Financial and economic risks

Commodity price risk

The market price of nickel has historically been volatile, and the company believes that this is likely to persist, driven by factors such as shifts in the supply–demand balance, macroeconomic indicators, variations in currency exchange rates, the availability and costs of substitutes, the inventory levels maintained by producers and others, and actions of participants in the commodities markets. Nickel sales currently represent approximately 90% of the company’s revenues, and variations in nickel prices therefore have a direct and significant effect on Talvivaara’s financial result and economic viability. Where Talvivaara’s second most important product, zinc, is concerned, there is no price risk, as the minimum price is set in the zinc streaming agreement concluded with Nyrstar for the term of supply, which is estimated at 10–15 years.

Talvivaara is not hedged against fluctuations in nickel prices. Full or practically full exposure to nickel prices is in line with Talvivaara’s strategy and is supported by the company’s view that it can operate the Talvivaara mine profitably through the lows of commodity price cycles after the targeted full scale level of production is reached.

The effect of variations in nickel prices on the Group’s financial result and equity is discussed in more detail under note 3 to the financial statements (‘Financial risk management’).

Foreign exchange risk

Talvivaara’s revenues are almost entirely gained in US dollars, whilst the majority of the company’s costs are incurred in euros. Therefore, strengthening of the euro against the US dollar has the potential to have a material adverse effect on the business and financial position of the company. Talvivaara hedges its exposure to the US dollar case specifically with the aim of limiting the adverse effects of US dollar weakness as is considered justified at the relevant time.

The effect of changes in foreign currency exchange rates on the Group’s financial result and equity is discussed in more detail under note 3 to the financial statements (‘Financial risk management’). 

Liquidity and refinancing risks

Liquidity risk arises when a company is not able to obtain the funds it requires for compliance with its obligations under financial instruments or other agreements entailing financial commitments. Talvivaara seeks to reduce its liquidity risk through close monitoring of liquidity in order to detect any threat of adverse changes in advance, so as to allow sufficient time to secure access to adequate credit or other funding on reasonable terms. Talvivaara also seeks to maintain a balanced maturity profile for its long-term debt in order to mitigate refinancing risks.

Internal control

Talvivaara’s internal control related to financial administration covers the following key processes: procurement, payments, revenue, production, human resources and payroll, financial reporting, and information technology. The internal control system comprises authorisations, distribution of work tasks so as to avoid risky combinations, and controls that form part of accounting and control systems.

If the control systems and the related internal controls do not detect erroneous actions, the reliability of Talvivaara’s internal and/or external reporting may be impaired, which, in turn, may have an adverse effect on the company’s business operations, communications, and reputation. 

Talvivaara seeks to reduce risks linked to internal control by testing its processes and controls periodically and by developing its practices and the related guidelines. The work on internal controls is based on the identification of risks related to key processes and on definition of internal controls to minimise the risks identified.