The purpose of this Currency Policy is to provide guidelines for defining and measuring balance-sheet and income-statement
These items are subject to fluctuations in currency exchange rates i.e., items that can be affected by currency exposure and currency risk, and for managing and eliminating any possible net currency risk.
Organization
Management of currency risks is a part of the industrial operations of the LKAB Group. This means that each group company manages its currency risk within the framework of this policy. Each group company will implement a currency policy that has been approved by the board of directors of the respective company, as well as rules for managing its currency positions. The policy must be aligned with the LKAB Group’s policy.
The president of each group company is responsible for implementing the currency policy. Deviations from this framework must be approved by the president and the chairman of the board.
All foreign exchange transactions will be affected via LKAB Treasury Center. Deviations from the policy, made in order to harmonize with local tax code or civil law, must be approved by LKAB's Vice President Treasury.
Definitions
Currency risk is the risk that fluctuations in exchange rates will affect the company's income statement, balance sheet and/or cash flow negatively. There are three types of currency risk:
- Transaction exposure
Net of realized inflow and expected inflows and outflows in a particular currency and given period time. Every company in the LKAB Group with commercial cash flows in a foreign currency will quantify the exposure.
- Translation exposure
Currency risk in assets and liabilities denominated in foreign currencies and measured at a given time.
- Economic exposure
The exposure in assets in foreign subsidiaries when these assets are measured in the Parent Company’s home currency.
Management of transaction exposure
Every company in the LKAB Group with a currency exposure will quantify that exposure. Forecasts of cash flows must be updated to provide a basis for correct quantification of exposure.
Invoicing
Invoicing between group companies will be in the currency agreed upon by the parties. The choice of invoicing currency must be such that the LKAB Group’s total currency exposure is minimized.
The choice of currency for pricing and invoicing to companies outside the LKAB Group shall be such that currency risk is avoided whenever possible, or in currencies for which exchange rates are regularly set on the foreign exchange market.
Payments
Currency management is strongly centralized to LKAB Treasury Center. This means that, for Swedish group companies, larger invoices in foreign currencies will be paid by LKAB Treasury Center. Centralized management of currencies facilitates reduced exposure, since deficits and surpluses within the Group can be eliminated and LKAB Treasury Center is in a position to get better exchange rates.
For foreign group subsidiaries, payment of foreign invoices is normally affected by the respective companies themselves. LKAB Treasury Center will assist with payment, if so desired.
Hedging
In this context, hedging implies the use of financial instruments on the foreign exchange market in order to establish a fixed future rate of exchange between two currencies.
Where management of a defined currency risk is concerned, the LKAB Group implements a policy of selective risk-taking. Risks are taken within certain defined limits, and the possibility of realizing gains is weighed against the risk of losses and the cost of hedging.
Luossavaara-Kiirunavaara AB
The greatest currency exposure within the Group, and thus the greatest currency risk, is assumed by Luossavaara-Kiirunavaara AB. For this reason, the Board has appointed a Currency Committee, which decides on issues pertaining to the LKAB Parent Company’s currency exposure. For currency-policy decisions concerning the Parent Company, please refer to the Currency Committee’s decisions. Hedging measures for the Parent Company are executed by LKAB Treasury Center and countersigned by LKAB’s Vice President Treasury.
Reports on currency exposure and hedging measures will be submitted to the President and Vice President Treasury on a current basis. Outstanding currency forward contracts or currency option contracts will be reconciled on an ongoing basis with bank statements of commitments and deposits.
Other group companies
Exposure in foreign currency that can give rise to a currency risk (currency exposure x fluctuation) must be identified as early as possible. Based on an estimate of a currency risk that describes how the company’s financial outcome will be affected by exchange rate fluctuations, the objective is to neutralize the risk in commercial cash flows by implementing a selective strategy whereby the possible costs and gains are weighed against each other to avoid the risk of loss.
Only currency flows based on an underlying commercial transaction that with great certainty will be realized may be hedged. Other forward contracts may only be entered into upon approval by LKAB’s Vice President Treasury.
In the eventuality that a transaction that has been hedged will not be realized, closure of the position must be discussed immediately with LKAB Treasury Center, provided the forward contract cannot be linked to another flow.
All hedging will be done via LKAB Treasury Center. Forward exchange contracts are affected at current market prices on any given occasion.
All hedging decisions documented
Hedging requirements will be determined on the basis of realistic forecasts of inflows and outflows. Extraordinary flows will be handled separately.
The Currency Committee and VP Treasury decide on the level at which LKAB Treasury Center will hedge the LKAB Group’s net exposure.
LKAB Treasury Center can use common market instruments for hedging, such as forward exchange contracts, currency options contracts, loans and investments in foreign currencies.
Management of translation exposure
Financial assets and liabilities, e.g., investments and loans, shall be placed so as to not to entail any currency risk for the LKAB Group. All decisions concerning financial investments and loans that entail translation exposure will be taken by LKAB's Vice President Treasury.
Management of economic exposure
Hedging of assets such as shares, participations or receivables in subsidiaries will be decided by LKAB's Vice President Treasury.
Trading in currencies
Trading in currencies for which there is no underlying commercial business may only be done by LKAB Treasury Center and only within limits established by LKAB's Vice President Treasury.
Control
LKAB's Vice President Treasury is responsible for ongoing follow-up of currency risk and regular reporting to the Board.