Ma’aden’s risk management policy and its supervision

Ma’aden has adopted appropriate policies and processes to manage the operational, financial, market-related and other risks, making risk management an integral part of all our activities and decision-making. We aim to secure an acceptable balance between the risks and returns as we seek to achieve our business goals.

Our procedures provide a framework to determine, analyze, assess, treat, monitor and report the significant risks that are faced by Ma’aden and to take proper decisions and promptly respond to risks or potential opportunities that have an impact the company’s competitiveness.

Our risk management approach is in accordance with ISO 31000:2009 risk management principles and guidelines. Accordingly, we assess our risks and organize our priorities using both a “top down” and a “bottom up” approach. The
risks are rated by the management on the basis of their classification, our exposure to potential risks and their mitigation.

Risks by their nature can cause unforeseen outcomes and following a recognized ISO-based process is not in itself a guarantee that all risks can be managed to ensure that they do not have any impact on the business.

The following section describes the principal risks facing Ma’aden and our efforts to mitigate them. It should be noted that there can be
no assurance that these efforts will be successful in mitigating these risks, wholly or partly. It should also be noted that the below is intended to be only a summary and that there are numerous other risks which could materially affect the Company’s financial condition and operating results adversely.

Ma’aden cannot control the market prices for its products and significant shifts in commodity prices will directly affect revenues. This effect can be positive during times of rising commodity prices or negative when commodity prices fall, leading to a significant impact on profitability and cash flows.

Ma’aden generally does not hedge its market price exposure but instead seeks to mitigate this risk by endeavouring to be a low cost producer. In times of surplus supply and declining prices higher cost marginal players will tend to be driven out of the market whilst the lower cost producers are better positioned to continue producing with a positive cash margin.

Cyber attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information, disrupt our
business operations, and result in physical damage, reputational harm and other negative consequences that could have a material adverse
effect on our financial condition and results of operations.

This is a constantly evolving area of risk. Ma’aden uses third party expert companies to assist with protecting and securing its information technology environment and constantly reviews cyber threats, looking for opportunities to enhance cyber security.

Identification of new projects, their development and execution is another risk. Ineffective development and execution of key projects can compromise the capital expenditure budgets and schedule and consequently affect the company’s profitability, growth prospects, reputation and overall financial health.

Development and investment decisions in respect of new projects are made using a “Stage Gate” system to ensure that new projects properly account for the costs, risks and expected returns of the investment. During execution, project managers, including third party expert companies, are used to manage progress to ensure project completion on budget and schedule.

This includes providing monthly completion reports and capital expenditure reports to the management to monitor progress, identify slippage and propose remedial action.

Ma’aden is reliant on the services provided by Saudi Arabian Railways (SAR) to provide efficient and cost-effective services to transport raw materials, ore and intermediate products between its principal operating sites. Should SAR fail to meet our volume demand, Ma’aden will rely on transportation by trucks.  However, this entails a higher cost and may not always be suitable for certain materials. An inability to move materials could result in the need to cease operations at certain facilities until supplies could be restarted, leading to a negative impact on the Group’s profitability and cash flows.

As a supplier of commodity products, there is a risk that we may be unable to find a market for all of our production particularly our flat rolled aluminium and fertilizer products during market downturns. Any failure to sell product would result in a negative impact on the Group’s profitability and cash flow. To mitigate this risk, the Group seeks to diversify its product portfolio as much as possible and expand its marketing and sales reach.

The curtailment of the aluminium smelter operations resulting from interruption or discontinuation of power supply due to equipment failure, issues with the connections to the Saline Water Conversion Corporation (SWCC) power plant or any other cause would have a material adverse effect on our operations and business results.

In order to mitigate this risk, Ma’aden maintains access to the Saudi Arabian power grid that can be activated in case of interruptions in the SWCC plant supply. This is despite the fact that Ma’aden Aluminium’s SWCC plant generation capacity is significantly greater than its requirements.

Limits on the availability and/or higher cost of key feedstock, including natural gas, sulfur, diesel and other fuel would have a negative impact on operations, profitability and cash flows.

Ma’aden depends on Saudi Aramco for the supply of natural gas, sulfur, diesel and other fuel. The natural gas is supplied from a reliable grid but in the event of an outage at Saudi Aramco there could be a shortage of supply.

Sulfur is readily available in Saudi Arabia from a number of Saudi Aramco facilities. However, sulfur supplies for MWSPC are reliant on access to the rail network (‘railway services’ risk above). The price of gas, sulfur and diesel are agreed with Saudi Aramco but may change as a result of market fluctuations or changes in the government’s energy policy.

Mining, metal and fertilizer production have inherent Environment, Health, Safety and Security (EHSS) risks that could result in serious personal injuries, casualties, operational disruptions and/or other operational and financial losses.

Ma’aden seeks to mitigate these risks through an integrated EHSS system at all locations using internationally recognized standards, policies and procedures. We have a system of Group-wide monthly EHSS reporting and all incidents are reviewed with the goal of drawing lessons and preventing recurrence.

Ma’aden’s ability to meet its operating costs and make scheduled payments of the principal and commission on its debts depends on the future performance of the Company, which is subject to economic, financial, competitive and other factors not fully under its control. We may not continue to generate sufficient cash flow from operations in the future to service the debt and make necessary capital expenditures.

In order to enhance liquidity, Ma’aden has centralized treasury functions to optimize the use of cash generated by the businesses. In addition, Ma’aden has access to a significant revolving line of credit in order to meet short term cash needs if required.

Cost of funding has been at historic lows in recent years. There can be no assurance that this situation will continue. Any significant increase in funding costs would have a negative impact on our profitability and cash flows. The Company seeks to ensure that its debt facilities are of an appropriate size and structure for the business and regularly monitors changes in the costs of funding. We may also seek to increase the portion of our debt that is at a fixed cost including potentially entering into derivative transactions to hedge floating rate exposures if appropriate.

Exploration, mining and operational activities are subject to various environmental regulations administered by the Royal Commission for Jubail and Yanbu and the Presidency of Meteorology and Environment (PME). These concern the maintenance of air and water quality standards and land reclamation rules. They also set out limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation may change resulting in stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for Ma’aden, its management and employees.

Ma’aden’s EHSS department monitors both the compliance with EHSS standards across the businesses and changes in the environmental regulatory landscape.

The availability of skilled manpower remains one of the key long-term challenges for Ma’aden. Succession challenges and the ability to attract, develop and retain top talent may limit our ability to complete projects, run our operations and deliver on our strategy.

Ma’aden runs its own in-house training academy to develop its staff and prepare them for succession roles. In addition, Ma’aden works closely with educational institutions in the Kingdom to develop young Saudi nationals for future roles in the industry.

Our operational results or financial position could be adversely affected by new or more stringent laws, regulatory requirements, interpretations or outcomes of significant legal proceedings. Ma’aden actively monitors actual and potential changes in the laws and regulations so that we can address and manage the impact of those changes.

The internal audit function is an integral part of our GRC framework. We follow the International Professional Practices Framework (IPPF) of internal auditing. Independent external quality assessors from the Institute of Internal Auditors Inc., USA, the global standard setting