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Corporate Governance AUDIT, COMPLIANCE & RISK MANAGEMENT COMMITTEE REPORT through utilisation of supplier credit, and use of appropriate hedges for forecasted foreign exchange based transactions. The Risk Management team worked with Executive Management to carry out a review of budgets to reflect volatile changes in the foreign exchange market so as to avoid disruption of the Group’s business operations. Scenario analyses were carried out to reflect the impact of plausible situations of further currency devaluations across all operating territories. In addition, the Board approved the necessary infrastructure support to boost our export business and thereby generate foreign currency income for the Group. All of these initiatives helped the Group to proactively manage its foreign exchange risk. Commodity risk In the course of 2016, Dangote Cement Plc was exposed to commodity risks resulting from price fluctuations in gas, LPFO, coal and indirectly in its sea freighting dealings. Appropriate instruments and actions, such as use of swap options and adequate insurance coverage, were employed in hedging exposure to this risk. Non-financial risks Business risk A key business risk to which Dangote Cement was exposed in Nigeria in 2016 was energy sourcing and cost. It posed a major threat to the Group’s business operations and profit margins were significantly impacted due to increased energy cost resulting from production lines switching to use of Low Pour Fuel Oil (LPFO) because of gas supply shortage caused by unrest in the Niger Delta. LPFO is significantly more expensive to use in kilns than gas or coal. The use of LPFO increased the cost of production by an average of 11% in the first and second quarters of the year; EBITDA margins consequently shrank by 8% for the same period. Typically, the cost of energy to total production costs ranges between 30% and 40% of operational costs; however, it averaged 51% at DCP Nigeria, with kiln fuel and power cost comprising 37% and 14% respectively. To address this huge variation, a more focused and strategic approach was adopted to In tandem with our efforts, our parent company Dangote Industries began preparations to mine coal in Kogi State in 2017. Using coal mined within the Group enables Dangote Cement to improve fuel security by controlling our own fuel supplies, reduce operating costs as a result of using cheaper, own-mined coal, and significantly reduce our need for foreign exchange to buy fuel in international markets. It is estimated that DCP will make 15% to 20% savings on cost of coal per tonne of cement by using own-mined coal. Furthermore, by using coal in our kilns, we ensure better gas supplies for our electrical generators at Obajana and Ibese, thus reducing the need to use expensive diesel as a back-up fuel for power generation at these plants. Operational risk Operational risk is regarded as any activity that would expose the organisation to the risk of loss resulting from failed or inadequate people, process, systems and issues stemming from external events that are not directly under the control of Dangote Cement Plc. It is further considered as the potential for incurring losses in relation to employees, project management, contractual specifications and documentation, technology, infrastructure failure and disasters, external influences and customer relationships. During the year under review the key risks identified and managed under this risk category were people risks, operational inefficiencies, logistics and transportation risk, IT risks, and health & safety risks. Risk assessments were carried out organisation-wide Annual Report 2016 103 ensure energy efficiency and improve profitability. As a result, the Company switched to the use of coal at Obajana, Ibese and Gboko, following a decision taken more than two years ago to diversify fuel supplies so as to ensure fuel security and improve margins. Significant investments have been made in building facilities to provide sufficient coal to fully fuel all kilns across our three Nigerian plants. By using imported coal, we were able to reduce dependence on what proved to be highly unreliable supplies of gas during the year, as well as mitigate the need to use expensive LPFO.

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