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13
Semi-annual Board of Directors Management Report
ΕPC Sector
Navigating through the challenges in its external environment, subsidiary com-
pany METKA is expected to continue on its positive course in the second half
of 2016. Adjusting its planning to the conditions of a volatile setting, METKA is
focusing on the development of its activities in markets with particular demands,
where its prestige and know-how can generate significant added value. The sub-
sidiary company aims at the creation of a portfolio of projects characterized by
relatively short duration and immediate returns, which will enhance its profitability.
In the specific projects, METKA is called to participate also as an investor, utiliz-
ing available self-financing opportunities.
Based on this strategy, the subsidiary company will pursue the timely execu-
tion of existing projects and the signature of new contracts in targeted markets.
METKA will continue to implement its plan for the expansion and strengthening
of its presence in the markets of Asia and Africa. Penetration in the market of Iran
will remain an essential business objective for subsidiary METKA, with a view to
exploiting the new opportunities in the energy infrastructure sector. At the same
time, the Group will continue to invest in wind farms and renewable energy pro-
jects, through its subsidiary METKA EGN.
Energy Sector
2016 is a turning point for the Energy Sector, as the reduction in natural gas
prices drastically improves the competitiveness of the Group’s thermal plants.
PROTERGIA is expected to continue to expand its share of the retail market, while
its recent agreement with COSMOTE will provide additional momentum in this
direction in the months to follow. More specifically, as of July 2016, the electricity
supply products of PROTERGIA for individuals and businesses are also available
from the COSMOTE and GERMANOS network of stores. With this agreement,
two of Greece’s largest Groups, the OTE Group and MYTILINEOS Group, launch
a strategic partnership in the retail market. As a result, PROTERGIA expands
the network of sales and promotion outlets for its products, as these will now
be available from more than 450 COSMOTE and GERMANOS stores all over
Greece.
Despite considerable delays in the last few years, significant progress is now
visible in terms of regulatory arrangements that promote the liberalisation of the
market. More specifically, the abolition of the excise duty on the consumption
of natural gas for the generation of electricity, the reinstatement of the capacity
assurance mechanism and, in general, the promotion of the changes foreseen
under the agreement on Greece’s financing plan signed last year, accelerate the
opening up of the market and are expected to strengthen competition.
With 1.2 GW of installed capacity now in full operation, the Group is firmly estab-
lished as the largest independent energy producer in Greece and has secured
the critical size required to benefit the most from the expected full liberalisation
of the domestic electricity market and its gradual transition to a more competitive
model.
2. Risks & Uncertainties
The Group’s activities expose it to a variety of financial risks: market risk (includ-
ing foreign exchange risk and price risk), credit risk, liquidity risk, cash flow risk
and fair value interest-rate risk. The Group’s overall risk management programme
focuses on the unpredictability of commodity and financial markets and seeks
to minimise potential adverse effects on the Group’s financial performance. The
Group uses derivative financial instruments to hedge the exposure to certain fi-
nancial risks.
Risk management is carried out by a central treasury department (Group Treas-
ury) under policies approved by the Board of Directors. Group Treasury operates
as a cost and service centre and provides services to all business units within the
Group, co-ordinates access to both domestic and international financial markets
and manages the financial risks relating to the Group’s operations.
Credit Risk
The Group has no significant concentrations of credit risk with any single coun-
ter party. Credit risk arises from cash and cash equivalents, derivative financial
instruments and deposits with banks and financial
institutions, as well as credit exposures to wholesale
customers.
Concerning trade accounts receivables, the Group
is not exposed to significant credit risks as they
mainly consist of a large, widespread customer
base. However, the atypical conditions that domi-
nate the Greek market and several other markets in
Europe are forcing the Group to constantly monitor
its business claims and also to adopt policies and
practices to ensure that such claims are collected.
By way of example, such policies and practices in-
clude insuring credits where possible; pre-collection
of the value of product sold to a considerable de-
gree; safeguarding claims by collateral loans on
customer reserves; and receiving letters of guaran-
tee.
To minimize credit risk on cash reserves and cash
equivalents; in financial derivate contracts; as well
as other short term financial products, the Group
specifies certain limits to its exposure on each indi-
vidual financial institution and only engages in trans-
actions with creditworthy financial institutions of high
credit rating.
Liquidity Risk
Liquidity risk is related with the Group’s need for
the sufficient financing of its operations and devel-
opment. The relevant liquidity requirements are the
subject of management through the meticulous
monitoring of debts of long term financial liabilities
and also of payments made on a daily basis.
The negative balance between Working Capital
and Short-Term Liabilities on Parent Company on
30/06/2016 is basically due to intragroup liabili-
ties.On 30/06/2016, the positive balance between
Group’s Working Capital and Short-Term Liabilities
secures the adequate funding of the Parent Com-
pany.
The Group ensures that there is sufficient available
credit facilities to be able to cover its short-term
business needs, after the calculation of cash flows
arising from the operation as well as cash and cash
equivalents which are held. The funds for long-term
liquidity needs ensured by a sufficient amount of
loanable funds and the ability to sell long-term finan-
cial assets.
Capital Control imposition in Greece
Regarding the capital control imposition there was
no differentiation to what was stated on the Group’s
Annual Financial Report of 31/12/2015.
Price Risk
The Group’s earnings are exposed to movements
in the prices of the commodities it produces, which
are determined by the international markets and the
global demand and supply.
The Group is price risk from fluctuations in the prices
of variables that determine either the sales and/or
the cost of sales of the group entities (i.e. products’
prices (LME), raw materials, other cost elements
etc.). The Group’s activities expose it to the fluctua-
tions of the prices of Aluminium (AL), Zinc (Zn), Lead (Pb) as well as to
Fuel Oil as a production cost.
Foreign Exchange Risk
The Group is activated in a global level and consequently is exposed
to foreign exchange risk emanating mainly from the US dollar. This
kind of risk mainly results from commercial transactions in foreign cur-
rency as well as net investments in foreign entities. For managing this
type of risk, the Group Treasury Department enters into derivative or
non derivative financial instruments with financial institutions on behalf
and in the name of group companies.
Interest rate risk
Group’s interest bearing assets comprises only of cash and cash
equivalents. Additionally, the Group maintains its total bank debt in
products of floating interest rate. In respect of its exposure to floating
interest payments, the Group evaluates the respective risks and where
deemed necessary considers the use of appropriate interest rate de-
rivatives. The policy of the Group is to minimise interest rate cash flow
risk exposures on long-term financing.
Other risks and uncertainties
a. Risk Factors
Mytilineos Group (the “Group”) being active in three main business
areas such as Metallurgy & Mining, Energy and EPC, faces a number
of diversified risk factors. Therefore, its business, financial condition or
results of operations may be impacted by such risk factors.
In addition to any other factors presented and discussed elsewhere
in this report, the following are the main important factors that could
cause the Group’s actual results to differ materially from those ex-
pected in any projection.
Market risk
The global economic conditions remain generally highly cyclical. The
Group is subject to cyclical fluctuations in LME prices,
€
/$ parity, gen-
eral economic, financial and credit conditions, and aluminium end-use
markets.
The Group implemented a number of actions to hedge its exposure to
market risk, improve its cost structure and secure liquidity.
Such actions mainly include:
- Forward selling of Aluminium by use of several financial
instruments.
- Mitigation of its
€
/$ parity exposure by use of derivative products.
- Assessment and/or restructuring of its energy cost items.
- Asset optimization and cost reduction programs.
- Production process improvements.
- Re-assessment of its credit policy and customer credit worthiness
procedures.
Increase in the cost of raw materials or significant lag effects
The Group results of operations are affected by increases in the cost
of raw materials, such as metallurgical Coke, caustic Soda and other
key inputs, as well as freight costs associated with the transportation
of raw materials.
The Group’s results may be affected also by signifi-
cant lag effects for declines in key input costs that
are LME or US dollar – linked as for example such
declines may not be adequate to offset sharp de-
clines in metal price during the same period.
Availability of Greek Bauxites and market
concentration
The Group for its Alumina operations is highly de-
pendent on the availability of Greek Bauxites. By the
operation of its own mines through its 100% subsidi-
ary Delphi Distomon S.A., the Group covers almost
the 38-40% of its requirements in Greek Bauxites.
However, in the years to come there might be dif-
ficulties in the licensing of new sites and the explo-
ration of new bauxite mines in Greece. Furthermore,
the Greek bauxite market is already quite concen-
trated; therefore this fact along with a possibility of a
further concentration could have a negative impact
on the Group’s input cost for Greek bauxite in the
future. For these reasons the Group is continu-
ously trying to negotiate long term bauxite contracts
as well as joint ventures or strategic alliances with
Greek miners.
Health, safety and environmental laws and
regulations and cost / liabilities associated with
such laws and regulations
The Group’s operations are subject to laws and reg-
ulations regarding health, safety and environmental
issues.
The cost for complying with such regulations in-
volves either investments or recurring expenses
for actions regarding the safe handling of industrial
wastes and the rehabilitation of old sites.
Environmental matters for which we may be liable
may arise in the future at our present sites, where
no problem is currently known, at previously owned
sites, or sites previously operated by us.
Climate change, climate change legislation or
regulations and greenhouse effects.
Energy is a significant input, and is foreseen to
become also a significant output for the Group’s
operations. In addition, the Group is also active in
the general perimeter of the Energy sector through
its EPC activity. There is growing recognition that
consumption of energy derived from fossil fuels is
a contributor to global warming. A number of gov-
ernments or governmental bodies have introduced
or are contemplating legislative and regulatory
change in response to the potential impacts of cli-
mate change. The Group will likely see changes in
the margins of greenhouse gas-intensive assets
and energy-intensive assets as a result of regulatory
impacts mainly in the E.U., where the Group oper-
ates. Assessments of the potential impact of future
climate change legislation, regulation and European
or International treaties and accords are uncertain,
given the wide scope of potential regulatory change.
The Group may realize increased capital expendi-
tures resulting from required compliance with re-
vised or new legislation or regulations, as well as
costs to purchase or profits from sales of Co2 allow-
ances or credits. On the other hand the Group may
