Investor Presentaiton
(iii) Cash flow and fair value interest rate risk
The interest rate risk arises from the fluctuations of each of the main
indexes of interest rates from borrowing and from financial investments,
which have an impact on the payments and receipts of the Company and its
subsidiaries. Borrowing at fixed rates exposes the Company and its subsi-
diaries to fair value interest rate risk.
(iv) Commodity price risk
The Financial Policy of the Company's operating subsidiaries establishes
guidelines to mitigate the risk of fluctuations in commodity prices that have
an impact on the cash flow of the Company's operating subsidiaries.
The exposure to each commodity price considers the monthly projections
of production, purchases of inputs and flows of maturities of the related
hedges. Hedge transactions are classified into the following categories:
Fixed-price commercial transactions - hedge transactions that switch,
from fixed to floating, the price contracted in commercial transactions with
customers interested in purchasing products at a fixed price;
Hedges for quotation periods - hedges that set a price for the different
quotation periods between the purchases of certain inputs (metal concen-
trate) and the sale of products arising from the processing of these inputs;
Hedges for costs of inputs - intended to ensure protection against vola-
tility in the prices or costs of its operating subsidiaries for commodities such
as oil and natural gas;
Hedges for operating margin - intended to set the operating margin for
a portion of the production of certain operating subsidiaries.
(b) Credit risk
Derivative financial instruments and financial investments create exposure
to credit risk of counterparties and issuers. The Company and its subsi-
diaries adopt a policy of working with issuers which have, at a minimum,
been assessed by two of the following three rating agencies: Fitch Ratings,
Moody's or S&P Global Ratings. The minimum rating required for the coun-
terparties is A (Brazilian scale) or BBB- (international scale), or equivalent.
For financial assets where issuers do not meet the minimum credit risk
ratings, criteria proposed by the Finance Committee are applied as an alter-
native, criteria approved by the Board of Directors.
The credit quality of financial assets is disclosed in Note 8. The ratings dis-
closed in this Note always represent the most conservative ratings of the
agencies in question.
The pre-settlement risk methodology is used to assess counterparty risk
on derivatives transactions, determining (via Monte Carlo simulations) the
likelihood of a counterparty not honoring the financial commitments de-
fined by the contract. The use of this methodology is described in the VSA
Financial Policy.
(c) Liquidity risk
The following table analyzes the financial liabilities of the Company and
its subsidiaries, by maturity, corresponding to the period remaining from
the balance sheet date up to the contractual maturity date. The amounts
disclosed in the table represent the undiscounted contractual cash flows,
and these amounts may not be reconciled with the amounts disclosed in
the balance sheet.
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