meet time limits for information management system rollout
- Budget deficit
- The new system not meeting management expectations
Risk management activities
Carrying out initiatives planned as part of the ERP implementation project
Social tensions among employees. New risk
Risk factors
Lack of information, absence of a relocation programme, inadequate relocation compensation
Impact on the Company
Negative employee sentiment and action in the course of the Company’s reorganisation
Risk management activities
Carrying out initiatives planned under the schedule for the reorganisation of the management company and the creation of the Shared Services Centre (SSC)
Operational risks (accidents and emergencies, lower output, disruption of production technologies)
Risk factors
- Limited funding of repairs / capital expenditures to replace worn out equipment
- Deterioration in ore quality
- Suspension or restriction of production and / or stripping due to the instability of the slope or dump mass (GOKs)
- Obsolescence and depreciation of equipment, non-compliance with industrial safety rules, low quality / untimely repairs, non-compliance with the correct production process (GOKs, steelmaking plants)
- Absence of alternative options (suppliers) for the purchase of basic feedstock and materials (metallurgical plants)
Impact on the Company
Reduced production volumes due to accidents and emergencies, or the use of technologies of a lower level than contemporary developments or approved technologies
Risk management activities
- Development and adjustment of long-term (as part of strategic planning), medium-term (as part of the three-year planning) and annual plans for purchasing core equipment to replace worn out equipment
- Compliance with the technology of dumping site construction, development of design documentation for reconstructed and newly commissioned dumping sites and land buyout
- Design of projects for existing dumping capacities development, design and construction of new dumping sites and land buyout
- Drawing up medium- and long-term plans for mining operations, investment projects for production process upgrades, subject to changing conditions and follow-up exploration
- Draining deposits
- Implementing measures to strengthen the walls of open-pit mines and dumping sites, compliance with construction technologies and parameters of mine openings
- Monitoring the stability of open-pit mines and dumping sites walls
- Implementing the projects of development and debottlenecking of the existing capacities of the metallurgical plants’ main units
- Carrying out high-quality scheduled preventive repair and interrepair maintenance of core equipment, proper repair budget spending
- Delivering timely research (including customer-oriented work)
- Strengthening manufacturing and engineering discipline and effective management framework
- Ensuring timely feedstock and materials supplies through diversification of supplier pool
Loss of sales markets
Risk factors
Foreign countries introducing restrictions or bans on transit or import of goods, competitor wars
Impact on the Company
Lower sales, sales geography limitations
Risk management activities
- Monitoring the situation (geopolitical, industrial, regional)
- Identifying new sales markets / consumers
- Diversifying the Company’s product portfolio (promoting new products)
Personnel abuse, corruption / contractor misconduct. New risk
Risk factors
- Lack of assets security control system
- Flawed access control system
- Physical security deficiencies
- Inadequate security of assets during transportation
- High crime rate in one or more region where the Company operates
- Gaps in the legal documentation of the Company’s proprietary rights to its assets
Impact on the Company
Infliction of damage through theft of inventory and harming the Company’s assets
Risk management activities
- Anti-corruption monitoring
- Initiatives to identify possible abuses, violations and conflicts of interest relating to sales and procurement operations at controlled entities
- Monitoring of compliance with local regulations when selling (disposing of) assets, real estate, fixed and other assets of the controlled companies, their subsidiaries and affiliates
- Inspections and audits of the business and financial operations of the Company’s enterprises by control and audit functions
- Theft investigations
- Security arrangements for inventory stored at temporary warehouses and during transportation
- Deployment of security equipment
- Checks and inspections for accounting, storage and write-off of inventories and equipment at controlled entities’ structural units
- Arrangements for the recovery of bad receivables
- Checks and inspections undertaken to establish the causes and conditions giving rise to bad receivables
- Checks and inspections for completeness and quality of implemented measures to recover debts that are subsequently written-off
- Inspections and audits of the business and financial operations of the Company’s enterprises by control and audit functions
Credit risk. New risk
Risk factors
Deteriorating financial condition of a contractor, bankruptcy
Impact on the Company
Risk of a contractor failing to meet its obligations due to insolvency / bankruptcy
Risk management activities
Compliance with the credit risk management procedures adopted by the Company
Investment project implementation / efficiency risks
Risk factors
Market changes during project implementation, initial planning / design errors, ill-judged contractor selection, macroeconomic changes
Impact on the Company
Failure to meet the target parameters (schedule, ROI and costs) set out in the feasibility study
Risk management activities
- Long-term fixed-price contracts, effective supplier and contractor selection processes, improvements in internal acceptance procedures, engagement of internal contractors, regular monitoring of the projects’ investment indicators
- Improvements in project implementation planning and KPI assessments
Key risks in 2016
Similarly to the previous year, potential changes in product prices were the key risk for the Company. Despite this, the Company’s core products performed moderately well on stock exchanges in the reporting period. The Company slightly amended the significance of other 2015 risks. The pronounced rise in risks related to feedstock procurement was mainly due to significant price volatility for the core types of purchased feedstock. This volatility did not, however, have a material impact on the Company’s operations. On the other hand, the reduction in investment risks was primarily related to the structure and progress of current investment projects.
As Metalloinvest has entered an active phase of its corporate programme to implement positive changes within the business, the Company’s management has decided to expand the list of key risks to fifteen items by adding the following risks:
- Social tensions among employees
- ERP roll out risks
- Information security
- Credit risk
- Personnel abuse, corruption / counterparty misconduct
As part of the drive to improve Metalloinvest’s risk management system, the Company’s governing bodies have continued to approve the quantitative assessment guidelines for key risks in the reporting period. The Company’s management analyses risks that have occurred on a quarterly and annual basis in order to effectively adjust its risk management system. The results for the reporting period confirmed the accuracy of the Company’s quantitative risk assessment models and risk appetite.
The key corporate risks have been linked to their desired outcomes to ensure business continuity through the implementation of the relevant risk management action plans. Apart from the key risks, Metalloinvest focuses on other corporate risks and risks affecting its controlled entities and subsidiaries. The company operates a zero tolerance policy with regard to HSE violations, corruption and employee misconduct.
The Company continued to automate its risk management and internal control functions in the reporting period.
In 2016, Metalloinvest took steps to deliver on its Action Plan to Manage Corruption Risks. For example, based on the Management Company’s anti-corruption policy, Metalloinvest Logistics AG and Metalloinvest Trading AG developed and approved their own anti-corruption policies, taking into account the respective legal systems of the countries in which the Company operates.
Risk management system development plans for 2017
In 2017, the Company plans to continue improving its internal control and risk management system, by automating processes as part of the SAP ERP implementation, providing new guidelines, and training internal control and risk management employees, among other measures.
Under the ERP Implementation Programme, the Company has plans to continue developing internal control documents, including descriptions of business processes, a register of process risks and a matrix of control procedures. As part of its drive to automate risk management and internal control processes, the Company intends to integrate all of the Company’s risks into a single corporate environment, conduct online monitoring of key risk indicators, and automate the testing of control procedures.
