Summary of conclusions from the independent review made by the international law firm Wolf Theiss

SUMMARY OF CONCLUSIONS FROM THE INDEPENDENT REVIEW MADE BY THE INTERNATIONAL LAW FIRM WOLF THEISS

 At the beginning of June 2020, the Board of Directors of Monbat AD appointed the international law firm Wolf Theiss, to conduct an independent external review (“Review”) of the compliance of Monbat AD (“Monbat”) and Monbat Recycling EAD (“Monbat Recycling”) with the environmental requirements for the lead-acid batteries recycling operations, including a general review of the tax risks related to the waste management activities.

Please find enclosed the summary of the main conclusions from that review. The management of Monbat has refrained from commenting on the various speculations in the public domain. However, based on this review, its own internal investigations and the information provided as part of the review conducted, the Company reserves all legal rights in respect to the dissemination of wrong and misleading information.

1.     The Activities of the Monbat Group and the Regulatory Framework

Monbat operates an installation for production of lead-acid batteries. Lead is among the major raw materials used in the production of batteries. A significant share of the lead is purchased from Monbat Recycling and its other recycling subsidiaries in Romania, Serbia and Italy (“Recycling Subsidiaries”).

Raw material basis

The Recycling Subsidiaries are producing lead on the basis of lead-containing raw materials. Bulgaria is the centre for production of polypropylene particles used for making the plastic elements of the batteries. The basis of raw materials for production of lead includes: (a) spent batteries, and (b) self-sufficient technology waste de-composition from the spent batteries, namely (b.1) metal fractions and (b.2) lead paste and/or  (c) technological waste from the production of new lead-acid batteries or from the process of lead production itself.

The polypropylene particles are produced from polypropylene which in turn are extracted from the spent batteries.

Pursuant to the EU legal framework, a significant portion of the above-mentioned basis of raw material is treated as hazardous waste and thus becomes object to trans-border shipment requirements. A specific code has been designated for each raw material element, used in the process of strictly regulated trans-border shipment, which within the context of Monbat is mainly taking place among the Recycling Subsidiaries.

End-product Technological Waste

In the course of the lead production technological process two technological waste products are generated, which the Recycling Subsidiaries presently do not have the technological capability to utilise and are therefore provided to third parties.  These are (а) lead slug, and (b) polyethylene separator. The transportation and utilisation of this end technological waste is also a strictly regulated process.

Compliance with the regulatory framework

The production, recycling and disposal of lead acid batteries in the European Union and the consequences of the batteries’ treatment are predominantly governed by EU environmental legislation.

Conclusion 1:

In the course of the independent review it has been established that Monbat and Monbat Recycling have a good level of organizational, documentary and operational controls and measures for compliance with the IPPC (complex) permit and the requirements of the applicable environmental and waste management laws.

This conclusion is supported by the findings of the relevant authorities’ inspections which have confirmed that Monbat and Monbat Recycling maintain consistent practices for regular keeping of their waste report books (particularly for lead slag and polyethylene separator) and for maintaining of the requisite documents for trans-border shipment of such waste and for providing the waste of its recycling activities to third parties for processing.

After the events which focused the media attention to the Monbat group companies and which provoked the Review, Monbat and Monbat Recycling have become subject to numerous inspections from the regional environmental authorities and during these inspections no violations of the applicable laws and regulations has been detected.

2.     Trans-border hazardous waste shipment

Export and import of hazardous waste for the activities of Monbat

The trans-border shipment of raw material used in the Recycling Subsidiaries’ activities (spent accumulators, metals, paste and polypropylene) takes place predominantly among the subsidiaries themselves except for the cases related to the direct purchase of spent accumulators from third parties.

The newly acquired factory in Italy in 2017 – Piombiferra Italiana – is a major supplier of lead paste, metal fractions and polypropylene to Bulgaria. In previous years lead paste was imported from the subsidiary in Romania as well.

The above trans-border shipment of raw material waste is made in accordance with two regulatory regimes, namely the so called a) “yellow regime“ and b) “green regime” on the shipment of waste, in particular:

 (a)  Yellow regime of written notification under Regulation 1013/2006, which is conducted by the authorities in power providing a written consent/approval, which grants the right to transport permitted quantities/quotas under the EWC codes nomenclature.

The regime is based on a notification document, which is a document “in development” being sent in three phases to all interested parties and supervising authorities, namely: (1) before setting the waste in shipment, (2) at the moment when it has been received by the processing party, and (3) upon the ultimate waste utilization by the recipient party.

(b)  Green regime, effected by filling in appendix VII for raw materials that are not subject to prior, more stringent regulation.

The trans-border shipment of spent accumulator batteries and lead paste falls under the yellow regime, while the shipment of metals (subject to certain exceptions) and polypropylene falls under the green regime.

Within the Review, the yellow regime compliance between 2015 and 2019 was checked in detail. All notification documents were reviewed. These are the most reliable primary documents as they represent evidence about all three processing phases and are sent to all authorities supervising the chain of trans-border shipment.

Each notification document for each notification and for each period was examined as to its compliance with (a) customs declarations (as far as relevant for the parties); (b) import declared before the National Revenue Agency; (c) quantities declared in the annual environmental report; and (d)  quantities declared in the annual waste report.

Conclusion 2:

The notification documents reviewed were in full compliance with all laws and regulations except for a few isolated cases with no significant adverse effects.

The same review approach of Wolf Theiss was also applied by Monbat senior management to the green regime. No violations were established within that review.

Conclusion 3:

The detailed review of the primary documents for the two applicable regimes (yellow and green) for management and control of trans-border hazardous waste shipment showed that:  (a) Monbat Recycling has no irregularity about declared quantities and there is a reconciliation between the primary and secondary documents trail; (b) the incoming and outgoing flows are only in relation to materials and waste related to production; and (c) no illegal import/export was made.

The imports from Italy received in that period were only in relation to the intra-group supply of lead paste, metal fractions and polypropylene where each quantity was imported in compliance with the respective regulatory regime.

Conclusion 4:

Processing of RDF (Refuse Derived Fuel) waste (household waste) is incompatible with Monbat’s technological capabilities and Monbat Recycling has never been engaged in this segment of waste management.

Import and export of end hazardous waste by the Recycling Subsidiaries

Conclusion 5:

All Recycling Subsidiaries exported end hazardous waste (slag and polypropylene separator) to third parties in the reviewed period between 2015 and 2019 and the review showed that all have acted in compliance with the regulatory regime under Regulation 1013/2006. The documents necessary under that Regulation – notifications, approvals by the relevant authorities, insurance policies, finance guarantees, shipment documents – are present, with some insignificant exceptions.

3.     Transport of end hazardous waste within Bulgaria

Conclusion 6:

Over the years Monbat Recycling has used several companies for the freight of waste for the handling of polypropylene separator and lead slag. The review showed that during all years, Monbat Recycling demonstrated care in its compliance with the statutory obligations for checking and verifying that each person hired to ship hazardous waste has the requisite documents under the Waste Management Act.

4.     Treatment of end hazardous waste

Scope of activity and cost advantages

The two types of end hazardous waste generated in the production activities of the Recycling Subsidiaries are (a) lead slag and (b) polyethylene separator.

Polyethylene separator

The volume of polyethylene separator generated depends on how many spent batteries have been separated during the period.

The separator, which is handed over for utilization to third parties, makes up a very small portion of the total cost as well as tonnage. On average and for the period 2013-2019 it amounts to approximately 350 metric tonnes, which if multiplied with the average cost per metric tonne over the period, amounts to approximately EUR 44 thousand per year.

While the volumes of separator are quite low, the price differential if shipped and utilised abroad is high due to transport and higher general cost in other countries within the EU. Nevertheless and if taken as a whole, the total added value/ lower cost for the entire Monbat group had the separator been shipped to Germany instead of being handed over to local Bulgarian suppliers/ third parties, amounts for a 4 year period to total of EUR 414 thousand, or a yearly average cost benefit of EUR 104 thousand.

The added value/ lower cost realised from the import of separator from abroad of the Recycling Subsidiaries to local operators which has been carried out in the last two years, amounts to approximately EUR 46 thousand or an average of EUR 23 thousand per year. 

Lead slag

Unlike the separator, lead slag represents a percentage of the produced raw lead, that comes out of the lead furnace.

Lead slag, which has been submitted by Monbat Recycling in Bulgaria on an average annual basis, for the period 2013-2019 amounts to 1,830 metric tonnes, which if multiplied by the average cost per metric tonne over the period, amounts to EUR 210 thousand per year.

The cost of utilization abroad is not significantly higher than Bulgaria. Despite the significantly larger volume when compared to the separator, the level of cost advantage for the group for the entire period of working with local suppliers amounts to approximately EUR 232 thousand or approximately EUR 58 thousand per year.

The cost advantage realised from the slag that was imported from abroad of the Recycling Subsidiaries to operators in Bulgaria in the whole four year period, during which this has been done, amounts to a total of EUR 4 thousand per year or an average of EUR 1 thousand per year.

Cost advantage

The total added value/lower cost resulting from the cost differentiating approach in the selection of operators (ie local vs abroad) for utilization of lead slag and polyethylene separator amounts to approximately EUR 696 thousand for the entire period of four years or a yearly benefit of EUR 174 thousand.

Conclusion 7:

The annual added value/ lower cost of approximately EUR 174 thousand, is in comparison to current the cost structure of the companies in the Monbat group, below 1% (only 0.11%). This amount is many times below group materiality thresholds and does not represent a structural cost advantage which would have a significant impact on the group’s profit.

5.     Relations with third parties that provide utilization services

Under the Waste Management Act, the submission of hazardous waste to third parties for treatment is possible if: (a) the third party which receives the waste for final utilization or disposal has the necessary permits for it and (b) a contract has been concluded between Monbat and this third party covering the submission of waste for utilization. Monbat Recycling has contracts with several companies for this purpose.

Regarding lead slag, Monbat Recycling has concluded contracts with “K + S Kali” GmbH (Germany) and “Eco Trading Company” EOOD.

For the polyethylene separator, Monbat Recycling had contracts with “Muldenhütten Recycling und Umwelttechnik” GmbH (Germany), “Global Recycling” EOOD, „Ton Eco“ EOOD and „Sun Tour“ EOOD.

Conclusion 8:

The review carried out by Wolf Theiss shows that Monbat Recycling conducted appropriate documentary processes to confirm and validate the information whether these third parties possess the necessary permits and licenses under the law to carry out the activity.

Monbat Recycling has also received duly completed notification documents under Regulation 1013/2006 certifying the utilization of the end waste.

Monbat Recycling, in its capacity as a producer of hazardous waste, continues to be financially responsible by law for the improper treatment of hazardous waste by these operators. In this regard, Wolf Theiss’ recommendations for validating whether waste management requirements are met by Monbat Recycling’s counterparties, which are operators of the utilization of the end waste, have been considered.

Conclusion 9:

The Review established that Monbat is not a direct or indirect owner of the operators engaged in the utilization of end technological waste, nor has the company entered fictitious contracts. Moreover, Monbat Recycling has included additional contractual requirements for operators, such as utilization certificates, which have secured its contractual position.

However, the fact that Monbat Recycling has not carried out its own independent and parallel review to the regulatory authorities control over the operational performance of the licensed operators with which it worked, is considered as a shortcoming and will be addressed.

 6.     Taxation

Conclusion 10:

There were several concurrent tax reviews and full tax revisions with respect to Monbat and Monbat Recycling initiated by the National Revenue Agency (“NRA”) in parallel to the Review of Wolf Theiss. As of the date of issuing this statement and the completion of the Review, all NRA reviews were closed and the same did not evidence any tax issues. The full tax revisions which cover the period 2014-2019 are yet to be completed but as of the date of issuing this statement no material tax issues have been identified.

7.      Monbat’s Action Plan

Actions taken to date

Monbat Recycling has proactively and immediately stopped working with operators for which there was information regarding procedural proceedings from the authorities.

Mr. Atanas Bobokov has resigned voluntarily from the position as Executive Director of Monbat to eliminate any potential conflicts connected with the ongoing activities of the Monbat group. The Board of Directors have appointed a new and independent Procurator, who was elected Executive Director at the Monbat’s Extraordinary General Assembly on 22.07.2020.

The Board of Directors has unanimously voted to hire the international law firm – Wolf Theiss to conduct the Review of compliance of Monbat AD and Monbat Recycling EAD with the requirements for environmental protection and adherence to the basic regulations ensuring the process of hazardous waste management, as well as an overview of tax risks.

Ahead of Wolf Theiss’ recommendations, Monbat’s management has introduced additional steps in the selection and approval processes for service providers, by conducting a full revision of the current portfolio, including initiating its own check for the operational viability of each new counterparty.

Recovery Utilization Plan

In its position as a socially and corporately responsible group, Monbat cannot ignore the potential risk of unsustainable management of the end waste submitted for utilization.

Monbat will initiate a proactive operational audit of all operators to whom polyethylene separator has been submitted over the years. The purpose of this audit is to ascertain their operational viability and the environmental risks associated with it.

For all operators with operational inefficiency, Monbat will try to identify the part of the separator that has not been utilized and belongs to Monbat. This is necessary because, as it is known from the public registers, Monbat had not been the only customer of these companies.

The unused share of the identified polyethylene separator will be gradually drawn out, with Monbat committing to its final utilization.

Monbat has already notified the Ministry of Environment and Water of its position, as well as of its readiness to propose and ensure the implementation of a recovery utilization plan, taking into account the administrative assistance from the MoEW, which accompanies the process.

Subject to the findings related with operational inefficiencies of Monbat’s counterparties as a result of the operational audit, as well as the amount of the accompanying costs for recovery utilization of the separator, Monbat will specify its legal claims against these third parties.