Evercore Annual Report 2004

FY2004 Annual Report · Evercore

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Map of operations

Russian Federation

Important incorporation information

Evraz Group S.A. was incorporated
on 31 December 2004, under the laws of
the Grand Duchy of Luxembourg to serve
as the holding company for Evraz’s
assets.

Throughout this Annual Report 2004, all
references to Evraz, Evraz Group or the
Group are to Evraz Group S.A. and its
consolidated subsidiaries, unless other-
wise indicated.

Table of contents

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EVRAZ at a glance

Chairman’s address

Review of achievements

Business and operations overview
Group corporate structure
Mission and strategy
Competitive advantage: Industry and market position
Steel division overview

Review of steel market developments
Description of subsidiaries
Production performance of the steel division
Quality and certification of products
Raw material and energy requirements
Transportation overview

Mining division overview

Review of iron ore and coking coal market developments
Description of subsidiaries
Production performance of the mining division

Overview of other operating divisions

Social responsibility and environmental measures
Ecology and industrial safety
Personnel and social policy
Charity and sponsorship

Corporate governance
Board of Directors
Remuneration, Audit and Strategy Committees
Management of subsidiaries
Dividend policy
Remuneration of directors and management
Stock option plan

Management’s discussion and analysis of financial condition and results
of operations

Consolidated financial statements for the year ended 31 December 2004

Reference Information

Russia’s Leading Steel and Mining Group

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

*
Evraz :

• Is one of the largest vertically-integrated steel production and

mining businesses with operations mainly in Russia.

• Is among the 15 largest steel producers in the world.

• Is the largest producer of steel and steel products in Russia, with

13.7 million tonnes of crude steel produced in 2004.

• Is the Russian market leader in key long products, optimally

positioned to benefit from strong growth in both the construc-
tion and rail transport industries.

• Holds the number 1 market position in rail products, beams and

channels in Russia.

• Is among the largest global producers of vanadium slag.

• Is largely self-sufficient in key raw materials:

— 72%1 self-sufficient in iron ore and 69%2 self-sufficient in
coking coal from internal and affiliated suppliers in 2004;
— 86%1 coverage in iron ore and 158%2 coverage in coking coal

from internal and affiliated suppliers in 2004.

• Is a significant holder of coking coal assets within the group and

through our related entities.

• Is the second largest iron ore producer in Russia.

• Is a low-cost steel producer benefiting from favourably located
mining operations, strategic product mix, increasing operational
efficiencies and upstream and downstream integration.

• Employs over 100,000 people within Russia.

1 Includes KGOK, VGOK and Evrazruda.

2 Includes Yuzhkuzbassugol, Raspadskaya mine and Mine 12.

* Disclaimer:

All references to Evraz, Evraz Group, the Group, “we” or “us” are references to
Evraz Group S.A. and its consolidated subsidiaries, unless otherwise indicated.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

EVRAZ AT A GLANCE

Basic financial indicators, 2004 (US$ million)

Sales

Gross profit

Profit from operations

EBITDA

Capital expenditure

Investments (in acquiring interests in subsidiaries and a joint venture)

Earnings per share attributable to equity holders of the parent entity (US$)

5,933

2,447

1,837

2,017

534

334

11.0

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Basic operating indicators, 2004

Iron ore reserves1 as of 31 December 2004 (proven), million tonnes

Coking coal reserves2 as of 31 December 2004 (proven), million tonnes

Crude steel production, million tonnes

Iron ore sold, million tonnes

Number of employees as of 31 December 2004

1,953

113

13.7

13.6

107,000

Notes:

1 The sum of KGOK’s reserves according to international methodology as of 1 July 2004
(1,201 million tonnes), VGOK’s and Abakanskoye’s reserves according to Russian
methodology (A, B and C1) as of 31 December 2004 (489 million tonnes), and
Evrazruda’s reserves according to international methodology as of 1 January 2005
(263 million tonnes).

2 The sum of Raspadskaya mine’s reserves according to international methodology as of
1 April 2004 (47 million tonnes) and Nerungri Ugol’s reserves according to Russian
methodology (A, B and C1) as of 31 December 2004 (66 million tonnes).

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

CHAIRMAN’S ADDRESS

“

Gross profits for 2004 increasing almost five-fold

to US$2,447 million. ”

Dear shareholders,

I believe that 2004 was a year marked by
success for Evraz. We have been able to
deliver extraordinary growth which has
enabled us to confirm our ambitious objec-
tives and focused strategies. However, this
has not been achieved without a great deal
of hard work on behalf of our employees and
meticulous planning by our management.

This success has translated into strong
financial
results across the Group.
Consolidated revenue grew to US$5,933
million, compared to US$2,168 million in
2003. Gross profits for 2004 increased
almost five-fold to US$2,447 million from
US$559 million in 2003, whilst net profits
grew by a similar margin to US$1,345 mil-
lion, compared to US$253 million in 2003.

Evraz continues to be the largest steel
producer in Russia, accounting for 13.7
million tonnes of crude steel in 2004.
Evraz sold 13.1 million tonnes of rolled steel
products and 13.6 million tonnes of iron
ore products in 2004.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

“

We remain strongly committed to Russia
as a production base.

“

Evraz now also owns significant mining
operations. In 2004, the Group’s mining
operations had total revenues of US$611
million, of which US$494 million consist-
ed of sales to other divisions of Evraz. It is
our intention to further strengthen our
mining platform via acquisition and deve-
lopment as a stand-alone division within
the Group.

These financial results have been helped
by further growth in Russia’s construction
sector which continues to outstrip growth
rates for Russian GDP. In addition, our
results have been strengthened by the
Russian rail industry's decision to invest in
both the country’s infrastructure and
rolling stock. Meanwhile, the Group has
engineered, both by reorganisation and
acquisition, a number of mutually benefi-
cial synergies, which have involved several
of our own business units. An example of
this was the acquisition of 47.7% owner-
ship of Raspadskaya, one of the largest
coal mines in Russia, and the recent pur-
chase of 80.7% of Kachkanarsky Ore
Mining-and-Processing Integrated Works
(KGOK) which has iron ore reserves of
over 1.2 billion tonnes according to inter-
national standards.

In addition, the Group’s ownership of the

Nakhodka Sea Port continued to signifi-
cantly boost our competitiveness in our
export markets in the Far East. In 2004,
freight throughput of Nakhodka was 7.9
million tonnes.

In line with our publicised intention to
become further vertically integrated, we
have acquired several iron ore and coal
mines. Our aim is to ensure that we are
not only self-sufficient in terms of our
major raw material requirements from a
quantity and quality perspective, but that
we are also able to supply external cus-
tomers. In this way, we are continuing to
further add to the Group’s diversity, balance
and profitability.

Similarly, our decision to enhance our
product mix to strengthen Evraz’s position
as a competitive exporter of semi-finished
products, as well as continuing to cut
costs without compromising quality, have
been well received by our customers and
partners, including our newly expanded
shareholder base.

At the beginning of June 2005, we
raised US$422 million in an initial pub-
lic offering (IPO) on the London Stock
Exchange. This flotation valued Evraz
Group S.A. at US$5.1 billion. It is anticipat-

ed that the proceeds will be used to: opti-
mise the performance of existing assets;
finance greenfield projects; finance addi-
tional acquisitions; finance equipment
and technology upgrades; consolidate
the Group’s structure, and
leverage
established skills. The IPO was a very
exciting development for the Group, and
I would like to welcome all our new share-
holders to the Evraz Group. From this
point on, the Group has the means to
achieve its true potential amongst the
league of world-class steel producers.
Historically, our growth has been
achieved through acquisition and consoli-
dation. It is anticipated that the IPO will
enable us to acquire other strategically
placed operations.

Our strategy remains resolute: to main-
tain a dominant position in the Russian
long products market; and to continue
to expand our export slab volumes with
increased capacity from 1.2 million tonnes
in 2003 to 2.7 million tonnes in 2004.

We remain strongly committed to Russia
as a production base. Moreover, our
favourably located mining operations
have enabled the Group to obtain a stable
supply of raw materials without incurring
the burden of high transport costs. In

“

Our Initial Public Offering will act as the catalyst for

future accelerated growth. ”

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

CHAIRMAN’S ADDRESS (continued)

“

Our objective is to make every dollar invested exceed
our target return rate.

”

order to maintain our cost competitive-
ness, we have made, and will continue to
make, significant investments in upgrad-
ing our various facilities to increase pro-
ductivity and yield, thereby maintaining
our competitive advantage over other
steel producers.

In other areas, Evraz has continued to
aspire to a responsible relationship
between business, society and the state.
The Group is committed to maintaining
high standards of environmental and
social responsibility. Evraz’s key environ-
mental objectives are the consistent
reduction of emissions, the installation of
state-of-the-art technologies and equip-
ment for energy reticulation, gaseous and
liquid waste treatment and the effective
processing of by-products. Furthermore,
we acknowledge the responsibility that
we hold for ensuring that those who live
in the vicinity of our operations not only
benefit from safer and healthier employ-
ment but also share in some of the social
benefits which we are able to offer.

Despite the fact that we have already
achieved significant operational improve-
ments at our core steel producing facili-
ties we continue to embrace technolo-
gies where they can provide financial,
environmental
engineering

and

advantages. In line with this philosophy,
we have embarked upon a number of ini-
tiatives to modernise and upgrade our
operations. Key initiatives include a major
overhaul of blast furnace No 6 and the
construction of a continuous slab caster
at NTMK as well as the construction of a
continuous caster at ZapSib.

Looking to the future we believe our pro-
duct mix, with its focus on the export of
semi-finished steel and domestic high-
growth long products, provides sharehold-
ers with the most beneficial product expo-
sure. However, we remain strongly
return-orientated and as such will con-
stantly evaluate our product mix to opti-
mise returns. The domestic Russian market
remains crucial, but we will also look to
expand the Group with targeted acquisi-
tions internationally that complement our
value chain. This approach has already yield-
ed significant results since our IPO. Finally,
we will also expand our mining platform
to create a stand-alone mining business
bringing further vertical integration to the
steel business, as well as enabling us to serv-
ice a growing external market.

We have demanding return criteria for
investments and, if we do not believe our
target return can be achieved, than the
investment will not be made.

Our hurdle rate when considering an
investment or an acquisition is 20%. Our
objective is to make every dollar invested
exceed our target return rate.

The Evraz Group S.A. is Russia’s premier
steel producer. However we are committed
to further expansion into both domestic
and global markets. The foundations upon
which we have built the Group are substan-
tial despite its short history. We are better
equipped than ever before to deliver
value and growth to shareholders.

Alexander Abramov

Chairman of the Board of Directors

Chief Executive Officer

“

Evraz has continued to aspire to a responsible relation-
ship between business, society and the state.

”

REVIEW OF ACHIEVEMENTS

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

MARCH 2004

JULY 2004

NOVEMBER 2004

Evraz acquires interest
in Raspadskaya mine
Evraz enters a JV agreement and acquires
a 50% interest1
in Corber Enterprises
Limited for the purpose of exercising con-
trol over Raspadskaya coal mine.
Raspadskaya, one of the largest coal
mines in Russia, mined over 9.7 million
tonnes of coking coal2 in 2004.

Evraz announces the placement
of its second Eurobond
Evraz announces the successful place-
ment of a US$150 million Eurobond. The
term of the bond is five years and the
yearly coupon is set at 10.875%. In
September 2004, Evraz successfully
places a US$150 million tap issue under
identical terms.

Key management appointments
for Evraz
Evraz announces a further strengthening
of the Group’s management team, in line
with its overall development strategy.

APRIL 2004

US$30 million credit secured
to finance modernisation at ZapSib
The facility arranged by Kazkommertsbank
will be used to finance ZapSib’s modernisa-
tion to a continuous casting operation. The
project includes the installation of a slab
caster and three billet casters.

A new slab caster constructed
at NTMK
NTMK completes the construction of an
additional continuous slab caster and
ladle furnace. This investment ends ingot
casting in the oxygen converter shop and
in doing so decreases production costs
whilst
increasing production yields,
improving steel quality and safety envi-
ronment. The new caster has a capacity
of 1.5 million tonnes of commercial qua-
lity slab. Total expenditure on the project
was US$100 million.

DECEMBER 2004

US$150 million syndicated
loan secured to finance subsidiaries
Evraz announces that it has secured a
US$150 million syndicated loan structured
for three separate facilities: NTMK
(US$60 million), ZapSib (US$60 million),
and NKMK (US$30 million). The loan will
be used to finance an ongoing moderni-
sation of the mills.

MAY 2004

AUGUST 2004

Evraz acquires controlling stake
in KGOK, a high-vanadium content
iron ore mining and processing works
Evraz finalises the acquisition of a control-
ling stake in KGOK. This acquisition is a
major step towards ensuring a steady raw
material supply which will result in the long-
term control of steel production costs.

NTMK completes reconstruction
of a blast furnace
NTMK completes reconstruction of its
blast furnace (BF6). This reconstruction
reduces coke consumption, modifies
operations to enable more efficient pro-
cessing of high-vanadium iron ore (such
as that produced at KGOK), decreases
environmental emissions and results in
lower labour, electricity and maintenance
costs. Total expenditure on the project
was US$82 million.

1 As of 31 December 2004 Evraz’s effective interest in Raspadskaya mine was 47.7%.
2 Out of total of 9.7 million tonnes mined at Raspadskaya field 8.2 million tonnes were

mined by Corber’s operations.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

BUSINESS AND OPERATIONS OVERVIEW

• Evraz is one of the largest vertically-integrated
steel and mining businesses with operations
mainly in the Russian Federation.

• Evraz produced 13.7 million tonnes of crude steel in
2004, ranking it as the largest producer of steel and
steel products in Russia, the largest Russian pro-
ducer of long products and among the 15 largest
producers of crude steel in the world.

• Evraz sold 13.1 million tonnes of rolled steel pro-
ducts and about 13.6 million tonnes of iron ore
products in Russia.

• Evraz’s total consolidated revenues in 2004
amounted to US$5,933 million, compared
to US$2,168 million in 2003.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Evraz’s principal assets are:

Three steel plants: OAO Nizhny Tagil Iron
and Steel Plant (‘’NTMK’’), which is located in
Nizhny Tagil, Sverdlovsk region; OAO West
Siberian Iron and Steel Plant (‘’ZapSib’’), the
largest steel plant in Siberia and the eastern-
most steel plant in the Russian Federation,
located near Novokuznetsk; and OAO
Novokuznetsk
Iron and Steel Plant
(‘’NKMK’’), located in Novokuznetsk, both in
Kemerovo region.

Three iron ore mining and processing
facilities: OAO Kachkanarsky Ore
Mining-and-Processing Integrated Works
(‘’KGOK’’), which is located in Sverdlovsk
region near NTMK; OAO Evrazruda
(’’Evrazruda’’), which operates mines in

region,

Kemerovo
the Republic of
Khakassia and South of Krasnoyarsk Krai
and which Evraz acquired in March 2005;
and OAO Vysokogorsky Ore Mining-and-
Processing Integrated Works (‘’VGOK’’),
which is located in Sverdlovsk region near
NTMK.

Two coal mines: OOO Mine 12 (‘’Mine 12’’),
which is located in Kemerovo region near
ZapSib and NKMK and produces coking coal
and steam coal, and which Evraz acquired in
March 2005; and OAO Neryungri Ugol,
(‘’Neryungri Ugol’’), which is developing
coking coal deposits in the Republic of Sakha
(Yakutia) and is expected to commence pro-
duction in 2006.

Group corporate structure

Trading and logistics assets, including
OAO Nakhodka Sea Port, one of the largest
ports in the Russian Far East, and the port
used by Evraz for the majority of its
exports.

Other assets. Evraz also holds a 47.7%
interest
Raspadskaya
ZAO
(‘’Raspadskaya’’), a coking coal mine locat-
ed in Kemerovo region that is accounted
for on an equity basis in the consolidated
financial statements.

Notes:

1 Corporate structure of Evraz Group as of 31 December 2004, with effective ownership for each subsidiary.

2 Evraz Group S.A.’s interest in Mastercroft was 100% as of 30 June 2005.

3 Evraz Group S.A. acquired 100% interest in Mine 12 in March 2005.

4 Evraz Group S.A. acquired 99.9% in Evrazruda from entities under common control in March 2005.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Mission and strategy

The Evraz Group S.A. aims to strengthen
its position as a world-class, low-cost
and vertically-integrated steel producer.

Strategy
Evraz’s strategy is to enhance its position as a
leading low-cost producer of long products
in Russia. Our core markets for long products
are the Russian construction and railway sec-
tors. Moreover, Evraz is expanding its pres-
ence in export markets for semi-finished
products and in the production and sale to
third parties of iron ore and coking coal. The
core drivers underpinning this strategy are
the enhancement of operating margins, the
achievement of superior growth and the
expansion of the mining platform.

Enhancing Margins

Realisation of synergies from recent
acquisitions and continued capital expen-
diture-driven efficiency improvements in
order to retain Evraz’s position as one of the
most cost efficient integrated steel produc-
ing and mining groups worldwide.

Enhance product mix to strengthen
Evraz’s position as a competitive
exporter of semi-finished products.
Evraz’s management believes that semi-
finished products (e.g. slabs) will continue
to offer the best export opportunities for
Evraz. As a result, Evraz has made signifi-
cant investments in expanding its continu-
ous slab-making capacity in order to
become a flexible manufacturer capable of
delivering a wide range of slab sizes and
specifications to customers.

Superior Growth

Capture domestic growth. Evraz intends
to leverage its leading position in Russia’s
construction sector, which has grown and
continues to grow at rates exceeding
Russian GDP growth. Evraz intends to
develop its own distribution network to
capture incremental margin on its con-
struction sector sales in Russia and to fos-
ter and retain higher market share in its
respective product groups. In particular,
Evraz intends to focus on selling higher
value-added products, such as beams and
channels, strengthening its position as a
leading full-range supplier to the Russian
construction industry. In the railway sector,
Evraz intends to capitalise on its position as
a dominant supplier to the Russian
Railways sector in light of Russian Railways’
planned extensive capital expenditure pro-
gramme aimed at overhauling infrastruc-
ture, rolling stock and other assets. An
example of Evraz’s response to this
demand are recently completed improve-
ments to its wheel-making facilities at
NTMK that increased annual production
capacity by approximately 40%
to
630,000 units per annum (approximately
250,000 tonnes). Evraz plans to continue
making selective investments in quality
upgrades and product range to maintain its
dominant position in railway products.

Developing markets outside Russia.
Evraz intends to achieve growth by captur-
ing additional margins through focused
acquisitions of re-rolling and other com-
plementary assets outside Russia, which
can be supplied by its fast growing slab
production capacity. As part of this strate-
gy, Evraz acquired Palini, a producer of
high quality steel plate located in Italy and
has submitted a bid with the Czech gov-
ernment for Vitkovice Steel, a heavy plate
producer in which Evraz was successful.
Evraz is also considering further acquisi-
tions of steel production assets in the CIS.

Notes:
1 Estimated.

Expanding the Mining
Platform

Enhance profitability and security of
supply through vertical integration.
Evraz is seeking to increase its iron ore and
coking coal production in order to enhance
margins within the steel business. To
accomplish this objective, Evraz plans to
intensify production from its existing iron
ore and coking coal reserves through capi-
tal expenditure targeted at improving pro-
duction capacity and efficiency. In addi-
tion, Evraz intends to expand its mining
asset base through acquisitions of addi-
tional subsoil licences as well as through
selective acquisitions of existing iron ore
and coal mining assets, primarily in Russia
and the CIS. In the coal sector, Evraz will
seek to increase its interest in Raspadskaya
and to acquire Yuzhkuzbassugol, should
the opportunity arise.

Drive growth through increased sales of
mining products to third parties. Evraz
intends to increase its sales of iron ore and
coking coal to third parties in order to ben-
efit from ongoing favourable market con-
ditions for these products and to develop
capabilities for exporting coking coal. Evraz
is currently developing a greenfield mine
for high quality coking coal, Neryungri
Ugol, in eastern Siberia that will focus on
third party sales to Asian markets and that
is expected to start operations in 2006 and
have an annual output of approximately
three million tonnes by 2008. Evraz plans
to pursue acquisitions in both the iron ore
and coking coal sectors.

Competitive advantage: Industry and market position

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Dominant producer of long products in
Russia: Evraz is the largest producer of
steel in Russia, the largest Russian produ-
cer of long products and among the fifteen
largest producers of crude steel globally.

Evraz is the leading supplier of steel pro-
ducts to the Russian railway and construc-
tion sectors which continue to experience
high levels of demand growth. There is re-
latively limited competition within these
sectors from other Russian producers
which primarily focus on producing flat
products.

Vertically-integrated business: As a ver-
tically-integrated steel producer, Evraz’s
exposure to high and variable raw material
prices is limited by its significant internal
sources of raw materials.

Source: Chermet, Evraz estimates

Note: Evraz’s sales of long products contribute more

than 50% to company’s sales in Russia.

Source: Evraz estimates

Low-cost producer: Russia is one of the
lowest cost regions for steel production,
enabling Evraz to benefit from some of
the lowest production costs in the global
steel industry. Favourably located mining
operations enable Evraz to obtain a stable
supply of raw materials with relatively low
transport costs. In addition to these cost
advantages Evraz’s position, as the largest

producer of steel in Russia, enables it to
benefit from economies of scale in pro-
duction and enhanced negotiating power
with its suppliers. In order to maintain its
cost competitiveness, Evraz has made and
continues to make significant capital
expenditures in upgrading its facilities to
increase productivity and yield.

Source: Evraz estimates

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Attractive and growing mining business:
Evraz has a strong asset base in iron ore, mak-
ing Evraz the second largest iron ore produc-
er in Russia. Evraz also has a significant equi-
ty interest in a major coking coal producer
and other coal assets. Evraz has sought to
increase its sales of iron ore to third parties
and expects to begin selling coking coal to
third parties, as well as to reduce its depend-
ence on outside suppliers of raw materials
through both organic growth and additional
acquisitions. Evraz is also among the largest
global producers of vanadium slag.

Strong position in high growth steel
markets: Aside from being a dominant pro-
ducer of long products in Russia, Evraz has a
leading market position in products with
strong growth profiles in Russia. These sec-
tors have a record of strong growth as well
as the potential to enjoy further high growth
rates into the future. The construction sec-
tor has grown at rates exceeding GDP
growth in Russia in recent years and contin-
ues to do so, resulting in significant growth
in demand for steel products. Evraz also
expects demand for its principal railway
products (rails and wheels) to increase sig-
nificantly as the Russian railroad network is
upgraded following a long period of under-
investment. Evraz is particularly confident of
this increase in demand in light of Russian
Railways’ planned capital expenditure pro-
gramme of approximately US$21 billion
between 2005 and 2007. This will be
focused primarily on the upgrading and
refurbishment of infrastructure and rolling
stock. Evraz is also well positioned in the
high growth Southeast Asian markets for
semi-finished steel as a competitive supplier.

Source: Rudprom, Evraz

Dynamic and experienced manage-
ment team: Evraz’s management team
has a proven track record in managing
operations under its control and turning
around newly acquired underperforming
assets. Evraz’s senior management team
and executive directors combine exten-
sive industry and marketing experience
with financial and management expert-
ise. The newly-formed board of directors
includes three internationally experi-
enced non-executive directors.

Strong financial performance: As an
integrated low-cost steel producer that
has invested substantially in modernising
its operations, as well as benefiting from
the improved market environment for
steel and related products in recent
years, Evraz has generated strong cash
flows and returns, resulting in net cash
flow from operating activities of US$946
million and an adjusted EBITDA margin
of approximately 34.0% in 2004. Evraz is
in a strong financial position, illustrated
by its Net Debt to Adjusted EBITDA ratio
of 0.51 at the end of 2004. Evraz believes
that its strong cash flows and balance
sheet strength will support and grow its
business.

Source: Russian Railways (RZD)

Source: OOO Rasmin, FGUP VUKhIN, Evraz

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Steel division overview

Review of steel market developments

Source: International Iron and Steel Institute

Steel is one of the most important, multi-
functional and adaptable materials in use
today, and is generally considered to be a
backbone of industrial development.

”

Russia is generally considered to be among

the lowest cost steel producing regions, largely

due to relatively low labour and energy costs. ”

Steel is highly versatile, as it is hot and cold
formable, weldable, hard, recyclable and
resistant to corrosion, water and heat. The
industries in which steel is used include
construction, transportation (including
railway) and engineering. Steel is also used
in the production of power
lines,
pipelines, white goods and containers.

The steel industry is affected by a combi-
nation of factors, including periods of
economic growth or recession, worldwide
production capacity and the existence of,
and fluctuations in, steel imports and pro-
tective trade measures. Steel prices
respond to supply and demand and fluc-
tuate in response to general and industry-
specific economic conditions. Global steel
prices have increased significantly since
the end of 2003, reflecting strong
demand, particularly in China.

The steel industry operates predominantly
on a regional basis as a result of the high
cost of transporting steel. While steel pro-
duction has historically been concentrated
in the EU, North America, Japan and the
former Soviet Union, steel production in
China and elsewhere in Asia has grown in
importance over the past decade. In 2004,
China was the largest single producer of
steel in the world, producing approxi-
mately 272 million tonnes of crude steel,
as well as the largest consumer of steel,
consuming over 301 million tonnes of
crude steel.

The major traded steel products world-
wide include semi-finished products, hot
and cold-rolled sheets and coils, steel
tubes and fittings, galvanised sheet, wire
rod and angles and sections. The strategy
and product mix of steel producers gener-
ally varies between producers in industrial
countries and producers in emerging mar-
kets. The growth and consolidation of
both steel consumers and raw material
suppliers has weakened the bargaining
power of steel producers and put further
pressure on their margins. Steel producers
have responded with a phase of industry
consolidation. Consolidation has enabled
steel companies to lower their production
costs and allowed for more stringent sup-
ply-side discipline,
including through
selective capacity closures. Despite this
recent consolidation, the global steel mar-
ket remains highly fragmented. In 2004
the five largest producers – Mittal Steel,
including ISG (59 million tonnes); Arcelor
(47 million tonnes); Nippon Steel (31 mil-
lion tonnes); JFE (31 million tonnes); and
POSCO (31 million tonnes) — accounted
for approximately 19% of total worldwide
steel production, with Mittal Steel, the
largest, accounting for under 6%. The 20
largest steel producers accounted for
approximately 41% of total global steel
production in 2004.

The Russian steel industry

In 2004, Russia produced 64 million
tonnes of crude steel, or 6.2% of world
production, making it the world’s fourth
largest producer of crude steel. Russia
produced nearly 54 million tonnes of
rolled products in 2004, operating at
approximately 93% of installed capacity.
Of this amount, approximately 29 million
tonnes (or 54% of the total output of
rolled steel) was exported. In 2004, semi-
finished products comprised approxi-
mately 47% of the total volume of Russian
steel exports. Overall, the Russian steel
industry sells over 54% of its output
abroad and benefits from geographical
proximity to strong global markets, partic-
ularly in Asia, which is the most significant
export market for Russian producers.

Russia is generally considered to be among
the lowest cost steel producing regions,
largely due to relatively low labour and
energy costs. Russian steel producers tend
to focus on vertical integration, which
ensures that they have access to a stable
supply of certain raw materials, particular-
ly coking coal and iron ore.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Source: CRU, Metal Expert, Global Insight (steel

Source: Russian State Customs Committee

consumption), Global Insight (population)

Russian steel market

Russian steel production decreased from
1991 through 1998 as a result of the gene-
ral economic decline in Russia during this
period and the consequent reduced
demand from the primary steel product
consumers: the construction, infrastruc-
ture and engineering industries and the
military sector. Consumption of rolled
steel products in Russia has followed a U-
shaped trend since 1990. Consumption
was 65 million tonnes in 1990 and then
declined steadily due to reduced consump-
tion by heavy industry, to only 18 million
tonnes in 1998. However, the devaluation
of the rouble in 1998 resulted in economic
growth and a sharp increase in domestic
demand for steel products, and by 2004,
total Russian steel consumption had
increased to 27.9 million tonnes. Despite
increase, steel consumption has
this
remained relatively low in Russia. In 2004,
Russia consumed approximately 198 kilo-
grams per capita, down from nearly 309
kilograms in 1992, and substantially less
than in such countries as Japan, United
States and countries in the EU.

Imported steel comprised only 11% of total
steel consumed in Russia during 2004, a
decrease from 15% in 2003. Imports of
steel into Russia have generally been
restrained by trade policy measures imple-
mented by Russian authorities as well as by
the relatively high costs of transporting
steel to customers in Russia. Russian trade
policy has included anti-dumping meas-
ures, safeguard measures, and compensa-
tory payments. Anti-dumping measures
are determined based on a comparison of
import and domestic prices, special
defenses are implemented based on dam-
ages to domestic producers, and compen-
sation payments are required where evi-
dence of foreign subsidies can be found.
Imports of Ukrainian rebar are currently
subject to compensation payments in the
form of a 21% duty and imports of gal-
vanised
and
Kazakhstan are subject to a 24% anti-

from Ukraine

steel

dumping duty. Investigations of anti-
dumping with respect to
imports of
Ukrainian pipe and channels and EU nick-
el-containing flat products are currently
ongoing.

product range is similar to that of Evraz.

Description of subsidiaries

NTMK

NTMK is located in Nizhny Tagil, Sverdlovsk
region, approximately 160 kilometres north
of Ekaterinburg and approximately 1,500
kilometres north-east of Moscow. Nizhny
Tagil is one of the oldest mining and steel
production centres in Russia. Shares in
NTMK are traded on the Russian Trading
System (‘‘RTS’’), a major Russian stock
exchange. NTMK is an integrated steel pro-
duction plant. It consists of coke-chemical
production facilities, six blast furnaces,
steel making facilities (oxygen converters
as well as open hearth furnaces), four con-
tinuous casters and six rolling mills.

Recent modernisation and upgrading pro-
jects include:

• Reconstruction of blast furnace increas-
ed productivity and reduced coke con-
sumption by 9%.

• Commissioning of a slab caster improv-
ed yield and broadened the product
range.

• Modernisation of railway wheel mill

increased capacity by 40%.

NTMK’s future investment programme is
primarily focused upon revamping of the

Export market

Asia, the Middle East and the EU are the
primary export destinations for Russian
steel producers. China, which is the largest
steel importer in the world, accounted for
8% of Russia’s total steel exports in 2004.
In 2004, Russian producers exported 29
million tonnes of rolled products, of which
semi-finished products (including pig iron,
slabs and billets) accounted for 47%, flat
products for 38%, and long products for
15%. The abolition of steel export duties in
2002 by the Russian government has also
improved export market opportunities.
Exports of rolled and cast products gradu-
ally gained importance during the 1990s,
increasing from 12 million tonnes in 1991 to
29 million tonnes in 2004. Exports of rolled
products accounted for over 53% of total
Russian steel production in 2004.

Competitive landscape

The Russian steel industry is characterised
by a relatively high concentration of pro-
duction, with the five largest steel compa-
nies accounting for approximately 79% of
total steel production
in Russia. The
Russian market is characterised by intense
competition for customers, raw materials,
capital and experienced personnel.

Both the Russian and international steel
markets are highly competitive. Primary
competitive factors include quality and price
and the use of new technologies to expand
the product range. While the Russian
domestic market for flat products is domi-
nated by MMK, Severstal and NLMK, Evraz
maintains the leading position in the Russian
market for long products. Its principal com-
petitors in this market are Mechel and Ural
Steel. Evraz also faces competition from
some Ukrainian steel producers whose

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

front-end. It involves:

• Reduction of five to three blast fur-

naces (BF) via rebuilding of BF5.

• Coke battery re-padding.
• Blast oxygen furnace (BOF) capacity
increases to eliminate OH route reduc-
ing emissions.

As a result of the investment programme
blast furnace output will increase to 5.3
million tonnes. The objective is to increase
yields by 6%, eliminate double conversion
and achieve 100% continuous casting.

Project capital expenditure is planned to be
US$210 million for 2005, and capital
expenditure for the period 2006–2008 is
estimated to be US$252 million.

ZapSib

The objective of NKMK’s investment pro-
gramme is to create a mini mill configura-
tion. In the short- to medium-term a single
BF operation will be maintained on a mar-
ginal cost basis.

Project capital expenditure is planned to
be US$82 million in 2005 and capital
expenditure for the period 2006/07 is
estimated at US$30 million.

ZapSib is the largest steel mill in the Siberian
region and the eastern most steel mill in the
Russian Federation. It is located 25 kilometres
from the city of Novokuznetsk, in the
Kemerovo Region. Shares in ZapSib are traded
on the RTS. ZapSib is an integrated steel plant.
Its operations include coke-chemical produc-
tion, sinter production, three blast furnaces,
steel making facilities, a blooming plant, a con-
tinuous casting machine and four rolling mills.

Focus of modernisation programme
to date:

• Commissioning of a billet caster.
• Reconstruction of BF2 commissioned
in May 2005 increasing capacity by
1.2 million tonnes thereby allowing
higher utilisation of existing BOF
capacity.

• Construction of a new slab caster with
2.5 million tonnes capacity to be com-
missioned in 4Q 2005.

• Ongoing coking battery reconstruction.
Project capital expenditure is planned to be
US$213 million in 2005.

the period
Capital expenditure for
2006–2008 is estimated at US$200 million.

NKMK

NKMK is an integrated iron and steel plant
located at Novokuznetsk, Kemerovo region.
NKMK is the leading rail producer in the
Russian Federation, producing a full range
of rails, and, together with NTMK, the
exclusive rail suppliers to Russian Railways.
NKMK’s rail output accounts for approxi-
mately two-thirds of Russian rail produc-
tion. NKMK is an integrated steel plant. It
produces various types of steel products. Its
production facilities include a coke-chemical
production plant, two blast furnaces, steel-
making facilities, a blooming plant, two
continuous casting machines, rail produc-
tion facilities and rolling mills.

Focus of modernisation programme to date:
• Increase in electric arc capacity.
• Refurbishment of a continuous caster.
• Construction of a walking beam furnace.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Production performance of the steel division

As stated above, Evraz conducts its
steel business primarily through NTMK,
ZapSib and NKMK. In 2004, it sold
13.1 million tonnes of steel, with con-
revenue
sales
solidated division
(including
inter-segment sales) of
US$5,809.0 million in 2004, an increase
from US$2,060.0 million in 2003.

Mix of products sold in 2002–2004 is presented in the table below:

(‘000 tonnes)

Construction sector

Railway sector

Other finished products

Semi-finished products

Mining sector

Total

2002

2,637

669

1,055

5,075

204

9,640

% of total

27%

11%

53%

2003

3,089

812

1,265

5,391

259

10,816

% of total

29%

12%

50%

2004

3,030

1,426

1,621

6,774

260

13,111

% of total

23%

11%

12%

52%

Evraz exports primarily semi-finished
products, as well as some finished pro-
ducts, mainly beams and rebars. The semi-
finished products Evraz exports have not
historically been subject to protective trade
barriers. In 2004, Evraz exported 54% of
its total steel sales volume, an increase

from 51% in 2003. Billets have historically
accounted for the largest share of export
sales, though the share of the contribution
of slabs to total exports has been increas-
ing as a result of the installation of addi-
tional slab-casting capacity.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Quality and certification of products

Evraz has established comprehensive
quality control systems at each stage of
its production cycle. The quality control
systems in use are described below.

NTMK products for sale on the Russian mar-
ket as well as those for export adhere to strict
specifications and standards. NTMK’s rolling
mills and refractory manufacturing facility
are certified under DIN EN ISO 9001:2000.
NTMK’s products have received various certi-
fications, both Russian and foreign, includ-
ing certification of its continuous casting
slabs by the Lloyd’s Register.

ZapSib operates a quality assurance sys-
tem certified under ISO9002, which it
originally received in 1994 and renewed in
1997. ZapSib has also received a Lloyd’s
Register Quality Assurance Certificate of
conformity to ISO 9001:2000, EN ISO
9001:2000 and BS EN ISO 9001:2000.

Quality control of NKMK is performed
on the basis of its ‘‘Quality Policy’’.
NKMK’s Quality Policy sets out the fol-
lowing priorities: involvement of all per-
sonnel in quality management, improve-
ment of consumer properties of metal

Raw material and energy requirements

products and reduction of production
costs. The quality management system
covers all stages of NKMK’s production
process. All railway products produced at
NKMK are also certified by the Russian
Railways certification system. NKMK’s
production of rails and rail fasteners has
also received DIN EN ISO 9001:2000 cer-
tification.

The principal materials used by Evraz in
steel production include coking coal, iron
ore sinter and pellets, scrap, ferroalloys
and refractory materials. As part of its
strategy to increase vertical integration,
Evraz has sought to increase the share of
these inputs that are sourced from other
members of its consolidated group or

from affiliates. Concluding such arrange-
ments helps to ensure reliability of supply
and helps to provide more stable pricing,
and in the case of purchases from other
members of its consolidated group also
enables Evraz to capture internally the
margin on its supplies of these raw mate-
rials. The steelmaking process requires

significant amounts of electricity and heat
energy. Energy related expenses amount-
ed to approximately 15.2% of Evraz’s con-
solidated cost of revenues in 2004, of
which 8.3% relates to electricity, 4.1% to
natural gas and the remainder to heat and
steam power.

Coking coal and coke
Evraz obtains coking coal primarily from
Raspadskaya, in which it holds an equity
interest, and Yuzhkuzbassugol, which is
controlled by an affiliate of Evraz. Evraz
obtained approximately 69% of its coking
coal requirements from Raspadskaya and
Yuzhkuzbassugol in 2004. Together with
Mine 12, which Evraz acquired in March
2005, production at these sites was suffi-
cient to cover 158% of Evraz’s 2004 cok-
ing coal requirements. Evraz has pur-
chased selected coal grades from parties
other
Yuzhkuzbassugol,
Raspadskaya and Mine 12 in order to max-
imise economic and operational efficien-
cy. Coke is the largest cost item in the blast
furnace production process. Evraz pro-
duces its entire requirements of coke at its
steel plants, and also sells some coke to
third parties.

than

Iron ore
Evraz’s principal sources of sinter and pel-
lets are its subsidiaries KGOK, VGOK and
Evrazruda, as well as Mikhailovsky GOK.
Including full-year production of KGOK,
which was acquired in May 2004, and of

Evrazruda, which was acquired in March
2005, Evraz’s iron ore production in 2004
was sufficient to cover approximately
86% of its total iron ore requirements.
ZapSib also operates a sinter plant on site.
As it has acquired control over additional
iron ore assets, Evraz has sought to

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

increase the share of these operations in
its total iron ore consumption. Evraz’s
steel making facilities consumed a total
of 6.9 million tonnes of concentrate, 4.8
million tonnes of pellets and 7.7 million
tonnes of sinter in 2004, of which
approximately 73% was supplied by
KGOK, VGOK and Evrazruda.

Ferroalloys
Evraz’s main suppliers of ferroalloys are
Chelyabinsk Electrometallurgical Plant,
Promspetskomplekt, Kosogorsky MZ and
Ural-Siberian GMK.

Scrap
Evraz purchases scrap from a number of
third parties and obtains it internally
from waste created by its blooming
plants and rolling mills. The share of out-
side purchases of scrap is expected to
increase as a result of the closure of
blooming mills as Evraz shifts its produc-
tion from ingot casting to continuous
casting, which results in lower volumes
of waste steel.

Refractory materials
Evraz produces some refractory materi-
als at NTMK, and purchases the remain-
der of its requirements from outside
suppliers. Evraz’s major suppliers of
refractory materials are Spetsoboru-
dovaniye
in
Germany), as well as the Russian pro-
ducers Magnesit, Pervouralsky Dinasovy
Zavod and OAO Ogneupory.

i Materialy

(located

Electricity
Evraz obtains electricity from regional
generation subsidiaries of UES and from
internal sources. In 2003 and 2004, Evraz
obtained approximately 8% of its total
electricity requirements from internal
sources, and it plans to increase this
amount. The average cost of electricity
purchased from subsidiaries of UES in
2004 was RUR7.57 (approximately
2.7 US$ cents) per KWh, and Evraz
believes that the total cost of internally
generated electricity is less than the cost
of electricity it purchases from external
sources.
In 2004, NTMK produced
approximately 32% of its electricity
requirements. ZapSib and NKMK do not
currently produce significant quantities

of electricity. Evraz is currently engaged
in a project to increase its generation
capacity at NTMK from 10% of NTMK’s
total electricity needs in 2001 to 60% by
2007 to mitigate the effects of increas-
ing costs of externally generated elec-
tricity by utilising waste gases from coke
production and blast furnace production
and waste steam as energy resources.
Evraz may also seek to participate in pri-
vatisations of generating assets resulting
from the proposed restructuring of the
Russian electricity sector.

Natural gas
Evraz purchases the natural gas con-
sumed by its blast furnaces and used in
generating heat and electricity from sub-
sidiaries of Gazprom. Average natural
gas tariffs have increased significantly in
recent years, for example on average in
Russia by 20% in 2004 as compared to
2003 and by approximately 65% from 1
February 2002 to 1 January 2004 in nom-
inal rouble terms. Evraz’s average natural
gas tariffs increased by a further 6% from
1 January 2005.

Transportation overview

Transportation costs impact Evraz’s oper-
ations directly, as a component of raw
material costs, and also by affecting the
overall price competitiveness of its prod-
ucts in comparison to other producers.
Costs associated with the transportation
of raw materials have increased in recent
years. The main provider of rail trans-
portation services to Evraz for factory-
bound shipments is Russian Railways. The
steel plants also operate their own trans-
portation facilities for transportation over
short distances, such as between stages

of the production process and shipments
of new materials and products to and
from railway stations. Tariffs for rail ship-
ments are set by Russian Railways and are
regulated by Russian Railways and the
Federal Tariffs Service. A discounted ta-
riff applies where a customer utilises its
own railcars to transport materials on
Russian Railways’ infrastructure. In order
to benefit from those discounts Evraz
owns or leases over 2,000 railcars, and
rents additional railcars. In 2004, Evraz
made use of such owned, leased or rent-

ed railcars in respect of over 40% of the
total volume of rail shipments by
Evraztrans, which provided substantially
all of Evraz’s rail transportation services
(including supplies of raw materials,
intragroup transfers and shipments to
Nakhodka Sea Port or other transport
transfer locations).

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Mining division overview

Review of iron ore and coking coal developments

Iron ore
Overview
The global iron ore industry is charac-
terised by a high degree of consolidation,
with BHP Billiton, CVRD and Rio Tinto
accounting for approximately 70% of the
global seaborne iron ore trade. The major
iron ore producing countries are Australia,
Brazil and China. Several development
projects in Australia, Brazil and South
Africa are expected to increase global pro-
duction. Iron ore production costs have
declined in recent years, largely due to
productivity enhancements. Freight rates
remain a major cost constraint, comprising
approximately half of total costs, accord-
ing to Metal Bulletin, and helping to main-
tain the regional segregation of the indus-
try. Iron ore prices increased significantly
during 2004, reflecting strong global
demand, and according to industry ana-
lysts are expected to rise further during
2005 and to remain high for the next sev-
eral years.

The major exporting countries of iron ore
globally include Australia, Brazil and India,
and the major importers are major steel
producing countries: China, Japan and
South Korea.

Russian market
Total iron ore production in Russia in 2004
was approximately 93 million tonnes. Total
iron ore exports were over 19 million tonnes,
and total imports exceeded 10 million
tonnes. Imports to Russia are generally lim-
ited by high transportation costs and the
lack of port facilities in the Far East and on
the Black Sea capable of handling large
sized iron ore carrying vessels. Russian iron
ore production is highly concentrated, and
the three largest producers accounted for
approximately 54% of total iron ore pro-
duction in Russia in 2004.

Russian steel producers have increasingly
sought to acquire control of iron ore produc-
tion assets, and had attained control over
nearly all of the major Russian producers of
iron ore by the end of 2004. For example,
during 2004 Evraz acquired control of
KGOK, NLMK acquired control of Stoilensky
GOK and Ural Steel acquired control over
Mikhailovsky GOK. Production of iron ore in
Russia is concentrated in the Kursk region
(55%), the Northwest district (18%) and the
Urals district (15%). Iron ore produced in
Russia is mainly magnetite, not hematite,
which is common in Australia and Brazil.
Total iron ore feed consumption of Russian
steel mills in 2004 consisted of concentrate
(61%), pellets (33%) and sinter (6%).

Coal
Overview
Coal may be divided into steam (thermal)
coal and coking (metallurgical) coal.
Steam coal is used in electricity generation
and industrial applications, while coking
coal is used to manufacture coke for use in
steel manufacture and other metallurgical
applications. Coking coal swells when
heated in coke ovens to produce hard
coke, whose characteristic is essential in
blast furnace operations. Approximately
400-500 kilograms of coke is used per
tonne of steel produced. Coke is supple-
mented by the direct injection of pul-
verised coal, or PCI, at rates of 100-200
kilograms per tonne of steel. PCI uses less
expensive steam and semi-soft coking coal
to reduce costs.

In recent years, the global coal industry
has consolidated, partly as a result of oil
companies and other non-mining compa-
nies exiting the sector. The top five export
coal producers (Anglo-American, BHP
Billiton, Drummond, Rio Tinto and Xstrata)
now produce 40% of total internationally
traded volumes, with the top ten produc-
ers controlling approximately 60% of the
total traded coal market. As a result of this
concentration, coal suppliers have gained
more pricing power.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Russian market
Russia has the world’s second largest coal
reserves after the United States. Its proven
coal reserves total approximately 157 bil-
lion tonnes, accounting for 16% of the
world’s proven coal reserves. In 2004,
Russia produced 283 million tonnes of
coal, of which approximately 74% was
steam coal and the balance was coking
coal. Approximately 70% of Russia’s cok-
ing coal production capacity was owned
by or affiliated with Russian steel produc-
ers in 2004.

Coal production in Russia is concentrated
in the Kuznetsk Basin and the Kansko-
Achinskii Basin, which are east of the Ural
mountains and together accounted for
approximately 68% of Russia’s total coal
production in 2004.

Exports of coal from Russia have increased
over the past several years. In 2004,
Russian companies exported approxi-
mately 79 million tonnes of coal, a 32%
increase from 60 million tonnes in 2003.

OAO SUEK

OAO UK Kuzbassrazrezugol

OAO OUK Yuzhkuzbassugol

OAO UK Yuzhni Kuzbass

Raspadskaya

OAO Yakutugol

OAO Vorkutaugol

Other

Total

Steam coal
production

Steam coal
share in total
production

Coking coal
production

Coking coal
share in total
production

78.2

34.1

4.1

6.3

–

4.0

0.4

81.1

208.2

38%

16%

39%

100%

–

5.2

14.0

9.3

9.7

5.4

7.1

23.7

74.6

19%

12%

13%

10%

32%

100%

Total

78.2

39.4

18.1

15.6

9.7

9.4

7.5

104.9

282.8

Total
share of
production

28%

14%

37%

100%

Description of subsidiaries

Iron ore assets overview

Coking coal assets overview

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

KGOK extracts
iron ore from the
Gusevogorsky deposit and processes iron
ore. KGOK is located approximately 150
kilometres away from NTMK, also in
Sverdlovsk region. KGOK currently mines
iron ore from three open pit mines, which
it processes in on-site crushing, enrich-
ment, sintering and pelletizing facilities.
Final products (sinter and pellets) are
loaded on to railcars and shipped to end
consumers. Approximately 16.9% of
KGOK’s total sales in 2004 were to cus-
tomers other than Evraz.

VGOK mines

VGOK operates underground ore mines as
well as processing facilities, and is located
near Nizhny Tagil, approximately 10 kilome-
tres from NTMK and 180 kilometres north of
Ekaterinburg.
the
Vysokogorskoye,
Lebyazhinskoye,
Estuninskoye and Mednorudyanskoye iron
ore deposits. VGOK supplies sinter to Evraz’s
steel plants, primarily NTMK, and also
makes sales to third parties. Approximately
75% of the iron ore used in producing sinter
constitutes VGOK’s own production and by-
products of the blast furnace process at
NTMK, and the balance is purchased from
other producers, primarily Bogoslovskoye
RU, an iron ore mine located nearby.

Evrazruda started operations in 2002,
bringing several mining and processing
enterprises
in Kemerovo region, the
Republic of Khakassia and Krasnoyarsk Krai
under common management. In February
2004 Evrazruda acquired items of property,
plant and equipment owned by KuzGOK,
and in July 2004 Evrazruda acquired pro-
duction operations of Sheregeshskoye Ore
Deposit and
Irbinskoye Ore Deposit.
Evrazruda sells iron ore primarily to NKMK
and ZapSib. Approximately 20% of
Evrazruda's total sales in 2004 were to cus-
tomers outside the Group.

Raspadskaya

located

interest

ownership

Raspadskaya is one of the largest coking
coal mines in the Russian Federation, and
is an underground mine
in
Kemerovo region. Evraz acquired a 50%
ownership interest in Corber Enterprises
Limited (‘‘Corber’’), in March 2004.
Corber then owned 72.03% of the ordi-
nary shares in ZAO Raspadskaya, and
Corber subsequently acquired a further
in
4.20%
Raspadskaya, resulting in a total effective
interest for Evraz of 47.7%. Operations at
the Raspadskaya field produced a total of
9,721 thousand tonnes of coking coal in
2004, of which 8,216 thousand tonnes
was attributable to the operations owned
by Corber (the remainder was attributa-
ble to other operations in which Corber
does not have an interest). Total produc-
tion at the Raspadskaya field (including
operations in which Corber does not now
have an interest) was 8,600 thousand
tonnes in 2003 and 7,073 thousand
tonnes in 2002.

Neryungri Ugol

Evraz acquired Neryungri Ugol in 2003 in
in the
order to develop resources
Denisovskoye field in the Republic of
Sakha (Yakutia). Evraz expects to start
production of coking coal from Neryungri
Ugol in 2006, and anticipates the field to
reach its full production capacity of three
million tonnes of raw coking coal by
2008, resulting in approximately 2.7 mil-
lion tonnes of coking coal output. Evraz
plans to export coking coal produced at
Neryungri Ugol to customers in Asia.
Evraz plans to invest a total of approxi-
mately US$183 million from 2004
through 2006 in starting production at
Neyungri Ugol.

Production performance of the mining division

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Overview of other operating divisions

Description of other assets

Management companies
OOO EvrazHolding is a management com-
pany registered in Russia that exercises
the management powers of a sole execu-
tive body of Evraz Group S.A.'s Russian
subsidiaries and undertakes operational
management of these assets.

Trading companies
Ferrotrade Limited is an export trader for
Evraz, selling the Group’s steel products
abroad (mainly China, Taiwan, South
Korea, and the Philippines).

TH EvrazHolding is a trading company
responsible for domestic steel sales.

Transport companies
Nakhodka Sea Port is a sea port located in
the Far East of Russia through which Evraz
ships most of its export sales. In 2004,
freight turnover was 7.9 million tonnes.

Evraz ships a significant proportion of its
export sales through its Nakhodka Sea
Port, one of the largest ports in the
Russian Far East, and it has an annual
capacity of approximately 10 million
tonnes. During 2004, Evraz purchased
four vessels with a total deadweight
capacity of 95,000 tonnes that cover
approximately 25% of Evraz’s total ship-
ping requirements and which it uses to
transport its products from Nakhodka to
end customers. The acquisition of these
vessels reduced Evraz’s exposure to price
and capacity fluctuations in the global
shipping market.

Evraztrans. Acts as a railway forwarder for
Evraz’s steel division. Evraztrans provides
substantially all of Evraz’s transportation

services including supplies of raw materi-
als, intragroup transfers and shipments to
Nakhodka Sea Port or other export trans-
port transfer locations. Evraztrans owns or
leases over 2,000 railcars and rents addi-
tional railcars, enabling it to benefit from
reduced tariffs when transporting its
products by Russian Railways. In 2004,
Evraz made use of such railcars in respect
of over 40% of its total volume of rail
shipments.

Other operations
Metallenergofinance (MEF). Supplies elec-
tricity and heat to Evraz’s steel and mining
divisions and to third parties.

Trading House EvrazResource. Trading
company responsible for the supply of
metallurgical raw materials for Evraz’s
steel operations.

SOCIAL RESPONSIBILITY AND ENVIRONMENTAL MEASURES

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

As Russia’s significant steel producer
with worldwide ambitions, Evraz is
committed to managing its various
businesses in a healthy, safe, environ-
mentally and socially responsible way.

The Board of Directors has overall respon-
sibility for the management of its employ-
ees' health, safety, environmental, com-
munity and social (HSEC&S) issues, and
sees these as central to its current and
future success.

Each of the Group’s operations has a team
of HSEC&S specialists who, along with the

operations management team, focus on
risk issues, performance indicators and
implementing improvements. Whilst each
business unit currently has its own HSEC&S
policies and management systems, it is
anticipated that in the near future, the
Group will operate a single policy which will
cover all of its operations, irrespective of
their function or location.

Ecology and industrial safety

Environmental
Evraz takes its environmental responsibility
very seriously. The Group aims to reduce
the impact its activities have on the envi-
ronment. Its key environmental objectives
are the consistent reduction of emissions,
introduction of environmentally friendly
industrial technologies and equipment to
facilitate energy savings, gas and liquid
waste treatment, and the processing of
by-products. The Group is attempting to
draw up significant business drivers and
policies, which will significantly reduce the
environmental negatives of its activities.

Evraz possesses all necessary and relevant
environmental licenses for the use of water
resources, water discharges, air emissions,
waste disposal and waste management for
operations and facilities. During 2004, the
Group paid pollution payments of approxi-
mately US$4.5 million which are made up
of “within limit discharges” and “excess
limit discharges” of air, water and waste.
Most of these payments related to air emis-

sions. During 2004, an independent evalua-
tion of Evraz’s steel plants by international
environmental consultants did not identify
any significant environmental concerns at
these facilities.

Nevertheless, the Group has conducted a
number of environmental improvements
at its steel making facilities in recent years
that have reduced emissions, including a
reduction in the volume of air discharged
at NTMK by approximately 62%, from
288,000 tonnes in 1998, to 110,000
tonnes in 2003. These reductions at NTMK
were accomplished by the commissioning
of three continuous casting machines and
a reduction in production by NTMK’s open
hearth plant, and other equipment mod-
ernisation and upgrades. In addition,
NTMK has also commissioned a 3 million
tonnes per year waste processing plant to
deal with the over 50 million tonnes of
accumulated and newly-produced slag
from the plant, as well as processing other
iron-containing materials.

“

The Group aims to reduce,
wherever and however
possible, the impact its
activities have on the

environment. ”

The key environmental objective of Evraz is
the consistent reduction of waste and emis-
sions and introduction of modern, environ-
ment-friendly
large
amount of obsolete equipment, which
failed to meet environmental standards,
has already been withdrawn as part of the
re-equipment and modernisation pro-
gramme at Company’s production facilities.

technologies. A

Innovative environmental solutions at
Company sites include a processing plant
for extracting iron from waste materials
(the first in the Russian steel industry).

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

“

Elaboration of a waste management sys-
tem throughout the Group is being coordi-
nated with introduction of international
quality standards, including ISO14000.

The Group takes its
responsibility for employee

H&S very seriously. ”

The programme for development of Evraz
production facilities gives special attention
to environmental issues, and includes a
commitment to implement environment
policy in full accordance with ISO14001.
Gross contaminant emissions will be sig-
nificantly reduced in the coming 6-7 years,
starting from 2003, by 35% and 30% in
the cities of Novokuznetsk (where ZapSib
and NKMK are located) and Nizhny Tagil,
respectively.

Health & safety
By its very nature, the mining and metal-
lurgical industries have significant health
and safety (H&S) issues associated with
them.

The Group takes
its responsibility for
employee H&S very seriously. It monitors
risks and incidents, and ensures that process-
es, procedures and locations are constantly
monitored to ensure that any potential prob-
lem, incident or deficit is rectified immedi-
ately. In addition, H&S managers ensure that

information is shared around the Group’s
operations, as well as with trade union and
industry representatives.

In addition, every plant has developed a
health programme for employees, includ-
ing additional health services provided
both by the local as well as the Group’s
medical centres. These centres deal with
diagnostic and preventative measures for
occupational illnesses, rehabilitation in
specialised medical clinics and periodic
medical inspections. Group employees are
able to participate in a Group-subsidised
health insurance scheme. Indeed some
operations fund their own clinics.

In 2004, every Group operation ran its
own medical practice which provides first
aid facilities, undertakes medical examina-
tions and deals with preventative health
matters for Evraz employees.

Although relevant Russian government
organisations and agencies offer no rec-
ommendations or directives on establish-
ment of ecological monitoring systems at
industrial sites, NTMK specialists have pre-
pared a “Technical Plan for a Local
Ecological Monitoring System”. The objec-
tive is to identify man-made ecological
impacts and to obtain regular scientific
assessments of the current and future
state of the environment. This data will be
the basis of recommendations for optimal
environmental policy and the use of natu-
ral resources.

ZapSib is taking steps to ensure more tho-
rough use of raw materials and full decon-
tamination of waste. ZapSib’s specialists
have drawn on international experience to
prepare a waste management concept,
which includes:

• reduction of absolute and relative
quantities of waste arising from the
industrial process;

• use of waste at the point of its creation;
• secondary use of waste without addi-

tional processing;

• recycling of waste to extract valuable

components and;

• decontamination and burial of waste.

Personnel and social policy

Community
Working with, and on behalf of, the com-
munities in which it operates is critical to
the ongoing success of the Group’s opera-
tions and an important element of its
overall responsibility. Group operations
bring employment opportunities, both
through direct employment and indirectly
through supporting activities in the local
and regional economies. The Group has a
policy of recruiting local people wherever
and whenever possible.

In addition to the numerous informal ways
of gaining information to enable a greater

understanding of local community issues,
concerns and needs, Group employees
regularly meet with local authorities to dis-
cuss mutual interest issues. The Group also
takes an active role in supporting local
needs and initiatives.

Social
Evraz considers its employees to be its
most valuable asset. It views its personnel
as like-minded people who share a com-
mon goal. The Group strives to attract and
retain experienced and knowledgeable
professionals, who are keen to make the
best of their abilities and thrive in the

workplace. In exchange, Evraz helps its
employees to realise their potential,
improve their qualifications and advance
their careers.

The dual achievement of both commercial
objectives and social stability at Group
operations, is one of the defining ele-
ments of Evraz’s social policy. The Group’s
social policy is aimed at the sustainable
development in the regions of its opera-
tion through creation of a Group-wide
corporate standard and standardised pro-
grammes that optimise both their effec-
tiveness and their value for money. Such

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

“

Evraz is actively involved in a number of charitable
projects at both regional and national level.

”

Employment
Evraz’s management interacts with trade
unions in order to ensure the appropriate
treatment of employees and the stability
of its business. At the end of 2004, over
80% of Evraz’s employees were members
of a trade union. Each of the Group’s pro-
duction facilities enters into collective bar-
gaining arrangements with
its trade
unions on a bi-annual basis. Current
agreements provide for an increase in
employee wages within the approved
budget and contain no restrictions on
employees’ layoffs due to temporary sus-
pension of operations. There have been no
strikes or other cases of industrial action at
any of the Group’s production facilities
since they were acquired.

In May 2002 Evraz set up a Social Council for
the Group’s operations. This initiative went
even further when at the start of 2004 it set
up a not-for-profit organisation. The
Council, which consists of plant managers
and trade union representatives, offers a
mechanism to facilitate the effective airing
and implementation of decisions that affect
the social interests of Group employees.

While the Group’s productivity (as meas-
ured by tonnes per employee) is below
western European standards, Evraz is
nevertheles committed to maintaining its
position as a low-cost producer of high-
quality products. Unfortunately, some
rationalisation of existing and recently
acquired business units will result in
redundancies. Evraz is currently seeking
to optimise its personnel structure, pri-
marily through the controlled reduction in
its employee numbers, outsourcing non-
production activities and reducing admin-
istrative staff.

However, the Evraz Group's management
is ever mindful that its production facilities
are the principal employers in their respec-
tive towns and regions, and therefore any
reduction in the workforce is generally
constrained by the relevant Russian labour
legislation, as well as other political and
social considerations. For these reasons,
Evraz manages any reduction in the num-
ber of personnel it employs, in a sympa-
thetic, gradual and controlled manner.

goals are in accordance with both progres-
sive thinking in Russia and throughout the
industrialised world.

In keeping with other progressive employ-
ers, Evraz runs a social care programme
for its female employees. This programme
includes a number of key features aimed
at giving additional privileges to women,
including lighter jobs for pregnant women
while maintaining the same salary on pri-
mary jobs. Furthermore, female employ-
ees are provided with material assistance
after childbirth, additional payments for
women on child care vacations, extra
vacations at the beginning of the school
year and the New Year, as well as contri-
butions towards kindergarten expenses.

The Group is also involved in various
other social worker programmes and ini-
tiatives including works canteens, health
clinics, gyms, kindergartens, sports sta-
diums, recreation centres, museums and
cultural palaces.

Charity and sponsorship

Evraz is actively involved in a number of
charitable projects at both regional and
national level. The Group provides on-
going support for several medical institu-
tions, including a number of hospitals, as
well as cancer and TB clinics in Kuzbass.
Additionally, Evraz financially supports
numerous children’s homes, including ten
in the Kemerovo region and the Urals.

The Group also funds equipment for
computer literacy teaching and sport
activities in regions where it has opera-
tions, as well as paying and providing
manpower for repairs and maintenance
at local schools and college buildings.

from amateur and children’s ensembles
to recognised professional artists, who
are active on the international perform-
ance circuit.

Financing publication of informative and
cultural literature, sponsorship of Russian
cinema projects and support for scienti-
fic research and social programmes are all
part of Evraz’s social mission.

In the field of sport the Company has
sponsored two regular judo tournaments,
the Grand Prix and President’s Cup, over a
number of years. Sponsorship pro-
grammes have been developed for the

ice-hockey

club,
Novokuznetsk
“Metallurg”, and for “Metallurg-Kuzbass”
football team. Long-term support for the
women’s volleyball club, “Uralokchka-
NTMK”, helped the club to victory in the
volleyball Europe championship.

Evraz also materially supports sport in the
wider community through sporting bodies.
The Company plants hold regular competi-
tions and championships for amateurs and
professionals. In Moscow Evraz has con-
tributed to reconstruction of the long-estab-
lished Trud Stadium: the project includes new
football and hockey pitches, an athletics
complex and other sport infrastructure.

Recognising the importance of Russia’s
spiritual revival, Evraz works with the
Russian Orthodox Church and supports its
missionary and pastoral activities. More
than 20 parishes receive material and
financial assistance from Group opera-
tions. Indeed, the Patriarch of Moscow
and All-Russia, Alexei II has especially
acknowledged the significant role that
Evraz played in rebuilding the Valaam
Monastery of the Holy Transfiguration.

Evraz’s enterprises sponsor musical and
other creative groups at varied levels,

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

CORPORATE GOVERNANCE

Board of Directors

Alexander G. Abramov

Alexander V. Frolov

Valery I. Khoroshkovsky

Chairman of the Board of Directors and
Chief Executive Officer
Born in 1959
Mr Abramov has served in similar roles with
Evraz or its predecessors since founding
EvrazMetal, the predecessor of Evraz (the
‘‘Original Group’’), in 1992, and was a mem-
ber of the Original Group. Mr Abramov is
also a member of the Boards of Directors
of NTMK and ZapSib. Mr Abramov previ-
ously worked at the Institute of High
Temperatures of the USSR Academy of
Sciences. Mr Abramov graduated from the
Moscow
Institute of Physics and
Technology with a first-class honours
degree in 1982, and he holds a Ph.D. in
Physics and Mathematics. Mr Abramov is a
Bureau member of the Council of
Entrepreneurs set up by the Government
of the Russian Federation.

Managing Director Corporate
Born in 1964
Responsible for the functions of strategy
and business development, finance, cor-
porate affairs and communications, busi-
ness process, human resource, legal and IT
and a member of the Board of Directors.
Mr Frolov joined the Original Group in
1994, and subsequently held various posi-
tions at EvrazMetal. Mr Frolov served as
Evraz's Chief Financial Officer from
2002 through 2004. Prior to joining
Evraz, Mr Frolov worked as a research
fellow at the I.V. Kurchatov Institute of
Atomic Energy. Mr Frolov graduated
from the Moscow Institute of Physics and
Technology with a first-class honours
degree in 1987, and he received a Ph.D. in
Physics and Mathematics in 1991 from
the Moscow Institute of Physics and
Technology.

Managing Director Operations
Born in 1969
Responsible for the management of
Evraz’s steelmaking, mining & process-
ing, trading, shipping/ports and techni-
cal operations and a member of the
Board of Directors. Mr Khoroshkovsky
joined Evraz in 2004. Prior to joining
Evraz, Mr Khoroshkovsky served as Minister
of Economics in Ukraine from 2002 until
January 2004. Mr Khoroshkovsky served in a
number of other positions in the Ukrainian
government from 1997 until 2002, and from
2000 was Chairman of the Supervisory
Board of the Ukrainian Bank for Social
Development. Mr Khoroshkovsky graduated
from Shevchenko Kiev State University with
a degree in law, and received a Ph.D. in
Economic Science in 2003 from the State
University of Economics.

Members of the Board of Directors are
elected by a majority vote of share-
holders at the annual general meeting.
Directors are elected for one-year terms
and may be re-elected an unlimited num-
ber of times. The Board of Directors cur-
rently consists of seven members, three of
whom are deemed to be independent pur-
suant to criteria adopted by the Board of
Directors on 25 April 2005. The Lord
Daresbury and Messrs Campbell and
Robinson serve on the Board of Directors
pursuant to agreements. These agree-
ments, each of which contains identical
terms, have a duration of one year and
provide for the payment of compensation
and reimbursement of certain expenses.

The Board of Directors has also estab-
lished a criteria by which to assess
whether a director is an independent

director with consideration of the cha-
racter and judgment of each member of
the Board of Directors and whether there
are relationships or circumstances which
are likely to affect, or could appear to
affect, any member's judgment. If the
Board of Directors determines that a
director is independent, notwithstanding
the existence of relationships or circum-
stances which may appear relevant to its
determination, the Board of Directors has
resolved to state the basis for its conclu-
sion, including if the director has been an
employee of Evraz within the last five
years; has, or has had within the last
three years, a material business relation-
ship with the Company either directly, or
as a partner, shareholder, director or sen-
ior employee of a body that has such a
relationship with the company; has
received or receives additional remunera-

tion from the Company apart from a
director's fee, participates
the
Company's share option or a perform-
ance-related pay scheme, or is a member
of the Company's pension scheme; has
close family ties with any of the
Company's advisers, directors or senior
employees; holds cross-directorships or
has significant links with other directors
through involvement in other companies
or bodies; represents a significant share-
holder; or has served on the board for
more than nine years from the date of
such director's first election.

The Board of Directors may alter the
foregoing procedures by passing an ordi-
nary resolution, and the Company would
expect to issue an explanatory press
release if these procedures are altered in
any material respect.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Otari I. Arshba

James W. Campbell

The Lord Daresbury

Member of the Board of Directors
Born in 1955
Mr Arshba joined the Original Group in
1998, and until December 2003 served as
Evraz's Senior Vice-President for Corporate
Communications. Mr Arshba worked in the
state security apparatus of the Russian
Federation until 1994. Mr Arshba graduat-
ed with distinction from the Felix
Dzerzhinsky KGB Higher School, and holds
a Ph.D. in political science from the
Russian Academy of Government Service.
In December 2003, Mr Arshba was elected
a deputy of the Lower House of
Parliament of the Russian Federation—the
State Duma.

Ltd.

Resources

Non-Executive Director
Born in 1949
Mr Campbell is currently the Chairman of
Minara
(formerly
Anaconda Nickel) in Australia. From 1975
until 2002 he served in various positions
with the Anglo-American group of com-
panies, including various positions with
Amcoal, then the coal division of Anglo
American, from 1984 through 2002. From
1999 through 2002 he served as Executive
Director of Anglo American plc; Chairman
of Anglocoal (formerly Amcoal) and
AngloBase Divisions; and a non-executive
director of Anglo Platinum, Anglogold
and Anaconda Nickel Ltd. Mr Campbell
received a B.Sc. in Mathematical Physics
from Queen's University, Belfast and an
M.A. in Engineering Management from
Cambridge University, England.
Mr Campbell is the Chairman of the
Strategy Committee.

Non-Executive Director
Born in 1954
The Lord Daresbury has served as Non-
executive Chairman of The De Vere Group
plc (formerly The Greenalls Group plc)
since 2000 and as a Senior Adviser to
Fleming Family & Partners, a private
investment house, since 2005. From 2002
to 2004, the Lord Daresbury served as
Executive Chairman of Highland Gold
Mining Ltd., a Russian gold mining compa-
ny. The Lord Daresbury previously served in
various positions with The Greenalls Group
plc, a pub, restaurant, hotel and leisure
group,
its Chief
including serving as
Executive from 1993 through to 2000. The
Lord Daresbury received an M.A. in History
from Magdalene College, Cambridge
University, England, and also received a
Sloan Fellowship from The London
Business School, England.
The Lord Daresbury is the Chairman of the
Remuneration Committee.

Terry Robinson

Non-Executive Director
Born in 1944
Mr Robinson also currently serves as
Interim Managing Director of Ede's UK Ltd.
From 2002 to 2004 he served as Non-execu-
tive Deputy Chairman of Chapada
Diamonds plc, a diamond producer in
Australia and Brazil; from 1998 to 2002 he
served as Chief Executive and then
Executive Chairman of The Albert Fisher
Group plc; and from 1995 to 1998 he served

as Chief Executive of Halstead Services Ltd.
Mr Robinson previously held various posi-
tions with Union International plc, a food
production, processing and trading compa-
ny, from 1992 to 1995; with Lonrho plc
from 1972 to 1991; and with Donald
Macpherson Group, a paint manufacturer,
from 1967 to 1992. Mr. Robinson is a Fellow
of the Institute of Chartered Accountants
of England and Wales.
Mr Robinson is the Chairman of the Audit
Committee.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

“

Remuneration Committee

The Remuneration Committee consists of
the Lord Daresbury, Mr James Campbell,
and Mr Alexander Frolov. Mr Antonino
Craparotta has been appointed as secretary
of the Remuneration Committee. The
Remuneration Committee is authorised to
carry out its functions as described or provid-
ed for in the Articles and terms of reference
as well as any other functions as may, from
time to time, be delegated to it by the Board
of Directors. The role of the Remuneration
Committee is to determine and agree with
the Board the policy for the remuneration of
the Chairman, the Executive Directors and
other members of senior management
(including the design of short- and long-
term incentive arrangements). In addition,
the Remuneration Committee overseas the
operation of all of the Company’s stock
based incentive schemes.

Audit Committee

The Audit Committee consists of Mr Terry
Robinson and the Lord Daresbury. The
Audit Committee is authorised to carry out
its functions as described or provided for
in the Articles as well as any other func-
tions as may, from time to time, be dele-
gated to it by the Board of Directors relating
to such matters as the oversight of audit
functions, financial reporting and internal
control principles and the appointment,
compensation, retention and oversight of
the Company's independent auditors.

In order to achieve integrated control over the activities
of its operating facilities, Evraz established EvrazHolding

as a centralised management company. ”

Mr Pavel Tatyanin, CFO, Mr Andrei Teterkin,
Director for Development, and Mr Antonino
Craparotta, Secretary to the Board of
Directors. The Strategy Committee deter-
mines overall the Group’s strategy, super-
vises the existing asset base as well as the
future investment in growth assets. The
Committee is also responsible for technol-
ogy selection and technical development
of management and training.

Management of subsidiaries

In order to achieve integrated control over
the activities of its operating facilities,
Evraz established EvrazHolding as a cen-
tralised management company.

EvrazHolding exercises the managing
powers of a sole executive body of the
companies that it manages including
entering into transactions on behalf of
each company (within the limits provided
for in the legislation), operating their bank
accounts, and representing them before
judicial agencies.
various state and
Management is exercised by an officer of
EvrazHolding acting under a power of
attorney.
by
EvrazHolding are applied fully against its
operating expenses and reflected fully in
the appropriate line item of Evraz's conso-
lidated financial statements.

Payments

received

EvrazHolding. EvrazHolding seeks to create
a team of highly-qualified, talented and
hard-working personnel dedicated to the
resolution of technical, social and econom-
ic challenges. These objectives form the
basis for the criteria for Evraz's processes
for hiring personnel, paying workers and
motivating, training and developing per-
sonnel. The appointment of EvrazHolding
as a management company serves to cen-
tralise all management functions within a
single body, and facilitates the adoption of
standard operating and financial manage-
ment practices across all of Evraz's opera-
tions. The delegation of management
functions to EvrazHolding also serves to
improve the efficiency of management
activities, by reducing the number of trans-
actions entered into in the ordinary course
of business that are subject to the approval
of minority shareholders, for example
under the Russian Joint Stock Companies
law (in particular, transactions with other
subsidiaries of the Company).

The Board of Directors and, as the case
may be, the Remuneration Committee,
determines the strategies to be employed
by Evraz, and EvrazHolding implements
those strategies with respect to each com-
pany that it manages, subject to approval
by the boards of directors of such compa-
nies. Decisions by EvrazHolding are subject
to the corporate governance procedures
that have been adopted by the Board of
above.
Directors,
EvrazHolding is also currently establishing
standard procedures for the companies it
manages, including procedures related to
budgeting, the approval of investments
and capital expenditures and management
information systems.

discussed

Strategy Committee

The Strategy Committee consists of three
members of the Board of Directors,
Mr James Campbell, the Chairman of the
Committee, Mr Alexander Frolov, and
Mr Valery Khoroshkovsky, as well as

Although human resources have been his-
torically managed by each operating com-
pany, this function is gradually being cen-
tralised with respect to the Company's
Russian subsidiaries by EvrazHolding. The
Company's human resources policy for its
also managed by
subsidiaries

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Company’s result of operations and
prospects, its planned and committed cap-
ital expenditures, the availability and cost
of funds from external sources, the prac-
tice of other steel and mining businesses
and other relevant considerations.

Dividend policy

Evraz Group S.A. declared interim 2005
dividend for a total amount of euro equiv-
alent to US$200 million to the holders of
record as of 31 May 2005.

The Company expects to pay dividends
of approximately 25% of its consolidat-
ed annual net income on average
through the business cycle, as calculat-
ed under IFRS. However, the payment of
dividends by the Company is subject to,
the
among

considerations,

other

”

The Company has established a stock option plan for
employees and directors of Evraz. The granting of
options to participants in the plan may be made at the
discretion of the Board of Directors.

”

Remuneration of directors
and management

During the current financial year the
Remuneration Committee will be conduct-
ing a review of the remuneration policy for
senior executives to ensure that packages
are appropriately structured to be competi-
tive and provide an appropriate balance
between fixed pay and performance
linked pay and to ensure that long-term
incentives provide good alignment
between the interests of senior executives
and shareholders. The results of this
review together with a description of the
remuneration policy will be contained in
next year’s report and accounts.

The aggregate amount of remuneration

paid by Evraz to its management, includ-
ing the senior management of its sub-
sidiaries, as a group (62 individuals,
including Messrs. Abramov, Frolov and
Khoroshkovsky) during the year ended 31
December 2004 was approximately
US$37.9 million in salary and bonuses.

Stock option plan

The Company has established a stock
option plan for employees and directors of
Evraz. The granting of options to partici-
pants in the plan may be made at the dis-
cretion of the Board of Directors, which is
authorised to issue options giving each
holder of options under the first allocation
the right to subscribe for shares without
reserving a preferential right of subscrip-

tion to the existing shareholders. Grants of
shares pursuant to the plan may be made
from the Company's authorised but unis-
sued share capital and from the shares
that may be acquired by the Company
from time to time. The Company intends
that total grants of shares under the stock
option plan shall not exceed 5% of the
Company's issued share capital for three
years from the date of the IPO, and that
the exercise price of such options shall be
the price of shares, stated at the IPO.

Evraz does not have any stock option plans
with respect to shares of any of its sub-
sidiaries.

30
30

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004
Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Evraz is one of the largest vertically-integrated
steel and mining businesses with operations based
mainly in the Russian Federation.

• Evraz produced 13.7 million tonnes of crude steel in
2004, ranking it as the largest producer of steel and
steel products in Russia, the largest producer of long
products in Russia and among the 15 largest steel
producers in the world.

• Evraz also produces significant quantities of iron

ore, and is expanding into the coal sector.

• Most of Evraz's iron ore production is used in its

steel making operations.

Overview

Divisions

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The following represents the management’s analysis of the operational
and financial performance of Evraz Group and of the significant factors
that may affect the future financial and operating performance. This dis-
cussion should be read in conjunction with Evraz Group S.A.'s consolidat-
ed financial statements, the notes thereto.

All references to Evraz, Evraz Group, the Group, the Company, “we” or
“us” are references to Evraz Group S.A. and its consolidated subsidiaries,
unless otherwise indicated.

This section contains forward-looking statements that involve risks and
uncertainties. Evraz's actual results may differ materially from those dis-
cussed in such forward-looking statements as a result of various factors,
including those described under “Forward-looking statement” on page 51.

Evraz is one of the largest vertically-integrated steel and mining businesses with operations based
mainly in the Russian Federation. Evraz produced 13.7 million tonnes of crude steel in 2004, rank-
ing it as the largest producer of steel and steel products in Russia, the largest producer of long
products in Russia and among the fifteen largest steel producers in the world. Evraz also produces
significant quantities of iron ore, and is expanding into the coal sector. Most of Evraz's iron ore
production is used in its steel making operations.

Evraz's principal assets are its three steel plants: NTMK, ZapSib and NKMK; three iron ore mining
and processing facilities: KGOK, VGOK and Evrazruda; coal mining assets: Mine 12 and a green-
field coking coal mine, Neryungri Ugol; and trading and logistics assets. Evraz also owns an equi-
ty interest in Raspadskaya, a coking coal mine. Evraz's consolidated revenues were US$5,933,1 mil-
lion, and its net profit attributable to equity holders of the parent entity was US$1,179.6 million,
for the year ended 31 December 2004.

Evraz's business is divided into two main divisions:

• the steel division, comprising the production and sale of semi-finished and finished steel

products; vanadium slag; coke and coking products; and refractory products; and

• the mining division, comprising the production, enrichment and sale of iron ore and the
development of coking coal fields at Neryungri Ugol and, since the acquisition of Mine 12,
the production of coal.

The mining division does not meet the criteria of a reportable division under the IFRS, as the
majority of its revenues are earned in inter-divisional transactions. However, we have desig-
nated the mining division as a reportable division based on our future plans to develop Evraz's
mining business.

Other operations include management, logistics (including Nakhodka Sea Port) and support
activities.

Inter-divisional sales

Evraz is a vertically-integrated steel and mining group. Evraz's mining division supplied approxi-
mately 60% of the steel division's total requirements of iron ore in 2004 (72% including supplies
by KGOK prior to its acquisition in May 2004). The steel division supplies grinding balls and pit
props to the mining division for use in its day-to-day operations. We believe that the prices at
which products are sold between divisions are generally based on those at which they could be
sold to unrelated third parties and thus are in accordance with relevant Russian transfer pricing
rules. These transactions are eliminated as inter-company transactions for purposes of Evraz's
consolidated financial statements.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Operational developments

Reorganisation and Formation of the Company

Evraz Group S.A. was incorporated on 31 December 2004, under the laws of the Grand Duchy of
Luxembourg, to serve as the holding company for Evraz's assets. The Company holds its interests
in its subsidiaries indirectly, through its interest in Mastercroft. Mastercroft was established on 31
December 2002 as a holding company to consolidate certain steel production, mining and trading
entities then controlled by Crosland Limited, an entity under common control with Evraz. In 2003,
Crosland Limited's interests in these entities were transferred to Mastercroft.

Purchases of subsidiaries from parties under common control are accounted for using the
“uniting of interest method”, which is equivalent to a pooling of interests. The Company's con-
solidated financial statements, therefore, have been prepared on the basis that it existed for all
periods presented in such statements and as if it owned interests in companies then owned by
Mastercroft and by the entities from which Mastercroft acquired the interests.

Summary of Acquisitions

Evraz has sought to develop an integrated steel and mining business through the purchase of
undervalued assets that it believes offer significant upside potential, particularly as Evraz imple-
ments improvements in work practices and operational methods.

Recent acquisitions

• Raspadskaya. In March 2004, as a part of a joint venture agreement, Evraz acquired a 50%
ownership interest in Corber Enterprises Limited ("Corber"), which was a joint venture created
for the purpose of exercising joint control over the economic activities of Raspadskaya mine –
one of the largest coal mines in Russia, producing coking coal – and other subsidiaries of
Corber. Corber holds 72.03% of the ordinary shares in Raspadskaya. Evraz acquired its interest
for a total of US$139.7 million, including US$61.8 million in cash, the issuance of 6% interest-
bearing promissory notes with a nominal value of US$19.2 million due after 10 March 2006 and
a contribution of 19.15% of the ordinary shares in Raspadskaya. Corber acquired a further
4.20% interest in Raspadskaya during 2004 for US$5.5 million. Evraz's effective ownership
interest in Raspadskaya was 45.70% as of 31 December 2004.

• Neryungri Ugol. In April 2004, Evraz acquired 100% of Neryungri Ugol for RUR100,000
(US$4,000). Neryungri Ugol is a coking coal mine being developed by Evraz. Production from
Neryungri Ugol is expected to start in 2006. Evraz's effective ownership interest in Neryungri
Ugol was 95.83% as of 31 December 2004.

• Kachkanarsky Ore Mining-and-Processing Integrated Works. KGOK is an iron ore mining and
processing complex that produces sinter, pellets and concentrate from high-vanadium iron ore.
In May 2004, Evraz acquired 83.59% of the ordinary shares of KGOK for US$190.3 million and
purchased restructured debts with fair value of RUR597.0 million (US$20.6 million) at their
nominal value of RUR1,283.0 million (US$44.3 million). Evraz acquired further interests in
KGOK amounting to 14.04% of the ordinary shares during 2004 for a total of US$31.3 million.
Evraz's effective ownership interest in KGOK was 80.68% as of 31 December 2004.

Post balance sheet date acquisitions in 2005.

• Evrazruda. Evrazruda is an iron ore mining and processing complex that produces iron ore con-
centrate. In March 2005, Evraz acquired a 99.9% interest in Evrazruda for US$32 million from
entities under common control with Evraz and 0.10% interest from third parties for
US$32,000. This acquisition has resulted in Evrazruda being consolidated with Evraz effective
as of 31 December 2001 as it existed at such date, with acquisitions by Evrazruda subsequent
to 31 December 2001 being accounted for by Evraz in the same manner as by Evrazruda when
it made the acquisitions (i.e., generally on the basis of the purchase method). Evraz's effective
ownership interest in Evrazruda was 99.9% as of 31 March 2005.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Macroeconomic factors affecting results of operations

Change in the price of steel, iron ore and coal

The prices at which we can sell products of our steel division is the main driver of our revenues.
Favourable world economic conditions and an increase in worldwide steel consumption, mainly by
China, resulted in significant price increases and strength in the steel market which directly ben-
efited Evraz’s steel division. The following table illustrates the average price trends for Evraz's prin-
cipal products from 2002 through 2004 in both the Russian and non-CIS export markets:

% change
1st half 2002 to
2nd half 2004

231%
198%

64%
142%

188%

227%
171%
226%
194%

148%
216%

117%
96%

104%
206%
149%

144%
94%

Construction products
Rebars
Sections

Railway products
Rails
Wheels

Mining products
Grinding balls

Semi-finished products
Billets
Slabs
Pig Iron
Pipe blanks

Other steel products
Plates
Wire rod and rounds

Construction
Rebars
Sections

Semi-finished products
Billets
Slabs
Pig Iron

Other steel products
Plates
Wire rod and rounds

Notes:

2004

Year ended 31 December
2003

2002

2nd half

1st half
(US$ per tonne, except percentages)
Average Russian and CIS prices for Evraz's products 1

2nd half

1st half

2nd half

437
510

375
940

406

421
308
261
406

484
425

413
443

316
715

336

365
233
246
318

422
373

260
283

266
509

235

249
178
138
225

316
241

217
225

254
466

184

203
149
125
188

256
194

175
186

224
420

147

145
117
82
148

183
153

Average non-CIS export prices for Evraz's products 1

416
416

366
502
306

485
407

373
407

364
410
278

413
400

284
296

263
252
183

303
290

256
255

247
248
169

296
280

205
237

214
215
131

252
239

1st half

132
171

229
389

141

129
114
80
138

195
135

192
212

179
164
123

199
210

Average price data for the year ended 31 December 2004 is for sales by Ferrotrade Limited, and
for the years ended 31 December 2003 and 2002 is for sales by Ferrotrade & Co. The actual
amounts received by Evraz in respect of sales by Ferrotrade & Co. are less than the amounts pre-
sented here, since Ferrotrade & Co. acquired products from Evraz for resale but was not consoli-
dated into Evraz's consolidated financial statements.

The U.S. dollar-rouble exchange rate and inflation:

Evraz’s products are typically priced in roubles for Russian and CIS sales and in U.S. dollars for
international sales. Evraz’s direct costs, including raw materials, labour and transportation costs,
are largely incurred in roubles, while other costs, such as interest expense, are incurred in rou-
bles, U.S. dollars and euro. The mix of Evraz’s revenues and costs is such that appreciation in real
terms of the rouble against the U.S. dollar tends to result in an increase in Evraz’s costs relative
to its revenues, while depreciation of the rouble against the U.S. dollar in real terms tends to
result in a decrease in Evraz’s costs relative to its revenues.
In addition, nominal depreciation of the rouble against the U.S. dollar results in a decrease in the
reported U.S. dollar value of Evraz’s rouble-denominated assets (and liabilities) and nominal
appreciation of the rouble against the U.S. dollar results in an increase in the reported U.S. dollar
value of Evraz’s rouble-denominated assets (and liabilities). Moreover, nominal appreciation and
depreciation of the rouble against the U.S. dollar has a similar effect when the income statements

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

of Evraz’s Russian subsidiaries are translated into U.S. dollars in connection with the preparation
of Evraz’s consolidated financial statements.

While Evraz's revenues depend substantially on international prices for metallurgical products, its
costs are closely linked to domestic cost factors. Inflation has moderated in Russia during the past
five years and declined to 11.7% in 2004, but there are signs it may be increasing again. Over the
same period, however, prices for certain important raw materials, and for transportation and
energy, grew faster than the consumer price index. Nonetheless, in 2004 overall price trends were
generally positive, with steel prices growing faster than many relevant cost factors, including rail-
way transportation costs, natural gas prices, electricity costs and the general consumer price
index. During 2004 iron ore prices increased at a slower rate than steel prices, but coking coal
prices increased approximately in line with steel prices.

The table below presents changes in Russia's consumer price index, rouble to U.S. dollar exchange
rates, nominal and real exchange rate changes from 2002 through 2004:

Consumer Price Index, December to December change in RUR

Nominal RUR/US$ exchange rate, December to December change

Real RUR/US$ exchange rate, December to December change

Average RUR/US$ exchange rate for the period

RUR/US$ at the end of the period

2004

11.7%

6.1%

13.6%

28.82

27.75

2003

12.0%

7.9%

15.0%

30.69

29.45

2002

15.1%

(5.2%)

6.0%

31.35

31.78

Tax burden

The Russian government has initiated reforms to the tax system that have resulted in some
improvement in the tax climate. Many tax laws and related regulations were introduced in 2003
and previous years. These were not always clearly written, and were subject to varying interpreta-
tion and inconsistent enforcement.

In Russia instances of inconsistent opinions between local, regional and federal tax authorities are
not unusual. We believe Evraz has paid all taxes that are applicable. Where uncertainty exists,
Evraz has made provision for tax liabilities based on management's best estimates. Management
estimates that the amount of potential liabilities that could arise as a result of assertions current-
ly being made by tax authorities and that are not accrued in the accompanying financial state-
ments could be up to approximately US$26 million. The majority of these amounts relate to
Russian tax liability on defaulted payments by an export customer of KGOK prior to its acquisition
by Evraz. Moreover, as noted above, restructured taxes payable as at 31 December 2004 does not
include US$55.9 million that will be forgiven so long as Evraz complies with the payment terms of
the restructuring agreement and makes timely payments of its current tax obligations.

Weaknesses and changes in the Russian tax system, unlawful, selective or arbitrary Government
action could materially adversely affect Evraz's business.

Results of operations for the years ended 31 December 2004, 2003 and 2002
From 2002 through 2004, Evraz's consolidated revenues increased by 285% and its net profit
attributable to equity holders of the parent entity increased from US$5.9 million to US$1,179.6 mil-
lion. This increase was due mainly to:

• Improved prices for steel products in Russia and in export markets.

• The impact of acquisitions and start-ups. In the steel division, the start-up of NKMK in
October 2003 made a substantial contribution, as did the consolidation of Evraz's export
trading activities through Ferrotrade Limited in the same month. In the mining division, the
acquisition of VGOK in October 2002 and of KGOK in May 2004 had the greatest impact,
both enhancing Evraz's vertical integration and allowing for sales of iron ore to third parties.
The acquisition of Nakhodka Sea Port in February 2003 had a significant effect on Evraz's
other operations division.

• A significant increase in the volume of products sold, resulting mainly from acquisitions and

start-ups.

• A shift toward higher margin products, especially within the semi-finished steel products group,

where the focus is increasingly on slabs instead of billets.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

• A significant improvement in margins, as sales prices increased faster than costs. Costs grew
mainly as a result of acquisitions and inflation, which was moderating in Russia throughout the
period. While raw materials prices increased significantly, the growth in Evraz's own iron ore
production shielded it to a considerable extent (and the recent acquisitions of Evrazruda and
Mine 12 further reduced exposure in this area). In addition, the expansion of Evraz's mining
operations has enabled it to benefit from the favourable conditions in raw materials markets by
capturing additional margin through increased sales to third parties.

The following table sets forth Evraz's income statement data for the years ended 31 December
2004, 2003 and 2002 in absolute terms and as a percentage of revenues.

2004

Year ended 31 December
2003

Amount Percentage Amount Percentage
of revenues

of revenues

(‘000 US$, except percentages)

2002

Amount

Percentage
of revenues

Income statement data

Revenues 1

Cost of revenues

5,933,121

100.0%

2,167,989

100.0%

1,540,352

100.0%

(3,514,048)

(59.2)% (1,635,496)

(75.4)%

(1,353,392)

(87.9)%

Amortisation of negative goodwill

Gross profit

Selling and distribution costs

General and administrative expenses

28,012

2,447,085

(192,535)

(346,689)

Other operating income and expenses, net

(71,278)

Profit from operations

1,836,583

Non-operating income and expenses, net

(114,406)

Profit before tax

Income tax expense

Net profit

Net profit attributable to equity holders of
the parent entity

1,722,177

(377,289)

1,344,888

1,179,625

Net profit attributable to minority interests

165,263

0.5%

41.2%

(3.3)%

(5.8)%

(1.2)%

31.0%

(1.9)%

29.0%

(6.4)%

22.7%

19.9%

2.8%

26,271

558,764

(28,524)

(164,585)

(30,007)

335,648

(7,831)

327,817

(74,873)

252,944

204,982

47,962

1.2%

25.8%

(1.3)%

(7.6)%

(1.4)%

15.5%

(0.4)%

15.1%

(3.5)%

11.7%

9.5%

2.2%

17,855

204,815

(44,659)

(110,162)

2,859

52,853

1.2%

13.3%

(2.9)%

(7.2)%

0.2%

3.4%

(40,208)

(2.6)%

12,645

0.8%

(11,275)

(0.7)%

1,370

0.1%

5,934

0.4%

(4,564)

(0.3)%

Note:

1 Includes service revenues of US$138.2 million, US$128.5 million and US$65.1 million for the years
ended 31 December 2004, 2003 and 2002, respectively. Sales of services consist primarily of heat
and electricity supply and port, transportation and accounting services.

In the years ended 31 December 2004, 2003 and 2002, approximately 9%, 31% and 40%,
respectively, of Evraz's revenues were generated in transactions with related parties. In addition,
Evraz made significant purchases from related parties. See Note 14 to the Consolidated Financial
Statements.

Revenues

Evraz's consolidated revenues increased by 40.7% in 2003 to US$2,168.0 million and by 173.7% in
2004 to US$5,933.1 million. The following table presents Evraz's consolidated revenues by division
for 2004, 2003 and 2002.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Revenues by division

Steel division
To third parties
To mining division
To other operations
Total

Mining division
To third parties
To steel division
To other operations
Total

Other operations
To third parties
To steel division
To mining division
Total
Eliminations

Consolidated revenues
% from steel division
% from mining division
% from other operations

Year ended 31 December

2004 2003

2002

5,726,069
75,168
7,804
5,809,041

116,410
493,581
783
610,774

90,643
235,145
19,050
344,838
(831,532)

5,933,121
96.5%
2.0%
1.5%

(‘000 US$)

2,042,156
17,693
240
2,060,089

60,377
171,632
—
232,009

65,456
31,973
—
97,429
(221,538)

2,167,989
94.2%
2.8%
3.0%

1,512,077
4,142
0
1,516,219

13,605
25,095
—
38,700

14,670
—
—
14,670
(29,237)

1,540,352
98.2%
0.9%
1.0%

Steel division

Steel division revenues increased by 35.9% in 2003 to US$2,060.0 million and by 182% in 2004 to
US$5,809.0 million.

The increase in sales was primarily due to the following:

• favourable price conditions
• commencement of operations by NKMK in October 2003. Revenues of NKMK in 2004 and the
fourth quarter of 2003 amounted to US$1,034.2 million (18.0% of steel division revenues) and
US$152.1 million (7.0% of steel division revenues)

• consolidation of export trading activities through Ferrotrade Limited beginning in October

2003, resulting in the capture of additional trading margin

The following table shows the breakdown of Evraz's steel division sales in 2003 and 2004, not-
ing the contribution made by NKMK (excluding margins earned by Ferrotrade Limited and TH
EvrazHolding on sales of products produced at NKMK), which commenced operations in
October 2003.

2004

2003

Year ended 31 December

US$ million

Percentage of total US$ million

Percentage of total

Construction products 1
of which NKMK

Railway products 2
of which NKMK

Semi-finished products 3
of which NKMK

Other steel products 4
of which NKMK

Other products 5
of which NKMK

Notes:

1,835.5
249.3

615.9
255.8

2,188.3
269.2

515.9
196.9

653.4
62.9

31.6%
4.3%

10.6%
4.4%

37.7%
4.6%

8.9%
3.4%

11.3%
1.1%

794.5
45.9

267.5
39.1

647.7
21.0

183.6
34.1

166.9
14.7

38.6%
2.2%

13.0%
1.9%

31.4%
1.0%

8.9%
1.7%

8.1%
0.7%

1 Includes rebars, H-beams, channels and angles.
2 Includes rails and wheels.
3 Includes billets, slabs, pig iron, pipe blanks and blooms.
4 Includes grinding balls, mine uprights, round rolls, wire and plates.
5 Includes coke and coking products, refractory products and vanadium slag.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Revenues from sales of semi-finished products increased as a proportion of steel division sales from
31.4% in 2003 to 37.7% in 2004, while revenues from sales of construction and railway products
experienced corresponding declines as a proportion of steel division sales. The increased share of rev-
enues attributable to sales of semi-finished products reflects Evraz's increased emphasis on higher-
priced slabs as opposed to billets in 2004 as well as generally strong prices for slabs and other semi-
finished products in export markets. The decline in the share of revenues attributable to sales of con-
struction products reflects a slight decline in sales volume, resulting from an increased emphasis on
sales of semi-finished and other products in order to benefit from favourable export market condi-
tions. The share of revenues attributable to railway products declined in 2004 despite an increase in
railway product sales volume as a percentage of steel division sales volume. This reflected the rela-
tively slower growth in the prices of railway products, particularly rails, and the increased share of
rails in the sales volume of railway products and steel division products resulting from the consolida-
tion of NKMK for the full year 2004. The slower growth in the price of rails reflected in part the
negotiating power of Russian Railways, the largest purchaser of rails from Evraz.

Excluding inter-divisional sales, export sales amounted to approximately 46% of steel division rev-
enues in 2004, compared to 30% and 38% in 2003 and 2002, respectively. The increased share
of export revenues in 2004 was attributable to increased export volumes, particularly of semi-fin-
ished products in response to favourable conditions in Evraz's Northeast and East Asian export
markets, as well as to the additional trading margin resulting from the consolidation of export
activities through Ferrotrade Limited. The reduced share of export revenues in steel division rev-
enues in 2003 was attributable to a reduced share of exports in total sales volumes, due to man-
agement’s decision to take advantage of relatively more favourable domestic market conditions.

Mining division

Mining division revenue increased by 499.5% in 2003 to US$232.0 million and by 163.3% in
2004 to US$610.8 million. The increases in mining division revenues were due mainly to the fol-
lowing factors:

• price increases;
• additional processing capacity of VGOK which was commissioned in December 2003;
• KGOK acquisition in May 2004. Revenues attributable to KGOK in 2004 amounted to US$209.4

million (34.3% of mining division revenues); and

• prior to 2 October 2002, Evraz’s mining segment consisted of Evrazruda as well as of OOO
Abakan Mining Company and OOO Mundybash Processing Plant, both of which are subsidiaries
of ZapSib. Revenues of Evrazruda increased from US$21.6 million in 2002 (55.3% of mining
segment revenues) to US$156.2 million in 2003 (67.3% of mining segment revenues) and to
US$270.5 million in 2004 (44.3% of mining segment revenues).

Substantially all of Evraz's mining division sales are of iron ore, and Evraz has recently expanded
its iron ore business through the acquisition of Evrazruda in March 2005, which is consolidated
with effect from 31 December 2001 as described above. During the period under review, consoli-
dated coal assets consisted only of Neryungri Ugol, which had yet to begin production, but they
now also include Mine 12 (acquired in March 2005). Evraz also has a 47.7% interest in the
Raspadskaya coking coal mine, which is accounted for under the equity method.

Third party sales have increased even faster than inter-divisional sales, reflecting the strong mar-
ket demand for raw materials in 2004. Most third party sales in the mining division were to cus-
tomers in Russia.

Other operations

The division that contains Evraz's other operations increased revenues by 564.1% in 2003 to
U$97.4 million and by 253.9% in 2004 to US$344.8 million. This division's revenues were signifi-
cantly affected by acquisitions, specifically:

• Nakhodka Sea Port, which has been consolidated since 15 February 2003, provides seaport serv-
ices. Nakhodka Sea Port's sales amounted to US$40.1 million in 2004 and US$29.9 million in
2003, subsequent to its consolidation. Inter-divisional sales accounted for 38% of Nakhodka
Sea Port's revenues in 2004.

• Evraztrans, which commenced operations in the fourth quarter of 2003, acts as a railway for-
warder for Evraz's steel division. Evraztrans sales amounted to US$75.9 million in 2004 and
US$0.5 million in 2003. Evraztrans derives most of its revenues from inter-divisional sales and
benefited in 2004 from the acquisition of its own railway cars.

• Metallenergofinance ("MEF"), which has been consolidated since September 2003, supplies
electricity and heat to Evraz's steel and mining division and to third parties. MEF's sales amount-
ed to US$186.6 million in 2004 and US$48.0 million in 2003, subsequent to its consolidation.
MEF derives most of its revenues from inter-divisional sales and benefited in 2004 by supplying
electricity to NTMK, VGOK and KGOK.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

• OOO EvrazHolding ("EvrazHolding") provides management, accounting and other services to
NTMK, ZapSib and NKMK and other Russian subsidiaries of the Company, including from 1 April
2005 KGOK, Evrazruda and VGOK. EvrazHolding generated management fees of US$37.2 mil-
lion, US$25.8 million and US$15.6 million in 2004, 2003 and 2002, respectively, from the provi-
sion of management, accounting and other services to the Company's subsidiaries and to relat-
ed parties; 68.5%, 33.4% and 6.2% of these fees were derived from the Company's sub-
sidiaries in 2004, 2003 and 2002, respectively.

Third-party sales by the other operations division, consisting primarily of sales of energy by MEF,
provision of port services by Nakhodka Sea Port and provision of transportation and freight for-
warding services by Evraztrans, increased from US$14.7 million in 2002 to US$65.5 million in 2003
and US$108.9 million in 2004. The increase is attributable primarily to the consolidation of MEF
and Evraztrans for all of 2004, offset by a decline in third-party sales by EvrazHolding and a slight
decrease in third-party sales of port services by Nakhodka Sea Port.

Evraz's consolidated cost of revenues amounted to US$3,514.0 million, US$1,635.5 million and
US$1,353.4 million in 2004, 2003 and 2002, respectively. It comprised 59.2%, 75.4% and 87.9%
of consolidated revenues in 2004, 2003 and 2002, respectively. The table below sets forth cost of
revenues, amortisation of negative goodwill and gross profit by division for 2004, 2003 and 2002,
including as a percentage of division revenues.

Year ended 31 December

2004

2003

2002

Cost of revenues

Amount Percentage
of division

Percentage
of division
revenues revenues revenues

Amount Percentage
of division

Amount

Steel division
Cost of revenues
Raw materials
Transportation
Staff costs
Depreciation
Energy
Other 1
Amortisation of negative goodwill
Gross profit

Mining division
Cost of revenues
Raw materials
Staff costs
Depreciation
Other 2
Amortisation of negative goodwill
Gross profit

Other operations
Cost of revenues
Amortisation of negative goodwill
Gross profit

(‘000 US$, except percentages)

(3,585,595)
(2,469,218)
(355,177)
(325,087)
(144,922)
(272,810)
(18,381)
18,305
2,241,751

(448,187)
(234,364)
(73,572)
(27,085)
(113,166)
8,166
170,753

(61.7)%

0.3%
38.6%

(73.4)%

1.3%
28.0%

(1,560,153)
(919,812)
(39,756)
(186,869)
(126,566)
(165,791)
(121,359)
18,590
518,526

(75.7)% (1,334,207)
(728,166)
(10,000)
(199,787)
(150,224)
(139,316)
(106,714)
15,259
197,271

0.9%
25.2%

(218,790)
(171,289)
(16,958)
(7,336)
(23,207)
6,405
19,624

(94.3)%

2.8%
8.5%

(35,100)
(21,813)
(8,814)
(3,192)
(1,281)
3,164
6,764

(88.0)%

1.0%
13.0%

(90.7)%

8.2%
17.5%

(279,998)
1,541
66,381

(81.2)%
0.4%
19.2%

(66,956)
1,276
31,749

(68.7)%
1.3%
32.6%

(12,353)
—
2,317

(84.2)%
0%
15.8%

Unallocated
Amortisation of negative goodwill
Gross profit
Eliminations—cost of revenues
Eliminations—gross profit
Consolidated cost of revenues
Consolidated amortisation of negative goodwill
Consolidated gross profit

—
—
799,732
(31,800)
(3,514,048)
28,012
2,447,085

Notes:

—
—
210,403
(11,135)
(1,635,496)
26,271
558,764

(568)
(568)
28,268
(969)
(1,353,392)
17,855
204,815

1 Includes repairs and maintenance and auxiliary materials such as ferroalloys and refractory
products.
2 Includes energy, auxiliary materials and repairs and maintenance.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Steel division

Steel division cost of revenues increased by 16.9% in 2003 to US$1,560.6 million and by 129.8% in
2004 to US$3,585.6 million. Cost of revenues was 61.7%, 75.7% and 88.0% of steel division rev-
enues for 2004, 2003 and 2002, respectively.
The primary factors causing the increase in the steel division’s cost of revenues were:
• Start-up of NKMK. The cost of revenues of NKMK in 2004 and the fourth quarter of 2003
amounted to US$738.3 million (20.6% of steel division cost of revenues) and US$138.0 million
(8.9% of steel division cost of revenues), respectively.

• Raw materials costs increased by 26.3% in 2003 and by 168.4% in 2004. The increases were
primarily due to price increases for coking coal and iron ore, and volume increases resulting
mainly from the start-up of NKMK. On a consolidated basis, the impact of price increases for
iron ore was increasingly mitigated by purchases of these products from Evraz's mining division,
as discussed above.

• Transportation costs in 2003 and 2004 resulted from the transfer of trading activities to
Ferrotrade Limited (which commenced operations in October 2003). These costs relate to rail-
way tariffs for the transport of Evraz's steel products from the mills to the relevant ports, and
prior to the transfer of trading activities to Ferrotrade Limited, such costs had been incurred by
Ferrotrade & Co., a related party.

• Depreciation costs remained generally flat despite the start-up of NKMK, due to the relatively
low prices paid by NKMK for the assets it acquired and to the fact that significant capital
expenditures were either still in progress or completed only late in 2004, resulting in the post-
ponement of depreciation expense into subsequent periods.

• Energy costs increased by 19.0% in 2003 and by 64.6% in 2004 mainly due to the start-up of

operations at NKMK and increases in electricity and natural gas tariffs.

• Staff costs decreased by 6.5% in 2003 and increased by 74.0% in 2004. The decrease in 2003
resulted from the allocation of costs attributable to an increase in inventories at Ferrotrade
Limited. Wages and salaries increased in 2004 in line with inflation, and the acquisition of NKMK
contributed further to staff costs.

• Other costs increased by 13.7% in 2003 and decreased by 84.9% in 2004. The decrease in 2004

resulted from the transfer of activities to Ferrotrade Limited.

Mining division

Mining division cost of revenues increased by 523.3% in 2003 to US$218.8 million and by 104.8%
in 2004 to US$448.2 million. Raw materials costs increased by 685.3% in 2003 and by 36.8% in
2004, and staff costs increased by 92.4% in 2003 and by 333.8% in 2004. Depreciation increased
by 129.8% in 2003 and by 269.2% in 2004. Cost of revenues was 73.4%, 94.3% and 90.7% of
mining division revenues for 2004, 2003 and 2002, respectively.

Mining division cost of revenues was significantly influenced by the acquisitions of VGOK and
KGOK:

• VGOK's cost of revenues in 2004, 2003 and 2002 (subsequent to its acquisition in October
of that year) amounted to US$73.6 million, US$41.3 million and US$7.8 million, respectively.
Price increases for purchased iron ore processed into sinter at VGOK as well as an increase of
approximately 20% in the production of sinter in 2004 contributed to the growth of VGOK's
cost of revenues in 2004. Purchased iron ore accounted for approximately 25%, 23% and
14% of the total volume of iron ore used by VGOK in producing sinter in 2004, 2003 and
2002, respectively.

• KGOK's cost of revenues amounted to US$110.3 million following its acquisition in May 2004.
Energy costs included in this amount accounted for most of the increase in other costs of
revenues.

Other operations

Other operations’ cost of revenues increased by 442.0% in 2003 to US$67.0 million and by
318.2% in 2004 to US$280.0 million. Cost of revenues was 81.2%, 68.7% and 84.2% of other
operations revenues for 2004, 2003 and 2002, respectively.

EvrazHolding's cost of revenues amounted to US$12.4 million in 2002, nil in 2003 and US$6.4
million in 2004. All of EvrazHolding's costs that were classified as cost of revenues in 2002 were

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Selling and distribution costs

reclassified as general and administrative expenses in 2003 and most of such costs (76.6%)
were so reclassified in 2004. The costs reclassified in this way were those attributable to inter-
divisional sales. Staff costs account for most of EvrazHolding's costs.

Selling and distribution costs decreased by 36.0% in 2003 to US$28.5 million and increased by
575.0% in 2004 to US$192.5 million.

The main drivers of change in absolute terms were:

•

the start-up in the fourth quarter of 2003 of Ferrotrade Limited's export operations, which incur
freight costs and port charges (these costs were previously incurred by Ferrotrade & Co., a related
party);

•

the development of the distribution network of Evraz across Russia during 2003 and 2004;

• an increase in bad debt provisions from a benefit of US$3.7 million in 2003 to a provision of
US$13.1 million in 2004. The bad debt provision in 2004 related principally to obligations of Tagil
Energo, which purchases heat energy from NTMK;

• abolition of road users tax effective 1 January 2003, which is largely responsible for the decline

in selling and distribution costs from 2002 to 2003; and

•

increase of bad debt provisions in respect of VGOK. The majority of this amount was owed by
GBRU, a related party of Evraz.

General and administrative expenses

General and administrative expenses increased by 49.4% in 2003 to US$164.6 million and by
110.6% in 2004 to US$346.7 million.

General and administrative expenses were affected by the following:

•

staff costs increased by 32.4% in 2003 to US$39.3 million and by 131.5% in 2004 to
US$90.9 million due to increases in wages and salaries in line with inflation, bonuses paid
to certain managers and the start-up of NKMK;

taxes, other than on income, including property, land and local taxes, increased by 33.7% in
2003 to US$35.5 million and by 9.8% in 2004 to US$38.9 million. A significant part of the
increase in 2004 was attributable to the start-up of NKMK;

• management fees to EvrazHolding were US$18.5 million, US$3.7 million and US$0.7 million in
2004, 2003 and 2002, respectively. The increase in these fees in 2004 and 2003 is attributable
to increased activities at EvrazHolding, the start-up of operations at NKMK and increased fees
charged by EvrazHolding to offset its expenses;

• acquisitions of VGOK in October 2002 and KGOK in May 2004 and the acquisitions of addi-
tional operations by Evrazruda in 2004. Staff costs increased by 176.6% in 2003 to US$4.2
million and by 366.6% in 2004 to US$19.5 million. Taxes, other than on income increased
by 44.9% in 2003 to US$1.3 million and by 339.6% in 2004 to US$5.9 million; and

• other costs increased by 132.9% in 2003 to US$4.1 million and by 465.6% in 2004 to
US$23.3 million, resulting primarily from the acquisitions of VGOK and KGOK and the
growth of operations at Evrazruda.

Other operating income and expenses

Other operating expenses, net of other operating income, increased by US$25.1 million, from
income of US$3.9 million in 2003 to an expense of US$29.0 million and increased by 165.7% in
2004 to an expense of US$77.0 million. Other operating income and expenses consist primarily of
social and social infrastructure expenses, gain (loss) on disposal of property, plant and equip-
ment, impairment of assets and foreign exchange gain (loss). Social and social infrastructure
expenses, in part a legacy of the Soviet period, include such items as maintenance of medical cen-
tres, holiday apartments, employee holiday allowances, sponsorship of sports teams and events,
charitable donations and cash assistance to retired and former employees and veterans.

In the steel division, the increase in social and social infrastructure expenses is primarily attributa-
ble to the start-up of operations at Ferrotrade Limited and NKMK in 2003, as well as increased

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Profit from operations

expenditure at NTMK. Social and social infrastructure maintenance expenses at Ferrotrade Limited
consist of payments to the Ekaterinburg Governor's Fund and charities in Primorsky Krai (the
region in which Nakhodka Sea Port is located). The increase in social expenses for the mining divi-
sion resulted primarily from the acquisition of KGOK in May 2004.

Profit from operations increased by 535.1% in 2003 to US$335.6 million and by 447.2% in 2004
to US$1,836.6 million. Steel division profit from operations increased by 538.6% in 2003 to
US$335.3 million and by 419.7% in 2004 to US$1,742.3 million. Mining division profit from oper-
ations increased from a loss of US$0.7 million in 2002 to a profit of US$6.9 million in 2003 and to
a profit of US$91.8 million in 2004. Loss from operations in 2003 related to losses at Nakhodka
Sea Port.

Non-operating income and expenses

Non-operating income and expenses consist of interest income, interest expenses, gain/loss on
sale of investments, gain/loss on transactions with related parties, gain/loss on extinguishment
of debts, write-off of negative goodwill on new acquisitions and income/loss from associates.

Interest income increased by 440% in 2003 to US$9.2 million and by 4.3% in 2004 to US$9.6 mil-
lion. The significant increase in 2003 resulted from loans made to related parties in that year.

Interest expenses decreased by 3.8% in 2003 to US$55.4 million and increased by 90.4% in 2004
to US$105.5 million. The issuance of Eurobonds in 2003, as well as bank borrowings related to
capital expenditure, resulted in the increase in interest expense in 2004. The impact of the increase
in borrowings was offset by a decline in average interest rates for most categories of borrowings.
See Note 19 to the Consolidated Financial Statements.

Gain on financial assets represents gain on re-measurement of 19.145% of shares in Raspadkaya
to fair value, which was realised when these shares were contributed into Corber Enterprises, the
joint venture through which Evraz holds its interest in Raspadskaya.

Loss on extinguishment of debts in 2004 amounted to US$140.3 million and included the fol-
lowing:

• a US$127.5 million loss due to the early settlement in 2004 by Evraz of debts of NTMK and
ZapSib that had been rescheduled under settlement agreements entered into in connection
with the resolution of the bankruptcies of those companies; a gain had arisen in prior periods
in respect of these debts as a result of the discounting to present value when they were
rescheduled under the settlement agreements;

• a US$8.7 million loss due to a reversal of the gain that had arisen in a prior period when Evraz
obtained a long term loan from a related party with a below-market interest rate; the reversal
was due to the early settlement of these liabilities in 2004; and

• a US$4.1 million loss resulting from the extinguishment of other debts.

Share of profits (losses) from associates and joint ventures in 2002 and 2003 arose mainly from
losses at Nakhodka Sea Port prior to its acquisition, when it was consolidated under the equity
method. In addition, loss from associates in 2002 includes VGOK's losses prior to its acquisition in
October 2002, in the period during which VGOK was consolidated under the equity method.
Income from associates and a joint venture in 2004 mainly relates to income attributable to Evraz's
interest in Raspadskaya.

Income tax expense increased by 564.1% in 2003 to US$74.9 million and by 403.9% in 2004 to
US$377.3 million. Evraz's effective tax rate, which is defined as income tax expense as a percent-
age of profit before tax, decreased from 89.2% in 2002 to 22.8% in 2003, and decreased to
21.9% in 2004. The high effective tax rate in 2002 resulted mainly from net losses at ZapSib,
which could not be offset against profits of other subsidiaries. The decrease in the effective tax
rate from 2003 to 2004 reflects an increase in deferred income tax provided for undistributed
earnings of subsidiaries.

Current income tax charge amounted to US$444.0 million, US$111.7 million and US$21.3 million in
2004, 2003 and 2002, respectively. Deferred income tax benefits related to the origination and
reversal of temporary differences amounted to US$66.7 million, US$36.8 million and US$10.0 mil-
lion in 2004, 2003 and 2002, respectively.

Income tax expense

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Net profit attributable to equity holders of the parent entity

As a result of the factors noted above, Evraz's net profit attributable to equity holders of the par-
ent entity increased from US$5.9 million in 2002 to US$205.0 million in 2003 and to US$1,179.6
million in 2004.

Net profit attributable to minority interests

Net profit attributable to minority interests was US$(4.6) million in 2002, US$48.0 million in 2003
and US$165.3 million in 2004. Net profit attributable to minority interests consists mainly of the
share of minority shareholders in the profits of NTMK and ZapSib. The increased net profit attrib-
utable to minority interests from 2002 through 2004 resulted from the growing net profit of the
subsidiaries. Evraz's strategy is to reduce the share of minorities in its subsidiaries.

Liquidity and capital resources

Capital requirements

In addition to meeting its working capital requirements, Evraz expects that repayments of out-
standing debt, capital expenditures and acquisitions will represent its most significant uses of
funds for the next several years. The amount and timing of Evraz's obligations in respect of out-
standing debt is described under "Contractual obligations and commercial commitments".

Evraz's capital expenditure programme is focused on the reconstruction and modernisation of its
existing production facilities to reduce costs, improve process flows and expand the product
range. Evraz also plans to undertake capital expenditure in order to increase the share of higher
margin products it produces and sells.

Evraz has a long-term capital expenditure programme that extends through until 2010. In 2005,
Evraz intends to undertake capital expenditure of US$590 million, including US$504 million in
respect of its steel division and US$86 million in respect of its mining division. Evraz currently plans
additional capital expenditure of approximately US$675 million between 2006 and 2010, includ-
ing US$434 million for its steel division and US$241 million for its mining division. Our capital
expenditure plans are subject to change depending, among other things, on the evolution of mar-
ket conditions and the cost and availability of funds.

Capital resources

Historically, Evraz has relied on cash generated from operations and short-term debt to finance its
working capital and capital requirements, and management expects that these will continue to be
important sources of cash in the future. At the same time, Evraz intends increasingly to substitute
short-term debt for longer-term debt in order to better match its capital resources to its planned
expenditure. Evraz does not currently make use of off-balance sheet financing arrangements.

Evraz intends to finance its capital investment programme with a mix of cash flows from opera-
tions and financing activities. Evraz seeks long-term financing (with tenures of five to seven
years) both domestically and internationally, from banks and in the capital markets, as well as
short-term working capital loans that may be secured by pledges over plant and equipment.
Purchases of equipment from major European producers have been, and are expected in the
future to be, backed by European export credit agencies, such as Hermes (Germany), OeKB
(Austria), KUKE (Poland), SACE (Italy), ODL (Luxembourg), EximBanka SR (Slovakia) and
Finnvera (Finland).

Net cash provided by operating activities was US$946.5 million, US$42.6 million and US$117.3
million in the years ended 31 December 2004, 2003 and 2002, respectively.

The increase in net cash provided by operating activities in 2004 compared to 2003 was primarily
due to an increase in operating margins and acquisitions. The increase in operating margins, in
turn, was due mainly to substantial growth in prices for steel products in the international and
domestic markets. This increase was partially offset by increases in cash used for working capital,
including an increase of input VAT from US$125.8 million in 2003 to US$324.6 million in 2004.

Net cash used in investing activities was US$816.7 million, US$358.9 million and US$116.7 million
in the years ended 31 December 2004, 2003 and 2002, respectively. Substantially all the cash used
in investing activities related to purchases of property, plant and equipment, purchases of shares
in subsidiaries, and purchase of interest in a joint venture.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Net cash (used in) from financing activities was US$(36.3) million, US$462.4 million and US$7.0
million in the years ended 31 December 2004, 2003 and 2002, respectively. In 2003 and 2004,
Evraz issued U.S. dollar-denominated notes, the proceeds of which were used to finance capital
expenditures and repay short-term borrowings, as follows:

•

in September and December 2003, EvrazSecurities S.A. issued notes in the aggregate principal
amount of US$175 million. The notes bear interest of 8.875% per annum payable semi-annu-
ally and mature on 25 September 2006.

in August and September 2004, EvrazSecurities S.A. issued notes in the aggregate principal
amount of US$300 million. The notes bear interest of 10.875% per annum payable semi-annu-
ally and mature on 3 August 2009. Mastercroft, Ferrotrade Limited, ZapSib, NTMK and NKMK
jointly and severally guaranteed all amounts in respect of the notes, except that the liability of
ZapSib and NTMK is subject in each case to a limit of US$300 million. The covenants in these
notes are generally less restrictive than those in the notes issued in 2003, and generally permit
the payment of dividends by Mastercroft provided that it maintains a specified minimum con-
solidated net equity.

In 2003 and 2004 the most significant syndicated loan facilities Evraz obtained from internation-
al banks to finance its capital requirements included:

• on 18 December 2003, NTMK and ZapSib each entered into US$50 million loan agreements
with a syndicate of banks (Societe Generale, Commerzbank (Eurasija), Moscow Narodny Bank,
BNP Paribas, Ost-West Handelsbank AG, GarantiBank International N.V., Natexis Banques
Populaires). The loans were promptly drawn down and are to be repaid in twenty-five equal
monthly instalments from 18 December 2004 to 18 December 2006.

•

in December 2004, Evraz received a US$150 million syndicated loan from a group of interna-
tional banks. The loan was divided into two parts: a US$50 million six-year tranche ("Tranche
A") and a US$100 million five-year tranche ("Tranche B"). Tranche A bears interest at LIBOR plus
a margin of 3.25% per annum, and Tranche B bears interest at LIBOR plus a margin of 2.75%
per annum.

Other financing facilities historically used by Evraz include loans from Russian and international
banks, trade financing facilities, and vendor financing for equipment deliveries. All decisions
about financing are made by the Company, even though the ultimate borrowers will usually be
operating subsidiaries.

Liquidity

We have sufficient liquidity to support our current operations and meet our current debt obliga-
tions. As the table below illustrates, Evraz had estimated liquidity, defined as cash and cash equiv-
alents and amounts available under unrestricted credit facilities, of approximately US$563 million
as of 31 December 2004. In the unlikely event that Evraz were not able to refinance any of the
debt falling due in 2005, this liquidity position would be sufficient to make all debt principal
repayments for this year.

Estimated liquidity

Cash and cash equivalents 1

Amount available under credit facilities 2

Total estimated liquidity

Notes:

As of 31 December 2004
(US$ million)

293

270

563

1 Since 31 December 2004, Evraz has used or agreed to use cash in several ways other than in the
ordinary course of its business. On 13 January 2005 Mastercroft declared and subsequently paid
a dividend of US$131 million to holders of shares in Mastercroft prior to the formation of the
Company, and Evraz made payment of US$124 million for a 4.17% interest in Mastercroft, and
subject to the completion of corporate formalities, the Mastercroft shares are expected to be
transferred to Evraz on 2 June 2005. In addition, on 17 May 2005, Evraz agreed to acquire a 10.7%
interest in NTMK from an unaffiliated minority shareholder for US$215 million. In July 2005, Evraz
declared interim dividends of US$200 million for the first six month of 2005. On 11 August 2005,
Evraz acquired a 75% stake in Clama S.r.l., which owns 100% of Palini e Bertoli SpA, for cash con-
sideration of EUR61.0 million. In addition, Evraz expects to complete the acquisition of Vitkovice
Steel in November 2005, the acquisition price of which has been fixed at CZK7,050,000,000
(US$283.9 million as of June 2005). In June 2005, GDRs representing approximately 8.3% of
Company’s issued share capital were admitted to trading on the Official List of the London Stock
Exchange, and the sale of the GDRs raised US$422 million from new investors.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

2 Total amounts available under borrowing facilities amounted to approximately US$367.7 million
as of 31 December 2004. Amounts in excess of the total stated in this table consisted offacilities
tied to specific capital expenditures or specific other uses.

In December 2004, NTMK and ZapSib repaid most of the remaining portion of debt due to third
parties in respect of settlement agreements entered into in prior periods in connection with the
bankruptcies of those entities, and KGOK made a similar repayment in April 2005.
Management believes that the early retirement of this debt will improve Evraz's ability to attract
external financing.

Evraz's overall liquidity improved substantially over the past two years. Evraz's current ratio,
defined as current assets divided by current liabilities, increased from 0.64 as of 31 December
2002 to 1.76 as of 31 December 2004. Evraz's corporate treasury monitors the financial needs of
Evraz's various subsidiaries. The treasury has a variety of instruments at its disposal to ensure that
each subsidiary has sufficient liquidity to meet its obligations and capital requirements.

Contractual obligations and commercial commitments

The following table sets forth the amount of Evraz's obligations in respect of loans and borrow-
ings as of 31 December 2004 by period:

Obligations in respect of borrowings Total

Less than 1 year

1-2 years

2-5 years

(‘000 US$)

Short-term loans and borrowing

(including current portion of long-term borrowings)

Long-term loans and borrowings

Unamortised debt issue costs 1

Note:

529,951

799,762

(11,669)

1,318,044

529,951

—

290,209

467,002

—

More than
5 years

—

42,551

—

1 Unamortised debt issue costs represent commissions and arrangement costs paid by the
Company's subsidiaries in relation to the arrangement of long-term loans and the issuance of
notes.

As of 31 December 2004, 2003 and 2002, Evraz had equipment with a carrying value of
US$95.8 million, US$103.2 million and US$431.7 million, respectively, pledged as collateral
under loans to Evraz. In addition, Evraz had pledged finished goods with a carrying value of
US$339.2 million, US$178.6 million and US$30.2 million as of 31 December 2004, 2003 and
2002, respectively.

As of 31 December 2004, 2003 and 2002, Evraz had incurred liabilities in respect of post-employ-
ment benefits it provides to employees of certain of its subsidiaries pursuant to collective bar-
gaining agreements of US$53.4 million, US$30.7 million and US$19.9 million, respectively. These
amounts represent the present value of Evraz's defined benefit obligation less the fair value of
plan assets and adjusted for unrecognised actuarial gains and past service costs, discounted to
present value. Of the total liability as at 31 December 2004, approximately US$13.6 million relat-
ed to NTMK, US$19.1 million to ZapSib, US$7.1 million to NKMK, US$7.2 million to KGOK and
US$1.2 million to Nakhodka Sea Port.

Evraz also makes defined contributions to Russia's state pension, social insurance, medical
insurance and unemployment funds at the current statutory rates (approximately 34% as of
31 December 2004), based on gross salary payments. Evraz is only required to make these
contributions as they become due, and it does not retain any legal or constructive obligation
to pay future benefits. These contributions are expensed as incurred.

In addition, as at 31 December 2004 restructured taxes payable, such as social insurance taxes, road
users taxes, other taxes and tax-related fines and penalties, amounted to US$36.3 million, includ-
ing a current portion of US$13.0 million. The restructured taxes are payable in quarterly instalments
through 2011, with nominal amounts of US$14.3 million and US$15.1 million being payable in 2005
and 2006, respectively. The amount of restructured taxes payable as at 31 December 2004 does not
include US$55.9 million that will be forgiven so long as Evraz complies with the payment terms of
the restructuring agreements and makes timely payments of its current tax obligations. Evraz
believes that it has complied, and will continue to comply, with the payment terms of the restruc-
turing agreements and will continue to make timely payments of its current tax liabilities. See Note
21 to the Consolidated Financial Statements.

Evraz has signed contracts for the purchase of production equipment and construction works.

2005

2006-2009

2010

Total

Less: current portion

Total

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

As of 31 December 2004, the amount remaining to be paid under these contracts was
US$385.7 million.

Future minimum lease payments were as follows as at 31 December 2004:

Principal

4,688

21,319

4,342

30,349

(4,688)

25,661

Interest
(‘000 US$)

2,828

5,879

428

9,135

(2,828)

6,307

Total

7,516

27,198

4,770

39,484

(7,516)

31,968

Evraz is also involved in a number of social programmes aimed to support education, health care
and development of social infrastructure in the towns in which its assets are located, and in the
second half of 2005 plans to spend US$47.5 million under these programmes.

Evraz has also committed to the government of Kemerovo Region that it will reduce future envi-
ronmental pollution and contamination in accordance with an environmental protection pro-
gramme.

In order to implement this obligation, Evraz has committed to spend approximately US$50.0 mil-
lion from 2005 to 2015 to replace old machinery and equipment, resulting in a reduction of emis-
sions of pollutants.

Quantitative and qualitative disclosures about market risk

Overview

Evraz is exposed in the ordinary course of its business to risks related to changes in exchange rates,
interest rates, commodity prices and energy and transportation tariffs. Evraz does not currently
enter into hedging or forward contracts with respect to any of these risks, and does not current-
ly plan to enter into such arrangements.

Exchange and interest rate risk

Evraz reports in U.S. dollars. Evraz's Russian subsidiaries report in Russian roubles. Evraz sub-
sidiaries located in other countries report in U.S. dollars and euros.

The rouble is not a fully convertible currency outside the territory of the Russian Federation. Within
the Russian Federation, official exchange rates are determined daily by the Central Bank of the
Russian Federation (the "CBR"). Market rates may differ from the official rates but the differences
are, generally, within narrow parameters monitored by the CBR.

Evraz's products are typically priced in roubles for Russian and CIS sales and in U.S. dollars for
international sales. Evraz's direct costs, including raw materials, labour and transportation costs,
are largely incurred in roubles, while other costs, such as interest expenses, are incurred in roubles,
U.S. dollars and euros. The mix of Evraz's revenues and costs is such that appreciation in real terms
of the rouble against the U.S. dollar tends to result in an increase in Evraz's costs relative to its rev-
enues, while depreciation of the rouble against the U.S. dollar in real terms tends to result in a
decrease in Evraz's costs relative to its revenues. The rouble appreciated in real terms against the
U.S. dollar by 6.0% in 2002, 15.0% in 2003 and 13.6% in 2004, according to the CBR. However,
in recent years the effect of the real appreciation of the rouble against the U.S. dollar has been
more than offset by increased prices for Evraz's steel products, both in Russia and internationally.

In addition, nominal depreciation of the rouble against the U.S. dollar results in a decrease in the
reported U.S. dollar value of Evraz's rouble-denominated assets (and liabilities) and nominal
appreciation of the rouble against the U.S. dollar results in an increase in the reported U.S. dollar
value of Evraz's rouble-denominated assets (and liabilities). Moreover, nominal appreciation and
depreciation of the rouble against the U.S. dollar have a similar effect when the income state-
ments of Evraz's Russian subsidiaries are translated into U.S. dollars in connection with the prepa-
ration of Evraz's consolidated financial statements. The average exchange rate of the rouble
against the U.S. dollar depreciated by 7.0% in nominal terms during 2002, but appreciated by
2.2% and 6.5% in nominal terms in 2003 and 2004, respectively, according to the CBR.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The following table summarises Evraz's outstanding interest-bearing debt, including loans and
other borrowings, using the currency and interest rate method:

dollar-denominated

rouble-denominated

euro-denominated

Total

Total debt, of which
Fixed-rate debt
Variable-rate debt

1,102,992
576,106
526,886

(‘000 US$)

73,458
35,759
37,699

156,237
6,354
149,883

1,332,687
618,219
714,468

A hypothetical, instantaneous and simultaneous 10% appreciation of the rouble and euro against
the U.S. dollar as of 31 December 2004 would have resulted in an increase of approximately
US$23.0 million on borrowings denominated in roubles and euro held as at 31 December 2004.

Commodity Price Risk

Evraz's revenue is exposed to the market risk of price fluctuations related to the sale of its steel prod-
ucts. Prices for the steel products that Evraz sells both inside and outside of Russia are generally deter-
mined by market forces. These prices may be influenced by factors such as supply and demand, pro-
duction costs (including the costs of raw material inputs) and global and Russian economic growth.
The prices for the mined products that Evraz sells to third parties are also affected by supply and
demand and global and Russian economic growth. Adverse changes in any of these factors may
reduce the revenue that Evraz receives from the sale of its steel or mined products. Evraz's costs are
also exposed to fluctuations in prices for the purchase, processing and production of iron ore, coking
coal, ferroalloys and other raw material inputs. Evraz's exposure to fluctuations in the price of iron ore
and, as a result of the acquisition of Mine 12, coking coal, is limited by its ability to obtain these prod-
ucts from its own production facilities. Where Evraz obtains these products from internal sources, the
effect of price fluctuations is accounted for as an inter-divisional transfer and eliminated on consoli-
dation. In addition, increased prices for coking coal paid to Evraz's equity investee Raspadskaya are
partially reflected as an increase in Evraz's income from affiliates.

As Evraz expands the share of raw materials that it acquires from internal sources, its exposure to
commodity price risk associated with the purchase and sale decline. Evraz's ongoing process of verti-
cal integration, including most recently its acquisitions of KGOK in May 2004, and the acquisition of
Mine 12 in March 2005, as well as the expansion of Evrazruda are important elements in Evraz's efforts
to reduce its exposure to input commodity price risk. Evrazruda acquired in 2004 KuzGOK for
US$1,000, items of property plant and equipment of KuzGOK for US$8.1 million, and the production
complexes of OAO Sheregeshskoye Ore Deposit and Irbinskoye Ore Deposit for US$3.0 million and
US$3.1 million, respectively.

Tariff Risk

Evraz is also exposed to uncertainty with respect to the prices of the electricity and natural gas that
it consumes in producing steel and mining iron ore and coal. Prices for both electricity and natural
gas are currently below market prices in Western Europe and are regulated by the Government,
limiting Evraz's exposure to fluctuations in the cost of these products.

Currently, the Russian electricity sector is characterised by very limited competition and regulated
prices. Pricing policy is determined by the Federal Tariffs Service, a governmental agency authorised
to regulate prices for the power generated by regional electricity companies, power transmission,
dispatch services and interregional trade, and is influenced by regional energy commissions that are
authorised to regulate prices within a specific region. Power may also be purchased from the
Federal Wholesale Electricity Market ("FOREM"). Most sellers of power on the domestic market are
regional generation companies, and most participants in FOREM are regional generating companies
that seek to sell a power surplus to regional generating companies with supply deficits as well as
industrial companies granted special access to FOREM. From October 2003, participants in FOREM
may also purchase and sell limited volumes of power on the competitive sector of the wholesale
market operating on test basis, in which prices for energy are formed on an "offer-demand" basis.
Evraz's subsidiary MEF has been granted such access to FOREM.

In 2004, Evraz's Russian operations purchased approximately 7,903 million kWh of electricity, rep-
resenting approximately 92% of their needs, from local subsidiaries of UES, the government con-
trolled national holding company for the Russian power sector. Domestic electricity prices are reg-
ulated by the Russian government. The Government is currently in the early stages of implement-
ing a restructuring plan for the power sector aimed at introducing competition, liberalising the
wholesale electricity market and moving from regulated pricing to a market-based system by 2008.
Moreover, according to the Russian Energy Strategy approved by the Government in 2003, elec-
tricity tariffs for industrial users are to reach 3.2-3.6 US$ cents per kWh by 2006. In 2004, Evraz's
average cost of electricity was 2.7 US$ cents per kWh. Assuming a price of 3.6 US$ cents per kWh
in 2004, Evraz's Russian operations would have incurred approximately US$103 million in addition-
al costs. Further price increases for electricity may also occur in the future as the industry is restruc-
tured and controlled to a greater extent by the private sector.

Critical accounting policies

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Evraz's Russian operations also purchase significant amounts of natural gas, primarily for the pro-
duction of electricity and heat energy at Evraz's facilities, from subsidiaries of Gazprom. Gazprom
is a state-controlled company and the dominant producer and monopoly transporter of natural
gas within Russia. Domestic natural gas prices are regulated by the government, and have been
rising over the last few years. Evraz's average price for natural gas in 2004 was RUR1,020 per
thousand cubic metres in the fourth quarter of 2004, and increased by a further 6% effective
from 1 January 2005. Despite these recent price increases, natural gas prices in Russia remain sig-
nificantly below western European levels, helping to provide Evraz with a cost advantage over its
competitors. In May 2004, in connection with an agreement on Russia's potential accession to the
WTO, Russia and the EU agreed that Russia would raise domestic gas prices to US$37-42 per thou-
sand cubic metres by 2006 and to U.S.$49-57 per thousand cubic metres by 2010. Assuming a
price of US$42 per thousand cubic metres in 2004, Evraz's Russian operations would have incurred
approximately US$19 million in additional costs.

Evraz is also exposed to fluctuations in transportation costs. Transportation costs influence Evraz's
financial results directly as a component of raw material costs and the costs for transporting fin-
ished products to Nakhodka Sea Port or another designated off-take location. Though Evraz's cus-
tomers in Russia for steel and mined products generally pay transportation costs from the pro-
duction site to the delivery location, the prices that Evraz receives may be adversely affected by
transportation costs to the extent that Evraz must reduce the prices that it can charge customers
for its products in order to ensure that its products remain competitive with those of other pro-
ducers, who may be located closer to customers and therefore less subject to increases in trans-
portation costs. In recent years the Government has indexed railway tariffs in line with inflation,
and Evraz expects this policy to continue for the immediate future. Therefore, Evraz does not cur-
rently expect fluctuations in railway tariffs to have a significant impact on its margins.

Evraz's financial statements are prepared in accordance with International Financial Reporting
Standards. Accounting policies applied in the preparation of the IFRS financial statements are
described in Note 2 to the Consolidated Financial Statements. The application of certain of these
policies requires management to make assumptions and judgments that can significantly affect
the amounts reported in the financial statements. Management believes that the following are the
critical policies where the assumptions and judgments made may significantly affect the consoli-
dated financial statements.

Accounting for business combinations

Acquisitions of subsidiaries were accounted for under the purchase method of accounting except
for acquisitions made prior to the date of transition to IFRS, which were accounted for in accor-
dance with IFRS 1, First-time Adoption of International Financial Reporting Standards.

In acquisitions prior to the date of transition to IFRS, which for Evraz is 31 December 2001, Evraz
adjusted the carrying amounts of the subsidiaries' assets and liabilities to the amounts that IFRS
would require in the separate subsidiaries' balance sheets. The deemed cost of goodwill/negative
goodwill was determined as the difference at the date of transition to IFRS between: (i) the par-
ent's interest in those adjusted carrying amounts; and (ii) the cost in the parent's separate finan-
cial statements of its investment in the subsidiary.

In the period from 1 January 2002 to 30 March 2004, in accordance with IAS 22, Business
Combinations, identifiable assets and liabilities acquired in business combinations were measured
initially at the aggregate of: (i) the fair value of the identifiable assets and liabilities acquired as at
the date of acquisition to the extent of the acquirer's interest obtained in the acquisition; and (ii)
the minority's proportion of the pre-acquisition carrying amounts of the identifiable assets and
liabilities of the subsidiary.

Beginning 31 March 2004, in accordance with IFRS 3, Business Combinations, identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are measured ini-
tially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The accounting for business combinations under the purchase method is complicated and involves
the use of significant judgment. The excess of purchase price over the fair value of Evraz's share
of identifiable net assets is recorded as goodwill. If the cost of the acquisition is less than the fair
value of Evraz's share of identifiable net assets of the subsidiary acquired the difference is either
recorded on the balance sheet as negative goodwill (for business combinations for which the
agreement date is prior to 31 March 2004) or recognised directly in the income statement (for
business combinations for which the agreement date is on or after 31 March 2004).

Determining the fair values of the assets and liabilities involves the use of judgment, particularly

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

in relation to the property, plant and equipment since the fair market value of the unique produc-
tion complexes do not have fair values that are readily determinable. Different techniques may be
used to determine fair values, including market prices, where available, appraisals, comparisons to
transactions for similar assets and liabilities and present value of estimated future cash flows,
among others. Since these estimates involve the use of significant judgment, they can change as
new information becomes available. Evraz uses all available information to assess the fair value of
the assets acquired through business combinations and, for major business acquisitions, typically
engages an outside appraisal firm to assist in the fair value determination of the acquired long-
lived assets.

Purchases of subsidiaries from entities under common control are accounted for using the uniting
of interest method. The assets and liabilities of the subsidiary transferred under common control
are recorded at the historical cost of the predecessor. The differences between the total book
value of net assets, including the predecessor's goodwill, and the consideration paid is accounted
for as an adjustment to the shareholders' equity.

Investments in associates are accounted for by the equity method of accounting and are initially
recognised at cost including goodwill. Subsequent changes in the carrying value reflect the post
acquisition changes in Evraz's share of net assets of the associate. Evraz's share of its associates'
profits or losses is recognised in the income statement and its share of movements in reserves is
recognised in equity. When Evraz's share of losses in an associate equals or exceeds its interest in
the associate Evraz does not recognise further losses, unless Evraz is obligated to make further
payments to, or on behalf of, the associate.

Interest in a joint venture is accounted for under the equity method of accounting whereby they
are initially recorded at cost and adjusted thereafter for post-acquisition changes in the
Company's share of net assets of the joint ventures. The income statement reflects the Company's
share of the results of operations of the joint venture.

Treatment of negative goodwill

Negative goodwill arising in business combinations that occurred prior to 31 March 2004 is recog-
nised if the cost of acquisition is less than the fair value of identifiable net assets of the acquired
entities. For agreements dated on or after 31 March 2004, any excess of the net fair values of the
identifiable assets, liabilities and contingent liabilities of the acquired entities over the cost of the
acquisition is recognised as income immediately.

Mineral licenses and long-life mining assets

Generally, Evraz's mining licenses and other operating permits related to the mining activity
require certain actions to be taken by Evraz in the abandonment of these operations after pro-
duction has ceased. Evraz's estimates of future abandonment costs consider present regulatory or
license requirements and are based upon management's experience of the costs and requirement
of such activities. Considerable judgment is required in forecasting future abandonment costs.

Provisions for site restoration costs are capitalised in mining assets within property, plant and
equipment.

Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the
Company and the revenue can be reliably measured. Generally, export revenues are recognised
when goods are delivered to the port of shipment and loaded to vessels. Domestic revenues are
recognised in accordance with individual contracts with the buyers, generally when title passes to
the buyer at railway stations at steel plant locations.

When goods are sold or services are rendered in exchange for dissimilar goods or services, the rev-
enue is measured at the fair value of the goods or services received, adjusted by the amount of
any cash or cash equivalents transferred. When the fair value of the goods or services received
cannot be measured reliably, the revenue is measured at the fair value of the goods or services
given up, adjusted by the amount of any cash or cash equivalents transferred.

Useful lives of property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation.

The following factors are considered in determining the useful life of an asset:

(a)

the expected usage of the asset by the enterprise;

(b)

the expected physical wear and tear;

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

(c)

technical obsolescence arising from changes or improvements in production, or from a
change in the market demand for the product or service output of the asset; and

(d)

legal or similar limits on the use of the asset, such as the expiry dates of related leases.

The estimation of the useful life of an item of property, plant and equipment is a matter of man-
agement judgment based on the experience of the enterprise with similar assets.

Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as
follows:

Buildings and constructions

Machinery and equipment

Transport and motor vehicles

Other assets

15-60 years

4-45 years

7-20 years

3-15 years

Land is not depreciated.

The depreciation policy for depreciable leased assets is consistent with that for depreciable assets,
which are owned. If there is no reasonable certainty that the Company will obtain ownership by
the end of the lease term, the asset is fully depreciated over the shorter of the lease term or its
useful life.

Accounts receivable

Accounts receivable are recognised and carried at original invoice amount less an allowance for
any uncollectible amounts. An estimate for doubtful debts is made when collection of the full
amount is no longer probable. Bad debts are written off when identified.

Significant judgment is used to estimate uncollectible amounts. In estimating uncollectible
amounts factors including current overall economic conditions, industry-specific economic condi-
tions, historical and unanticipated customer performance are considered. Changes in the econo-
my, industry, or specific customer conditions may necessitate adjustments to the allowance for
doubtful accounts recorded in the consolidated financial statements.

Inventories

Inventories are valued at the lower of cost and net realisable value.

Costs are accounted for on a weighted average basis and include expenditures incurred in acquir-
ing inventories and bringing them to their existing locations and conditions. The cost of finished
goods and work in progress includes an appropriate share of production overheads based on nor-
mal operating capacity but excluding borrowing costs.

Net realisable value is the estimated selling price in the ordinary course of business, less estimat-
ed costs of completion and estimated costs necessary to make the sale.

As a part of the estimate, inventory balances are reviewed to identify slow moving and obsolete
inventories. The identification process includes historical performance of the inventory, current
operational plans for the inventory, as well as industry and current specific trends.

Deferred income taxes

Deferred income tax is provided for, using the liability method, on all temporary differences at the
balance sheet date between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. This occurs except where the deferred income tax arises from good-
will amortisation or the initial recognition of an asset or liability in a transaction that is not a busi-
ness combination and, at the time of the transaction, affects neither the accounting profit nor
taxable profit or loss.

Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilised. The estimation of that probability includes judgments based on the expect-
ed performance.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates and tax laws that have
been enacted or substantively enacted at the balance sheet date.

Post-employment benefits

In addition to defined contributions to Russian Federation state pension, social insurance, medical
insurance and unemployment funds at statutory rates in force, the Company's subsidiaries pro-
vide pensions and other post-employment benefits to their employees in accordance with collec-
tive bargaining agreements. In addition, Nakhodka Sea Port operates a separately administered
defined benefit pension scheme. The entitlement to these benefits is usually conditional on the
employee remaining in service up to retirement age, the completion of a minimum service period
and the amount of the benefits stipulated in the collective bargaining agreements.

The liability recognised in the balance sheet in respect of post-employment benefits is the present
value of the defined benefit obligation at the balance sheet date less the fair value of the plan
assets, together with adjustments for unrecognised actuarial gains or losses and past service costs.
The defined benefit obligation is calculated annually using the projected unit credit method. The
present value of the benefits is determined by discounting the estimated future cash outflows
using interest rates of high-quality government bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating to the terms of the
related obligations.

Actuarial gains and losses are recognised as income or expenses when the cumulative unrecog-
nised actuarial gains or losses for each individual plan exceed 10% of the higher of defined bene-
fit obligation and the fair value of plan assets. These gains or losses are recognised over the
expected average remaining working lives of the employees participating in the plan.

Litigation, claims and assessments

Evraz is subject to various lawsuits, claims and proceedings related to matters incidental to its busi-
ness. Accruals of probable cash outflows have been made based on an assessment of a combina-
tion of litigation and settlement strategies. It is possible that results of operations in any future
period could be materially affected by changes in assumptions or by the effectiveness of these
strategies.

Evraz records liabilities for potential tax deficiencies. These liabilities are based on management's
judgment of the risk of loss. In the event that Evraz were to determine that tax-related items
would not be considered deficiencies or that items previously not considered to be potential defi-
ciencies could be considered as potential tax deficiencies (as a result of an audit, tax ruling or
other positions or authority) an adjustment to the liability would be recorded through income in
the period such determination was made.

Developments in the trading environment

Evraz's trading environment in the first quarter of 2005 generally remained positive. Each of
Evraz's steel plants experienced growth in revenue in the first quarter of 2005 as compared to the
first quarter of 2004, reflecting generally stronger steel product prices in the first quarter of 2005
compared to the first quarter of 2004.

Performance at Evraz's steel plants in the first quarter of 2005 was positively affected by a num-
ber of factors including a significant increase in slab volumes resulting from the commissioning of
additional slab production capacity at NTMK during 2004. Increased iron ore and coking coal input
prices had a negative affect. Other cost increases resulted from increases in electricity and natu-
ral gas tariffs. As compared to the fourth quarter of 2004, in the first quarter of 2005, Zapsib and
NKMK experienced a decline in profit from operations, due largely to weaker markets for their
principal products, while NTMK exhibited overall growth in profit from operations. Evraz's mining
operations benefited from stronger raw material prices. Ferrotrade Limited also experienced
increased revenues in the first quarter of 2005 as compared to the fourth quarter of 2004, which
were offset in part by increased costs of purchasing steel from Evraz's plants and increased trans-
portation costs.

Steel product sales were negatively affected in early 2005 by several factors, including weakness
in demand for construction products largely due to the seasonal effects of lower construction
activity in the winter months and a relatively long winter in Russia, a weakening of export slab and

Trend information

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

billet prices as compared to the fourth quarter of 2004 and increased competition in Russia for
some of Evraz's products as a result of seasonal increases in imports from Ukraine, offset in part
by generally more favourable market conditions for railway products.

Operational outlook

Evraz's future revenues will be primarily determined by the steel price environment. However,
Evraz's investment plans, which are targeted to increase operational efficiency, will enable a shift
in product mix towards higher margin products as well as result in a moderate increase in output.
These improvements are likely to have a positive effect on Evraz's operational result. For example,
the premium of slab prices over billet prices has increased to nearly US$170 per tonne in 2004 and
early 2005, in comparison to an average of approximately US$10 per tonne in recent years. Evraz
expects its total steel production to increase by approximately 10% by 2007 as a result of the re-
commissioning of the third blast furnace of ZapSib in May 2005, enabling the utilisation of cur-
rently excess production capacity.

Inventories were higher at the end of 2004 as a result of higher volumes of finished products and
increased prices, both for raw materials and steel products. In particular, Ferrotrade had as inven-
tory approximately 200,000 tonnes of billets for export market (left-over from 2003). Evraz does
not expect this trend of inventory accumulation to continue in the future.

Most of Evraz's investment programmes aim to increase the efficiency of its production facilities
and to reduce the cost of production per tonne. Evraz's mining division, including Evrazruda, sup-
plies approximately 73% of the steel division’s iron ore requirements. Evraz's requirements for
coking coal can be fully covered by purchases from affiliated parties, including Raspadskaya,
which is accounted for under the equity method. At NTMK, investment into expansion of power-
generation capacity is planned to reduce significantly NTMK's dependence on external sources of
electricity by 2007. These factors are expected to help Evraz to limit the impact of increasing costs
of raw materials, thereby helping to keep its production cost per tonne of steel relatively stable.

Evraz expects other domestic cost factors, such as salaries, construction materials and natural gas,
to continue increasing due to Russian domestic inflation.

This management analysis and discussion includes ‘‘forward-looking statements’’, which include
all statements other than statements of historical facts, including, without limitation, any state-
ments preceded by, followed by or that include the words ‘‘targets’’, ‘‘believes’’, ‘‘expects’’,
‘‘aims’’, ‘‘intends’’, ‘‘will’’, ‘‘may’’, ‘‘anticipates’’, ‘‘would’’, ‘‘could’’ or similar expressions or the
negative thereof. Such forward-looking statements involve known and unknown risks, uncertain-
ties and other important factors beyond the Company’s control that could cause the actual results,
performance or achievements of the Company to be materially different from future results, per-
formance or achievements expressed or implied by such forward-looking statements. Such for-
ward-looking statements are based on numerous assumptions regarding the Company’s present
and future business strategies and the environment in which the Company will operate in the
future. Among the important factors that could cause the Company’s actual results, performance
or achievements to differ materially from those expressed in such forward-looking statements
include those in ‘‘Management’s discussion and analysis of financial condition and results of ope-
rations’’ and elsewhere in this Annual Report. These forward-looking statements speak only as at
the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company’s expectations with regard thereto or any change in events,
conditions or circumstances on which any such statements are based.

Forward-looking statements

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2004

Report of Independent Auditors

The Shareholders and Board of Directors
Evraz Group S.A.

We have audited the accompanying consolidated balance sheets of Evraz Group
S.A. (the “Group”) as of December 31, 2004, 2003 and 2002 and the related con-
solidated statements of income, changes in equity and cash flows for the years
then ended. These financial statements are the responsibility of the Group's mana-
gement. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with International Standards on Auditing
issued by the International Federation of Accountants. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a rea-
sonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above give a true
and fair view of the consolidated financial position of the Group as of December
31, 2004, 2003 and 2002, and of the consolidated results of its operations and its
cash flows for the years then ended in accordance with International Financial
Reporting Standards.

As discussed in Note 2, the consolidated financial statements authorised for
issue by the directors of Evraz Group S.A. on April 25, 2005 have been revised to
reflect the acquisition of OAO Evrazruda in March 2005 in a transaction with an
entity under common control with the Group, which has been accounted for in
the accompanying consolidated financial statements using the pooling of inter-
ests method to present the consolidated financial statements of the Group as if
that transfer had occurred from the beginning of the earliest period presented.

Without qualifying our opinion, we draw attention to Note 1 to the consolidat-
ed financial statements. A significant part of the Group's transactions were
made with related parties.
October 12, 2005

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Evraz Group S.A.
Consolidated Income Statements
(In thousands of US dollars, except for per share information)

Revenue

Sale of goods

Rendering of services

Cost of revenue

Amortisation of negative goodwill

Gross profit

Selling and distribution costs

General and administrative expenses

Social and social infrastructure maintenance expenses

Loss on disposal of property, plant and equipment

Impairment of assets

Foreign exchange gains/(losses), net

Gain on net monetary position

Other operating income/(expenses), net

Profit from operations

Interest income

Interest expense

Notes

2004

2003

2002

Year ended December 31,

$5,794,879

$2,039,461

138,242

128,528

5,933,121

2,167,989

$1,475,215

65,137

1,540,352

(3,514,048)

(1,635,496)

(1,353,392)

28,012

2,447,085

(192,535)

26,271

558,764

(28,524)

(346,689)

(164,585)

(47,314)

(11,011)

(1,366)

1,152

—

(12,739)

(25,975)

(15,438)

(5,499)

5,678

—

11,227

1,836,583

335,648

9,639

9,245

17,855

204,815

(44,659)

(110,162)

(28,582)

(15,068)

(1,919)

(14,984)

62,681

731

52,853

1,712

(105,460)

(55,387)

(57,559)

Share of profits/(losses) of associates and a joint venture

(Loss)/gain on extinguishment of debts

14,20,22,26

Net trading gain from a related party

Gain on financial assets

Loss on sale of minority interest

Excess of interest in the net fair value

of acquiree's identifiable assets, liabilities

and contingent liabilities over the cost of acquisition

Other non-operating gain, net

Profit before tax

Income tax expense

Net profit

Attributable to:

Equity holders of the parent entity

Minority interests

Earnings per share attributable to equity holders

43,037

(140,321)

—

57,189

(34,885)

53,963

2,432

1,722,177

(377,289)

(121)

12,065

24,433

—

1,934

327,817

(74,873)

$1,344,888

$252,944

$1,179,625

$204,982

165,263

47,962

$1,344,888

$252,944

(663)

16,302

—

12,645

(11,275)

$1,370

$5,934

(4,564)

$1,370

of the parent entity, basic and diluted, US dollars

$11.00

$1.91

$0.06

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Evraz Group S.A.

Consolidated Balance Sheets

(In thousands of US dollars)

ASSETS

Non-current assets

Property, plant and equipment, net

Negative goodwill, net

Investment in a joint venture

Other long-term investments

Restricted deposits at banks

Receivables from related parties

Other non-current assets

Current assets

Inventories

Trade and other receivables, net

Prepayments

Loans receivable

Receivables from related parties

Loans receivable from related parties

Taxes receivable

Short-term investments and notes receivable

Restricted deposits at banks

Cash and cash equivalents

Total assets

EQUITY AND LIABILITIES

Equity

Parent shareholders' equity

Issued capital

Additional paid-in capital

Unrealised gain on financial assets

Accumulated profits

Translation difference

Minority interests

Non-current liabilities

Long-term loans

Liabilities under the Settlement Agreements

Restructured taxes payable

Promissory notes payable

Loans payable to related parties

Deferred income tax liabilities

Finance lease liabilities

Post-employment benefits

Provisions

Notes 2004 2003

2002

December 31,

$2,398,929

(362,612)

194,712

8,644

8,570

406

9,245

$1,349,838

(348,674)

$1,174,382

(340,531)

—

9,869

18,122

—

14,916

—

36,390

—

1,011

4,828

2,257,894

1,044,071

876,080

807,819

285,747

79,801

7,959

85,110

4,206

397,533

21,804

12,441

292,947

1,995,367

484,312

80,227

43,189

2,474

139,325

16,958

149,032

71,718

4,850

195,681

1,187,766

121,752

42,368

20,789

2,680

31,151

10,611

62,841

11,037

—

43,001

346,230

$4,253,261

$2,231,837

$1,222,310

$42

319,177

—

1,126,070

163,755

1,609,044

357,579

1,966,623

$138,935

1,003

948

156,042

69,661

366,589

192,540

559,129

788,093

354,046

4,224

23,259

20,220

—

214,481

25,661

53,381

20,581

39,413

26,000

576

92,521

155,170

14,434

30,699

13,740

$—

1,003

—

(24,582)

19,691

(3,888)

223,214

219,326

34,257

58,098

29,064

5,353

49,555

180,139

11,489

19,922

15,544

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Notes

2004

988

1,150,888

227,935

55,189

529,951

69,809

47,997

197,721

—

4,688

2,416

December 31,

2003

65,272

791,871

189,140

26,206

228,244

258,379

35,253

98,873

19,583

5,251

19,908

—

2002

62,331

465,752

115,731

21,758

87,303

158,296

18,102

86,444

29,697

2,000

17,901

—

1,135,750

880,837

537,232

$4,253,261

$2,231,837

$1,222,310

Other long-term liabilities

Current liabilities

Trade and other payables

Advances from customers

Short-term loans and current portion of long-term loans

Payables to related parties

Short-term loans from related parties

Taxes payable

Current portion of liabilities under the Settlement Agreements

Current portion of finance lease liabilities

Current portion of other long-term liabilities

Dividends payable

Total equity and liabilities

Evraz Group S.A.
Consolidated Cash Flow Statements
(In thousands of US dollars)

Cash flows from operating activities

Net profit

Adjustments to reconcile net profit to net cash provided by operating activities:

Amortisation of negative goodwill (Note 4)

Depreciation, depletion and amortisation (Note 5)

Deferred income tax benefit (Note 6)

Loss on disposal of property, plant and equipment

Impairment of assets

Loss/(gain) on extinguishment of debts (Notes 14, 20, 22, 26)

Loss on sale of minority interest (Note 18)

Foreign exchange (gains)/losses

Share of (profits)/losses from associates and a joint venture

Excess of interest in the net fair value of acquiree's identifiable

assets, liabilities and contingent liabilities over the cost of acquisition

Gain on financial assets (Note 5)

Other non-operating gain

Interest income

Interest expense

Net trading gain from a related party

Gain on net monetary position

Bad debt expense

Changes in operating assets and liabilities:

Inventories

Year ended December 31,

2004

2003

2002

$1,344,888

$252,944

$1,370

(28,012)

196,302

(66,749)

11,011

1,366

140,321

34,885

(1,152)

(43,037)

(53,963)

(57,189)

(2,432)

(9,639)

105,460

—

23,815

1,595,875

(26,271)

145,872

(36,779)

15,438

5,499

(17,855)

156,774

(9,991)

15,068

1,919

(12,065)

(16,302)

—

(5,678)

121

—

(1,934)

(9,245)

55,387

(24,433)

—

14,984

663

—

(1,712)

57,559

—

(62,681)

4,057

362,913

11,220

151,016

(277,068)

(321,952)

15,934

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Year ended December 31,

2004

2003

2002

Trade and other receivables

Prepayments

Receivables from / payables to related parties

Taxes receivable

Other assets

Trade and other payables

Advances from customers

Taxes payable

Other liabilities

Net cash flows from operating activities

Cash flows from investing activities

Issuance of short-term loans receivable to related parties

Proceeds from repayment of short-term loans issued to related parties

Issuance of long-term loans receivable to related parties

Issuance of short-term loans receivable

Proceeds from repayment of short-term loans receivable

Issuance of long-term loans receivable

Purchases of shares in subsidiaries, net of cash acquired

Purchases of minority interests

Purchase of interest in a joint venture

Restricted deposits at banks

Short-term deposits at banks

Purchases of property, plant and equipment

Proceeds from disposal of property, plant and equipment

Payments to acquire equity of other companies

Proceeds from sales of equity of other companies

Payments to acquire debt instruments of other companies

Proceeds from sale/redemption of debt instruments of other companies

(223,086)

(29,978)

(3,647)

(198,075)

298

(9,206)

26,778

57,441

7,130

946,462

(4,553)

14,833

(1,177)

(2,921)

4,585

(1,057)

(224,820)

(47,443)

(61,800)

5,601

6,867

(533,951)

3,577

(2,120)

1,608

(9,629)

35,698

(69,062)

(25,924)

94,805

(77,056)

(11,225)

60,974

3,816

15,946

9,323

42,558

(20,184)

—

(431)

634

—

(90,030)

—

(21,979)

(10,719)

(219,627)

1,122

(4,921)

19,690

(52,773)

40,325

(18,422)

(12,102)

8,900

(28,256)

—

(37,119)

19,452

16,787

1,091

117,281

(6,098)

2,339

—

(20,850)

16,922

—

(13,197)

—

(9,307)

(75,075)

1,277

(16,656)

6,569

(19,075)

16,427

Net cash flows used in investing activities

(816,702)

(358,893)

(116,724)

(Note 18)

$30,042

$52,935

Cash flows from financing activities

Proceeds from issuance of share capital,
net of issuance costs of $65

Proceeds from issue of shares by a consolidated subsidiary
to minority shareholders

Payments to entities under common control for
the transfer of ownership interest in subsidiaries

Proceeds from long-term loans provided by related parties

Repayment of long-term loans provided by related parties

Proceeds from short-term loans provided by related parties

Repayment of short-term loans provided by related parties

Proceeds from bank overdrafts, net

Proceeds from short-term loans

Repayment of short-term loans, including interest

Proceeds from long-term loans and promissory notes

Repayment of long-term loans and promissory notes, including interest

Dividends of consolidated subsidiary paid to minority shareholders

Payments under finance leases, including interest

Proceeds from sale-leaseback

—

(60,847)

—

(11,863)

417,574

(634,870)

202,661

2,051,627

(2,152,272)

508,048

(78,020)

(55,584)

(10,459)

21,717

1,784

(9,273)

105,346

(8,253)

63,381

(37,167)

89,896

353,763

(319,683)

296,602

(11,621)

(31)

(4,601)

—

$—

—

(8,021)

56,657

—

16,234

(14,598)

—

469,326

(483,652)

33,294

(4,268)

—

(2,340)

—

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Payments under Settlement Agreements, including
interest, and purchases of debts in subsidiaries

Payments of restructured taxes, including

Net cash flows (used in) from financing activities

Effect of foreign exchange rate changes on cash and cash equivalents

Effect of hyperinflation on cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplementary cash flow information:

Cash flows during the year:

Interest paid

Income taxes paid

2004

Year ended December 31,
2003

2002

(243,470)

(20,572)

(36,288)

3,794

—

97,266

195,681

$292,947

(93,091)

(17,592)

462,395

6,620

—

152,680

43,001

$195,681

(44,017)

(11,617)

7,001

269

(5,113)

2,714

40,287

$43,001

$86,330

441,910

$36,394

95,972

$37,149

12,203

Evraz Group S.A.
Consolidated Statements of Changes in Equity Years ended December 31, 2004, 2003 and 2002
(In thousands of US dollars)

Issued Additional Unrealised Accumulated Translation Parent
Minority
capital paid-in gain on profits difference share- interests

Total

capital financial
assets

(losses)

holders'
equity

At December 31, 2001

$—

$1,003

$—

$(30,516)

$— $(29,513)

$318,072

$288,559

Minority interest arising
on acquisition of a subsidiary

Purchases of minority interests

Net profit

Effect of exchange rate changes

At December 31, 2002

—

1,003

Issue of share capital, net of
issuance costs of $65 (Note 18)

138,935

Net gains on available-
for-sale financial assets

Minority interest arising
on acquisition of a subsidiary

Purchases of minority interests

Distributions to entities under
common control (Note 18)

Net profit

Effect of exchange rate changes

—

948

—

5,934

—

(24,582)

—

19,691

—

5,934

19,691

(3,888)

138,935

948

—

6,210

(135,668)

(4,564)

39,164

223,214

—

1,370

58,855

219,326

138,935

948

11,595

(111,499)

—

(24,358)

204,982

— (24,358)

—

204,982

— 49,970

49,970

47,962

21,268

At December 31, 2003

138,935

1,003

948

156,042

69,661

366,589

192,540

Issue of share capital (Note 18)

30,042

—

(168,935)

292,046

—

(123,111)

Decrease in share capital due
to the Group's
reorganisation (Note 18)

Net gains on available-for-sale
financial assets removed from
equity recognised in net profit

—

(948)

—

30,042

—

(948)

—

252,944

71,238

559,129

30,042

—

(948)

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Issued Additional Unrealised Accumulated Translation Parent
capital paid-in gain on profits difference share-
holders'
equity

capital financial (losses)

assets

Minority
interests

Total

Acquisition of minority interests
in subsidiaries (Note 18)

Acquisition of minority interest
by a joint venture (Note 8)

Minority interest arising on
acquisition of a subsidiary

Sale of minority interest (Note 18)

Distributions to entities under
common control (Note 18)

Net profit

Dividends (Note 18)

Effect of exchange rate changes

—

20,611

5,517

—

(12,128)

—

(12,500)

(3,858)

1,179,625

(58,000)

—

8,483

(103,179)

(94,696)

5,517

—

(12,500)

(3,858)

1,179,625

(58,000)

—

5,517

35,600

47,385

35,600

34,885

—

(3,858)

165,263

1,344,888

—

(58,000)

—

94,094

19,970

114,064

At December 31, 2004

$42

$319,177

$— $1,126,070

$163,755 $1,609,044

$357,579

$1,966,623

1. Corporate Information

These consolidated financial statements were authorised for reissue in accordance with a resolution of the directors
on October 12, 2005. These consolidated financial statements are different from the consolidated financial state-
ments for the years ended December 31, 2004, 2003 and 2002 authorised for issue by the directors of the Group on
April 25, 2005 in that they reflect the transfer of ownership interest in OAO Evrazruda in a transaction with an enti-
ty under common control with the Group (Note 1, Controlling Interests in Subsidiaries Transferred to the Group by
Entities under Common Control During 2004 and 2005), which occurred on March 29, 2005. The reissue of the con-
solidated financial statements was made due to the inclusion of these consolidated financial statements together
with the Group's unaudited condensed consolidated financial statements for the six-month period ended June 30,
2005 in a prospectus for the issuance of Evraz Group S.A. securities.

Evraz Group S.A. (“Evraz Group”) is a limited liability company registered under the laws of Luxembourg on
December 31, 2004. The registered address of Evraz Group is 1, Allee Scheffer L-2520, Luxembourg. Evraz Group's
parent is Crosland Global Limited (“Crosland” or the “Parent”).

Evraz Group was formed through a reorganisation in which 95.83% of the shares in Mastercroft Limited
(“Mastercroft”), a limited liability company registered in Cyprus, directly owned by Crosland, were contributed into
Evraz Group. Although legally binding agreements for this reorganisation were in place at December 31, 2004, the
legal title to the shares in Mastercroft had not been transferred to Evraz Group until April 5, 2005.

As Evraz Group has been formed through a reorganisation of entities under common control, these consolidated
financial statements have been prepared using the pooling of interests method and, as such, the financial state-
ments have been presented as if the transfers of the Group interests in Mastercroft had occurred from the begin-
ning of the earliest period presented.

In 2003, Mastercroft was the parent of the group companies contributed to Evraz Group. Mastercroft was estab-
lished on December 31, 2002 as a holding company to consolidate certain steel production, mining and trading enti-
ties under control of Crosland. In 2003, controlling ownership interests in such entities were transferred to
Mastercroft in transactions with entities under common control with Mastercroft. In 2004, additional three entities
were transferred into Mastercroft by entities under common control as described further below. The Group also
applied the pooling of interests method in accounting for these business combinations.

Evraz Group, together with its subsidiaries (the “Group”), is involved in production and distribution of steel and
related products. In addition, the Group owns and operates certain mining assets. The Group's steel production and
mining facilities are located in the Russian Federation. The Group operates three steel mills in Russia: one plant in the
Sverdlovsk region and two plants in the Kemerovo region. The Group is one of the biggest steel producers in the
Russian Federation.

In the years ended December 31, 2004, 2003 and 2002, approximately 9%, 31% and 40%, respectively, of the
Group's revenues were generated in transactions with related parties. In addition, a significant part of the Group's
purchases was made in transactions with related parties. For detailed information related to such activities refer to
Note 14.

At December 31, 2004, the Group employed approximately 107,000 employees.

The major subsidiaries included in the consolidated financial statements of Evraz Group were as follows at December 31:

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Actual Effective ownership interest, %

2004

2003

2002

Business activity

Location

Subsidiary

OAO Nizhny Tagil Iron & Steel Plant

OAO West-Siberian Iron & Steel Plant

OAO Novokuznetsk Iron & Steel Plant

OAO Kachkanarsky Mining-and-Processing
Integrated Works

OAO Vysokogorsky Mining-and-Processing
Integrated Works

OOO Abakan Mining Company

OOO Mundybash Processing Plant

OOO GBRU-Yuzhnaya

OAO UK Neryungriugol

Ferrotrade Limited

OOO Trade House EvrazHolding

OOO Trade House EvrazResource

East Metals S.A.

OAO Nakhodka Commercial Sea Port

Aino Dake Maritime Limited

Kita Dake Maritime Limited

Mae Dake Maritime Limited

Sinano Shipmanagement Limited

Korten Corporation

Mastercroft Limited

OOO Sibmetinvest

Mastercroft Mining Limited

Mastercroft Pipe Projects Limited

Steeltrade Limited

Coke Oven Overseas Contribution Limited

East Metals Limited

Mastercroft Finance Limited

OOO Financial Company EvrazHolding

ownership
interest, %
2004

80.44

94.59

100.00

77.09

90.65

89.97

74.35

93.36

90.09

97.64

80.68

—

87.38

100.00

91.51

100.00

95.83

100.00

—

100.00

78.50

90.65

78.50

95.83

82.21

95.83

89.85

95.83

—

95.83

77.09

80.32

93.36

80.32

—

100.00

98.00

—

100.00

84.12

—

100.00

91.93

100.00

—

100.00

74.35

61.10

77.39

—

80.00

77.39

61.10

—

98.00

—

Steel production

Ore mining
and processing

Ore mining

Ore processing

Ore mining

Coal mining

Trading

30.01

Seaport services

—

Shipping

100.00

Holding entity

—

Holding entity

100.00

—

Holding entity

— Management services

—

61.10

Financing

Russia

Gibraltar

Russia

Switzerland

Russia

Malta

Cyprus

Panama

Cyprus

Russia

Cyprus

Russia

Consolidated Subsidiaries with Ownership Less Than 50%

OAO Large-Diameter Pipe Plant 1

25.00

19.27

18.59

15.28

Pipe manufacturing

Russia

OOO EvrazHolding 2

Caplink Limited 2

Velcast Limited 2

OOO Slab Continuous Casting Machine 2

EvrazSecurities S.A. 3

—

Management
services

Holding entity

Steel production

Russia

Cyprus

Russia

Financing

Luxembourg

Controlling Interests in Subsidiaries Transferred to the Group in 2004 by Entities under Common Control

Pamplune S.A.

Dufin Caster Project S.A.

OOO Continuous Casting Machine No.4

OOO Metallenergofinance

ZAO Evraztrans

OAO Evrazruda

99.68

99.84

100.00

76.00

99.90

95.52

95.37

95.83

72.83

99.90

99.68

99.52

—

100.00

99.90

99.68

99.52

—

Holding entity

Luxembourg

Holding entity

Luxembourg

Steel production

Utilities supply

Freight-forwarding

99.90

Ore mining

Russia

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Actual ownership interest in subsidiaries differs from the effective ownership interest due to the
existence of minority interests in subsidiaries that hold ownership interests in other subsidiaries.

Subsidiaries Consolidated with Ownership of Less Than 50%

OAO Large-Diameter Pipe Plant ("LDPP") is an entity which is in development stage. As of
December 31, 2004, the Group owned 25% plus one share in LDPP and had signed a legally bind-
ing agreement to acquire an additional 30.1% of the shares in LDPP. Before the agreement was
signed, an entity under common control with the Group had an option to acquire that additional
interest. The option was exercisable at any time and, therefore, represented potential voting rights
which require consolidation under Interpretation SIC-33, Consolidation and Equity Method—
Potential Voting Rights and Allocation of Voting Interests. The Group consolidates LDPP under the
provisions of IAS 27, Consolidated Financial Statements and Accounting for Investments in
Subsidiaries, as the Group controlled LDPP in 2004.

The Group consolidates OOO EvrazHolding (“EvrazHolding”), a limited liability company regis-
tered in Russia, Caplink Limited (“Caplink”) and Velcast Limited (“Velcast”), limited liability com-
panies registered in Cyprus, and OOO Slab Continuous Casting Machine, a subsidiary of Caplink
registered in Russia, under the provisions of Interpretation SIC-33, Consolidation and Equity
Method — Potential Voting Rights and Allocation of Voting Interests. The Group holds options to
acquire all the ownership interests in EvrazHolding, Caplink and Velcast for $1,000, Є100 ($0.136
at the exchange rate as of December 31, 2004) and Є100 ($0.136 at the exchange rate as of
December 31, 2004), respectively. These options are currently exercisable and, therefore, repre-
sent potential voting rights which require consolidation under Interpretation SIC-33.

EvrazSecurities S.A. (“EvrazSecurities”) is a special purpose entity of the Group. In 2003 and 2004,
EvrazSecurities issued $175,000 and $300,000 guaranteed notes due on September 25, 2006 and
August 3, 2009, respectively (the “Notes”), which are listed on the Luxembourg stock exchange.
Mastercroft and certain of its subsidiaries guaranteed EvrazSecurities' liabilities under the Notes.
The Group consolidates EvrazSecurities under the provisions of Interpretation SIC-12,
Consolidation - Special Purpose Entities as, in substance, the activities of EvrazSecurities are being
conducted on behalf of the Group so that the Group benefits from EvrazSecurities' operations,
and the Group is exposed to risks incidental to the activities of EvrazSecurities.

Controlling Interests in Subsidiaries Transferred to the Group by Entities under Common Control
During 2004 and 2005

Controlling interests in Pamplune, OOO Metallenergofinance (“MEF”), OAO Large Diameter Pipe
Plant (“LDPP”) and OAO EvrazTrans (“EvrazTrans”) were transferred to the Group by entities under
common control with the Group in the year ended December 31, 2004. The Group applied the pool-
ing of interests method with respect to those acquisitions and presented its consolidated financial
statements as if the transfers of controlling interests in those subsidiaries had occurred from the
beginning of the earliest period presented or, if later, the date of acquisition of the subsidiary by the
transferring entity.

Further, as discussed in this Note above, controlling interest in OAO Evrazruda (“Evrazruda”) was
transferred to the Group by an entity under common control with the Group in the six-month peri-
od ended June 30, 2005. The Group also applied the pooling of interests method with respect to this
acquisition and presented its consolidated financial statements as if the transfers of controlling inter-
est in Evrazruda had occurred from the beginning of the earliest period presented.

As a result, the Group (formerly Mastercroft) has re-presented its financial position, results of oper-
ations and cash flows for the years ended December 31, 2004, 2003 and 2002.

2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards (“IFRS”).

Group companies maintain their accounting records and prepare their statutory financial state-
ments in accordance with the Regulations on Accounting and Reporting of the country in which
the particular subsidiary is resident. The financial statements are based on the statutory account-
ing records, with adjustments and reclassifications recorded for the purpose of fair presentation
in accordance with IFRS. The principal adjustments relate to (1) expense and revenue recognition,
(2) valuation of unrecoverable assets, (3) depreciation and valuation of property, plant and
equipment, (4) accounting for income taxes, (5) use of fair values, (6) business combinations
and (7) restatement of financial statements to reflect the effect of hyperinflation.

The consolidated financial statements have been prepared under historical cost convention, other
than in respect of property, plant and equipment at the date of transition to IFRS as described below.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

First-time Adoption of International Financial Reporting Standards (IFRS 1)

The Group early adopted and applied IFRS 1 in the preparation of its first consolidated financial state-
ments in accordance with IFRS for the year ended December 31, 2003. The Group's transition date to
IFRS is December 31, 2001. Prior to this date, in past business combinations, the Group acquired certain
subsidiaries, which were not previously consolidated. For such subsidiaries, the Group adjusted the car-
rying amounts of the subsidiaries' assets and liabilities to the amounts that IFRS would require in the sep-
arate subsidiaries' balance sheets. The deemed cost of goodwill/negative goodwill was determined as
the difference at the date of transition to IFRS between: (i) the parent's interest in those adjusted car-
rying amounts; and (ii) the cost in the parent's separate financial statements of its investment in the
subsidiary. In addition, the Group elected under IFRS 1 to account for property, plant and equipment in
its subsidiaries at deemed cost being the fair value of property, plant and equipment at the date of tran-
sition to IFRS and to recognise all cumulative actuarial gains and losses at the date of transition to IFRS.

Changes in Accounting Policies

IFRS 3, Business Combinations, IAS 36, Impairment of Assets, and IAS 38, Intangible Assets

IFRS 3 applies to accounting for business combinations where the agreement date is on or after
March 31, 2004. Upon acquisition the Group initially measures the identifiable assets, liabilities
and contingent liabilities acquired at their fair values as at the acquisition date hence causing any
minority interest in the acquiree to be stated at the minority proportion of the net fair values of
those items. For business combination for which the agreement date is before March 31, 2004,
minority interest in the acquiree was stated at the minority proportion of the pre-acquisition car-
rying amounts of the identifiable assets and liabilities.

Additionally, for business combinations where the agreement date is on or after March 31, 2004,
goodwill is not amortised but rather tested for impairment annually at the cash generating unit
level unless an event occurs during the year which requires the goodwill to be tested more fre-
quently. Intangibles with indefinite useful lives acquired in those business combinations are
reviewed annually to ensure the carrying value does not exceed the recoverable amount regard-
less of whether an indicator of impairment is present.

IAS 36 and 38 will be applied prospectively from January 1, 2005.

IAS 27, Consolidated and Separate Financial Statements

The Group early adopted IAS 27, Consolidated and Separate Financial Statements, which requires
to present minority interests within equity, separately from the parent shareholders' equity.

Accounting for Increases in Ownership Interests in Subsidiaries

Increases in ownership interests in subsidiaries prior to January 1, 2004 were accounted for using
the purchase method.

Effective January 1, 2004, the differences between the carrying values of net assets attributable
to interests in subsidiaries acquired and the consideration given for such increases is either added
to additional paid-in capital, if positive, or charged to accumulated profits, if negative, in the
accompanying consolidated financial statements.

Accounting for the Effect of Inflation

Prior to January 1, 2003, the adjustments and reclassifications made to the statutory records of the
Russian subsidiaries of the Group for the purpose of IFRS presentation included the restatement
of balances and transactions for the changes in the general purchasing power of the Russian rou-
ble in accordance with IAS 29 (“Financial Reporting in Hyperinflationary Economies”). IAS 29
requires that the financial statements prepared in the currency of a hyperinflationary economy be
stated in terms of the measuring unit current at the balance sheet date. As the characteristics of
the economic environment of the Russian Federation indicate that hyperinflation has ceased,
effective from January 1, 2003 the Group ceased applying IAS 29 to current periods and only
recognises the cumulative impact of inflation indexing on non-monetary elements of the finan-
cial statements through December 31, 2002.

Non-monetary assets and liabilities acquired prior to December 31, 2002 have been restated by
applying the relevant conversion factors to the historical cost (“restated cost”) through December
31, 2002. Gains or losses on subsequent disposal are recognised based on the restated cost of the
non-monetary assets and liabilities.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Management Estimates

The preparation of financial statements requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities at the date of the financial state-
ments and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The most significant estimates with regard to these
financial statements relate to the estimated useful lives of long lived assets, fair value of proper-
ty, plant and equipment at the date of transition to IFRS, fair values of assets and liabilities
acquired in business combinations, site restoration costs, post-employment benefits, allowances
for doubtful accounts receivable, allowances for net realisable value and obsolescence of inven-
tories, and deferred income taxes.

Foreign Currency Transactions

The presentation currency of the Group is the US dollar because the presentation in US dollars is
convenient for the major current and potential users of the consolidated financial statements.

The measurement currency of the Group's subsidiaries located in the Russian Federation is the
Russian rouble (the “rouble”). The measurement currency of the subsidiaries located in other
countries is the US dollar or euro. As at the reporting date, the assets and liabilities of the sub-
sidiaries with the rouble or euro, as measurement currency, are translated into the presentation
currency at the rate of exchange ruling at the balance sheet date, and their income statements are
translated at the weighted average exchange rates for the year. The exchange differences arising
on the translation are taken directly to a separate component of equity. On disposal of a foreign
entity, the deferred cumulative amount recognised in equity relating to that particular foreign
operation is recognised in the income statement.

Transactions in foreign currencies in each subsidiary of the Group are initially recorded in the
measurement currency at the rate ruling at the date of transaction. Non-monetary items meas-
ured at fair value in a foreign currency are translated using the exchange rates at the date when
the fair value was determined. Monetary assets and liabilities denominated in foreign currencies
are translated at the measurement currency rate of exchange ruling at the balance sheet date.
All resulting differences are taken to the consolidated income statement.

Basis of Consolidation

Subsidiaries

Subsidiaries, which are those entities in which the Group has an interest of more than 50% of the
voting rights, or otherwise has power to exercise control over their operations, are consolidated.
Subsidiaries are consolidated from the date on which control is transferred to the Group and are
no longer consolidated from the date that control ceases. All intercompany transactions, balances
and unrealised gains on transactions between group companies are eliminated; unrealised losses
are also eliminated unless the transaction provides evidence of an impairment of the asset trans-
ferred. Where necessary, accounting policies for subsidiaries have been changed to ensure con-
sistency with the policies adopted by the Group.

Acquisition of Subsidiaries

The purchase method of accounting was used to account for the acquisition of subsidiaries by the
Group except for acquisitions made prior to the date of transition to IFRS, which were accounted
for in accordance with IFRS 1, as described above.

In the period from January 1, 2002 to March 30, 2004, in accordance with IAS 22, Business
Combinations, identifiable assets and liabilities acquired in a business combination were measured
initially at the aggregate of:

(a) the fair value of the identifiable assets and liabilities acquired as at the date of acquisition to
the extent of the acquirer's interest obtained in the acquisition; and

(b) the minority's proportion of the pre-acquisition carrying amounts of the identifiable assets
and liabilities of the subsidiary.

Beginning March 31, 2004, in accordance with IFRS 3, Business Combinations, identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are measured ini-
tially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The initial accounting for a business combination involves identifying and determining the fair values
to be assigned to the acquiree's identifiable assets, liabilities and contingent liabilities and the cost of

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

the combination. If the initial accounting for a business combination can be determined only provi-
sionally by the end of the period in which the combination is effected because either the fair values
to be assigned to the acquiree's identifiable assets, liabilities or contingent liabilities or the cost of the
combination can be determined only provisionally, the Group accounts for the combination using
those provisional values. The Group recognises any adjustments to those provisional values as a result
of completing the initial accounting within twelve months of the acquisition date.

The excess of purchase consideration over the fair value of the Group's share of identifiable net
assets is recorded as goodwill. If the cost of the acquisition is less than the fair value of the Group's
share of identifiable net assets of the subsidiary acquired the difference is either recorded on the bal-
ance sheet as negative goodwill (for business combinations for which the agreement date is prior to
March 31, 2004) or recognised directly in the income statement (for business combinations for
which the agreement date is on or after March 31, 2004).

Minority interest is that portion of the profit or loss and net assets of subsidiaries attributable to
equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
Minority interests at the balance sheet date represents the minority shareholders' portion of the pre-
acquisition carrying amounts (for business combinations for which the agreement date is before
March 31, 2004) or the fair values (for business combinations for which agreement date is on or
after March 31, 2004) of the identifiable assets and liabilities of the subsidiary at the acquisition date
and the minorities' portion of movements in equity since the date of the combination. Minority inter-
ests are presented in the consolidated balance sheet within equity, separately from the parent's
shareholders' equity.

Losses allocated to minority interest do not exceed the minority interest in the equity of the sub-
sidiary. Any additional losses are allocated to the Group unless there is a binding obligation of the
minority to fund the losses.

For the identifiable assets, liabilities and contingent liabilities initially accounted for at provisional val-
ues, the carrying amount of identifiable asset, liability or contingent liability that is recognised or
adjusted as a result of completing the initial accounting is calculated as if its fair value or adjusted fair
value at the acquisition date had been recognised from that date. Goodwill or any gain recognised
when the acquired interest in net fair values of the identifiable assets, liabilities and contingent lia-
bilities exceeds the cost of their acquisition is adjusted from the acquisition date by an amount equal
to adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent
liability being recognised or adjusted.

Comparative information presented for the periods before the completion of initial accounting for
the acquisition is presented as if the initial accounting had been completed from the acquisition date.

Purchases of Subsidiaries from Entities under Common Control

Purchases of subsidiaries from entities under common control are accounted for using the uniting
of interest method.

The assets and liabilities of the subsidiary transferred under common control are recorded in these
financial statements at the historical cost of the controlling entity (the “Predecessor”). Related
goodwill inherent in the Predecessor's original acquisition is also recorded in these financial state-
ments. Any difference between the total book value of net assets, including the Predecessor's
goodwill, and the consideration paid is accounted for in these consolidated financial statements
as an adjustment to the shareholders' equity.

These financial statements, including corresponding figures, are presented as if the subsidiary had
been acquired by the Group on the date it was originally acquired by the Predecessor.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Investments in Associates

Associates are entities in which the Group generally has between 20% and 50% of the voting
rights, or is otherwise able to exercise significant influence, but which it does not control or joint-
ly control. Investments in associates are accounted for by the equity method of accounting and
are initially recognised at cost including goodwill. Subsequent changes in the carrying value reflect
the post acquisition changes in the Group's share of net assets of the associate. The Group's share
of its associates' profits or losses is recognised in the income statement and its share of move-
ments in reserves is recognised in equity. However, when the Group's share of losses in an associ-
ate equals or exceeds its interest in the associate the Group does not recognise further losses,
unless the Group is obligated to make further payments to, or on behalf of, the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent
of the Group's interest in the associates; unrealised losses are also eliminated unless the transac-
tion provides evidence of an impairment of the asset transferred.

The Group's interest in its joint venture is accounted for under the equity method of accounting
whereby an interest in jointly controlled entities is initially recorded at cost and adjusted thereafter
for post-acquisition changes in the Group's share of net assets of the joint ventures. The income
statement reflects the Group's share of the results of operations of the joint venture.

Interest in a Joint Venture

Property, Plant and Equipment

Buildings and constructions

Machinery and equipment

Transport and motor vehicles

Other assets

Leases

The Group's property, plant and equipment, except for the items acquired prior to December 31,
2001, are stated at historical cost less accumulated depreciation and any impairment in value. Land
is not depreciated. As described under Basis of Presentation above, the items of property, plant
and equipment acquired prior to December 31, 2001 were accounted for at deemed cost being
their fair value at December 31, 2001.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as
follows:

15-60 years

4-45 years

7-20 years

3-15 years

Depletion of mining assets including capitalised site restoration costs is calculated using the units-
of-production method based upon proved developed mineral reserves.

Maintenance costs relating to items of property, plant and equipment are expensed as incurred.

The Group has the title to certain non-production and social assets, primarily buildings and facili-
ties of social infrastructure, which are carried at their recoverable amount of zero. The costs to
maintain such assets are expensed as incurred.

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to
ownership of the leased item, are capitalised at the inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve
a constant rate of interest on the remaining balance of the liability. Finance charges are charged
to interest expense.

The depreciation policy for depreciable leased assets is consistent with that for depreciable assets,
which are owned. If there is no reasonable certainty that the Group will obtain ownership by the
end of the lease term, the asset is fully depreciated over the shorter of the lease term or its useful
life.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset
are classified as operating leases. Operating lease payments are recognised as an expense in the
income statement on a straight-line basis over the lease term.

Goodwill

Investments

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's
share of the net assets of the acquired subsidiary/associated undertaking at the date of acquisi-
tion. Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an
acquisition of an associate is included in investment in associate.

Goodwill arising from business combinations where the agreement date is prior to March 31, 2004
is amortised using the straight-line method over its estimated useful life of ten years. Goodwill
relating to business combinations where the agreement date is on or after March 31, 2004 is not
amortised but is reviewed for impairment annually or more frequently, if events or changes in cir-
cumstances indicate that the carrying amount may be impaired. Impairment is determined by
assessing the recoverable amount of the cash-generating unit, to which the goodwill relates.
Where the recoverable amount of the cash-generating unit is less than the carrying amount, an
impairment loss is recognised.

Where goodwill forms part of a cash-generating unit and part of the operations within that unit
are disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation.

Negative goodwill represents the excess of the fair value of the Group's share of the net assets
acquired over the cost of acquisition.

Negative goodwill arising from business combinations where the agreement date is prior to March
31, 2004 is presented in the same balance sheet classification as goodwill. To the extent that nega-
tive goodwill relates to expectations of future losses and expenses that are identified in the Group's
plan for the acquisition and can be measured reliably, but which do not represent identifiable lia-
bilities, that portion of negative goodwill is recognised in the income statement when the future
losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair values
of the non-monetary assets acquired, is recognised in the income statement over the remaining
weighted average useful life of depreciable and amortisable assets acquired; negative goodwill in
excess of the fair values of those assets is recognised in the income statement immediately.

Negative goodwill relating to business combinations where the agreement date is on or after
March 31, 2004 is recognised in the income statement.

The Group classified its investments into the following categories: trading, held-to-maturity and
available-for-sale. Investments that are acquired principally for the purpose of generating a prof-
it from short-term fluctuations in price are classified as trading investments and included in cur-
rent assets. Investments with fixed maturity that the management has the intent and ability to
hold to maturity are classified as held-to-maturity and are included in non-current assets.
Investments intended to be held for an indefinite period of time, which may be sold in response
to needs for liquidity or changes in interest rates, are classified as available-for-sale; these are
included in non-current assets unless management has the express intention of holding the
investment for less than 12 months from the balance sheet date or unless they will need to be sold
to raise operating capital, in which case they are included in current assets. Management deter-
mines the appropriate classification of its investments at the time of the purchase and re-evalu-
ates such designation on a regular basis.

All purchases and sales of investments are recognised on the settlement date, which is the date that
the investment is delivered to or by the Group. All investments are initially recognised at cost, being
the fair value of the consideration given and including transaction costs. Trading and available-for-
sale investments are subsequently carried at fair value, whilst held-to-maturity investments are car-
ried at amortised cost using the effective yield method. Gains or losses on trading investments are
recorded in the income statement in the period in which they arise. Gains or losses on available-for-
sale investments are recognised as a separate component of equity until the investment is sold, col-
lected or otherwise disposed of, or until the investment is determined to be impaired, at which time
the cumulative gain or loss previously reported in equity is included in the income statement.

For investments that are actively traded in organised financial markets, fair value is determined by
reference to Stock Exchange quoted market bid prices at the close of business on the balance
sheet date. For investments where there is no quoted market price, fair value is determined by ref-
erence to the current market value of another instrument which is substantially the same or is cal-
culated based on the expected cash flows of the underlying net asset base of the investment.

All purchases and sales of financial assets under contracts to purchase or sell financial assets that
require delivery of the asset within the time frame generally established by regulation or conven-
tion in the market place are recognised on the settlement date i.e. the date the asset is delivered
by/to the counterparty.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Impairment of Assets

An assessment is made at each balance sheet date to determine whether there is objective evi-
dence that an asset or a group of assets may be impaired. When there is an indication that an asset
may be impaired, the asset is measured at its estimated recoverable amount, which is the higher
of the net selling price and value in use.

Net selling price is the amount obtainable from the sale of an asset in an arm's length transaction
between knowledgeable, willing parties, after deducting any direct incremental disposal costs.
Value in use is the present value of estimated future cash flows expected to arise from continuing
use of an asset and from its disposal at the end of its useful life.

In assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset. For an asset that does not generate cash inflows largely inde-
pendent of those from other assets, the recoverable amount is determined for the cash-generat-
ing unit to which the asset belongs.

Impairment loss is recognised for the difference between the estimated recoverable amount and
the carrying value. The carrying amount of the asset is reduced to its estimated recoverable
amount either directly or through the use of an allowance account and the amount of the loss is
included in the net profit and loss for the period.

An impairment loss is reversed if the subsequent increase in the recoverable amount can be related
objectively to an event occurring after the impairment loss was recognised. An impairment loss is
only reversed to the extent that the asset's carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation, if no impairment loss had been recognised.

Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is deter-
mined on the weighted average basis and includes expenditure incurred in acquiring inventories
and bringing them to their existing location and condition. The cost of finished goods and work in
progress includes an appropriate share of production overheads based on normal operating
capacity, but excluding borrowing costs.

Net realisable value is the estimated selling price in the ordinary course of business, less estimat-
ed costs of completion and estimated costs necessary to make the sale.

Accounts receivable, which generally have 30-180 day terms, are recognised and carried at origi-
nal invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful
debts is made when collection of the full amount is no longer probable. Bad debts are written off
when identified.

The tax authorities permit the settlement of sales and purchases value added tax (“VAT”) on a net basis.

VAT Payable

VAT payable represents VAT related to sales payable to tax authorities upon collection of receiv-
ables from customers net of VAT on purchases which have been settled at the balance sheet
date. In addition, VAT related to sales which have not been settled at the balance sheet date
(VAT deferred) is also included in VAT payable. Where provision has been made for impairment
of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.
The related VAT deferred liability is maintained until the debtor is written off for tax purposes.

VAT Recoverable

VAT recoverable relates to purchases which have not been settled at the balance sheet date and
property, plant and equipment not put into operation. VAT recoverable is reclaimable against sales
VAT upon payment for the purchases and putting property, plant and equipment into operation.

Inventories

Accounts Receivable

Value Added Tax

Cash and Cash Equivalents

Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an
original maturity of three months or less.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Borrowings

Borrowings are initially recognised at cost, being the fair value of the consideration received, net
of transaction costs incurred. In subsequent periods, borrowings are measured at amortised cost
using the effective interest rate method; any difference between the fair value of the considera-
tion received (net of transaction costs) and the redemption amount is recognised as interest
expense over the period of the borrowings.

Borrowing costs are expensed as incurred.

Shareholders' Equity

Share Capital

Provisions

Ordinary shares are classified as equity. External costs directly attributable to the issue of new
shares, other than on a business combination, are shown as a deduction in equity from the pro-
ceeds. Any excess of the fair value of consideration received over the par value of shares issued is
recognised as a share premium.

Dividends

Dividends are recognised as a liability and deducted from equity at the balance sheet date only if
they are declared before or on the balance sheet date. Dividends are disclosed when they are pro-
posed before the balance sheet date or proposed or declared after the balance sheet date but
before the financial statements are authorised for issue.

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result
of a past event, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Where the Group expects a provision to be reimbursed, for example under an insurance contract, the
reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

If the effect of the time value of money is material, provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market assessments of the time
value of money and, where appropriate, the risks specific to the liability. Where discounting is used,
the increase in the provision due to the passage of time is recognised as an interest expense.

Provisions for site restoration costs are capitalised in mining assets within property, plant and equipment.

Social and Pension Contributions

Defined contributions are made by the Group to the Russian Federation state pension, social insur-
ance, medical insurance and unemployment funds at the statutory rates in force (approximately
34%), based on gross salary payments. The Group has no legal or constructive obligation to pay
further contributions in respect of those benefits. Its only obligation is to pay contributions as they
fall due. These contributions are expensed as incurred.

Employee Benefits

Post-Employment Benefits

The Group companies provide additional pensions and other post-employment benefits to their employ-
ees in accordance with collective bargaining agreements. In addition, one of the Group's subsidiaries
operates a separately administered defined pension scheme. The entitlement to these benefits is usually
conditional on the employee remaining in service up to retirement age, the completion of a minimum
service period and the amount of the benefits stipulated in the collective bargaining agreements.
The liability recognised in the balance sheet in respect of post-employment benefits is the present
value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets,
together with adjustments for unrecognised actuarial gains or losses and past service costs. The
defined benefit obligation is calculated annually using the projected unit credit method. The present
value of the benefits is determined by discounting the estimated future cash outflows using interest
rates of high-quality government bonds that are denominated in the currency in which the benefits
will be paid, and that have terms to maturity approximating to the terms of the related obligations.

Actuarial gains and losses are recognised as income or expense when the cumulative unrecognised
actuarial gains or losses for each individual plan exceed 10% of the higher of defined benefit obli-

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Revenue

Deferred Income Tax

3. Segment Information

gation and the fair value of plan assets. These gains or losses are recognised over the expected
average remaining working lives of the employees participating in the plan.

Other Costs

The Group incurs employee costs related to the provision of benefits such as health services, kinder-
gartens and other services. These amounts principally represent an implicit cost of employing pro-
duction workers and, accordingly, have been charged to cost of sales.

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the
Group and the revenue can be reliably measured.

The following specific recognition criteria must also be met before revenue is recognised:

Sale of goods
Revenue is recognised when the significant risks and rewards of ownership of the goods have
passed to the buyer and the amount of revenue can be measured reliably.

Rendering of services
Revenue is recognised when services are rendered.

Interest
Revenue is recognised as the interest accrues.

Dividends
Revenue is recognised when the shareholders' right to receive the payment is established.

Rental Income
Rental income arising on investment properties is accounted for on a straight-line basis over the
lease term on ongoing leases.

Deferred tax assets and liabilities are calculated in respect of temporary differences using the
liability method. Deferred income taxes are provided for all temporary differences arising
between the tax basis of assets and liabilities and their carrying values for financial reporting
purposes, except where the deferred income tax arises from goodwill amortisation or the ini-
tial recognition of an asset or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be utilised. Deferred tax assets
and liabilities are measured at tax rates that are expected to apply to the period when the asset is
realised or the liability is settled, based on tax rates that have been enacted or substantively enact-
ed at the balance sheet date.

Deferred income tax is provided on temporary differences arising on investments in sub-
sidiaries, associates and joint ventures, except where the timing of the reversal of the tempo-
rary difference can be controlled and it is probable that the temporary difference will not
reverse in the foreseeable future.

The Group’s major business segments are steel production and mining. Steel production seg-
ment includes production of steel and related products at the three iron and steel plants.
Mining segment includes ore mining and enrichment. The mining segment does not meet the
criteria of a reportable segment under IFRS, because the majority of revenues of the mining
segment are earned in inter-segment transactions. Despite this fact, management has desig-
nated the mining segment as a reportable segment based on the future plans to develop this
business segment. The following table presents revenue and profit information and certain
asset and liability information regarding business segments for the years ended December 31,
2004, 2003 and 2002:

Other segment information

Additions to property, plant and equipment

$487,924

Assets acquired in business combination

—

Depreciation, depletion and amortisation

(164,545)

Impairment of assets

(75)

$47,961

532,496

(30,517)

—

$97,099

—

(6,878)

(1,291)

Year ended December 31, 2004

Revenue

Sales to external customers

Inter-segment sales

Total revenue

Result

Segment result

Unallocated expenses

Profit from operations

Assets and liabilities

Segment assets

Investment in associates

Unallocated assets

Total assets

Segment liabilities

Unallocated liabilities

Total liabilities

Year ended December 31, 2003

Revenue

Sales to external customers

Inter-segment sales

Total revenue

Result

Segment result

Unallocated expenses

Profit from operations

Assets and liabilities

Segment assets

Investment in associates

Unallocated assets

Total assets

Segment liabilities

Unallocated liabilities

Total liabilities

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Steel
production

$5,726,069

82,972

5,809,041

Mining Other

Eliminations

Total

operations

$90,643

254,195

344,838

$116,409

494,365

610,774

$—

$5,933,121

(831,532)

—

5,933,121

$1,742,283

$91,767

$6,368

$3,031,412

1,237

$784,004

195,017

$170,942

396

$1,218,294

$357,051

$126,584

Steel
production

$2,042,156

17,933

$2,060,089

Mining Other

Eliminations

Total

operations

$65,456

31,973

$97,429

$60,377

171,632

$232,009

$—

$2,167,989

(221,538)

—

$(221,538)

$2,167,989

$335,261

$6,903

$(1,922)

$1,867,397

1,413

$171,717

—

$51,967

2,210

$483,122

$109,362

$28,070

1,840,418

(3,835)

$1,836,583

$3,986,358

196,650

70,253

$4,253,261

$1,701,929

584,709

$2,286,638

$632,984

532,496

(201,940)

(1,366)

$340,242

(4,594)

$335,648

$2,091,081

3,623

137,133

$2,231,837

$620,554

1,052,154

$1,672,708

$253,754

22,673

(169,577)

(5,499)

Other segment information

Additions to property, plant and equipment

$234,150

Assets acquired in business combination

—

Depreciation, depletion and amortisation

(158,335)

Impairment of assets

(5,068)

$14,184

—

(7,735)

—

$5,420

22,673

(3,507)

(431)

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

$55,185

(2,332)

$52,853

$1,145,732

167

76,411

$1,222,310

$446,733

556,251

$1,002,984

$97,636

164,342

(156,624)

(1,919)

Year ended December 31, 2002

Revenue
Sales to external customers

Inter-segment sales

Total revenue

Result

Segment result

Unallocated expenses

Profit from operations

Assets and liabilities

Segment assets

Investment in associates

Unallocated assets

Total assets

Segment liabilities

Unallocated liabilities

Total liabilities

Steel
production

$1,512,077

4,142

$1,516,219

Mining Other

Eliminations

Total

operations

$13,605

25,095

$38,700

$14,670

$—

$1,540,352

—

(29,237)

—

$14,670

$(29,237)

$1,540,352

$52,500

$(726)

$3,411

$1,051,768

$89,685

167

—

$4,279

—

$386,585

$48,717

$11,431

Other segment information

Additions to property, plant and equipment

$84,698

Assets acquired in business combination

—

Depreciation, depletion and amortisation

(153,080)

Impairment of assets

(1,493)

$11,144

164,342

(3,264)

—

$1,794

—

(280)

(426)

Russia

Taiwan

Thailand

Philippines

Korea

Vietnam

Iran

Hong Kong

China

Other countries

Total

Russia

Other countries

Total

Distribution of the Group’s revenues by geographical area based on the location of customers for
the years ended December 31 was as follows:

2004

$3,288,123

806,674

457,574

214,655

213,292

213,000

195,456

178,148

160,873

205,326

$5,933,121

2003

$1,561,789

2002

$973,275

95,935

53,136

69,957

45,095

37,873

47,320

57,709

120,647

78,528

83,536

50,612

62,021

33,889

84,589

—

50,437

105,738

96,255

$2,167,989

$1,540,352

Carrying amounts of the Group’s assets by geographical area in which the assets are located at
December 31 were as follows:

2004

$3,439,893

813,368

$4,253,261

2003

$1,736,854

494,983

$2,231,837

2002

$1,184,697

37,613

$1,222,310

In 2004, 2003 and 2002, substantially all the additions to the Group’s property, plant and equip-
ment related to the Russian operations of the Group.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

4. Acquisitions and Increases of Ownership Interests in Subsidiaries

NTMK

As of December 31, 2001, the Group owned 41.71% of ordinary shares in Nizhny Tagil Iron & Steel
Plant (“NTMK”) and, through agreements with agents, had the power to cast the majority of the
votes at shareholders’ and board of directors meetings and had the power to appoint or remove the
majority of members of the board of directors. The financial position and results of operations of
NTMK were included in the Group’s consolidated financial statements beginning December 31, 2001.

In the years ended December 31, 2003 and 2002, the Group acquired minority interests in NTMK
(32.64% ownership interest) for an aggregate cash consideration of $35,238. These acquisitions
were accounted for as step acquisitions and the Group has recorded negative goodwill of
$90,962. In the year ended December 31, 2004, the Group acquired additional minority interests
in NTMK (6.09% ownership interest) for cash consideration of $47,980. As a result of the
change in accounting policy (Note 2), the excess of the amount of consideration over the carry-
ing value of minority interest amounting to $8,466 was charged to accumulated profits.

The amount of negative goodwill is being recognised as income over the remaining average
useful life of the identifiable depreciable assets acquired (13.5-15.5 years).

ZapSib

As of December 31, 2001, the Group owned 36.78% of ordinary shares in West-Siberian Iron & Steel
Plant (“ZapSib”) and, through agreements with agents, had the power to cast the majority of the
votes at shareholders’ and board of directors meetings and had the power to appoint or remove the
majority of members of the board of directors. The financial position and results of operations of
ZapSib were included in the Group’s consolidated financial statements beginning December 31, 2001.

In the years ended December 31, 2003 and 2002, the Group acquired minority interests in ZapSib
(56.58% ownership interest) for an aggregate cash consideration of $80,393. These acquisitions
were accounted for as step acquisitions and the Group has recorded negative goodwill of $33,025.
In the year ended December 31, 2004, the Group acquired additional minority interest in ZapSib
(1.23% ownership interest) for cash consideration of $9,323. As a result of the change in account-
ing policy (Note 2), the excess of the amount of consideration over the carrying value of minority
interest amounting to $3,662 was charged to accumulated profits, the excess of the carrying value
of minority interest over consideration amounting to $587 was included in additional paid-in capital.

The amount of negative goodwill is being recognised as income over the remaining average use-
ful life of the identifiable depreciable assets acquired (10-12 years).

Teisky Rudnik

On August 1, 2002, the Group acquired a production complex of OAO Teisky Rudnik for a cash con-
sideration of 32,340,000 roubles ($1,017 at the exchange rate as of December 31, 2002). The pro-
duction complex of Teisky Rudnik (“Teisky Rudnik”) represented a business and therefore that acqui-
sition was accounted for as a business combination in accordance with IAS 22. Identifiable assets and
liabilities of the production complex were measured at fair value on the date of acquisition.

The financial position and results of operations of Teisky Rudnik were included in the Group’s con-
solidated financial statements beginning August 1, 2002.

The table below sets forth the fair values of Teisky Rudnik identifiable assets and liabilities at the
date of acquisition:

August 1, 2002

$90,740

1,922

1,224

$93,886

(399)

(19,882)

(20,281)

$73,605

$1,017

$(72,588)

Property, plant and equipment

Inventories

Accounts and notes receivable

Total assets

Non-current liabilities

Deferred income tax liabilities

Total liabilities

Net assets

Consideration paid

Total negative goodwill

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Teisky Rudnik’s net (loss)/profit for the years ended December 31, 2004 and 2003 and for the peri-
od from August 1, 2002 to December 31, 2002 amounted to $(183), $(553) and $384, respectively.

The amount of negative goodwill is being recognised as income over the remaining average use-
ful life of identifiable depreciable assets acquired (20 years).

VGOK

As at October 3, 2002, the Group acquired an additional 38.61% ownership interest in OAO
Vysokogorsky Mining-and-Processing Integrated Works (“VGOK”) for $402. Prior to this date,
the Group had accumulated a 48.76% ownership interest in VGOK for an aggregate considera-
tion of $1,738, resulting in negative goodwill of $21,418.

The acquisition on October 3, 2002 provided the Group a controlling interest and, as a result, the
financial position and the results of operations of VGOK have been included in the Group’s con-
solidated financial statements as of this date.

Prior to October 3, 2002, VGOK was accounted for under the equity method.

The table below sets forth the fair values of VGOK’s assets and liabilities at the date of acquisition:

October 3, 2002

Property, plant and equipment

Other non-current assets

Inventories

Accounts and notes receivable, net

Cash

Total assets

Non-current liabilities

Current liabilities

Total liabilities

Net assets

Fair value of net assets attributable to 38.61% ownership interest

Less: consideration paid

Negative goodwill on acquisition of 38.61% ownership interest

Negative goodwill recognised on acquisitions prior to October 3, 2002

Total negative goodwill

$73,949

3,058

2,622

8,303

88,031

20,215

17,607

37,822

$50,209

$19,386

(402)

18,984

21,418

$40,402

VGOK’s net profit/(loss) for the years ended December 31, 2004 and 2003 and for the period from
October 3, 2002 to December 31, 2002 amounted to $6,246, $4,074 and $(2,773), respectively.

The amount of negative goodwill is being recognised as income over the remaining average use-
ful life of the identifiable depreciable assets acquired (16-17 years).

NMTP

As at February 15, 2003, the Group acquired an additional 24.48% ownership interest in OAO
Nakhodka Commercial Sea Port (“NMTP”) for $3,815. Prior to this date, the Group had accumu-
lated a 35.47% ownership interest in NMTP for an aggregate cash consideration of $6,364, result-
ing in the recognition of negative goodwill of $5,045.

The acquisition on February 15, 2003 provided the Group a controlling interest and, as a result, the
financial position and the results of operations of NMTP have been included in the Group’s con-
solidated financial statements as of this date. In the period from February 11, 2002 to February 15,
2003, NMTP was accounted for under the equity method.

The table below sets forth the fair values of NMTP’s assets and liabilities at the date of acquisition:

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Property, plant and equipment

Other non-current assets

Inventories

Accounts and notes receivable, net

Other current assets

Cash

Total assets

Non-current liabilities

Deferred income liabilities

Current liabilities

Total liabilities

Net assets

Fair value of net assets attributable to 24.48% ownership interest

Less: consideration paid

Negative goodwill on acquisition of 24.48% ownership interest

Negative goodwill recognised on acquisitions prior to February 15, 2003

Total negative goodwill

February 15, 2003

$22,705

3,154

1,621

4,805

3,830

1,852

37,967

710

414

3,982

5,106

$32,861

$8,044

(3,815)

4,229

5,045

$9,274

NMTP’s net loss for the year ended December 31, 2004 and for the period from February 15, 2003
to December 31, 2003 amounted to $2,793 and $2,562, respectively.

In the period from February 15, 2003 to December 31, 2003, the Group acquired an additional
31.56% ownership interests in NMTP for a consideration of $6,374. These acquisitions were account-
ed for as step acquisitions and the Group has recorded additional negative goodwill of $4,473.

The amount of negative goodwill is being recognised as income over the remaining average use-
ful life of the identifiable depreciable assets acquired (9 years).

KGOK

On May 21, 2004, the Group acquired 83.59% of the ordinary shares in Kachkanarsky Mining-
and-Processing Integrated Works (“KGOK”) for 5,519,647,048 roubles ($190,311 at the exchange
rate as of the dates of transactions). In addition, as part of the acquisition cost, the Group pur-
chased restructured debts of KGOK with a fair value of 596,957,000 roubles ($20,595 at the
exchange rate as of the date of transaction) for 1,283,000,000 roubles ($44,264 at the exchange
rate as of the date of transaction). As a result, the financial position and the results of operations
of KGOK were included in the Group’s consolidated financial statements beginning May 21, 2004.

The table below sets forth the fair values of KGOK’s identifiable assets, liabilities and contingent
liabilities at the date of acquisition:

Property, plant and equipment

Other non-current assets

Inventories

Accounts and notes receivable, net

Cash

Total assets

Non-current liabilities

Deferred income liabilities

Current liabilities

Total liabilities

Net assets

Fair value of net assets attributable to 83.59% ownership interest

Consideration paid

May 21, 2004

$337,053

3,983

17,140

66,342

2,271

$426,789

35,722

68,155

66,924

170,801

$255,988

$213,980

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

KGOK’s net profit for the period from May 21, 2004 to December 31, 2004 amounted to $58,220.

Subsequent to the acquisition date, the Group acquired an additional 14.04% ownership interest
in KGOK for 896,155,736 roubles ($31,256 at the exchange rate as of the dates of transactions).
The excess of the carrying value of minority interest over the amount of consideration amounting
to $11,420 was recorded in additional paid-in capital.

Kuznetsky Mining-and-Processing Integrated Works

In February 2004, the Group acquired a production complex from OOO Centerprom-MT for
$8,085. The production complex consisted of items of property, plant and equipment, which
were previously owned by OOO Kuznetsky Mining-and-Processing Integrated Works
(“KuzGOK”). The production complex acquired represents a business and was accounted for as a
business combination in accordance with IAS 22. Identifiable assets and liabilities of the produc-
tion complex were measured at fair value on the date of acquisition. In September 2004, the
Group acquired 100% ownership interest in KuzGOK, for $1. KuzGOK had licenses for iron ore
reserves being mined using the assets of the production complex acquired.

The financial position and results of operations of the production complex and KuzGOK were
included in the Group’s consolidated financial statements beginning February 19, 2004 and
September 30, 2004, as the Group exercised control over their operations since these dates.

For accounting purposes, the acquisitions of the production complex and ownership interest in
KuzGOK were accounted for as a single business combination.

The table below sets forth the fair values of identifiable assets and liabilities of the production
complex and KuzGOK at the dates of acquisition:

February 19, 2004

September 30, 2004

Property, plant and equipment

Inventories

Accounts and notes receivable, net

Cash

Total assets

Non-current liabilities

Deferred income tax liabilities

Current liabilities

Total liabilities

Net assets / (liabilities)

Consideration paid

$87,943

–

$87,943

(2,293)

(19,063)

–

(21,356)

$66,587

8,085

Total goodwill / (negative goodwill)

$(58,502)

$8,315

2,743

20,494

$31,559

(1,178)

–

(51,843)

(53,021)

$(21,462)

$21,463

Total

$96,258

2,743

20,494

$119,502

(3,471)

(19,063)

(51,843)

(74,377)

$45,125

8,086

$(37,039)

The acquired production complex was vertically integrated into the Group. As a result, it is imprac-
ticable for the Group to disclose the acquiree’s profit or loss for the period from February 19, 2004
to December 31, 2004

The amount of negative goodwill is being recognised as income over the remaining average use-
ful life of identifiable depreciable assets acquired (20 years).

Neryungriugol

in OAO UK Neryungriugol
In April 2004, the Group acquired 100% of the shares
(“Neryungriugol”) for 100,000 roubles ($4 at the exchange rate as of the date of the transaction).
As of the date of the acquisition, Neryungriugol was at the development stage applying for cer-
tain mining licences. Initially, acquisition of Neryungriugol in the consolidated financial statements
authorised for issue on April 25, 2005 was accounted for in accordance with IFRS 3 using the pro-
visional values. In April 2005, Neryungriugol obtained the licence for Denisovskoye coal field.

As a result, the Group completed the initial accounting for that business combination. The com-
pletion of the initial accounting is reflected in these consolidated financial statements.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Sheregeshskoe and Irbinskoe Ore Deposits

In July 2004, the Group acquired production complexes of OAO Sheregeshskoe Rudoupravlenie
(“Sheregeshskoe Ore Deposit”) and OAO Irbinskoe Rudoupravlenie (“Irbinskoe Ore Deposit”) on
open auctions for cash considerations of $2,996 and $3,053, respectively. The production com-
plexes acquired represent businesses and therefore their acquisitions were accounted for as busi-
ness combinations in accordance with IFRS 3. Indentifable assets, liabilities and contingent liabili-
ties of the production complexes were measured at fair value on the dates of acquisitions.
The financial position and results of operations of Sheregeshskoe and Irbinskoe Ore Deposits were
included in the Group’s consolidated financial statements from July 30, 2004, as the Group exer-
cised control over their operations from that date.
The table below sets forth the fair values of Sheregeshskoe Ore Deposit identifiable assets, liabil-
ities and contingent liabilities at the date of acquisition:

Property, plant and equipment

Inventories

Accounts and notes receivable, net

Total assets

Non-current liabilities

Deferred income liabilities

Total liabilities

Net assets

Consideration paid

Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets,

liabilities and contingent liabilities over

the cost of acquisition recognised in the income statement

July 30, 2004

$37,991

798

324

$39,113

(1,216)

(9,946)

(11,162)

$27,951

$2,996

$(24,955)

The table below sets forth the fair values of Irbinskoe Ore Deposit’s identifiable assets, liabilities
and contingent liabilities at the date of acquisition:

Property, plant and equipment

Inventories

Accounts and notes receivable, net

Total assets

Non-current liabilities

Deferred income liabilities

Total liabilities

Net assets

Consideration paid

Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets,

liabilities and contingent liabilities over

the cost of acquisition recognised in the income statement

July 30, 2004

$37,262

704

2,729

$40,695

(850)

(10,418)

(11,268)

$29,427

$3,053

$(26,374)

The acquired production complexes were vertically integrated into the Group. As a result, it is
impracticable for the Group to disclose the acquirees’ profit or loss for the period from July 30,
2004 to December 31, 2004

Negative Goodwill

The table below presents a reconciliation of the carrying amount of negative goodwill at
December 31, 2004, 2003 and 2002:

At December 31, 2001

Gross
book value

$(136,004)

Accumulated
amortisation

Total

$—

$(136,004)

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Negative goodwill previously recognised in investments
under the equity method

Negative goodwill recognised on acquisitions

Amortisation

At December 31, 2002

Negative goodwill previously recognised in investments under
the equity method

Negative goodwill recognised on acquisitions

Amortisation

Translation difference

At December 31, 2003

Negative goodwill recognised on acquisitions

Amortisation

Translation difference

At December 31, 2004

5. Revenues and Expenses

(21,418)

(200,964)

—

(358,386)

(5,045)

(23,974)

—

(6,048)

(393,453)

(37,039)

—

(5,488)

$(435,980)

—

17,855

343

—

26,271

310

44,779

–

28,012

577

$73,368

(21,418)

(200,964)

17,855

(340,531)

(4,702)

(23,974)

26,271

(5,738)

(348,674)

(37,039)

28,012

(4,911)

$(362,612)

Revenue from sales of goods and cost of revenues included non-monetary exchanges of dissim-
ilar goods for $0, $239,165 and $238,159 for the years ended December 31, 2004, 2003 and
2002, respectively.

Cost of revenues, distribution costs, administrative expenses and social infrastructure mainte-
nance expenses include the following for the years ended December 31:

Cost of inventories recognised as expense

Staff costs

Depreciation, depletion and amortisation

2004

$2,299,722

591,771

196,302

2003

$891,466

288,218

145,872

2002

$839,370

247,934

156,774

6. Income Taxes

Current income tax expense

Deferred income tax benefit

Gain on Financial Assets

Gain on financial assets represents gain on re-measurement of 19.145% of shares in ZAO
Raspadskaya to fair value. This gain was realised when these shares were contributed into a joint
venture (Note 8).

Major components of income tax expense for the years ended December 31 were as follows:

2004 2003

$444,038

$111,652

2002

$21,266

(9,991)

$11,275

Relating to origination and reversal of temporary differences

Income tax expense reported in the consolidated income statement

(66,749)

$377,289

(36,779)

$74,873

In the years ended December 31, 2004, 2003 and 2002, the Group’s income was subject to tax at
24% in the Russian Federation, 10% in Cyprus, and 24% and 11.6% (depending on the type of
income) in Switzerland. Ferrotrade Limited has a Taxation Exemption Certificate under which it is
currently liable to tax at the fixed annual amount of £225. This certificate is valid through 2010.

Major part of income taxes is paid in the Russian Federation. A reconciliation of income tax
expense applicable to profit before income tax using the Russian statutory tax rate of 24% to
income tax expense as reported in the Group’s consolidated financial statements for the years
ended December 31 is as follows:

Profit before income tax

At the Russian statutory income tax rate of 24%

Effect of non-deductible expenses and other
non-temporary differences

2004

$1,722,177

413,323

(48,092)

2003

$327,817

78,677

7,762

2002

$12,645

3,035

8,267

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Effect of the difference in tax rates in countries
other than the Russian Federation

Deferred income tax provided for undistributed earnings of
the Group's subsidiaries

(4,279)

16,337

Income tax expense reported in the consolidated income statement $377,289

(11,566)

—

$74,873

(27)

—

$11,275

Deferred income
tax liabilities:

Property, plant
and equipment

Liabilities under
the Settlement Agreements

Undistributed earnings
of subsidiaries

Other

Deferred income tax assets:

Tax losses available
for offset

Accrued liabilities

Accounts receivable

Other

Net deferred income
tax asset
Net deferred income
tax liability

Deferred income tax assets and liabilities and their movements for the years ended December 31
were as follows:

2004

Change
recognised
in income
statement

Change
due to
business
combi-
nations

2003

Trans-
lation
difference

Change
recognised
in income
statement

Change
due to
business
combi-
nations

2002

Trans-
lation
difference

$228,220

$(14,656) $103,025

$10,298 $129,553

$(28,639)

$342

$11,065

$146,785

14,586

(31,722)

8,669

1,395

36,244

(11,558)

16,337

14,736

16,337

7,532

—

679

—

3,924

2,601

—

3,617

273,879

(22,509)

112,373

15,617

168,398

(36,580)

—

19,673

11,887

31,228

62,788

—

(6,368)

13,135

(2,578)

1,065

2,541

28,564

44,240

5,255

624

3,301

8,051

3,424

1,753

667

287

2,019

13,228

2,266

3,623

678

199

3,390

3,465

–

(75)

–

—

155

497

—

–

110

–

3,053

44,749

—

(4,150)

2,979

9,968

194,513

218

(1,403)

(506)

236

6,150

7,188

307

729

(1,455)

14,374

–

$214,481

$(63,284)

$109,072

$13,523

$155,170

$(36,779)

$387

$11,423 $180,139

For Russian income tax purposes, ZapSib had unused tax losses incurred in 1997 and 1998. As of
December 31, 2002, the unused tax losses carry forward approximated $25,623. In 2003, these
tax losses were fully utilised.

As of December 31, 2004, deferred income taxes have been provided for undistributed earnings
of the Group’s subsidiaries amounting to $273,268 as management intends to dividend this
amount. As of December 31, 2004, the amount of undistributed earnings for which deferred
income taxes have not been provided was $1,768,515. Management does not intend on distribut-
ing those earnings in the foreseeable future.

The current tax rate for dividends income in respect of the Group’s subsidiaries varies from 5% to 10%.

7. Property, Plant and Equipment

Property, plant and equipment consisted of the following as of December 31:

Cost:

Land

Buildings and constructions

Machinery and equipment

Transport and motor vehicles

Mining assets

2004

2003

2002

$53,250

662,182

1,276,433

143,970

284,244

$26,239

274,324

935,563

20,996

169,838

$15,844

232,898

807,159

9,087

146,497

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Other assets

Assets under construction

Accumulated depreciation, depletion and amortisation:

Buildings and constructions

Machinery and equipment

Transport and motor vehicles

Mining assets

Other assets

Government grants:

Machinery and equipment, net

46,204

499,430

2,965,713

(70,568)

(440,467)

(13,080)

(14,488)

(18,804)

(557,407)

29,292

242,961

1,699,213

(40,367)

(276,526)

(5,187)

(6,755)

(10,912)

(339,747)

(9,377)

$2,398,929

(9,628)

$1,349,838

20,284

107,761

1,339,530

(18,223)

(129,670)

(2,161)

(1,011)

(4,425)

(155,490)

(9,658)

$1,174,382

Assets under construction include prepayments to constructors and suppliers of property, plant
and equipment in the amount of $137,489, $74,027 and $19,986 as of December 31, 2004, 2003
and 2002, respectively.

The movement in property, plant and equipment for the year ended December 31, 2004 was as
follows:

Land

Buildings
and
construc-
tions

Machinery
and
equipment

Transport
and
motor
vehicles

Mining
assets

Other
assets

Total

Assets
under
construc-
tions

At December 31, 2003,
cost, net of accumulated
depreciation and
government grants

$26,239

$233,957

$649,409

$15,809

$163,083

$18,380

$242,961

$1,349,838

Additions

21,214

5,467

5,581

84,612

9,555

3,228

503,327

632,984

Assets acquired in business
combination

Assets put into operation

Disposals

Depreciation
& depletion charge

Amortisation
of government grants

Impairment loss

(4)

–

—

3,942

322,845

52,539

24,952

95,973

994

31,251

532,496

32,854

222,459

(2,865)

(3,641)

11,108

(650)

–

11,398

(277,880)

–

(899)

(21,967)

(30,026)

(29,339)

(146,461)

(8,637)

(10,354)

(7,149)

Translation difference

1,798

28,695

45,892

3,696

—

811

—

(1,701)

13,200

—

1,448

At December 31, 2004,
cost, net of accumulated
depreciation
and government grants

$53,250

$ 591,614

$826,589

$130,890

$269,756

$27,400

$499,430

$2,398,929

–

—

(127)

21,865

(201,940)

811

(1,828)

116,594

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The movement in property, plant and equipment for the year ended December 31, 2003
was as follows:

Land

Buildings
and
construc-
tions

Machinery
and
equipment

Transport
and
motor
vehicles

Mining
assets

Other
assets

Total

Assets
under
construc-
tions

At December 31, 2002,
cost, net of accumulated
depreciation and
government grants

$15,844

$214,675

$667,831

$6,926

$145,486

$15,859

$107,761

$1,174,382

Additions

7,863

11,797

25,345

2,708

10,627

4,186

191,228

253,754

Assets acquired in business
combination

1,059

Assets put into operation

Disposals

Depreciation
& depletion charge
Amortisation
of government grants

Impairment loss

–

—

4,001

6,611

(904)

15,449

31,134

(3,410)

1,860

6,058

(48)

–

134

3,436

(625)

170

22,673

(47,273)

–

(19,676)

(24,663)

(19,201)

(137,846)

(2,546)

(4,862)

(5,883)

—

761

—

–

—

(170,338)

761

(4,094)

Translation difference

1,439

16,978

50,145

851

11,832

1,273

14,845

97,363

At December 31, 2003,
cost, net of accumulated
depreciation and
government grants

At December 31, 2001,
cost, net of accumulated
depreciation and
government grants

$26,239

$233,957

$649,409

$15,809

$163,083

$18,380

$242,961 $1,349,838

The movement in property, plant and equipment for the year ended December 31, 2002
was as follows:

Land

Buildings
and
construc-
tions

Machinery
and
equipment

Transport
and
motor
vehicles

Mining
assets

Other
assets

Total

Assets
under
construc-
tions

$–

$211,286

$750,394

$6,818

$–

$14,583

$104,762 $1,087,843

Additions

15,844

3,923

292

2,744

3,000

71,812

97,636

Assets acquired
in business combination

Assets put into operation

Disposals

Depreciation &
depletion charge

Amortisation of
government grants

At December 31, 2002,
cost, net of accumulated
depreciation
and government grants

–

—

16,217

5,630

(244)

1,799

48,405

(5,918)

792

1,193

(4)

143,725

–

480

2,275

(38)

1,329

164,342

(57,531)

–

(12,611)

(18,815)

(18,235)

(131,507)

(2,165)

(1,011)

(4,441)

—

735

—

–

—

(157,359)

735

$15,844

$214,675

$667,831

$6,926

$145,486

$15,859

$107,761

$1,174,382

As of December 31, 2004, 2003 and 2002, certain items of production equipment with an approx-
imate carrying value of $95,802, $103,172 and $431,748, respectively, were pledged to banks as
collateral against loans to the Group (Notes 19).

In addition, the Group pledged property, plant and equipment with an approximate carrying value
of $0, $12,752 and $1,121 as of December 31, 2004, 2003 and 2002, respectively, in respect of
loans received by the Group’s related parties.

Government grants represent the reduction in ecological tax payable by the Group in 2001. Such
reductions were granted to the Group for the amount of actual expenditures on the acquisition of
certain assets qualified for ecological purposes.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

8. Investment in a Joint Venture

On March 10, 2004, as a part of a joint venture agreement, the Group acquired a 50% ownership
interest in Corber Enterprises Limited (“Corber”), a joint venture created for the purpose of exer-
cising joint control over economic activities of Raspadskaya Mining Group and other Corber’s sub-
sidiaries. At the date of acquisition, Corber owned 72.03% of ordinary shares in ZAO
Raspadskaya, one of the largest coal mines in the Russian Federation. The Group’s consideration
in exchange for the ownership interest in Corber was $139,651 including a cash payment of
$61,800, the issuance of 6% interest-bearing promissory notes of Mastercroft Mining with total
nominal value of $19,200 payable not earlier than March 10, 2006 and a contribution of 88,016
(19.15%) ordinary shares in ZAO Raspadskaya with a carrying value of $58,651.

The table below sets forth the fair values of Corber’s identifiable assets, liabilities and contingent
liabilities at the date of acquisition:

March 10, 2004

Property, plant and equipment

Mineral reserves

Other non-current assets

Inventories

Accounts and notes receivable, net

Other current assets

Cash

Total assets

Non-current liabilities

Deferred income tax liabilities

Current liabilities

Total liabilities

Minority interests

Net assets

Fair value of net assets attributable to 50% effective interest

Negative goodwill

Consideration paid

$176,723

269,960

1,139

11,000

33,373

1,294

5,644

499,133

16,564

82,100

27,387

126,051

36,988

$336,094

168,047

(28,396)

$139,651

The Group accounted for the investment in Corber under the equity method.

The Group completed the initial accounting for the acquisition of its ownership interest in Corber,
which previously was accounted for using provisional values. As a result, the Group made certain
adjustments to identifiable assets and liabilities used in the preparation of consolidated financial
statements of the Group for the year ended December 31, 2004 authorised for issue on April 25,
2005. These changes did not have a significant impact on the carrying value of the investment bal-
ance as of December 31, 2004 and the share of profits of a joint venture for the year then ended.

Subsequent to the acquisition date, Corber acquired additional 4.20% ownership interest in
Raspadskaya Mining Group for $5,522. The 50% of excess of the carrying value of acquired
minority interest over the amount of consideration paid by the joint venture amounting to $5,517
is recorded in additional paid-in capital.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The table below sets forth Corber’s assets and liabilities as of December 31, 2004:

Property, plant and equipment

Mineral reserves

Other non-current assets

Inventories

Accounts and notes receivable, net

Cash

Total assets

Non-current liabilities

Deferred income tax liabilities

Current liabilities

Total liabilities

Minority interests

Net assets

$234,818

266,758

612

12,681

63,170

48,066

626,105

43,243

80,060

34,758

158,061

23,958

$444,086

As of December 31, 2004, the Group’s effective interest in these assets and liabilities is 50%.

The table below sets forth Corber’s income and expenses for the period from March 10, 2004 to
December 31, 2004:

Revenue

Cost of revenue

Other expenses, including income taxes

Minority interests

Net profit

Share of profits attributable to the Group

Amortisation of negative goodwill

Share of profits/(losses) of a joint venture

Investment at March 10, 2004

Share of profit of a joint venture

Translation difference

Additional paid-in capital in respect of acquisition of minority interests

Investment at December 31, 2004

$363,586

(211,952)

(64,499)

(2,983)

$84,152

$42,076

1,065

$43,141

$139,651

43,141

6,403

5,517

$194,712

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

9. Other Long-Term Investments

Name

Business activity

Percentage holding 2004

2003

2002

Long-term investments were as follows as of December 31:

Investments in associates:

OAO Nakhodka Commercial Sea Port

OOO Mecona

OOO Plant of Metallurgical Reagents

OAO TagilBank

Other associates

Investments in other companies:

seaport services

production of metallurgical
reagents

banking

OAO Ugolnaya Kompaniya Kuznetskugol

coal mining

Novosibirsk Steel Plant

steel making, pipe manufacturing

OAO Ugolnaya Kompaniya Kuzbassugol

coal mining

OAO Rossiiskie Kommunalnye Systemy

electricity, heating and other
public utilities

35.47%

50.00%

37.91%

20%

0.20%

3.91%

$—

—

708

615

—

$— $4,917

1,683

679

579

527

—

536

167

—

7,822

12,443

8,869

10.00%

2,395

3,395

—

ZAO Raspadskaya

Other investments

Held-to-maturity financial assets:

OGVZ bonds

Other bonds and promissory notes

coal mining

19.09%

—

615

1,310

612

1,214

422

1,172

2,524

1,055

—

$8,644

$9,869 $36,390

10. Cash and Cash Equivalents and Restricted Deposits at Banks

Cash and cash equivalents were denominated in the following currencies as of December 31:

Roubles

US dollars

Euros

2004

$64,632

227,194

1,121

2003

$41,767

150,327

3,587

2002

$40,883

2,086

$292,947

$195,681

$43,001

The above cash and cash equivalents mainly consist of cash at banks.

Restricted deposits at banks were as follows as of December 31:

Deposits to secure bank loans

Deposits for repayment of Settlement Agreements (Note 20)

Less: deposits with current maturities

2004

$17,570

3,441

21,011

(12,441)

$8,570

2003

$22,972

—

22,972

(4,850)

$18,122

2002

$—

—

$—

The deposits earned interest in the range from 0.98% to 8.50% per annum. The deposits to
secure bank loans are denominated in US dollars.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

11. Other Non-Current Assets

Other non-current assets were as follows as of December 31:

Prepaid contributions to pension plans

Long-term VAT relating to Settlement Agreements

Long-term input VAT

Deferred income tax assets (Note 6)

Other

2004

$—

197

3,980

3,390

1,678

2003

$8,031

3,978

1,990

—

917

2002

$—

4,320

304

—

204

$9,245

$14,916

$4,828

Inventories, at cost, consisted of the following as of December 31:

12. Inventories

Raw materials and spare parts

Work-in-progress

Finished goods:

—at cost

—at net realisable value

Allowance for obsolete and slow-moving items

2004

2003

2002

$390,367

$188,440

$101,550

63,229

34,885

19,808

327,099

266,386

4,668

35,510

816,205

(8,386)

—

489,711

126,026

(5,399)

(4,274)

$807,819

$484,312

$121,752

As of December 31, 2004, 2003 and 2002, certain items of inventory with an approximate carry-
ing amount of $339,238, $178,597 and $30,219, respectively, were pledged to banks as collateral
against loans provided to the Group (Note 19).

13. Trade and Other Receivables

Trade and other receivables consisted of the following as of December 31:

Trade accounts receivable

Other receivables

Allowance for doubtful accounts

14. Related Party Disclosures

2004

2003

2002

$275,189

$77,537

$44,284

38,341

313,530

17,693

95,230

14,027

58,311

(27,783)

(15,003)

(15,943)

$285,747

$80,227

$42,368

For the purposes of these financial statements, parties are considered to be related if one party
has the ability to control the other party or exercise significant influence over the other party in
making financial or operational decisions. In considering each possible related party relationship,
attention is directed to the substance of the relationship, not merely the legal form.

Related parties may enter into transactions which unrelated parties might not, and transactions
between related parties may not be effected on the same terms, conditions and amounts as trans-
actions between unrelated parties.

Amounts owed by/to related parties at December 31 were as follows:

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

EAM Group

Evrazmetall-Centre

Evrazmetall-Sibir

Ferrotrade & Co.

Ferrotranstrade

Fletcher Holdings International Corp.

Goroblagodatskoye Ore Mine

KMK-Energo

Kuzbassuglepostavka

Marteck Shipping

Relsy KMK

SEAR MF

Shareteam

Sibirskaya Gornaya Company

Steel of KMK

Other entities

Liabilities to entities under common control for
transfers of ownership interests in subsidiaries -
current portion

Less: allowance for doubtful accounts

Less: amounts due to related parties under
Settlement Agreements (Note 20)

Amounts due from related parties

Amounts due to related parties

2004

$—

20,930

21,721

2003

$—

—

2002

$401

—

62,247

8,850

2004

2003

2002

$—

—

349

—

$7,709

$23,559

—

116,514

74,480

—

4,005

—

20,766

20,699

6,975

2,456

—

8,679

867

—

2,277

9,028

—

5,551

59,510

—

4,327

—

2,227

19,197

—

148,162

(8,837)

—

42,004

(10,853)

–

206

—

7,708

—

22,782

32,303

69,809

–

—

5,530

19,408

—

7,629

1,766

32,047

5,574

54,136

—

196

5,278

—

5,530

12,061

618

271,708

–

47,277

189,122

–

(13,329)

(30,826)

$85,110

$139,325

$31,151

$69,809

$258,379

$158,296

In addition to the balances and transactions disclosed in this note, loans due to and from
related parties presented separately in the accompanying consolidated balance sheets and in
Notes 15, 22 and 28.

Transactions with related parties were as follows for the years ended December 31:

Sales to related parties

Purchases from related parties

2004

2003

2002

2003

$—

—

2002

$369

22,317

51,868

—

484,669

311,829

7,377

1,145

6,822

10,435

104,471

—

7,238

83,866

—

7,271

—

27,668

—

499

—

630

151,880

5,463

—

233

472

$12,423

$24,629

—

3,483

51,597

—

97,528

532

79,504

—

377

—

1,745

14,213

229,280

142,738

—

1,263

—

51,451

—

21,651

18,042

25,903

69,814

13,368

$—

—

223

—

18,251

—

214

40,274

17,485

D.E.Metals

Duferco S.A.

EAM Group

Evrazmetall-Centre

Evrazmetall-Sibir

Ferrotrade & Co.

Ferrotranstrade

KMK- Energo

Kuzbassuglepostavka

Kuznetsk Coal Company

Kuznetskuglesbyt

UK Kuznetskugol

Marteck Shipping

PromKhimProduct

Raspadsky Ugol

Relsy KMK

Sibirskaya Gornaya Company

Steel of KMK

25,453

—

7,778

—

433

15,309

—

91,692

(6,582)

2004

$637

—

105,654

102,660

124,258

45,585

5,538

—

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

UK Yuzhkuzbassugol

ZAO Yuzhkuzbassugol

Other entities

Sales to related parties

Purchases from related parties

2004

209

31,825

2003

14,609

–

5,312

2002

–

49,072

2004

29,582

257,676

51,524

2003

2002

6,122

–

23,787

16,281

$539,569

$677,386

$620,535

$653,736

$509,067

$92,728

ZAO D.E.Metals (“D.E.Metals”) became an entity under common control with the Group in 2003.
It served as a purchasing agent to the Group.

Duferco S.A. is an entity under control of Duferco Participation Holdings Limited (“Duferco”), a
shareholder of NTMK. In 2002, Duferco sold its shares in NTMK to the Group and ceased to be a
related party. Duferco S.A. was a customer of the Group.

ZAO EAM Group (“EAM”) is an entity under common control with the Group. At December 31,
2003 and 2002, the Group owed $7,661 and $20,963, respectively, to EAM under the Settlement
Agreement (Note 20). In 2002, EAM purchased the Group’s steel products.

OOO Evrazmetall-Centre and OOO Evrazmetall-Sibir, the entities under common control with the
Group, purchase steel products from the Group.

Ferrotrade & Co. is an entity under common control with the Group. Prior to 2004, Ferrotrade &
Co. exported the Group’s products from Russia. At the end of 2003, Ferrotrade & Co. discontin-
ued entering into new sales contracts and sold all of its inventories to Ferrotrade Limited, the
Group’s newly established wholly owned subsidiary. Prior to December 31, 2003, in order to fulfil
remaining sales commitments, Ferrotrade & Co. repurchased back from Ferrotrade Limited
521,560 metric tons of steel products at a higher price. The Group did not include these transac-
tions in revenue and cost of revenue. Gain of $24,433 arising from the resale at a higher price was
recognised as a net trading gain in the accompanying consolidated income statement for the year
ended December 31, 2003. In 2004, the Group sold to Ferrotrade & Co. 467,479 metric tons of
steel products for $124,258.

OAO Ferrotranstrade (“Ferrotranstrade”), an entity under common control with the Group, acts
as the Group’s sales agent. The Group also sells its products to Ferrotranstrade.

Fletcher Holdings International Corp. (“Fletcher”) was an entity under common control with the
Group. At December 31, 2003 and 2002, the Group’s accounts payable to Fletcher mainly com-
prised of the amounts due for the purchase of shares in the Group’s subsidiaries. In 2004, the
Group repaid all its liabilities to Fletcher.

KMK-Energo, an entity under common control, supplies electricity to certain subsidiaries of the
Group.

OOO Kuzbassuglepostavka (“Kuzbassuglepostavka”), an entity under common control with the
Group, supplied coal to and purchased tolling services from the Group in 2003. In 2004,
Kuzbassuglepostavka ceased to be a related party with the Group.

OOO Kuznetsk Coal Company (“Kuznetsk Coal Company”), an entity under common control with
the Group, purchased metal products, inventory and services from the Group and sold coke and
coal to the Group. In June 2004, Kuznetsk Coal Company ceased to be a related party with the
Group.

ZAO Kuznetskuglesbyt (“Kuznetskuglesbyt”), an entity under control of a shareholder of ZapSib,
sold spare parts and provided transportation services to ZapSib and purchased metal products
from ZapSib.

OAO UK “Kuznetskugol” (“Kuznetskugol”) is an entity under common control with the Group. In
2003 and 2004, the Group sold metal products and raw materials and rendered services to
Kuznetskugol.

Marteck Shipping Limited (“Marteck Shipping”), an entity under common control with the Group,
provides freight services to the Group.

OOO PromKhimProduct (“PromKhimProduct”), an entity under common control with the Group,
purchased coke from the Group. In 2004, PromKhimProduct ceased to be a related party with the
Group.

OOO Raspadsky Ugol, a subsidiary of the Group’s joint venture, sells coal to the Group.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

OOO Relsy KMK (“Relsy KMK”) was an entity under common control with the Group. Relsy KMK
sold metal products and materials to and purchased metal products from the Group. In 2003, the
Group acquired property, plant and equipment items for 308,506,799 roubles ($10,340 at the
exchange rate as of the date of acquisitions) from Relsy KMK. In 2003, Relsy KMK ceased to be a
related party.

ZAO SEAR MF (“SEAR MF”) is an entity under common control with the Group. At December 31,
2003 and 2002, ZapSib owed $1,562 and 3,681, respectively, to SEAR MF under the Settlement
Agreement (Note 20). In 2004, the Group repaid these liabilities to SEAR MF. The difference
between cost and carrying value of the debts amounting to $10,480 was included in loss on extin-
guishment of debts in the accompanying consolidated income statement for the year ended
December 31, 2004.

Shareteam Investments Limited (“Shareteam”) is an entity under common control with the Group.
At December 31, 2003, amounts due to Shareteam represented accounts payable for 41,055,936
common shares of NMTP purchased by the Group. In 2004, the Group repaid all its liabilities to
Shareteam.

ZAO Sibirskaya Gornaya Company (“SGC”), an entity under common control with the Group, was
liquidated in 2003. In 2002, the Group purchased raw materials from and sold metal products to
SGC.

OOO Steel of Kuznetsk Steel Plant (“Steel of KMK”) was an entity under common control with the
Group. In 2004, Steel of KMK provided tolling services related to processing of pig iron to the
Group and the Group provided services and sold metal products to Steel of KMK. Steel of KMK
ceased to be a related party in July 2004.

OAO OUK Yuzhkuzbassugol and ZAO UK Yuzhkuzbassugol, associates of the entity under com-
mon control with the Group, sell coal to the Group.

The balances of amounts due to related parties as of December 31, 2003 and 2002 include liabili-
ties to entities under common control for transfers of ownership interests in subsidiaries. As
described in Notes 1 and 18, ownership interests in certain subsidiaries were transferred to the
Group in transactions with entities under common control with the Group. When the transfer of
ownership interest in such subsidiaries actually occurred after December 31, 2002, and the results
of operations of such subsidiaries have been included in the accompanying consolidated financial
statements from the dates earlier than December 31, 2002, the carrying amounts of net assets of
such subsidiaries, net of minority interests, have been included in amounts due to related parties
as of December 31, 2003 and 2002.

Compensation to Key Management Personnel

Key management personnel totalled 62, 49 and 38 persons as at December 31, 2004, 2003 and
2002, respectively. Total compensation to key management personnel included in general and
administrative expenses in the accompanying income statement amounted to $37,818, $2,925
and $1,406 for the years ended December 31, 2004, 2003 and 2002, respectively. Compensation
to key management personnel consists of contractual salary and performance bonus depending
on operating results.

15. Loans Receivable from Related Parties

Loans receivable from related parties as of December 31 were as follows:

ZAO Yuzhkuzbassugol

OOO KMK-Energo

OOO Spetsmash-MT

Marteck International Ltd.

OAO Goroblagodatskoye Ore Mine

ZAO SEAR MF

2004

$2,763

1,443

—

2003

$—

—

13,148

2,000

1,460

350

$4,206

$16,958

2002

$—

—

10,611

$10,611

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

As of December 31, 2004, 2003 and 2002, loans receivable from related parties include promis-
sory notes due on demand and short-term loans receivable. Notes and loans receivable as of
December 31, 2004 bear interest in the range between 1% and 12% per annum. Notes and loans
receivable as of December 31, 2003 and 2002 bore no interest.

Loans receivable from related parties are mainly denominated in roubles.

Taxes receivable were denominated in roubles and consisted of the following as of December 31:

2004

$324,571

72,962

$397,533

2003

$125,829

23,203

$149,032

2002

$52,205

10,636

$62,841

As of December 31, 2004, 2003 and 2002, input VAT included the current portion of input VAT
related to the restructured liabilities under the Settlement Agreements of $143, $1,606 and $2,477,
respectively (Note 20).

Input VAT, representing amounts payable or paid to suppliers, is recoverable from the tax author-
ities via offset against VAT payable to the tax authorities on the Group’s revenue or direct cash
receipts from the tax authorities. Management periodically reviews the recoverability of the bal-
ance of input value added tax and believes it is fully recoverable within one year.

16. Taxes Receivable

Input VAT

Other taxes

17. Short-Term Investments and Notes Receivable

Short-term investments and notes receivable as of December 31 were as follows:

Promissory notes

Alfa-bank—deposit accounts

Nomos bank—deposit certificates

Other investments

2004

$170

19,573

—

2,061

$21,804

2003

$35,987

24,445

9,430

1,856

$71,718

2002

$441

10,571

—

$11,037

In 2002-2004, subsidiaries had deposit accounts with Alfa-bank. The deposits earned interest in
the range from 2.75% to 11% per annum. The certificates of Nomos bank earned interest of 9.5%
per annum.

Short-term investments and notes receivable are mainly denominated in roubles.

18. Equity

Share Capital

As described in Note 1, Evraz Group was formed through series of transactions between entities
under common control with the Group. Prior to the reorganisation of the Group, in which 95.83%
of Mastercroft shares were contributed into Evraz Group, share capital of the Group comprised of
the share capital of Mastercroft.

Share Capital of Mastercroft

On December 31, 2002, Mastercroft issued 1,966 shares with par value of 1 US dollar each. These
shares were paid in cash in 2003.

On May 14, 2003 and October 31, 2003, the Central Bank of Cyprus granted permissions for the
additional issue to Crosland of 100,017,700 and 200,000,000 ordinary shares of 1 US dollar each,
respectively.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

In respect to the shares issued on May 14, 2003, Mastercroft received contributions from Crosland
of $100,018, of which $14,018 was in cash and $86,000 was in the form of promissory notes of
an entity under common control with the Group. The Group offset its liabilities to that entity under
common control against these promissory notes.

In respect of the shares issued on October 31, 2003, Mastercroft called up for payment of 0.1949
US dollar per share out of 1 US dollar, being the nominal value of the ordinary share, and received
from Crosland cash of $38,980. As of December 31, 2003, the balance of 0.8051 US dollar has not
been called for payment.

In the year ended December 31, 2004, Mastercroft called for payment an additional $30,000 and
received this amount from Crosland. As of December 31, 2004, the balance of 0.6551 US dollar
has not been called for payment.

In January 2005, prior to the completion of the Group’s reorganisation, Mastercroft called up for
payment the remaining $131,020 for shares issued in 2003 and received this amount from
Crosland.

As Mastercroft is a subsidiary of Evraz Group at December 31, 2004, the share capital of
Mastercroft is eliminated on consolidation.

Share Capital of Evraz Group

As of December 31, 2004, Evraz Group issued 15,500 ordinary shares with par value of Є2 each,
which resulted in the share capital of Є31,000 ($42 at the exchange rate as of December 31,
2004). As of December 31, 2004, these shares were fully paid. On April 5, 2005, Evraz Group
issued additional 107,204,325 ordinary shares with a par value of Є2 each in exchange for the con-
tribution of 95.83% of Mastercroft shares. On the same date, the share capital of Evraz Group
was reduced by the cancellation of 15,499 ordinary shares with par value of Є2 each. As the con-
sideration for these additional shares issued subsequent to year end has been accounted for in the
consolidated financial statements as at December 31, 2004, the April 5, 2005 issue of shares will
result in a capitalisation of reserves within equity.

Shareholders of Evraz Group are entitled to standard rights provided under the laws of
Luxembourg to shareholders of stock companies (“socie’te’ anonyme”). These rights comprise the
right to vote at the shareholders meetings and the right to receive dividends.

Earnings per Share

Earnings per share are calculated by dividing the net income attributable to ordinary shareholders
by the weighted average number of ordinary shares in issue during the period.

Net profit attributable to equity holders of the parent entity

2004

$1,179,625

2003

$204,982

2002

$5,934

Weighted average number of ordinary shares outstanding

107,204,326

Earnings per share attributable to equity holders of the parent entity,

$11.00

$1.91

$0.06

basic and diluted (US dollars)

As the number of shares has increased as a result of the capitalisation subsequent to year end
but prior to issuing these financial statements, earnings per share calculations for the years
ended December 31, 2004, 2003 and 2002 have been based on the number of shares in issue at
April 5, 2005.

The Group has no dilutive potential ordinary shares; therefore, the diluted earnings per share
equal basic earnings per share.

Sale of Minority Interest

On August 6, 2004, Crosland Limited sold 12,500,000 shares (4.17%) of Mastercroft to a minor-
ity shareholder for $12,500. The Group charged the amount received by Crosland, Mastercroft’s
parent prior to reorganisation, to accumulated profits as a distribution to shareholders. Difference
between the carrying value of that minority interest and the amount of consideration amounting
to $34,885 was recognised by the Group as a loss on sale of minority interest in the accompany-
ing income statement for the year ended December 31, 2004.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Acquisitions of Minority Interests in Subsidiaries

In 2004, in addition to acquisitions of minority interests in subsidiaries described in Note 4, the
Group acquired minority interests in certain other subsidiaries. The excess of acquired minority
interests over the consideration amounting to $20,611 is recorded as additional paid-in capital and
the excess of consideration over the minority interests amounting to $12,128 is charged to accu-
mulated profits.

Transfers of Ownership Interests in Subsidiaries

The legal transfer of ownership interests in certain subsidiaries has been made by entities under
common control with the Group in the year ended December 31, 2003. The excess of the
amounts paid by the Group to the entities under common control over the historical cost of net
assets transferred to the Group amounting to $24,358 was recorded as a distribution to enti-
ties under common control in the accompanying statement of changes in equity for the year
ended December 31, 2003.

Distributions to Entities under Common Control

In 2004, the Group’s distributions to entities under common control were $3,858, representing
dividends payable to an entity under common control, which were declared prior to the transfer
of ownership interest in a subsidiary to the Group.

Dividends

On November 19, 2004, directors of Mastercroft approved distribution of dividends in the amount
of $58,000, which represents 0.19 US dollars of dividends per share.

On January 13, 2005, directors of Mastercroft approved distribution of dividends in the amount
of $131,000 to Crosland and other shareholders registered as of December 31, 2004 (0.44 US dol-
lars of dividends per share).

Short-term and long-term loans and borrowings were as follows as of December 31:

2004

$110,061

688,983

300,000

175,000

36,038

859

(11,669)

18,772

2003

$159,991

207,990

—

175,000

33,951

11,105

(10,109)

4,362

2002

$72,417

—

31,794

17,318

—

$1,318,044

$582,290

$121,560

As of December 31, 2004, 2003 and 2002, total interest bearing loans and borrowings consist-
ed of short-term loans and borrowings in the amount of $378,583, $217,880 and $87,272,
respectively, and long-term loans and borrowings in the amount of $932,358, $370,157 and
$34,257, respectively, including the current portion of long-term liabilities of $132,596, $6,002
and $0, respectively.

In 2004, average annual interest rates were 11.1%, 5.0% and 5.0% for short-term loans
denominated in roubles, US dollars and euros, respectively, and 14.8%, 8.8%, 5.9% for long-
term loans denominated in roubles, US dollars and euros, respectively.

In 2003, average annual interest rates were 13.0%, 5.8% and 15.0% for short-term loans
denominated in roubles, US dollars and euros, respectively, and 13.7%, 7.5%, 6.9% for long-
term loans denominated in roubles, US dollars and euros, respectively.

19. Loans and Borrowings

Russian banks

International banks

10.875 per cent notes due 2009

8.875 per cent notes due 2006

Bearer coupon debt securities

Loans provided by other companies

Unamortised debt issue costs

Interest payable

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Roubles

US dollars

Euros

Unamortised debt issue costs

Less than one year

Between one year and two years

Between two years and five years

After five years

Unamortised debt issue costs

In 2002, average annual interest rates were 17.4% and 8.8% for short-term loans denominated in
roubles and US dollars, respectively, and 17.7% and 9.4% for long-term loans denominated in rou-
bles and euros, respectively.

The liabilities are denominated in the following currencies:

2004

$78,828

11,094,087

156,798

(11,669)

2003

$89,116

463,097

40,186

(10,109)

2002

$53,047

67,521

992

–

$1,318,044

$582,290

$121,560

The liabilities are contractually repayable after the balance sheet date as follows:

2004

$529,951

290,209

467,002

42,551

(11,669)

2003

$228,244

87,439

266,831

9,885

(10,109)

2002

$87,303

2,023

32,123

111

–

$1,318,044

$582,290

$121,560

Some of the loan agreements provide for certain covenants in respect of Mastercroft and its sub-
sidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios,
including restrictions in respect of indebtedness and profitability.

The Group pledged its rights under some export contracts as collateral under the loan agreements.
All proceeds from sales of steel pursuant to these contracts can be used to satisfy the obligations
under the loan agreements in the event of a default.

At December 31, 2004, 2003 and 2002, the Group had equipment with a carrying value of
$95,802, $103,172 and $431,748, respectively, pledged as collateral under the loan agreements. In
addition, the Group pledged finished goods with a carrying value of $336,348, $178,597 and
$30,219 as of December 31, 2004, 2003 and 2002, respectively.

Bonds and Notes

In September and December 2003, EvrazSecurities issued notes amounting to $175,000. The notes
bear interest of 8.875% per annum payable semi-annually and mature on September 25, 2006.
Mastercroft Limited, Ferrotrade Limited, ZapSib, NTMK and NKMK, jointly and severally, guaran-
teed the due and punctual payments of all amounts in respect of the notes except that NKMK’s
liabilities are limited to $137,512.

On August 3, 2004 and September 30, 2004, EvrazSecurities issued notes amounting to
$300,000. The notes bear interest of 10.875% per annum payable semi-annually and mature on
August 3, 2009. Mastercroft Limited, Ferrotrade Limited, ZapSib, NTMK and NKMK, jointly and
severally, guaranteed the due and punctual payments of all amounts in respect of the notes
except that the liability of ZapSib and NTMK, each, is subject to a limit of $300,000.

On December 6, 2002, FC EvrazHolding issued 1,000,000 of bearer coupon bonds with a par value
of 1,000 roubles each. These securities were issued at par value and mature on December 5, 2005.
Interest payments on the coupons are due semi-annually from the date of issuance. First coupon
bears interest of 17.70% per annum; second coupon bears 16.50% per annum; third and fourth
coupons bear 15.00% per annum; fifth and sixth coupons bear 12.50% per annum. NTMK guar-
anteed all of the liabilities of FC EvrazHolding under the bonds. The liabilities under the bonds were
accounted for at amortised cost in the accompanying consolidated financial statements.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Unamortised Debt Issue Costs

Unamortised debt issue costs represent agent commission and arrangement costs paid by sub-
sidiaries in relation to the arrangement of long-term loans and issue of notes.

Unutilised Borrowing Facilities

As of December 31, 2004, the Group had unutilised borrowing facilities in the amount of
$367,687

20. Liabilities under the Settlement Agreements

Liabilities under the Settlement Agreements, at carrying amounts, consisted of the following as of
December 31:

Entities under common control

Others

Less current portion:

Entities under common control

Others

2004

$—

4,224

—

$4,224

2003

$13,329

45,667

58,996

(1,680)

(17,903)

(19,583)

$39,413

2002

$30,826

56,969

87,795

(6,360)

(23,337)

(29,697)

$58,098

In 1997, under the decision of the Arbitration Court of the Kemerovo Region, ZapSib was placed
under external management in connection with the bankruptcy proceedings against ZapSib. On
November 14, 2001, ZapSib entered into a restructuring agreement with its creditors (the
“Settlement Agreement”). On November 29, 2001, the court approved the Settlement
Agreement and ceased the bankruptcy proceedings against ZapSib. Under the Settlement
Agreement, ZapSib’s liabilities to the creditors were rescheduled for repayment during the peri-
od from 2002 to 2026.

In 1999, creditors of NTMK initiated bankruptcy proceedings against NTMK and filed a suit with
the Sverdlovsk region Arbitration court. On November 26, 1999, the NTMK entered into a
restructuring agreement with its creditors, which was approved by the court in December 1999
(the “Settlement Agreement”). Under the Settlement Agreement, NTMK’s liabilities to the
creditors were rescheduled for repayment during the period from 2001 to 2008.

In 2000, under the decision of the Arbitration Court of the Sverdlovsk Region, KGOK was
placed under external management in connection with the bankruptcy proceedings against
KGOK. On March 11, 2001, KGOK entered into a restructuring agreement with its creditors (the
“Settlement Agreement”). On April 19, 2001, the court approved the Settlement Agreement and
ceased the bankruptcy proceedings against KGOK. Under the Settlement Agreement, KGOK’s
liabilities to the creditors were rescheduled for repayment during the period from 2006 to 2014.

The restructuring of the liabilities under the Settlement Agreements was accounted for as
extinguishments of the old financial liabilities and recognition of the new financial liabilities
with substantially different terms.

The liabilities under the Settlement Agreements were measured at amortised cost in the accom-
panying consolidated balance sheets. The cost of liabilities of NTMK and ZapSib as of the dates
of restructurings was determined based on the future cash payments discounted at the annual
rates of 20% for the liabilities denominated in roubles and 12%, for the liabilities denominated
in US dollars and euros. The cost of liabilities of KGOK as of the date of restructuring was deter-
mined based on the future cash payments discounted at the annual rate of 13% for the liabili-
ties denominated in roubles.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

In 2004, the Boards of Directors of NTMK and ZapSib resolved to repay the liabilities of the com-
panies ahead of schedule. In November and December 2004, the subsidiaries repaid most of the
liabilities under the Settlement Agreements. As of December 31, 2004, the unpaid current portion
of liabilities under the Settlement Agreements in the amount of $17,844 was included in other
accounts payable in the accompanying consolidated balance sheet (Note 27).

Loss arising from the repayment of liabilities under the Settlement Agreements was included in
loss extinguishment of debts in the amount of $41,212 in the accompanying consolidated income
statement for year ended December 31, 2004.

In March 2005, the Board of Directors of KGOK resolved to repay the all of KGOK’s liabilities
under the Settlement Agreement ahead of schedule. As of December 31, 2004, the nominal
amount of the liabilities was 259,881,288 roubles ($9,358 at the exchange rate as of December
31, 2004.

In April 2005, KGOK repaid 200,004,541 roubles ($7,208 at the exchange rate as of December 31,
2004) of its liabilities under the Settlement Agreement.

21. Restructured Taxes Payable

Restructured taxes payable as of December 31 were as follows:

Social insurance taxes

Road users tax

Tax-related fines and penalties

Other taxes

Less current portion (Note 29):

Social insurance taxes

Road users tax

Tax-related fines and penalties

Other taxes

2005

2006

2007

2008

2009

2010

2011

2004

$16,655

14,833

4,161

652

36,301

(8,685)

(4,093)

(119)

(145)

(13,042)

$23,259

2003

$21,714

13,301

3,029

1,402

39,446

(9,646)

(2,744)

(303)

(753)

(13,446)

$26,000

2002

$29,274

12,546

2,226

1,735

45,781

(12,884)

(2,290)

(814)

(729)

(16,717)

$29,064

In 2001-2003, certain of the Group’s subsidiaries agreed with the tax authorities to restructure their
liabilities under social insurance taxes, road users’ tax, other taxes and related fines and penalties.

As of December 31, 2004, the amount of $49,373, which is denominated in roubles, should be paid in
quarterly installments through 2011 as follows:

$14,323

15,057

5,784

5,921

1,996

371

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The restructured taxes and related fines and penalties are carried at amortised cost which was
determined at the dates of respective restructurings based on the present value of future cash
outflows using discount rates of 13% in KGOK and 20% in NTMK and ZapSib per annum.

Further, tax fines and penalties in the amount of $101,498 to be forgiven under the restructuring
terms, if all the other payments are made on a timely basis, were derecognised as of December 31,
2001, because management believes that it was virtually certain that the Group will comply with
the payment terms of the restructuring agreements and make timely payments of its current tax
liabilities.

Gains on restructurings were recognised at respective restructuring dates as gains on extinguish-
ment of debts. Such gains were $0, $2,259 and $12,804 in the years ended December 31, 2004,
2003 and 2002, respectively, and included in the accompanying consolidated income statements.

22. Long-Term Loans due to Related Parties

Long-term loans due to related parties as of December 31 were as follows:

Entities under common control:

Ferrotrade & Co.

Marteck International Ltd.

Melandra Marketing

Less: current portion

2004

2003

2002

$—

—

$—

$91,887

11,686

321

$103,894

(11,373)

$92,521

$—

49,555

—

49,555

—

$49,555

Ferrotrade & Co.

In June 2003, Ferrotrade & Co. granted to the Group a $120,000 loan facility. The loan bore
no interest and was repayable on June 1, 2006. The long-term loan due to Ferrotrade & Co.
was measured at amortised cost based on a contractual maturity and a discount rate of 3.96%
in the accompanying consolidated balance sheet as of December 31, 2003. In 2004, the loan
agreement was revised and the facility became payable not later than December 31, 2004,
bearing interest at the rate of 4.25% starting from January 1, 2004. In 2004, the Group
received additional $11,948 under this loan agreement and in November 2004 repaid the out-
standing loan amount along with the interest of $4,091 accrued for the period from January
1, 2004 up to the payment date. Loss of $8,695 arising from the change in terms of the loan
agreement was included in loss on extinguishment of debts in the accompanying consolidat-
ed income statement for year ended December 31, 2004.

Marteck International Ltd.

In April 2001, Marteck International Ltd. (“Marteck”) granted to the Group a $50,000 loan facili-
ty. The loan bore no interest and was repayable on December 31, 2007. In 2004, the Group fully
repaid its liabilities to Marteck.

On October 3, 2002, the Group entered into another agreement with Marteck International Ltd.
for a loan of Є 9,100,000 ($11,373 and $9,485 at the exchange rates as of December 31, 2003 and
2002, respectively). The loan was due for repayment on December 31, 2010 and bore interest of
3% per annum. The loan was fully repaid in June 2004.

23. Finance Lease Liabilities

In 2000-2004, the Group entered into lease agreements under which they have an option to
acquire the leased assets at the end of lease term ranging from 2 to 10 years. The estimated aver-
age remaining useful life of leased assets varies from 5 to 22 years.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

The leases were accounted for as finance leases in the consolidated financial statements. The car-
rying value of the leased assets was as follows as at December 31:

Machinery and equipment

Transport and motor vehicles

Other assets

2004

$4,811

29,369

$34,232

2003

$18,537

—

2002

$13,251

—

$18,537

$13,251

The leased assets are included in property, plant and equipment in the accompanying consoli-
dated balance sheets (Note 7).

Future minimum lease payments were as follows at December 31, 2004:

2005

2006-2009

2010

Less: current portion

Roubles

US dollars

Euros

Principal

$4,688

21,319

4,342

30,349

(4,688)

$25,661

Interest

$2,828

5,879

428

9,135

(2,828)

$6,307

Total

$7,516

27,198

4,770

39,484

(7,516)

$31,968

In the years ended December 31, 2004, 2003, 2002, the average interest rates under the finance
lease liabilities were 9.3%, 14.8% and 10.0%.

The finance lease liabilities are denominated in the following currencies at December 31:

2004

$17,098

13,041

210

$30,349

2003

$5,392

14,293

—

$19,685

2002

$5,026

8,463

—

$13,489

24. Post-Employment Benefits

The Group companies provide additional pensions and other post-employment benefits to their
employees in accordance with collective bargaining agreements. Defined benefit pensions and
other post-employment benefits consist of regular lifetime pension payments and lump-sum
amounts payable at the retirement date. These benefits generally depend on years of service, level
of compensation and amount of pension payment under the collective bargaining agreement. The
Group pays the benefits when they fall due for payment.

The components of net benefit expense recognised in the consolidated income statement for the
years ended December 31, 2004, 2003 and 2002 and amounts recognised in the consolidated balance
sheet as of December 31, 2004, 2003 and 2002 for the post-employment benefits are as follows:

Net benefit expense (recognised in cost of sales)

Current service cost

Interest cost on benefit obligation

Expected return on plan assets

Net actuarial loss recognised in the year

Past service cost

Net benefit expense

2004

$5,313

2,553

(50)

—

3,944

$11,760

2003

$1,759

1,850

(25)

(1)

6,230

$9,813

2002

$1,126

1,602

—

$2,728

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

2004

$53,857

(476)

53,381

(3,076)

1,731

$52,036

2004

$30,699

11,760

11,159

(2,934)

—

–

2,697

$53,381

2003

$31,107

(408)

30,699

(1,816)

–

2002

$19,922

—

19,922

(884)

–

$28,883

$19,038

2003

$19,922

9,813

655

(1,494)

(95)

–

1,898

$30,699

2002

$22,187

2,728

–

(1,082)

—

(2,764)

(1,147)

$19,922

The principal assumptions used in determining pension obligations for the Company’s plan are
shown below:

2004

8.0%

4.2%

2003

8.0%

4.2%

2002

8.0%

4.2%

Benefit liability

Benefit obligation

Plan assets

Unrecognised net actuarial gains

Unrecognised past service cost

Benefit liability—non-current

Movements in benefit liability

At January 1

Benefit expense

Change in liability due to business combination

Benefits paid

Contributions

Hyperinflation gain

Translation difference

At December 31

Discount rate

Future benefits increases

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

25. Provisions

In the years ended December 31, 2004, 2003 and 2002, the movement in provisions was as follows:

Site restoration costs

Legal claims

Balance at December 31, 2001

Additional provisions

Increase from passage of time

Change in provisions due to business combination

Translation difference

Balance at December 31, 2002

Additional provisions

Increase from passage of time

Change in provisions due to business combination

Utilised in the year

Unused amounts reversed

Translation difference

Balance at December 31, 2003

Additional provisions

Increase from passage of time

Change in provisions due to business combination

Utilised in the year

Translation difference

Balance at December 31, 2004

$242

—

456

9,903

(57)

$10,544

—

$2,098

—

886

$13,528

$72

212

4,408

—

1,024

$19,244

$—

5,000

—

$5,000

—

$–

283

(4,300)

(786)

$212

$1,196

—

–

(71)

–

Total

$242

5,000

456

9,903

(57)

$15,544

—

$2,098

283

(4,300)

(786)

901

$13,740

$1,268

212

4,408

(71)

1,024

$1,337

$20,581

Site Restoration Costs

Under the Russian legislation, mining companies have obligations to restore mining sites. As of
December 31, 2004, 2003 and 2002, the Group accrued a provision for site restoration costs in the
amount of $18,605, $13,198 and $10,279, respectively. The liabilities were measured based on esti-
mates of restoration costs which are expected to be incurred in the future discounted at the annu-
al rates of 19.0% and 18.6%.

In addition to mining sites, the Group has constructive obligations to restore certain parcels of land
at steel mills. The related provisions were measured at the present value of expenditures expect-
ed to be incurred in the future discounted at the annual rate of 15.54% and amounted to $481,
$330 and $265 as of December 31, 2004, 2003 and 2002, respectively.

26. Other Long-Term Liabilities

Other long-term liabilities comprised of the following as of December 31:

Ocstar Holding, Inc.

City Capital, Inc.

Liabilities to entities under common control for transfers of ownership

interests in subsidiaries – non-current

Other liabilities

Less: current portion

2004

$—

—

–

1,032

(44)

$988

2003

$35,866

15,965

30,432

2,917

85,180

(19,908)

$65,272

2002

$—

49,918

28,201

2,113

80,232

(17,901)

$62,331

Roubles

US dollars

Euros

Yens

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Other long-term liabilities were denominated in the following currencies as of December 31:

2004

$—

–

1,032

$1,032

2003

$33,561

40,696

10,923

—

$85,180

2002

$36,844

43,388

–

—

$80,232

Amounts payable to City Capital, Inc. (“City Capital”) represented the Group’s long-term obliga-
tions maturing in the period from 2004 to 2026. On July 1, 2003, in accordance with an assign-
ment agreement between City Capital and Ocstar Holding, Inc. (“Ocstar”), the Group’s long-term
accounts payable to City Capital became payable to Ocstar.

Long-term accounts payable to City Capital and Ocstar were recognised at amortised cost which
was determined as of the dates the amounts became payable to City Capital and Ocstar based on
the expected amounts to be paid to City Capital and Ocstar, their expected timing and applicable
discount rates.

The Group’s payments to City Capital and Ocstar in 2003 were $74,043.

In 2004, the Group repaid all its liabilities to City Capital and Ocstar. The difference between the
carrying value of the liabilities as of the date of repayment and the nominal amount repaid to City
Capital and Ocstar amounting to $79,658 is included in loss on extinguishment of debts in the
accompanying consolidated income statement for the year ended December 31, 2004.

27. Trade and Other Payables

Trade and other payables were mainly denominated in roubles and consisted of the following as
of December 31:

Trade accounts payable

Long-term promissory notes with current maturities

Promissory notes payable on demand

Accrued payroll

Other payables

2004

$116,279

–

14,523

57,495

39,638

$227,935

2003

$131,932

7,986

7,779

30,850

10,593

$189,140

2002

$60,024

1,465

7,738

20,138

26,366

$115,731

As of December 31, 2004, other payables included $17,844 of unpaid current portion of liabilities
under the Settlement Agreements (Note 20).

28. Short-Term Loans due to Related Parties

Short-term loans due to related parties as of December 31 were as follows:

Marteck

EvrazInvest

Ferrotrade & Co.

Other

2004

$25

45,594

–

2,378

$47,997

2003

$27,113

–

7,623

517

$35,253

2002

$16,958

–

1,144

$18,102

Short-term loans due to related parties represent borrowings made from entities under common
control with the Group. These loans bore interest from 2.0% to 7.7% per annum and had a matu-
rity within 12 months from the date of respective borrowing.

Short-term loans due to Marteck and Ferrotrade & Co. are denominated in US dollars, and the
loans payable to EvrazInvest and other loans are denominated in roubles.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

29. Taxes Payable

Taxes payable were mainly denominated in roubles and consisted of the following as of
December 31:

Income tax

Social insurance taxes

VAT and related fines and penalties

Road users tax

Current portion of restructured taxes

Property tax

Land tax

Personal income tax

Other taxes, fines and penalties

30. Commitments and Contingencies

2004

$54,643

19,813

83,605

1,900

13,042

4,796

6,058

13,826

2003

$25,714

14,571

22,626

1,724

13,446

2,617

4,092

3,762

10,321

2002

$10,048

9,803

6,810

30,731

16,717

1,303

3,771

2,378

4,883

$197,721

$98,873

$86,444

Operating Environment of the Group

The Russian economy while deemed to be of market status continues to display certain charac-
teristics consistent with that of a market in transition. These characteristics include, but are not
limited to, relatively high inflation and the existence of currency controls which cause the nation-
al currency to be illiquid outside of Russia. The stability of the Russian economy will be significantly
impacted by the government’s policies and actions with regards to supervisory, legal, and eco-
nomic reforms.

Taxation

Russian tax, currency and customs legislation is subject to varying interpretations, and changes,
which can occur frequently. Management's interpretation of such legislation as applied to the
transactions and activity of the Group may be challenged by the relevant regional and federal
authorities. Recent events within the Russian Federation suggest that the tax authorities are
taking a more assertive position in its interpretation of the legislation and assessments and as a
result, it is possible that transactions and activities that have not been challenged in the past
may be challenged. As such, significant additional taxes, penalties and interest may be
assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three
calendar years preceding the year of review. Under certain circumstances reviews may cover
longer periods.

Management believes that it has paid or accrued all taxes that are applicable. Where uncertain-
ty exists, the Group has accrued tax liabilities based on management’s best estimate of the
probable outflow of resources embodying economic benefits, which will be required to settle
these liabilities. Possible liabilities, which were identified by management at the balance sheet
date as those that can be subject to different interpretations of the tax laws and regulations
and are not accrued in the accompanying financial statements could be up to approximately
$25,900.

Contractual Commitments

The Group signed contracts for the purchase of production equipment and construction works for
an approximate amount of $389,663.

Social Commitments

The Group is involved in a number of social programmes aimed to support education, health care
and social infrastructure development in towns where the Group’s assets are located. In 2005, the
Group plans to spend $20,000 under these programmes.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Environmental Protection

The Group has a constructive obligation to the government of Kemerovo Region to reduce envi-
ronmental polutions and contiminations in the future in accordance with environmental protection
program. In the period from 2005 to 2015, the Group is obligated to spend approximately $54,000
for replacement of old machinery and equipment which will result in reduction of polution.

Guarantees of Debts of Related Parties

As of December 31, 2004, the Group guaranteed to Alfa-Bank the repayment of liabilities of ZAO
UK Yuzhkuzbassugol, an associate of entity under common control, under the credit line agree-
ment between ZAO UK Yuzhkuzbassugol and Alfa-Bank. The borrowing facility of $15,000 bears
interest of 11.25% per annum, and matures on May 27, 2005. The Group pledged certain items of
property, plant and equipment with a carrying value of $11,299 as collateral under the credit line
agreement.

As of December 31, 2004, the Group guarantees to certain banks repayment of credit facilities
provided to the Group and Ferrotrade & Co., as joint borrowers Bank, up to but not exceeding
$90,000 in total.

As of December 31, 2004, the Group guaranteed to ZAO Raiffeisenbank Austria the repayment of
liabilities of OOO EvrazInvest, an entity under common control with the Group, under a loan
agreement between OOO EvrazInvest and ZAO Raiffeisenbank Austria. The loan amounting to
$9,200 bore interest at a rate of LIBOR plus margin of 2.95% per annum and mature on
September 1, 2005.

As of December 31, 2004, the Group guaranteed the repayment of liabilities up to 385,940,959
roubles ($13,908 at the exchange rate as of December 31, 2004) of ZAO Raspadskaya Processing
Plant (“RPP”), subsidiary of a joint venture, under the loan agreement between RPP and
Raspadskaya Financial and Industrial Company.

Legal Proceedings

The Group has been and continues to be the subject of legal proceedings, none of which has had,
individually or in aggregate, a significant effect on the Group’s operations or financial position.

The Group, together with several other corporations and individuals, acts as a defendant in a civil
action related to bankruptcy proceedings at KGOK that occurred between 1999 and 2003, prior to
the Group’s acquistion of KGOK. This law suit was filed in November 2004 and is now pending
before the United States District Court for the District of Delaware. The plaintiffs seek damages in
excess of $500,000. Management believes that the risks that the ultimate resolution of the suit
case will have a significant impact on the financial position of the Group is remote. Therefore, no
provision is recognised in the accompanying financial statements in respect of this case.

31. Financial Risks

Foreign Exchange Risk

The Group exports production and attracts substantial amount of long-term borrowings denom-
inated in euros or in US dollars.

The Group does not have formal arrangements to mitigate foreign exchange risks of the Group’s
operations. However, management believes that the Group is secured from foreign exchange
risks as foreign currency denominated sales are used to cover repayment of foreign currency
denominated borrowings.

100

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Fixed-rate debt

Variable-rate debt

2005

2006

2007

2008

2009

2010

2011

2012

2013

Interest Rate Risk

The Group incurs interest rate risk on loans and borrowings. The Group borrows on both a fixed
and variable rate basis. The table below summarises the Group’s outstanding interest-bearing debt
as of December 31, 2004:

The table below summarises the Group’s outstanding variable-rate debt by the year of repayment
as of December 31, 2004:

$659,571

718,522

$1,378,093

$461,246

100,997

40,285

39,138

40,967

20,577

4,775

5,762

$718,522

Credit Risk

Financial instruments that potentially expose the Group to concentrations of credit risk consist pri-
marily of cash, and trade accounts receivable.

To manage this credit risk, the Group maintains its available cash, mainly in US dollars, in interna-
tional banks, Russian affiliates of international banks and Russian major banks. Management
periodically reviews the creditworthiness of the banks in which it deposits cash.

The Group constantly monitors the status of accounts receivable collection and the credit worthi-
ness of the customers. In addition, the Group requires prepayments from certain customers.

Fair Value of Financial Instruments

The carrying amounts of financial instruments, consisting of cash, short-term and long-term
investments, short-term accounts receivable and payable, short-term and long-term loans receiv-
able and payable, and long-term obligations under the Settlement Agreements and promissory
notes approximate their fair value.

The fair value of restructured taxes with a carrying amount of $36,301 is equal to $38,168 as of
December 31, 2004. The fair value of long-term obligations under restructured taxes as of
December 31, 2004 was determined based on the future payments discounted at the annual rate
of 13%.

The fair value of the notes issued by EvrazSecurities with a carrying amount of $490,365 is equal
to $500,124. The fair value of the bonds issued by FC EvrazHolding with a carrying amount of
$36,038 is equal to $37,209. The fair value of the notes and bonds was determined based on mar-
ket quotations.

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

101

32. Non-cash Transactions

Investing and financing transactions that did not require the use of cash or cash equivalents were
as follows in the years ended December 31:

Liabilities for purchases of property, plant and equipment

$15,234

$2,083

$6,092

2004

2003

2002

Liabilities for purchases of shares in subsidiaries and other entities

Fair value of ordinary shares of ZAO Raspadskaya given in consideration

for an acquisition of an interest in a joint venture (Notes 8)

Liabilities for purchase of interest in a joint venture

43,532

58,651

19,200

—

46,206

19,267

Loans paid by entities under common control to vendors and suppliers in respect

1,333

47,384

of operating activities

Loans paid by banks to suppliers in respect of operating activities

Loans paid by banks to vendors for property, plant and equipment

Exchange of promissory notes for equity of other enterprises

Settlement of accounts payable with available-for-sale financial instruments

Offset of available-for-sale financial instruments and loans receivable against

loans payable

Receipt of promissory notes of entity under common control as capital contribution

Exchange of debt instruments of other enterprises for debt instruments of subsidiaries

Repayment of loans receivable by promissory notes

85,832

55,149

—

15,600

27,875

16,858

91,822

86,000

6,025

—

33. Subsequent Events

—

904

—

3,890

Business Combinations

On August 11, 2005, the Group acquired a 75% ownership interest in Clama S.r.l for cash consider-
ation of Є61,000,000 ($79,123 at the exchange rate as of the date of the transaction). Clama S.r.l
owns 100% of the share capital of Palini & Bertoli S.p.A., an Italian rolling mill. In April 2005, the
Group made a prepayment for the acquisition amounting to Є38,500,000 ($50,416 at the
exchange rate as of the date of transaction).

On July 13, 2005, the Group won a tender for the sale of 98.96% in Vitkovice Steel, a rolling mill,
located in the Czech Republic. The purchase price is fixed at 7,050,000,000 Czech Koruna
($283,878 at the exchange rate as of June 30, 2005). In June 2005, the Group made a prepayment
for the acquisition of 500,500,000 Czech Koruna ($20,454 at the exchange rate as of the date of
transaction).

In addition to the information disclosed in respect of these acquisitions, IFRS 3 Business
Combinations requires the Group to disclose the amounts to be recognised at the acquisition date
for each class of the acquiree’s assets, liabilities and contingent liabilities. It is impracticable for the
Group to disclose this information because the acquired subsidiaries have not prepared their finan-
cial statements as of the dates of acquisitions in accordance with IFRS and independent appraisers
have not completed their valuations.

102

Evraz Group S.A. Annual Report and Accounts Year ended 31 December 2004

Joint venture agreement

On September 21, 2005, the Group signed a joint venture agreement with Mitsui & Co. (Japan)
according to which Mitsui & Co. will pay $42,797 to the Group in exchange for a 30% ownership
interest in Nerungriugol, the Group’s subsidiary. Further investments in the project will be shared
by the Group and Mitsui & Co. on a pro rata basis to their shareholdings.

Increase in Authorised Share Capital

On May 17, 2005, the Group’s shareholders resolved to increase authorised share capital to
Є314,408,652 represented by 157,204,326 shares with par value of Є2 each.

On June 7, 2005, 29,100,000 global depositary receipts, representing additionally issued
9,700,000 shares with par value of Є2 each (totalling $23,833 at the exchange rate as of June 7,
2005) were placed on the London Stock Exchange for $421,950. Share premium arising on the
share issue amounted to $375,914, net of transaction costs of $22,203.

Purchase of Minority Interests

On June 1, 2005, the Group acquired a 4.17% interest in Mastercroft for $124,000.

Legal Proceedings

On April 26, 2005, the plaintiffs in the civil action related to bankruptcy proceedings at KGOK
(Note 30) filed another suit with Delaware Chancery Court against the same defendants, includ-
ing the Group, based on the same factual allegations. The plaintiffs seek for the return of shares
in KGOK. Management believes that the risk that the ultimate resolution of the matter will have
a significant impact on the financial position of the Group is remote, and, therefore, no provision
is required to be recognised in the accompanying financial statements in respect of this case.

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Reference Information

Evraz Group S.A.
1 Allee Scheffer
L-2520 Luxembourg

www.evraz.com
ir@evraz.com
tel.: +7 (095) 232 1370

OOO EvrazHolding
Management Company
Ulitsa Dolgorukovskaya 15, Buildings 4 and 5,
Moscow 127006, Russia