Vesuvius Regulatory News (VSVS)

RISK AND IMPACT

MITIGATION

The financial performance and financial position of Cookson may be adversely affected by a significant weakening in demand in its core endmarkets.

End-market conditions, and the Group's trading performance, have improved

markedly during 2010 following the economic downturn which started in the fourth quarter of 2008 and persisted through much of 2009. Whilst the recovery has been strong, end-markets (and Group underlying revenue) are typically still not yet back to pre-crisis levels. The economic outlook for 2011 remains unclear. For example, whilst concerns about a "double-dip" recession have largely abated, there are still concerns about slowing growth in China, sluggish growth in the developed world, plus the potential impact of a sovereign debt crisis affecting the Eurozone. The Group's end-markets are historically somewhat cyclical in nature and the 2008/09 financial crisis, which affected all end-markets simultaneously, resulted in a very pronounced deterioration in the Group's trading performance.

Cookson's divisions predominantly supply consumable products, on short lead times, to the global steel, foundry, electronics and precious metals industries. As such the Group's expectations of future trading are based upon the Directors' assessment of end-market conditions, which conditions are subject to some uncertainty. In the event that end-market conditions suffer further significant deterioration, Cookson may experience further reductions in trading activity, a lower share price, the financial failure of one or more of its key customers and suppliers, asset impairments, lower profitability and a material adverse impact on its financial position.

The Board regularly reviews Group strategy, which determines the markets in which the Group operates. The current spread of the Group's major businesses, both geographically and by end-market served, provides some protection to the Group should conditions, in particular markets, deteriorate. Further, the reduction in the Group's cost base - which resulted from the cost-saving initiatives introduced by management in late 2008 and early 2009 as the recent recessionary market conditions began to develop - provides additional insulation to the adverse impact of any near-term market downturn. Also, in view of the extent of the de-stocking which took place during 2009 in the Group's end-markets, the Directors believe that any

downturn in its end-markets is likely to be less severe than that experienced in 2009. Following the cost-reduction initiatives and equity raising successfully completed during 2009 and the debt refinancing recently completed in 2010, the Directors believe that the Group is well positioned financially to sustain a further downturn in end-market activity should this occur

Should Cookson be unable to refinance its main banking facilities on acceptable commercial terms as they fall due, this could limit Cookson's operational flexibility.

Cookson's borrowing requirements are met by US Private Placement Loan Notes ("USPP") and a multi-currency committed syndicated bank facility. $250m of USPP were issued in December 2010 with seven ($110m) or ten ($140m) year durations. The current syndicated bank facility expires at the end of 2012. If Cookson is unable to refinance its banking facility on commercially acceptable terms, this could: limit flexibility in the management of the Group; limit flexibility in making acquisitions; place Cookson at a competitive disadvantage to competitors; and increase Cookson's vulnerability to a significant resumption of adverse economic and industry conditions.

Cookson's total committed debt facilities as at 31 December 2010 were £855m, of which £350m was undrawn. Total Group net debt as at 31 December 2010 was £330m, of which £223m was financed out of the syndicated banking facility which expires in the fourth quarter of 2012. The Group intends to refinance its bank facility no later than the end of 2011. Based on the favourable market response to the Group's recent USPP issue, the recent marked recovery in the Group's trading performance and its strong financial position, the Board is confident that this will be achievable.

A withdrawal or reduction of precious metal consignment arrangements, or increased precious metal prices resulting in consignment lines being fully utilised, may cause a shortage of raw materials requiring the business to be restructured and downsized and may result in a short-term material increase in the Group's financial indebtedness.

The Group's precious metal fabrication operations utilise significant quantities of precious metals, primarily gold by value. These metals are held predominantly on consignment under contractual arrangements whereby the consignor retains title to the metal and the associated risks and benefits of ownership, with the result that the physical metal so held is not recorded in the Group balance sheet. Certain of these arrangements are uncommitted in that the consignor has the right, with limited or in some cases no notice, to demand physical return or purchase of its consigned metal. The utilisation of consigned precious metals is established practice in the precious metals industry. Should precious metals consignors decide to reduce or withdraw the facilities for whatever reason, or require a return of the consigned metal, or increased metal prices lead to the consignment arrangements becoming fully utilised, the Group's precious metal fabrication operations may suffer shortages of raw materials requiring the business to be restructured and downsized in order to be able to operate within its available consignment facilities. In the short term this may require precious metals to be purchased, which could materially increase the Group's financial indebtedness pending completion of the downsizing.

Cookson has successfully maintained precious metal consignment arrangements of this nature for over 20 years. The Group has close commercial relationships with its group of consignor banks. Management seeks to operate the business at all times with appropriate headroom within the consignment facilities, taking account of anticipated levels of business activity and precious metals prices.

The Group's worldwide operations and businesses may be adversely affected by various political, legal, regulatory and other developments in countries in which it operates.

The Group is subject to various legal and regulatory regimes, including those

covering taxation and environmental matters; and political risks including the imposition of trade barriers, changes of regulatory requirements, lack of protection for intellectual property rights and the volatility of input costs, selling prices, taxes and currencies. In particular, operating within the rapidly evolving emerging nations can expose the Group's businesses to significant local risks and challenges. Future global political, legal or regulatory developments concerning Group businesses may affect their ability to operate and to operate profitably in the affected jurisdictions. Should Group businesses fail to comply with applicable legal and regulatory requirements, this may result in a financial loss or restriction on their ability to operate.

The Group's businesses are subject to a variety of operational risks, including natural catastrophe, terrorist action, theft, fraud and, particularly in emerging nations, insufficient supply of high-quality local management and technical personnel. If any of the operational risks materialise to a significant extent, this could result in a substantial interruption to a facility, loss of future insurance cover, a potential loss of customers and revenue and financial loss.

As part of its planning process before entering a new market or territory, or expanding in an existing market or territory, the Group undertakes a rigorous assessment of the risks involved. In addition, the spread of the Group's major businesses, both geographically and by end-market served, provides some protection to the Group should any of its businesses be adversely impacted by legal, regulatory or other changes in an individual market or territory.

The Group has in place an insurance programme covering all of its businesses

which provides an acceptable level of coverage for the operational risks which they face.

The Group's financial position and trading results may be adversely affected by fluctuations in exchange rates, interest rates or the rate of inflation.

The Group has no control over changes in foreign currency exchange rates, or inflation and interest rates. In the normal course of business, many transactions are carried out by Group businesses in currencies other than their reporting currency, leading to transactional foreign exchange risk, although this is not material for the Group overall. The Group is exposed to the effect of translating the results and net assets of its overseas subsidiaries into sterling. Significant fluctuations in the value of currencies in which it operates, in interest rates, or in rates of inflation may adversely impact the Group's financial position, results of operations and ability to comply with its financial covenants.

The Group attempts to manage transactional and balance sheet translation risks associated with currency exchange rate fluctuations through its hedging and funding policies and it is Group policy that foreign currency transaction exposures that are material at an individual operating unit level are hedged using appropriate instruments such as forward foreign exchange contracts. For its key operating currencies, the Group broadly matches the currency profile of its borrowings with the currencies of its asset base, but does not hedge translational impact on the income statements of overseas subsidiaries. Where appropriate, the Group manages its interest rate exposures using interest rate swaps or other instruments.

The Group may lose customers to competitors with new or alternative technologies if its businesses either do not adequately adapt to market developments or are unable to protect, maintain and enforce their intellectual property.

The markets in which many of the Group's businesses operate can experience

rapid changes due to the introduction of new technologies. The Group's continued success depends upon its ability to continue to develop and produce new and enhanced products and services on a cost-effective and timely basis in accordance with customer demands. If the Group fails to adequately adapt to market developments related to new products and technology, it could lose customers to suppliers with better or less costly products. Throughout its operations, the Group relies on a combination of trade secrets, patents, confidentiality procedures and agreements, and copyright and trade mark laws to protect its proprietary rights. If the Group fails to or is unable to protect, maintain and enforce its existing intellectual property, this may result in the loss of the Group's exclusive right to use technologies and processes which are included or used in its businesses. In addition, the laws of certain foreign countries in which the Group operates may not protect proprietary rights to the same extent as those of, for example, the UK or the US.

Cookson invests significant amounts in research and development and endeavours to sustain its competitive advantage and take appropriate action to ensure that its cost base remains competitive. In 2010, total research and development spend was £38.1m, equivalent to 1.5% of revenue.

The Group applies for patents over its major products, technologies and processes in a number of jurisdictions, including in Europe and the US. New product and service offerings by competitors are regularly monitored and any perceived breach of a Group patent is vigorously challenged. To the extent possible, the Group avoids holding key intellectual property in countries which do not afford an acceptable degree of legal protection to the Group.

The Group's financial condition may be materially adversely affected by any significant liabilities for any defects of its products or services.

If a product of the Group or of one of the Group's industrial customers does not conform to agreed specifications or is otherwise defective, the Group may be subject to claims by its customers arising from end-product defects, injury to individuals or other such claims. Legal claims have been brought against certain Group companies by third parties alleging that persons have been harmed by exposure to hazardous materials used by those companies in the manufacture of industrial and consumer products, and further claims may be brought in the future. Certain of the Group's subsidiaries are subject to suits, predominantly in the US, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by the Group. These suits usually also name many other product manufacturers. To date, the Group is not aware of there being any liability verdicts against any of these subsidiaries.

The Board believes that, taking into account legal advice received, the Group's insurance arrangements, indemnification provided by former owners of certain of the subsidiaries impacted and financial provisions, none of the currently pending or potential claims will, either individually or in the aggregate, have a material adverse impact on the Group's financial position and results of operations.