Evercore Annual Report 2008

Plain-text annual report

STRATEGIC ASSETS SUSTAINABLE BUSINESS STRONG COMPANY Annual Report & Accounts 2008 2 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 1 Contents I Company Overview Who We Are Corporate Structure Major Assets Operations Map Our Progress Key Events II Messages Chairman’s Statement Chief Executive’s Report III Economic and Industry Overview IV Business Overview Performance in Figures Production by Region Sales by Region Advance Long Product Leadership Position in Russia and the CIS Expand Presence in the International Flat and Tubular Markets Enhance Cost Leadership Position Complete Vertical Integration and Grow Competitive Mining Platform Achieve World Leadership in Vanadium Business Management’s Response to Challenging Market Environment V Corporate Responsibility Introduction Economic Prosperity Health, Safety, Environment Our People 2 3 4 5 6 8 10 12 14 16 18 24 25 26 28 30 34 38 42 46 49 50 51 52 54 55 VI Corporate Governance Introduction Directors and Senior Management Board and Management Remuneration Risk Management Internal Control The Board Remuneration Committee Report Audit Committee Report Strategy Committee Report Shareholder Information VII Management Report Selected Consolidated Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations VIII Consolidated Financial Statements for the year ended 31 December 2008 Independent Auditors’ Report Consolidated Income Statement Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity 58 59 60 66 68 69 70 72 73 76 77 78 79 83 110 112 113 114 115 117 Notes to the Consolidated Financial Statements Year ended 31 December 2008 120 Responsibility Statement of the Directors in respect of the Annual Report and the Financial Statements Abbreviations and Acronyms Glossary of Terms 180 181 182 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 2 Company Overview Evraz Group is a vertically- integrated steel, mining and vanadium business and is currently ranked the 15th largest steel company in the world based on crude steel production volumes. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. COMPANY OVERVIEW 3 Who We Are Our Business Evraz Group is a global industrial enterprise that spans four Evraz’s strategy is focused on achieving ongoing improve- continents and employs 134,000 people. During 2008, ments in operating efﬁ ciency, cost control and synergies Evraz produced 17.7 million tonnes of crude steel, 13.3 mil- derived from asset consolidation, while maintaining the lion tonnes of pig iron and 16.1 million tonnes of rolled steel Company’s prime positions in the railway and construction products. Self-coverage in relation to the Company’s iron ore steel products markets in Russia and CIS, the ﬂ at products and coking coal requirements amounted to 93% and 89% markets in Europe and the US and the global vanadium respectively. market. Our principal activities include the manufacture and sale of The consistent implementation of these strategic objectives steel and steel products, iron ore mining and enrichment, continued throughout 2008. coal production and processing, the manufacture and sale of vanadium products and trading and logistics. As a leading supplier to major industrial sectors, Evraz’s operations extend to all key steel markets. Our Vision Our Story Originally founded in 1992 as a small metal trading company in Russia, Evraz has developed into a multinational corpora- tion through progressively extending its steel and mining operations around the globe. Evraz’s vision, in addition to being a world class steel and We believe our greatest responsibility to our shareholders, mining company, is to become one of the Top Five most our employees, our customers, our communities and other proﬁ table global steelmakers in terms of ROCE and EBITDA relevant constituencies is to deliver maximum value while margin. Evraz remains focused on its primary objective of sustaining the Company’s position as one of the most cost-efﬁ cient inte- grated steel producing and mining enterprises in the world. aligning our activities to a framework of sustainability that lies at the heart of our business. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. COMPANY OVERVIEW 4 Corporate Structure Key subsidiaries and jointly controlled entities as of 1 July 2009 STEEL IRON ORE COAL COKE VANADIUM SALES, SERVICES & LOGISTICS *Evraz Inc. NA a 100% * Evraz Inc. NA Canada b 100% North America *Stratcor e 72.84% NTMK 100% KGOK Palini e Bertoli 100% VGOK 100% 100% Europe *Vítkovice Steel 100% Sukha Balka 99.42% DKHZ DMZ 96.03% Bagleykoks 93.74% 93.83% Dneprokoks 98.65% Nikom 100% *Evraz Overseas 100% TK EvrazHolding 100% EvrazTrans g *Mastercroft 76% 100% Nakhodka Sea Port EvrazEK 100% 100% Zapsib NKMK *Delong Asia 100% 100% 10% Evrazruda 100% Yuzhkuzbassugol 100% Raspadskaya d 40% *Highveld c 85.12% Africa *Stratcor e 72.84% *Highveld c 85.12% * Interests in subsidiaries marked with an asterisk (*) are held directly by Evraz Group S.A., the parent company. a b Evraz Inc. NA headquartered in Portland (Oregon, USA) incorporates steel manufacturing facilities in Portland, Pueblo (Colorado, USA), Claymont (Delaware, USA), Camrose (Alberta, Canada), and General Scrap business (Canada, USA). Evraz Inc. NA Canada, formerly IPSCO’s Canadian plate and pipe business, comprises a steelmaking and rolling mill in Regina (Saskatchewan), tubular operations in Regina, Calgary and Red Deer (Alberta), a cut-to-length processing centre in Surrey (British Columbia) and a sales ofﬁ ce in Calgary. c Highveld Steel and Vanadium Corporation produces both steel and vanadium products. Highveld’s shares have a primary listing on the Johannesburg Stock Exchange. d 40% interest in Raspadskaya is held by its management, while 20% is free ﬂ oat. e f Strategic Minerals Corporation comprises two divisions: Stratcor, Hot Springs (Arkansas, USA) and Vametco Alloys, Brits (South Africa). Other major sales and service companies include Ferrotrade, TH EvrazHolding, Trade House EvrazResource, Trade House EvrazResource-Ukraine, Metallenergo- ﬁ nance, East Metals and Sinano. g The remaining 24% in EvrazTrans is held by its management. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. COMPANY OVERVIEW 5 Major Assets Dnepropetrovsk Iron and Steel Works (“DMZ”), Ukraine, an Nizhny Tagil Iron and Steel Plant (“NTMK”), an integrated integrated steel mill specialising in the manufacture of pig steel plant that primarily produces railway and construction iron, steel and rolled products. long products, pipe blanks and semi-ﬁ nished products. Evraz Inc NA together with Evraz Inc. NA Canada represents Novokuznetsk Iron and Steel Plant (“NKMK”) specialises in one of the most diversiﬁ ed steel manufacturers in North the production of rolled long metal products for the railway America. Evraz’s facilities in the USA and Canada, estab- sector and semi-ﬁ nished products. lished in 2008 through the combination of Evraz Oregon Steel Mills, Claymont Steel and IPSCO’s Canadian plate and pipe business, produce higher margin specialty and com- modity steel products. Evraz Palini e Bertoli (“Palini e Bertoli”) in northern Italy produces customised, high-quality steel plate products. Evraz Vitkovice Steel (“Vitkovice Steel”), the largest pro- ducer of steel plates in the Czech Republic. Strategic Minerals Corporation (“Stratcor”), one of the world's leading producers of vanadium alloys and chemicals for the steel and chemical industries. Sukha Balka Iron Ore Mining and Processing Complex (“Sukha Balka”) operates two underground mines in Ukraine for the production of lumping iron ore. Vysokogorsky Ore Mining and Processing Enterprise (“VGOK”) produces sinter from its iron ore resources, as well Evrazruda Iron Ore Mining and Processing Complex as iron ore concentrate, limestone, crushed stone and other (“Evrazruda”) produces iron ore concentrate and sinter, op- products. erating mines in Kemerovo region, the Republic of Khakassia and south Krasnoyarsk Krai. West Siberian Iron and Steel Plant (“Zapsib”), an inte- grated steel plant that primarily produces construction long Highveld Steel and Vanadium Corporation (“Highveld”), one products and semi-ﬁ nished products. of the largest steel producers in South Africa with primary positions in medium and heavy structural sections and ultra thick plate as well as being a leading producer of vanadium slag. Kachkanarsky Ore Mining and Processing Enterprise (“KGOK”) produces sinter, pellets and concentrate from high- vanadium iron ore. Nakhodka Trade Sea Port (“NMTP”), one of the largest ports in the Far East of Russia, from where Evraz ships the majority of its exports. Yuzhkuzbassugol Coal Company (“Yuzhkusbassugol”), one of the largest coal companies in Russia that produces both coking and steam coal. Ukrainian coking plants – Bagleykoks, Dneprokoks and Dneprodzerzhinsk Coking Plant (“DKHZ”) – supply their coke production to DMZ and various local steelmakers in Eastern Europe. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. COMPANY OVERVIEW 6 Operations Map US and Canada Red Deer Works Calgary Works Camrose Works Regina Steel Rocky Mountain Steel Claymont Steel Oregon Steel Stratcor Steel Production Iron Ore Mining and Enrichment Coal Mining Coke Production Vanadium Production Logistics COMPANY OVERVIEW 7 Russia KGOK NTMK VGOK Moscow Western Europe Palini e Bertoli Vitkovice Steel Yuzhkuzbassugol Zapsib NKMK Evrazruda Raspadskaya Nikom Ukraine Nakhodka Sea Port DMZ Bagleykoks DKHZ Dneprokoks Sukha Balka South Africa Vametco Highveld MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. COMPANY OVERVIEW 8 Our Progress COMPANY OVERVIEW 9 Revenues (US$ million) EBITDA (US$ million) Steel Sales Volumes (million tonnes) Assets (US$ million) 20,380 12,859 6,323 4,305 8,292 6,508 2,642 1,859 15.9 16.4 17.1 12.9 19,448 18,637 8,510 6,754 2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008 Net Proﬁ t* (US$ million) Operating Cash Flow (US$ million) Revenues by Region 2008 Debt (US$ million) * Net proﬁ t attributable to equity holders of Evraz Group S.A. 2,103 1,868 1,377 918 2,994 2,084 1,496 4,569 37.2% Russia 22.3% Americas 15.8% Asia 14.0% Europe 7.0% CIS (excl. Russia) 3.5% Africa 0.2% RoW Total Debt Net Debt 2,596 1,730 2,350 1,693 9,986 9,031 6,756 6,404 2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. COMPANY OVERVIEW 10 Key Events 2008 January Evraz completed the acquisition of Claymont Steel, a manu- facturer of custom steel plate based in Delaware, USA. Evraz concluded the buyout of all outstanding common stock of West Siberian Heat and Power Plant (“ZapSibTETs”). February Evraz acquired a 10% stake in Delong Holdings Limited (“Delong”), an SGX-listed steel manufacturing group head- quartered in Beijing, China and entered into an agreement to acquire an interest of up to 51% in Delong, subject to anti- trust clearance from the People’s Republic of China. March May Evraz placed an additional US$400 million Eurobonds. The Annual General Meeting of shareholders approved a ﬁ - nal dividend of US$4.20 per ordinary share, or US$1.40 per GDR, for the year ended 31 December 2007. Taking into ac- count the interim payment this made a total dividend for the year of US$9.00 per ordinary share, or US$3.00 per GDR. June Evraz completed the acquisition of IPSCO’s Canadian plate and pipe business. The latter’s Canadian assets, including the Regina Steel mill together with plate and pipe production capacities in Regina, Calgary and Red Deer, became part of Evraz’s North American operations. Evraz rebranded its North American subsidiaries under the Evraz acquired IPSCO’s Canadian plate and pipe busi- name of Evraz Inc. NA. ness from SSAB for a net consideration of US$2.3 billion in a transaction that involved the acquisition of the IPSCO Tubulars business from SSAB for US$4.025 billion and the on-sale of IPSCO’s US tubular and seamless business to TMK for approximately US$1.7 billion. April Evraz completed the ﬁ rst stage of the acquisition of select production assets in Ukraine through the US$1.11 bil- lion purchase of a 51.4% interest in Palmrose Limited, a Cyprus-based holding company that owned the following investments: a 99.25% interest in Sukha Balka iron ore min- ing and processing complex; a 95.57% interest in Dnepro- July Evraz won the tender to develop the Mezhegey coal deposit in the Republic of Tyva, Russia. Evraz signed a cooperation agreement with the China Metal- lurgical Group Corporation for the joint development of the Cape Lambert Iron Ore Project in Western Australia. August Evraz concluded a US$550 million ﬁ ve-year revolving credit facility and a US$175 million ﬁ ve-year term loan facility in re- spect of Evraz Inc. NA, primarily for the purpose of reﬁ nancing the existing indebtedness of the North American operation. petrovsk Iron and Steel Works; and major interests in three Evraz sold certain vanadium assets controlled by Highveld coking plants (94.37% of Bagleykoks, 98.65% of Dneprokoks including the latter’s Vanchem operations, its 50% share- and 93.86% of Dneprodzerzhinsk Coke Chemical Plant). holding in South Africa Japan Vanadium (Proprietary) Limited Evraz successfully placed US$1.6 billion Eurobonds: the US$1,050 million 5-year bond issue with a coupon of 8.875% and the US$550 million 10-year bond issue with a coupon of 9.50%. and its non-dividend bearing equity interest in Mapochs Mine (Proprietary) Limited. The approval by the European Commission and South African competition authorities of Evraz’s acquisition of a majority interest in Highveld in 2007 was conditional on these disposals. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. COMPANY OVERVIEW 11 The Board of Directors declared an interim dividend for the ﬁ rst six months of 2008 of US$8.25 per ordinary share, or US$2.75 per GDR, payable before 18 December 2008. 2009 January September Evraz completed the second stage of the acquisition of Ukrainian assets through the issue of 4,195,150 shares in favour of Lanebrook Limited, the Company’s major share- holder, in exchange for the remaining 48.6% interest in Palmrose Limited. November Evraz Group S.A. renounced the right to purchase the license to develop the Mezhegey coal deposit in the Republic of Tyva, Russia. The decision reﬂ ected the global economic downturn and weakening coal markets. An Extraordinary Shareholders’ Meeting approved the modiﬁ cation of the method of payment of the 2008 interim dividends, proposed by the Board of Directors in December 2008. This resolution was supported by holders of ap- Russian bank VTB granted Evraz a one-year RUB10 billion proximately 80% of Evraz’s shares. Following the decision, (approximately US$360 million as at the date of the an- 9,755,347 new shares were issued in favour of those share- nouncement) credit facility. holders who supported 2008’s partial scrip interim dividend. Russia's State bank “Vnesheconombank” (VEB) approved credit lines of US$1,006.6 million and US$800 million for Evraz to reﬁ nance its indebtedness under syndicated loans. December February Evraz sold 49% of NS Group to TMK for US$508 million, thereby completing the transfer of IPSCO’s former US tubular and pipe businesses. Evraz’s Board of Directors elected Alexander Abramov as April Chairman of the Board. Highveld agreed to sell 26% of Mapochs Mine to local part- The Board of Directors proposed that shareholders should ners. This agreement is part of the South African Govern- be permitted to elect to receive up to US$2.25 per share ment’s Black Economic Empowerment programme and was or US$0.75 per GDR of the interim dividend announced signed in order to comply with South African legislation in in August 2008 in the form of new shares to be issued at respect of the mining industry. US$22.50 per share or US$7.50 per GDR. May The Board of Directors approved a change in Evraz’s divi- Shareholders approved the proposal not to pay a ﬁ nal dend policy whereby the Company’s dividend distribution will dividend for 2008. Dividend payments will only resume not exceed 25% of consolidated net income, as calculated upon completion of the deleveraging exercise and market under IFRS, with effect from the ﬁ nal dividend in respect of recovery. 2008. The historic policy was to pay not less than 25% of consolidated net income in dividends. July Evraz raised approximately US$965 million from concurrent convertible bond and equity offerings through the issue of US$650 million (including US$50 million of over-allotment option) 7.25% convertible bonds due 2014 and US$315 mil- lion (including US$15 million of over-allotment option) of new equity. The Bonds will be convertible into GDRs at an initial conversion price of US$21.12 per GDR. New equity was issued in the form of GDRs at an issue price of US$16.50 per GDR. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 12 Messages We are pleased to introduce this Annual Report for 2008. Evraz Group demonstrated a strong financial and operating performance despite the challenges of the world economic downturn in the second half of the year. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 13 Alexander Abramov, Chairman of the Board: Alexander Frolov, Chief Executive Ofﬁ cer: “... We are determined to grow shareholder value, continue to meet the objectives of our stakeholders and serve the communities in each region and location in which we operate. Together we can overcome the challenges and, indeed, emerge even stronger.” “... Our strategic disciplines of cost leadership, vertical integration, geographic diversiﬁ cation and product mix improvement, while highly efﬁ cient in a growing market, also proved viable at a time of global recession” see pages 14-15 see pages 16-17 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MESSAGES 14 Chairman’s Statement commenced in the second half of 2008, presented the most serious challenge in decades and put our Company and the entire industry to the test. Driven by our original vision, we built a company based on key strategic pillars: cost leadership, a sufﬁ cient level of vertical integration into raw materials, geographic diversiﬁ ca- tion, exposure to infrastructure investment and the develop- ment of downstream operations in regions where value- added products enjoy high consumption. Earlier years represented the periods of rapid growth: up- stream vertical integration and downstream geographical ex- pansion. Now it is time to focus on operations, improvements in efﬁ ciency and the integration of acquired assets. Such focus will enable us to prepare for the new growth phase as we become more efﬁ cient, more viable and even stronger. Low-cost production has always been a cornerstone of our strategy, the key rationale behind our decision making. This has been achieved through the production of semi-ﬁ nished steel at the most cost-efﬁ cient locations and our expansion into raw materials. This consistent focus on cost leadership and efﬁ ciency became even more critical as the need to improve competitiveness gathered momentum in the face of the global meltdown. In order to implement our strategy of operating in regions syn- onymous with the consumption of high value-added products we acquired a number of “proﬁ tability champions,” operating in mature markets, which possessed the ﬁ nancial health to enable them to overcome any short-term difﬁ culties. The importance of geographic diversiﬁ cation was also evident amid the down-cycle. For example, during the fourth quarter of 2008 and the onset of 2009, when domestic demand for our products in Russia collapsed and exports declined, we beneﬁ ted from the stable business and healthy margins of our North American operations. Dear Stakeholders, 2008 was a remarkable year for our Company and for the industry as a whole. This was most certainly a year to remember, one that left us with mixed feelings. On the one hand we achieved new records in terms of revenues and EBITDA, ﬁ nalised a number of landmark acquisitions, improved the product mix and further diversiﬁ ed our busi- ness. On the other, the world economic downturn, which MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MESSAGES 15 The ﬁ nancial crisis became a stress test for the global consumption, the appropriate treatment of gaseous and economy and for the metals and mining industry, one of the liquid waste and the effective processing of by-products. key elements of worldwide infrastructure. Against this back- ground Evraz’s management took swift and decisive action to reorganise the business to meet the market challenge. Ongoing improvements in the standards of health and safety in relation to the well-being of our employees remain at the forefront of our priorities. Evraz continues to address the First of all we eliminated the less efﬁ cient parts: shut down occupational and social needs of its employees and sup- open-hearth furnaces and reduced a number of iron ore and port social projects for the beneﬁ t of the residents of those coking coal sites. We are constantly reviewing our products regions in which we operate. and resources ﬂ ows to identify potential efﬁ ciency gains. We put rather aggressive cost reduction targets in place and we are conﬁ dent that these will be achieved. Evraz has always taken the view that its employees repre- sent a tremendously important asset which is critical to the Company’s long-term success. It is manifestly clear that The rapid expansion of our business during recent years our achievements would not have been possible without was partially ﬁ nanced through borrowing which resulted in a the hard work, commitment and dedication of our talented relatively high debt level. We recognised deleveraging as a employees around the world and I would like to take this key priority and a signiﬁ cant reduction in indebtedness bears opportunity to thank each one of them for their enormous witness to our considerable achievements in this regard. We contribution to our results. have further improved cash management, reduced working capital, cut CAPEX to what essentially equates to mainte- nance levels and sacriﬁ ced dividends: all of which improved our liquidity position. A successful capital raising transaction in July 2009 reﬂ ected the conﬁ dence of our investors and debt-holders alike. It is inevitable that the closure of non-efﬁ cient production chains, the improvement of business processes and actions designed to increase productivity sometimes result in unpop- ular measures. Even when redundancies cannot be avoided we are endeavouring to provide people with opportunities for alternative employment. We are intent on retaining our best During this challenging time my appointment as Chairman people, an approach that is not only socially responsible but of the Board served to split the roles of Chairman and Chief will also yield rewards when the market regains momentum. Executive and permitted Alexander Frolov, Evraz’s CEO, to focus solely on the Company’s business and operations. My principal duty, as Chairman of the Board and a founder of the Company, is to maintain good working relationships with our key stakeholders. Evraz remains totally committed to its corporate principles in respect of safe, sustainable and socially-responsible develop- ment. We constantly endeavour to mitigate any negative We are determined to grow shareholder value, continue to meet the objectives of our stakeholders and serve the communities in each region and location in which we oper- ate. Together we can overcome the challenges and, indeed, emerge even stronger. impact on the environment. Evraz’s key environmental objec- Alexander Abramov tives include consistent reductions in emissions and energy Chairman of the Board ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MESSAGES 16 Chief Executive’s Report Organic growth beneﬁ ted from a favourable pricing environ- ment for much of the year enhanced by an improved product mix. We further strengthened our position as the largest producer of crude steel and construction steel products in our core Russian market. Acquisitions of US and Canadian businesses served to underwrite our position as the regional leader in the plate and tubular products markets. The exceptionally strong results achieved during the ﬁ rst nine months of 2008 were overshadowed by a sharp slowdown of the global economy in the fourth quarter. Our strategic disciplines of cost leadership, vertical integration, geographic diversiﬁ cation and product mix improvement, while highly efﬁ cient in a growing market, also proved viable at a time of global recession. One of Evraz’s competitive strengths lies in management’s ability to assess and react swiftly to market challenges. I am pleased to inform you that the initial results from the man- agement action plan are encouraging. We were able to stabilise the situation and achieve opera- tional improvements, further supported by a pick-up in de- mand, particularly in export markets, which became evident in the ﬁ rst half of 2009. The aforementioned stabilisation has enabled management to focus on two key areas: efﬁ ciency gains through extensive cost reductions and deleveraging. In order to improve our ef- ﬁ ciency we need to do away with our non-core activities and reduce our labour costs. We are focusing on the optimisa- tion of our production capacities and the discontinuation of Dear Stakeholders, I am pleased to report that Evraz achieved a strong ﬁ nancial cost inefﬁ cient operations that lack a competitive edge on a and operating performance in 2008, a year that witnessed global scale. We have set aggressive cost reduction targets, another important step in the implementation of our corpo- in comparison with 2008 levels, including cuts of as much rate strategy. We grew our business by almost 60% last year, as 50% in certain areas. both organically and through a series of strategic internation- al acquisitions, namely in the US, Canada and Ukraine. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MESSAGES 17 We have also decreased our capital expenditure to effec- increasing Russian production volumes in order to meet tive maintenance levels and planned investment in 2009 export demand. Following this restart, our Russian steelmak- is not expected to exceed US$500 million. Our prudent ing plants are running at full capacity of 13.5 million tonnes management of working capital continued, as illustrated by of crude steel per annum, albeit two million tonnes less than the reduction from a 16% proportion of revenues in 2007 to last year’s capacity due to production optimisation. 10% in 2008, despite the challenging market environment in the fourth quarter. We currently plan to reduce our working capital by US$700 million in 2009. All these factors indicate that consistent implementation of the management’s response plan will enable us to success- fully weather the downturn and prepare to fully capitalise on I am pleased that our liquidity plan has started to yield a market recovery. rewards. During the ﬁ rst quarter of 2009 we reduced our net debt by US$1 billion to approximately US$8 billion. As of 31 March 2009, we have accumulated more than US$800 million of current cash and US$1.8 billion of undrawn credit facilities. As part of the liquidity plan, and through dialogue with our debt-holders, we converted some US$650 million of short-term debt into longer-term debt during the fourth quar- The industry and the wider global economy continue to face serious challenges and considerable uncertainty. Despite positive pricing and volume dynamics in some markets, the shape of the global economic recovery remains questionable and longer-term projections of demand for infrastructure products are not possible at this stage. ter of 2008 and the ﬁ rst quarter of 2009. We are pleased Few can doubt that 2009 is going to prove a difﬁ cult year to see that our banking and lending relationships, built up for the global steel industry and for Evraz as one of the over time, continue to hold us in fair standing and that the sector’s key players. However, we strongly believe that the overwhelming majority of our debt-holders are professionally combination of asset composition, a high degree of vertical disposed to conduct continuous business with us. integration and our geographic diversiﬁ cation, together with our experienced international management team, will ensure that we not only overcome the challenges but enter a new growth era with enhanced competitive credentials. Alexander Frolov Chief Executive Ofﬁ cer A successful GDR and convertible bond placement in July 2009, which enabled us to attract US$965 million, provided another illustration of capital market conﬁ dence. This deal represented the second largest transaction on the Russian market since July 2008 and the largest ever convertible bond issue executed on the Russian market. Despite the chal- lenging market environment investors showed considerable appetite for the issues. This capital raising exercise provides us with a comfortable ﬁ nancial cushion in respect of our short-term reﬁ nancing needs. The stabilisation of demand and some positive price trends in respect of exported semi-ﬁ nished products registered in the middle of 2009 allowed us to restart the previously idled blast furnace at our Zapsib plant in June 2009, thereby ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 18 Economic and Industry Overview Evraz outlines the challenging economic issues and industrial trends that have affected the Company’s key markets. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 19 Global Macroeconomic Environment The year 2008 proved somewhat contradictory for the global quarter of 2008 global GDP registered a fall of 0.6%. The economy. The ﬁ rst three quarters enjoyed relatively favourable steel consuming sectors proved the most severely affected economic conditions and healthy growth, despite the gradually with both investment (construction, mechanical engineering) deepening mortgage problems in the USA. As from September and consumer (automotive industry, domestic appliance) 2008 these positive trends gave way to an effective paralysis demand experiencing major reversals. By way of example, of the global ﬁ nancial system accompanied by a breakneck the 4Q output of the global automotive industry decreased by fall in the ‘real’ sector of the economy. This trend manifested 22%, domestic appliance output fell by 7%, while construction itself in a stock market decline (around 30% in August-Decem- output declined by 4.5%*. ber), an increase in interest rates on banking loans, a collapse in commodity prices, the descent of GDP growth rates in developed countries into negative territory (-0.8% in the USA in 4Q, -1.5% in EU-27 countries and -4.6% in Japan) together Governments across the world have worked together on measures designed to counteract the global recession but the pace of economic recovery remains unpredictable. with a signiﬁ cant slowdown in BRIC countries. In the fourth * Oxford Economics estimates Global GDP Growth Rate for Selected Countries and Regions (y-o-y, %) Source: Oxford Economics, OECD, Rosstat China Russia World EU-27 USA 12.5 7.4 3.5 1.3 0.70 7 0 0 2 1 Q 13.5 13.5 8.0 3.3 1.8 0.56 7 0 0 2 2 Q 7.3 3.4 2.8 0.72 7 0 0 2 3 Q 12.5 9.5 3.3 2.3 0.56 7 0 0 2 4 Q 10.6 8.5 3.3 2.5 0.53 8 0 0 2 1 Q 10.1 7.5 2.7 2.1 -0.09 8 0 0 2 2 Q 9.0 6.2 1.6 0.7 -0.28 8 0 0 2 3 Q 6.8 1.1 -0.6 -0.8 -1.48 8 0 0 2 4 Q ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. ECONOMIC AND INDUSTRY OVERVIEW 20 Steel Industry For a long time steel has been one of the basic structural crease over 2007), Japan (119 mt, a decrease of 1.2% com- materials widely used in mechanical engineering and pared with 2007), the USA (91 mt, -7%) and Russia (69 mt, construction which are essential to satisfy both investment -5.4%). Crude steel output growth in India slowed to +3.7% and consumer demand. That is why the steel industry is the (+7.3% in 2007) and was -0.2% in Brazil (+9.3% in 2007). backbone of every modern economy and steel consumption (especially per capita) is a universally recognised indicator of economic development and industrial growth. Global consumption of ﬁ nished steel products fell by 1.4% in 2008, from 1,215 mt to 1,197 mt in the wake of a healthy 12% ﬁ rst half growth rate and a 14% second half collapse (-19% in Due to an unprecedented rally during the ﬁ rst half of 2008 4Q). Once again China increased its share of global steel con- annual average benchmark steel prices soared by 40-60% sumption from 34.1% in 2007 to 35.5%, or 427 mt, in 2008 to reach historic highs. For example, South Europe ex-works – a record for any single country and considerably in excess of average hot-rolled coil (HRC) price increased by 40% to 928 the EU-27 countries’ 15.2% share, the USA’s 8.2% and Japan’s US$/t, while North America FOB US Midwest mill HRC price 6.4%. India’s and Brazil’s shares have expanded slightly from advanced 61% to 945 US$/t*. 4.1% to 4.4% and from 1.8% to 2.0% respectively, in contrast According to the World Steel Association (“Worldsteel”), to Russia’s share which declined from 3.3% to 3.0%. total world crude steel output decreased by 1.4% in 2008 The global steel industry is still highly fragmented despite from 1,351 mt to 1,332 mt. This outcome encompasses considerable consolidation in recent years, with the top 10 6% growth in the ﬁ rst half of the year and a 9.3% decrease producers accounting for 28% of global crude steel produc- (-20% in 4Q) in the second half. The top crude steel produc- tion in 2008. ers included China with approximately 500 mt (a 2.3% in- *Source: Steel Business Brieﬁ ng Share of World Crude Steel Production in 2008 Crude Steel and Apparent Steel Use Dynamics Source: Worldsteel (Total world, quarterly, y-o-y, %) Source: Worldsteel 37.6% China 8.9% Japan 14.9% EIU-27 6.9% USA 5.1% Russia 4.1% India 4.0% South Korea 2.8% Ukraine 2.5% Brazil 11.7 9.7 7.5 5.8 7.6 7.0 6.6 6.5 11.9 11.6 6.3 5.6 1.6 -8.7 Crude steel production Apparent steel use 2.0% Turkey 11.2% RoW 7 0 0 2 1 Q 7 0 0 2 2 Q 7 0 0 2 3 Q 7 0 0 2 4 Q 8 0 0 2 1 Q 8 0 0 2 2 Q 8 0 0 2 3 Q -19.4 -20.2 8 0 0 2 4 Q MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ECONOMIC AND INDUSTRY OVERVIEW 21 Iron Ore Market World iron ore mine production rose by 10% to 2,200 mt in Iron ore prices achieved an impressive advance that carried 2008*. The top iron ore producers – China: 770 mt (+9% ver- through from the second half of 2007 into the ﬁ rst quarter of sus 2007), Brazil: 390 mt (+10% ), Australia: 330 mt (+10%) 2008. Between July 2007 and March 2008 prices increased and India: 200 mt (+11%) – accounted for 77% of total world by as much as 92%, illustrated by the rise from 103 US$/t to iron ore production. Australia, Brazil and India are the largest 197 US$/t in spot Indian iron ore concentrate (63% Fe) CFR iron ore exporters** and respectively accounted for 35%, 32% Northern China terms***. The strength of the market proved and 12% of the total export market. China, in contrast, is the a contributory factor to the steel price hikes of 2008, although indisputable leader in iron ore imports at 444 mt, a ﬁ gure that iron ore prices subsequently suffered a major correction which shows a 16% increase over 2007 and represents almost 50% brought a 62% reversal between March and December 2008. of total international iron ore trade volume. Unlike the rather As a result, the iron ore contract prices ﬁ xed in April 2008 fragmented steel industry, in corporate terms the iron ore were 70-100% higher than the comparable ﬁ gures for 2007. trade is dominated by three major mining companies, namely By way of example, Vale Carajas ﬁ nes, FOB Ponta de Madeira, Vale (29% of global iron ore export in 2008), Rio Tinto (21%) increased from 73 US$/t to 125 US$/t. The fact that iron ore and BHP Billiton (14%). Iron ore seaborne trade increased by contract prices were signiﬁ cantly higher than spot prices at 9% in 2008. Share of Iron Ore Production in 2008 Source: USGS, Metal Courier 21.8% Brazil 18.4% Australia 20.2% China 12.8% India the year end served to further erode the proﬁ tability of non-in- tegrated steel producers, already impacted by the cutbacks in demand and the collapse in steel prices. This was particularly evident in China, Japan, South Korea and the EU. *Source: US Geological Survey, January 2009 **Source: TEX Report, UN Comtrade ***Source: Steel Business Brieﬁ ng 5.6% Russia 4.1% Ukraine 3.0% USA 2.3% South Africa 2.0% Canada 9.8% RoW ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. ECONOMIC AND INDUSTRY OVERVIEW 22 Coking Coal Market World exports of coking coal registered an increase of just extent than the iron ore market. BHP Billiton, according to 4% to 243 mt in 2008, compared with an 11% advance in CRU estimates, accounted for 24% of global export in 2008, 2007, according to CRU estimates. The market is dominated followed by Teck Cominco (10%), Xstrata (7%), Anglo Coal by Australia (135 mt or 55% of 2008’s world coking coal (7%) and Rio Tinto (5%). export) followed by the USA (39 mt or 16%), Canada (27 mt or 11%) and Russia (21 mt or 9%). The major importers of coking coal are Japan (81 mt in 2008 or 33% of the world market), EU-27 countries (57 mt or 23%), India (24 mt or 10%) and South Korea (20 mt or 8%). As these statistics show, the world coking coal market, leaving aside the unprecedented prices spike brought about by the ﬂ ooding of Australian coal mines at the onset of 2008, proved relatively sedate with exports achieving only minimal growth against the backdrop of a 6% fall in EU-27 import, an 8% reduction in Turkey’s import requirement, -2% in Brazil and import growth of just 1% in Japan. The international coking coal trade is also dominated by large companies, albeit to a much lesser Coking coal prices proved the subject of a surprising fourfold upswing from almost 100 US$/t (spot FOB Australia price) at the outset of 2007 to around 400 US$/t in July 2008. In sympathy with the erosion of the steel market, the price fell to 150 US$/t in December, a reversal of around 60%. As with iron ore, however, the spot price dynamics contrasted to the strength of the contract price which trebled from 98 US$/t (hard coking coal, FOB Australia) in 2007 to 305 US$/t in April 2008. This also impacted unfavourably on steel companies’ proﬁ ts, particularly in major importing countries with small coking coal reserves such as Japan, India, South Korea and Brazil. Coking Coal Export Breakdown by Countries in 2008 Coking Coal Import Breakdown by Countries in 2008 Source: TEX Report, CRU Source: TEX Report, CRU 55.4% Australia 33.2% Japan 15.9% USA 11.0% Canada 23.3% EU-27 9.7% India 8.8% Indonesia 5.6% Russia 8.1% S.Korea 5.5% Brazil 3.8% Ukraine 2.8% China 3.3% RoW 2.0% Taiwan 1.9% Turkey 9.7% RoW MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ECONOMIC AND INDUSTRY OVERVIEW 23 Vanadium Market The vanadium market is closely related to the steel market due to the fact that almost 90% of vanadium is utilised as a steel alloying element in steel production. The world output of vanadium in 2008 is estimated at some 60,000 tonnes*, an increase of around 2.5% compared to 2007. Russia and China were the only major producers to register higher output with increases of 10% and 5% respectively. In contrast, South Af- rica’s vanadium output reduced by 4%. Having beneﬁ ted from the strong growth in steel consumption during the ﬁ rst half of the year, particularly in relation to the construction sector, vanadium prices declined in the second half of 2008 following a contraction in global steel production. *Source: US Geological Survey rounded estimate Price of FeV (US$/kg V) 84.56 78.72 79.94 76.77 62.58 63.58 65.06 63.69 54.67 40.87 Source: London Metal Bulletin 34.94 28.83 26.26 25.04 22.77 22.56 19.54 18.96 8 0 0 2 n a J 8 0 0 2 b e F 8 0 0 2 r a M 8 0 0 2 r p A 8 0 0 2 y a M 8 0 0 2 n u J 8 0 0 2 l u J 8 0 0 2 g u A 8 0 0 2 p e S 8 0 0 2 t c O 8 0 0 2 v o N 8 0 0 2 c e D 9 0 0 2 n a J 9 0 0 2 b e F 9 0 0 2 r a M 9 0 0 2 r p A 9 0 0 2 y a M 9 0 0 2 n u J ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 24 Business Overview Evraz, which services customers in more than 40 countries, is a global supplier of steel products for industrial applications. More than 40% of the Company’s assets are based in Russia with 30% located in the USA and Canada. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 25 Performance in Figures Revenues by Segment (US$ million) EBITDA by Segment (US$ million) 17,925 Steel 3,634 Mining 4,790 Steel 1,391 Mining 1,206 Vanadium 1,022 Other Operations 212 Vanadium 134 Other Operations Revenues and EBITDA Growth (US$ million) Steel Segment Sales by Product (US$ million) Revenues EBITDA 12.859 4.305 8.292 2.642 6.508 1.859 20.380 6.323 Other products Tubular Flat-rolled Railway Construction Semi-ﬁ nished 7,939 948 1,073 961 2,100 2,857 365 5,978 771 884 1,755 2,203 17,925 2,237 1,861 3,239 2,226 4,850 11,908 1,330 703 1,968 1,697 3,713 3,512 2,497 2005 2006 2007 2008 2005 2006 2007 2008 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. BUSINESS OVERVIEW 26 BUSINESS OVERVIEW 27 Production by Region (share of total steel rolled products produced by region) 33% Tubular 15% Construction 18% Railway 34% Flat-rolled North America Production, Mining and Vanadium Segments (thousand tonnes, unless indicated otherwise) Ukraine Mining segment: Lumping ore 2,694 Europe Vanadium segment*: Vanadium in alloys and chemicals 2,541 North America Vanadium segment*: Vanadium in alloys and chemicals 1,942 South Africa Vanadium segment*: Vanadium in slag 419 Vanadium in alloys and chemicals 10,872 Russia Mining segment: Iron ore concentrate 3,615 Sinter 7,119 Pellets 5,304 Coking coal mined 9,065 Steam coal mined 4,901 Vanadium segment*: Vanadium in slag 10,591 40% Semi-ﬁ nished 36% Construction 72% Semi-ﬁ nished 82% Flat-rolled Ukraine Russia 17% Railway 3% Flat-rolled 4.0% Other Europe 23% Construction 5% Other 7% Other 11% Construction 40% Construction 55% Flat-rolled South Africa 5% Other * Tonnes, calculated in pure vanadium equivalent All information concerning production volumes of the enterprises only relates to the period of operation within Evraz Group. The total volume of rolled steel products excludes those re-rolled at other group’s plants. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. BUSINESS OVERVIEW 28 Sales by Region (US$ million, based on the location of the customer) BUSINESS OVERVIEW 29 Americas 4,538 2,138 340 87 2005 2006 2007 2008 Europe Russia 7,575 2,862 5,954 4,217 3,905 1,864 1,410 318 2005 2006 2007 2008 2005 2006 2007 2008 CIS 1,429 Asia 3,217 Total 20,380 641 2,027 1,945 1,900 12,859 8,292 6,508 2005 2006 2007 2008 344 139 2005 2006 2007 2008 2005 2006 2007 2008 Africa & RoW 759 362 32 36 2005 2006 2007 2008 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. OUR STRATEGY Advance Long Product Leadership Position in Russia and the CIS Capitalise on breadth of construction product range, effective distribution and customer service strengths to grow construction steel business segment in Russia and gain leading position in CIS Develop railroad product portfolio to strengthen dominant position in Russian Railways segment and CIS, growing export sales of rails and Russian market share in wheels BUSINESS OVERVIEW 32 Advance Long Product Leadership Position in Russia and the CIS Evraz is Russia’s number one steel producer by volume accounting for more than 18% of total Russian crude steel output and almost 20% of rolled products manufacture. The steel segment’s revenues in Russia increased from US$5.6 billion in 2007 to almost US$7 billion in 2008 primarily due to the higher average prices of steel products. The Company is the largest producer of long products and Evraz expects to capitalise on its position as a major supplier the leading manufacturer of Russian railway products with to Russian Railways taking into account the latter’s commit- an estimated near 97% market share in rails in 2008 and ment to the development of Russia’s railway network and an estimated 30% market share in wheels by volume. Evraz an upgrade of rolling stock in the wake of a long period of also produces a full range of products for the Russian con- under-investment. Against this background Evraz expects struction sector. In 2008, Evraz estimates that it accounted demand for railway products (rails and wheels) to remain for an 88% market share in H-beams, a 22% market share in strong. With an approximate 40% share of the North Ameri- rebar and a 60% market share in channels. can rails market via Oregon Steel Mills, acquired in 2007, Evraz intends to further strengthen its competitive position as a diversiﬁ ed supplier to Russia's construction sector and is currently focused on expanding its respective market shares in high value-added products such as beams and channels. Evraz has emerged as the largest rail manufacturer in the world with a global market share of approximately 23% by volume. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. BUSINESS OVERVIEW 33 Strategic Highlights 2008 M&A Activities 2008 Revenue from sales of construction products in Russia and CIS increased by 24% Acquisition of Dnepropetrovsk Iron and Steel Works in Ukraine Overall rebar sales rose by 30.4% in 2008 to US$1.25 bil- lion with stable market share and sales volumes of approxi- mately 1.5 million tonnes. Revenue from sales of railway products in Russia and CIS increased by 34% with sales volumes expanding by 6% Rail revenue increased by 37% accompanied by a 7% expansion of shipments in Russia and the CIS Wheels revenue rose by 22% with sales volumes increasing by 3% Integrated steel mill, located in the proximity of iron ore resources and key markets Crude steel capacity of 1.2 million tonnes Key Investment Projects 2008 Commencement of reconstruction of NKMK and NTMK rail production with introduction of rail head hardening technology Third stage of wheel rolling shop reconstruction at NTMK ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. OUR STRATEGY Expand Presence in the International Flat and Tubular Markets Expand presence in the attractive ﬂ at product markets through selective M&A and greenﬁ eld projects in plate and other ﬂ at segments Build a ﬂ exible world-class semis export business through achieving best in class position in product range, quality and customer service benchmarks BUSINESS OVERVIEW 36 Expand Presence in the International Flat and Tubular Markets As a result of a series of strategic acquisitions in Europe and North America, Evraz will beneﬁ t from enhanced exposure to mature, stable and protected European and North American markets. Evraz’s strategy is to achieve superior performance by captur- In March 2008, Evraz signed an agreement to acquire ing additional margins through focused acquisitions of steel, IPSCO's Canadian plate and pipe business which repre- re-rolling and other complementary assets outside Russia, sents another successful strategic move in the Company’s which can be supplied with slab produced at the Company’s geographic diversiﬁ cation. This transaction enhances Evraz’s Russian plants. As part of this strategy, Evraz has made sev- presence in high value-added steel segments in North eral foreign acquisitions: in August 2005 it acquired Palini America and increases Evraz’s exposure to the attractive en- e Bertoli, a producer of steel plates, located in Italy; in No- ergy and infrastructure sectors throughout the region. Evraz vember 2005 it acquired Vitkovice Steel, a producer of steel expects the combination of IPSCO Canada and Evraz’s exist- plates in the Czech Republic; in January 2007, it acquired ing North American operations to yield substantial synergies. Oregon Steel, a diversiﬁ ed steel producer headquartered in Portland, Oregon, the USA, laying the foundation of the Company’s American plate business. As a result of these transactions, Evraz has acquired a ﬁ rst class asset portfolio in relation to the production of plate and welded pipes in North America, one of the most important In 2008 Evraz strengthened its global steel business by steel markets in the world. These assets represent a product consolidating and expanding its presence in the North mix targeted at infrastructure expenditures in the USA American market. In January 2008, Evraz acquired Claymont which are supported by government within the framework of Steel, a producer of steel plates based in Delaware, the USA. America’s anti-recession programme and/or are required in This transaction serves to expand Evraz’s presence in North the wake of historic under-investment. America and represents another important step in the imple- mentation of the Company’s long-term strategy to develop higher value downstream markets. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. BUSINESS OVERVIEW 37 Strategic Highlights 2008 Key Investment Projects 2008 Expansion into the North American market through stra- Evraz Highveld Steel and Vanadium Corporation – tegic acquisitions and successful integration of IPSCO Upgrade of the Plate Mill (phase 1) – replacement of Canada and Claymont Steel low-margin coils with high margin plates 165% growth in tubular sales revenue with sales vol- Evraz Vitkovice Steel – Slab Area Scarﬁ ng Plates of above umes increasing 81% 40 mm thickness – increase in production capacity Increase of 65% in ﬂ at-rolled revenue with sales volumes Evraz Inc. NA, Portland – Heat Treat Expansion project – up 22% primarily due to North American operations designed to increase market share in respect of high value-added products Evraz Inc. NA Canada, Regina Tubular – Coil Prep line Facility and Associated Equipment – productivity increase and improvements in overall efﬁ ciency M&A Activities 2008 Claymont Steel Leading integrated producer of custom steel plate on the East Coast of the USA 450,000 tonnes capacity for cash consideration of US$422 million IPSCO Canadian plate and pipe business Major synergies from combination of business with Evraz’s existing facilities in North America Net cost of US$2.3 billion ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. OUR STRATEGY Enhance Cost Leadership Position Cut production costs through operational improvements, increased investments in efﬁ ciency, ongoing realisation of asset synergies and energy savings Achieve best in class performance in workplace safety and ecological compliance indicators BUSINESS OVERVIEW 40 Enhance Cost Leadership Position The ability to manufacture low cost steel products is essential to ensure the Company’s competitiveness in a market characterised by growing supply and limited demand. Evraz beneﬁ ts from the fact that Russia represents one of the lowest cost regions for steel production in the world. In addition, Evraz’s favourably located mining operations enable the Company to obtain a stable supply of raw materials. The purchase of a select portfolio of assets in Ukraine has In response to challenging market conditions in the fourth enhanced these advantages in terms of both production quarter of 2008, Evraz elaborated and implemented a num- costs and the availability of raw materials. As one of the larg- ber of measures designed to increase operational efﬁ ciency est steel producers in Russia, Evraz enjoys signiﬁ cant econo- involving production optimisation together with cost and mies of scale and endeavours to secure competitive input CAPEX savings initiatives. Due to the fact that the majority of consolidated cost is Rouble and Hryvnia denominated, Evraz’s US Dollar denomi- nated cost position was enhanced as a result of the Rouble and Hryvnia devaluations. prices from its suppliers. Evraz continued to upgrade certain facilities during 2008 in order to drive cost competitiveness through increased productivity and improved yields. This reﬂ ects Evraz’s consistent focus on operating performance and cost management. Evraz is conﬁ dent that its low-cost priorities, which are syn- onymous with the Company’s integrated mining platform, will serve to underwrite ongoing competitive advantages in the global marketplace. During the past three years Evraz’s advances in project man- agement, operations optimisation and planning processes have beneﬁ ted from a number of strategic programmes designed to enhance overall business efﬁ ciency. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. BUSINESS OVERVIEW 41 Strategic Highlights 2008 Key Developments 2008 Overall optimisation of products and ﬂ ows Maximisation of intercompany inputs consumption (reduction of cash out-ﬂ ows) Minimisation of coal and iron ore transportation Initiation of pulverised coal injection projects at NTMK and Zapsib – reduction of coke consumption by up to ~30-40% and gas consumption by 100% in pig iron pro- duction Implementation of investment optimisation programmes Shutdown of inefﬁ cient production capacity with CAPEX essentially reduced to maintenance levels Idling three out of 10 blast furnaces Acquisition of Ukrainian assets – expansion into one of the lowest cost producing regions Open hearth furnace and blooming at NTMK Coke batteries at NTMK and Zapsib Constant implementation of cost reduction programmes Cost-cutting programmes at Evraz steel plants, including – Consumption reduction of key production inputs (coke, lining, rollers, ferroalloys, power) – Capital repairs and contractor services optimisation at production facilities Optimisation of purchasing functions Programmes designed to increase labour productivity ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. OUR STRATEGY Complete Vertical Integration and Grow Competitive Mining Platform Cover up to 100% of Company requirements in iron ore and coking coal Capitalise on further development of the mining business BUSINESS OVERVIEW 44 Complete Vertical Integration and Grow Competitive Mining Platform As one of the world’s top three vertically integrated steel producers, Evraz’s exposure to the volatility of raw material prices is limited due to the availability of its own signiﬁ cant resources. Evraz was the second-largest iron ore producer (17%) and the largest coking coal producer (26%) in Russia by volume in 2008 with self-coverage of 93% and 89% respectively. In the ﬁ rst half of 2008, Evraz acquired the Sukha Balka iron ore complex and three Ukrainian coking plants. This acquisi- tion increases Evraz’s self-sufﬁ ciency in respect of iron ore and ensures further upstream integration.The strategically located Ukrainian coking plants will utilise surplus coking coal from the Company’s coal mines in Siberia and, in turn, will provide a captive source of coke for the Dnepropetrovsk Iron and Steel Works. This scale of vertical integration has enabled Evraz to maintain high utilisation rates in respect of the Company’s iron ore and coking coal operations, thereby alleviating the impact of the global downturn in the steel industry. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. BUSINESS OVERVIEW 45 Strategic Highlights 2008 Key Investment Projects 2008 One of the world’s top three steel producers with the Iron Ore highest levels of vertical integration in iron ore, coking Realisation of Sobstvenno-Kachkanarskoye iron ore coal and coke Iron ore self-coverage 93% Coking coal self-coverage 89% deposit development programme Modernisation of dry magnetic separation technology at KGOK – productivity increase and cost reduction Mining revenue up 91% to US$3.6 billion Coking Coal M&A Activities Acquisition and integration of Ukrainian assets Sukha Balka iron ore complex Three coking plants Bagleykoks Dneprodzerzhinsk Coking Plant Dneprokoks Construction of a new mine Erunakovskaya-8 to be completed in 2010; output of two million tonnes of hard coking coal p.a. to be achieved in 2011 Revamp of Alardinskaya mine will add 1.5 million tonnes of semi-hard coking coal in 2009 Ulyanovskaya mine reconstruction and implementation of safety measures ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. OUR STRATEGY Achieve World Leadership in Vanadium Business Diversify processing base and increase quality of vanadium slag BUSINESS OVERVIEW 48 Achieve World Leadership in Vanadium Business Evraz is the sole producer of vanadium-rich ore in Russia and, with ﬁ ve operating units on four continents, is one of the largest producers of vanadium slag in the world. The acquisitions of Highveld, Stratcor and Nikom were designed to provide vanadium processing capabilities and technical know-how to enable Evraz to fully capitalise on its leading position in the global vanadium market. The international aspect of operations yields a geographically diversiﬁ ed revenue stream. In 2008, Evraz produced about 21,000 tonnes of vanadium Strategic Highlights 2008 in vanadium-bearing products, which represents approxi- mately 39% of the total global vanadium consumption in steel alloying. Finished vanadium products totalled 19,400 tonnes of vanadium in 2008 compared to 23,800 tonnes in 2007, a decline that reﬂ ected the focus on production of ﬁ nal product FeV over slag and fourth quarter production cuts in relation to the global downturn. Global footprint – geographically diversiﬁ ed operation with ﬁ ve operating units on four continents The sole producer of vanadium-rich ore in Russia Vanadium segment revenues and EBITDA doubled year- on-year Key Developments 2008 Optimisation of products and ﬂ ows through integration of global vanadium facilities Acquisition of Nikom – a ferrovanadium producer located in the Czech Republic Divestment of Vanchem and completion of all other obli- gations to EU competition authorities Sales function consolidated under single management channel MAKING THE WORLD STRONGER EVRAZ GROUP S.A. BUSINESS OVERVIEW 49 Management Response to Challenging Market Environment The sharp slowdown of the global economy in the fourth Active focus on working capital management to minimise quarter of 2008 required quick and decisive action. Evraz’s cash outﬂ ows management developed and promptly implemented a series of measures that served to stabilise the situation and achieve operational improvements. Key aspects of the action plan include: Excess inventory levels have been sold down to almost zero Expect signiﬁ cant cash inﬂ ow of approximately US$700 million in 2009 as a result of reduced working capital Capacity Utilisation Management and Product Mix Flexibility Proactive management of production capacity in order to avoid inventory build-ups and extended receivables Idling excessive blast furnace capacity Extracting synergies from integration with international downstream assets “Hot switching” between slab and billet production de- pending on market pricing requirements Dividends Change of dividend policy through introduction of ceiling of 25% of net income on dividend payments Voluntary partial scrip in respect of the 2008 interim dividend No dividend payments to be made in 2009 Payments will only resume upon the completion of de- leveraging and the appearance of a sustainable market Extensive Cost Reduction recovery Labour costs forecast to decline by more than 40% in Management remains focused on achieving efﬁ ciency 2009 vs. 2008 due to reductions in salaries, Rouble and gains and deleveraging. The liquidity plan has yielded rapid Hryvnia devaluation, four-day working week, ﬁ ve-shift rewards which saw the Company’s net debt reduced by schedule and reduction in workforce US$1 billion to approximately US$8 billion during the ﬁ rst Key services and auxiliary materials price cuts of ca. 50% quarter of 2009. vs. 2008 levels due to extensive renegotiation with sup- Our successful GDR and convertible bond issues in July pliers and Rouble and Hryvnia devaluation 2009, which attracted US$965 million, illustrated the Optimisation of Capital Expenditure conﬁ dence of the capital market. This capital raising exercise provides us with a comfortable ﬁ nancial cushion in respect Since 3Q08, capital expenditure has been reduced to of our short-term reﬁ nancing needs. essentially maintenance levels Positive demand and the pricing trends of export markets CAPEX in 2009 expected to be less than US$500 million allowed us to restart some of our previously-idled capacity. Prudent Working Capital Management Russian operations are now running at full capacity, exclud- ing the less efﬁ cient production sites that have been shut Historically low working capital was further reduced to down. 10% of revenues in 2008 compared to 16% in 2007 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 50 Corporate Responsibility As an enterprise that employs more than 134,000 people in 10 countries around the world, manufacturing and selling 16 million tonnes of steel products per annum, responsible corporate management, in relation to people and the environment, is Evraz Group’s key priority. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 51 Introduction We believe that Evraz’s commitment to maximising share- creation of a proﬁ table enterprise. The Group believes that holder value is synonymous with the sustainability of our the implementation of sound ﬁ nancial, environmental, business which, in turn, is dependent on the manner in social, health and safety and quality attentive management which the Company’s activities impact on the environment, policies will serve to enhance proﬁ tability and underwrite consumers, employees, economies, the communities we future success. Consequently, Evraz is committed to encour- work within and all other stakeholders. aging innovation throughout the Group in order to continue Evraz has deﬁ ned the following priorities in relation to corpo- rate responsibility: Economic – contributing to the sustainability of regional and national economies Environmental – endeavouring to reduce the adverse to improve the quality of its products and the efﬁ ciency of its manufacturing processes. In the pursuit of these objectives, Evraz is pleased to endorse the principles of the Internation- al Council on Mining and Metals Sustainable Development Framework. environmental impact of the Company’s activities Engagement with Stakeholders Social – focusing on the safety and development of em- We recognise the importance of an ongoing and consistent ployees and support for local communities dialogue with our employees and customers, local communi- The Company’s Code of Business Conduct and Code of Ethics constitute the framework for the management of sus- ties and authorities and suppliers and partners in order to form constructive mutually beneﬁ cial relationships. tainable development at Evraz, while our social funding and Our people are committed to acting in a professional man- community activities are governed by the Social Investment ner, with integrity and in compliance with legal and regula- Guidelines. In addition, individual entities within the Group tory requirements and good governance. We endeavour to have their own speciﬁ c policies in relation to health, safety meet and surmount market challenges by achieving continu- and the environment which are fully compliant with, and in ous improvements in performance. many instances go beyond, local legislation. Through sustainable compliance with internal, local and in- Evraz understands that its business activities are capable of ternational regulations, Evraz endeavours to make a positive having signiﬁ cant effects on the areas in which it operates, contribution to society. both on people and on the regional and ultimately global environment, and the Company’s objective is to ensure that such effects are as beneﬁ cial as possible. Evraz believes that it can be a positive force in the lives of those associated with the Company and that through good stewardship and innovative industrial practices it can help to safeguard the planet for future generations. An underlying aspect of our corporate philosophy is the belief that respect for the well-being of people and places impacted by the Group’s operations is consistent with the The proﬁ tability of our Company does not merely represent the means to reward shareholders and develop the busi- ness. Our steel production and mining activities contribute to the economic sustainability of the regions where we oper- ate, support local communities and fund corporate social programmes. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 52 Economic Prosperity Economic Contribution Community Support Steel is one of the basic materials used in the construc- tion of buildings and infrastructure with more than 50% of steel applications related to the construction industry. As often as not, steel represents the ultimate solution, with no viable alternatives, to various aspects of construction with consumption closely related to economic development (ﬁ xed asset investment) and urbanisation. Evraz’s role as a leading supplier to major industrial sectors is illustrated by an average daily output from our plants of more than 48,000 tonnes of crude steel and more than 44,000 tonnes of rolled products during 2008. All of Evraz’s steelmaking facilities and Strategic Minerals Corporation (Stratcor), our US based vanadium producer, have estab- lished certiﬁ ed quality management systems in accordance with ISO 9001 standard and hold certiﬁ cates of compliance with various international and local standards in relation to separate products such as slabs, rails, tubular goods and plates. Evraz’s earning capabilities was reﬂ ected in the Company’s operating margin of 18.3% on revenues in excess of US$20 billion in 2008, while CAPEX totalled US$1.1 billion, of which US$831 million was allocated to investment projects. As a major employer and corporate taxpayer, Evraz contributes to all the economies within which the Company operates. Evraz is strongly committed to its social investment pro- grammes which are reviewed by the Board of Directors on an annual basis. These policies are designed to ensure that Evraz contributes in a direct and meaningful way to local communities in the areas where we operate. Many of the tangible steps that the Company takes to protect the environ- ment and improve the well-being of employees will not be immediately apparent to local communities, irrespective of the fact that they can be expected to ultimately beneﬁ t from such measures. We take the view that actions speak louder than words and Evraz’s commitment to social investment seeks to redress any imbalance in perception and demon- strate the Group’s respect for the communities within which we operate. Social investment priorities: Youth: initiatives and projects which assist in the develop- ment of young people Education: enabling individuals of all ages to acquire new knowledge, abilities and skills Citizenship: fostering favourable neighbourhood values and safe environments in local communities Evraz seeks an active dialogue with the residents of the areas in which it operates in order to discuss speciﬁ c proj- ects within the priority areas of Evraz’s Social Investment Programme. The Company establishes local Supervisory Boards, including representatives from the community, which decide which projects would be most appropriate and should therefore receive funding. To further communica- tion with local communities with regard to social investment spending, Evraz has established corporate charity funds in the Czech Republic, Siberia and the Urals. Our employees are also involved in various charitable initiatives and are ac- tive members of local business communities. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 53 In 2008 Evraz’s community investments in Russia amounted The primary focus of our support activities in South Africa to approximately US$15 million (RUB371.5 million). Most of related to Black Economic Empowerment and resulted in the projects are focused on stimulating sport and education the agreement to transfer a 26% ordinary equity interest in initiatives, the improvement of living conditions in the towns Mapochs Mine (Proprietary) Limited to local partners (as where Evraz’s subsidiaries are situated and encouraging announced in April 2009). We also participated in extensive residents to start their own community projects. Some of the community engagement and educational programmes. most important social projects include “City of Friends – City of Ideas”, “Yards” and “The Town Needs You”. The “Beloved Children” programme is aimed at organising medical and educational assistance, as well as psychological support, for children with infantile cerebral paralysis and their parents. Our community investments in the Czech Republic exceeded EUR760,000 (CZK20.2 million). The most important projects include ﬁ nancial support for the University Hospital in Ostrava and the Centre for Advanced Innovation Technology CPIT-TL2, together with contributions to the MS Stankova kindergarten and the Centre of Early Care Ostrava, which specialises in assisting families with children suffering from eye diseases. In Canada, Evraz supports the Canadian Red Cross’s “Imag- ine…No Bullies” Campaign, designed to promote the preven- tion of bullying among young people. The Regina Globe Theatre also received support and donations were made to the Saskatchewan Nutrition Advisory Council for Kids, Junior Achievement of Southern Alberta, the Surrey Children’s Hos- pital Foundation & BC Children’s Hospital and the Children’s Health & Hospital Foundation. One of our more high proﬁ le projects in Saskatchewan, funded by Evraz Inc NA, is the renovation of Evraz Place, a vast event complex that hosts trade shows, exhibitions and houses an indoor soccer facility and a hockey arena. During 2008, Evraz Inc. NA contributed some US$326,000 to charities and community groups. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 54 Health, Safety, Environment Health and Safety Environment The health and safety of Evraz’s employees are paramount. Evraz employs its best endeavours to comply with all envi- The Group constantly seeks ways in which the health and ronmental laws and regulations applicable in the territories safety of its workforce can be improved and complies with within which it operates. The Group is acutely aware of the all applicable health and safety laws and regulations. Evraz possible environmental consequences of its production pro- conducts regular inspections designed to eliminate danger- cesses and energy consumption. Accordingly, the Group has ous conditions or behaviour, together with the causes of set a number of targets in this context, namely: such, and is committed to the development of programmes that serve to improve safety and well-being. Employees are strongly encouraged to report the slightest sign of risk and to suggest ways in which their jobs could be made safer. Health and safety can always be improved, even where all to continuously monitor the Company’s environmental impact at all levels, ranging from individual smelters to the global environment; to eliminate environmental incidents; and applicable legal and regulatory requirements are satisﬁ ed, to operate processes which make the most efﬁ cient use and Evraz’s ultimate scenario is to experience zero accidents of natural resources and energy. across the entire Group each year. In pursuit of this goal, Evraz sets its production facilities speciﬁ c objectives and constantly strives to ﬁ nd new ways to reduce risk. One of Evraz’s priorities in this area is to ensure a uniform approach across the entire Group by implementing globally recognised health and safety standards within each subsidiary and each plant. In line with these targets one of Evraz’s key objectives is to achieve a consistent reduction in waste emissions alongside the introduction of modern, environmentally-friendly tech- nologies. A signiﬁ cant amount of obsolete equipment, which failed to meet environmental standards, has already been withdrawn as part of the modernisation of Evraz’s production facilities and, by the end of 2008, closure of all open-hearth As of 2008, the Occupational Health and Safety Systems at furnaces at the Russian steel plants had been completed. Zapsib, NKMK and NTMK were certiﬁ ed in accordance with OHSAS 18001 standard. Evraz strives to implement environmental policies that are fully compliant with ISO 14001. By the end of 2008, all of the Russian steelmaking facilities, Evraz Vitkovice Steel and Highveld had established environmental management sys- tems in accordance with ISO 14001 and received relevant certiﬁ cates of compliance. Evraz believes that these goals fully complement sustainabil- ity, enhanced proﬁ tability and the maximisation of share- holder value. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 55 Our People We believe that our employees are the key drivers of the suc- The emphasis on the role of middle management as the cessful and sustained development of the Group. Evraz has key driver of sustainable development was facilitated by the always proclaimed its intention to ensure that all of its em- creation of a corporate model of management competencies ployees enjoy fair treatment and equality of opportunity in a and the launch of a comprehensive management assess- work environment free from discrimination and harassment. ment programme. This programme provided the foundations Evraz is committed to the development of expertise and for the creation of a strategic management pool that com- know-how by its entire workforce and to this end employees prises more than 200 managers of which 70% are employed receive regular training, assessment and appraisals, the goal at the Urals and Siberian production sites. being that each and every employee becomes an expert in his/her ﬁ eld. Special training programmes were developed exclusively for Evraz to facilitate the education and development of the By the end of 2008 the number of Group employees totalled personnel who make up this strategic resource. The primary objective is to develop professional principals with excellent managerial skills and considerable expertise in respect of technological and production processes. Professors associ- ated with some of the world’s leading business schools and universities participated in the development of the educational programmes, as did a number of acknowledged experts in corporate governance and business development. In addition, 2008 witnessed the launch of a separate three- stage educational project designed to develop the manageri- al skills and competencies of 1,800 line managers at Evraz’s plants in the Urals and Siberia. This project will also serve to identify prospective members of Evraz’s strategic manage- ment resource. approximately 134,000. Key Personnel Priorities in 2008 During 2008 there was considerable focus on the following objectives: the improvement of working efﬁ ciency, making staff costs more comprehensible and the further strengthening of Evraz’s position as a low-cost producer the need to reinforce the role of middle management as the key driver of positive changes to the Company’s busi- ness Management focus in respect of the improvement of work- ing efﬁ ciency and the strengthening of Evraz’s position as a low-cost producer, included the ongoing modernisation of production facilities and further improvements in labour management. At the same time the organisational structure was simpliﬁ ed in order to enhance transparency and stream- line processes through a reduction in supportive functions, the elimination of duplication and the implementation of a strategic outsourcing programme. The result was a reduction of approximately 7.5% in the number of employees in 2008. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 56 Professional Education Employee Social Programmes The provision of development opportunities for person- Evraz’s approach to social responsibilities in respect of nel has always ranked as one of Evraz’s key priorities. Our personnel is based on a detailed system of protection and employees around the world have the opportunity to upgrade support of the Company’s employees. A wide range of their professional grades via training courses, workshops, social programmes for personnel is constantly extended seminars and through mentoring and the sharing of best and includes not only employees but also members of their practices. families. Such programmes include: To further this process Evraz established its own educational centres that facilitate the training of employees in line with Evraz’s corporate requirements. Highveld Steel, for example, operates its own training centre for the education of employ- employee insurance programmes, encompassing life insurance, accident and occupational illness insurance and the co-ﬁ nancing of a voluntary medical insurance programme; ees. In Russia, two educational centres - “Evraz-Siberia” in recreational activities for employees and their families; Kemerovo region and “Evraz-Urals” in Sverdlovsk region - provide professional training in some 500 aspects of employ- ment for more than 20,000 Evraz employees each year. At the same time Evraz supports regional specialised institutes and colleges through the provision of educational allowances, practical training, mentoring and consultancy support of health programmes (sporting events, healthy eating programmes, etc.); support of veteran and youth organisations; co-ﬁ nancing of employee pension plans; mortgage programmes. together with work-books, manuals and other descriptive ma- In order to adapt to the changing economic situation, Evraz, terials. During 2008 more than 4,500 students completed towards the end of 2008, launched a programme of ﬁ nancial internships at Evraz’s plants in Russia and more than 750 support for employees in Russia who had mortgage loans or of these were employed at the Company’s steel and mining loans in respect of education or medical treatment. Under plants after graduation. the programme, which was initially launched for one year but can be extended depending on the economic cycle, the Company provides help with regard to interest payments. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE RESPONSIBILITY 57 Cooperation with Trade Unions Evraz respects the right of each employee to decide whether It is for this reason that Evraz became the ﬁ rst steel compa- to join a trade union and acknowledges employees’ rights to ny in Russia to establish the so-called Social Council in which collective bargaining. The Company’s policy is to develop a constructive and mutu- ally beneﬁ cial cooperative relationship with trade unions that represent the majority of our employees. We believe that such a dialogue should be based on the principles of transparency, openness and fair social partnership. Our principal objective is to create conditions that will support and preserve social stability at the Company’s plants and engender the same fair-minded approach to the resolution of any issues that may arise as that which lies at the heart of relations between Evraz and its employees. representatives of the Russian Steel and Mining Trade Union and members of regional trade unions at Evraz’s plants par- ticipate. The Council’s most important function is to discuss, identify and approve mutually acceptable decisions that will serve to create a stable social atmosphere and an effective production environment at the Company’s plants. Number of Employees by Segment Allocation of Employees According to Geographical Location 57% Steel 36% Mining 6% Sales, Logistics 78% Russia 13% Ukraine 6% Americas & Other 1% Vanadium 2% Africa 1% Europe ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 58 Corporate Governance Evraz Group strives to constantly enhance its corporate governance system in order to maximise shareholder value, provide for business prosperity over the long-term and maintain the trust of the Company’s internal and external stakeholders. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 59 Introduction Evraz Group S.A., incorporated as a société anonyme under We relate to a range of audiences through various chan- the laws of the Grand Duchy of Luxembourg, operates in ac- nels including, in terms of ﬁ nancial calendar reporting and cordance with Luxembourg law and adheres to all applicable disclosure, announcements made via the London Stock Ex- laws and regulations incumbent upon the Company, atten- change, the Annual Report and Accounts, the Annual General dant to the listing of its Global Depositary Receipts on the Meeting and the Company’s website www. evraz.com. Our Ofﬁ cial List of the UK Listing Authority, with particular regard transparency credentials were acknowledged in Standard to the Combined Code on Corporate Governance. & Poor’s Transparency and Disclosure Survey 2008 which, We recognise corporate governance as a system of objec- tives, policies and procedures designed to ensure the proper control and regulation of the Company’s affairs through the provision of guidance to shareholders, the Board and man- agement. Our ultimate corporate objective is to maximise long-term shareholder value consistent with the Company’s commitment to transparency, integrity and appropriate com- pliance in whichever jurisdiction we operate. The manner in for the second consecutive year, placed Evraz among the 10 most transparent companies in Russia. The Chairman of the Board, the Chief Executive, senior management and the investor relations team regularly engage with institutional investors to discuss the Company’s operations and a wide range of issues including governance. More than 450 indi- vidual/group meetings, conferences and other public events involving the investment community took place during 2008. which the Board carries out its duties and exercises its au- In addition to the Evraz Group S.A. Articles of Association thority is integral to good governance and a detailed account and internal rules and regulations, our governance principles of the Board’s activities can be found on page 70. are detailed in the Company’s Corporate Governance Code An ongoing dialogue with stakeholders is synonymous with transparency and, in keeping with accountability to share- holders and responsibilities in relation to other parties with which the Company interacts, such communication is an essential aspect of corporate activity. adopted by the Board in April 2007. Certain issues such as corporate responsibility, sustainable development, and relations with business partners and stakeholders are also covered in our Code of Business Conduct and Code of Ethics. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 60 Directors and Senior Management The following table lists the Company’s directors and senior management as of 1 June 2009 Name Initially elected or appointed Alexander Abramov Director, Chairman of the Board Chairman since December 2008, Director since April 2005 Alexander Frolov Otari Arshba Gennady Bogolyubov James W. Campbell Philippe Delaunois Olga Pokrovskaya Terry Robinson Eugene Shvidler Eugene Tenenbaum Leonid Kachur Pavel Tatyanin Giacomo Baizini Vladimir Bruev Natalia Cheltsova Igor Gaponov Daniel Harris Natalia Ionova Alexey Ivanov Giuseppe Mannina Igor Markov Dmitry Sotnikov Timur Yanbukhtin Director, Chief Executive Ofﬁ cer Director since April 2005 Non-executive director Non-executive director Independent director Independent director Non-executive director Independent director Non-executive director Non-executive director Senior Vice President Senior Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President May 2005 May 2008 April 2005 January 2007 August 2006 April 2005 August 2006 August 2006 June 2002 November 2004 August 2006 March 2006 March 2006 March 2006 November 2007 June 2006 June 2009 July 2006 April 2008 June 2009 February 2007 On 3 December 2008 Evraz announced the election of Alexander Abramov as Chairman of Evraz Group’s Board of Directors. He succeeded Alexander Frolov who remains the Company’s CEO and a member of the Board. At the Company’s AGM on 15 May 2009 all directors were duly re-elected. Dmitry Melnikov has been Secretary to the Board since 2007. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 61 Directors and Senior Management As of 1 June 2009 Alexander Abramov Director, Chairman of the Board Alexander Frolov Director, Chief Executive Ofﬁ cer Member of the Remuneration Committee since 18 Decem- Member of the Remuneration Committee until 18 December ber 2008 Born in 1959. 2008 Born in 1964. In 1992, Mr Abramov founded EvrazMetal company, a prede- cessor of Evraz Group. Mr Frolov joined EvrazMetal, a predecessor of Evraz Group, in 1994, and subsequently held various positions within the Company. Elected Chairman of the Board effective 1 May CEO of Evraz Group until 1 January 2006, Chairman of the 2006 and continued to serve as Chairman of the Board until Board until 1 May 2006. Served as non-executive director 1 December 2008. until 1 December 2008 until his re-appointment as Chair- man of the Board. A director of OOO Invest AG, President of OOO EvrazInvest, a member of the Bureau of the Board of Directors and a Graduated with honours from the Moscow Institute of Phys- ics and Technology in 1987 and received a Ph.D. in Physics and Mathematics in 1991 from the Moscow Institute of Phys- ics and Technology. member of the Board of Directors of the Russian Union of A director of OAO Raspadskaya and ZAO Raspadskaya Coal Industrialists and Entrepreneurs, an independent non- Company, Evraz Vitkovice Steel, Evraz Inc. NA and Highveld governmental organisation. Steel and Vanadium Corporation. Graduated with honours from the Moscow Institute of Physics and Technology in 1982 and holds a Ph.D. in Physics and Mathematics. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 62 Otari Arshba Non-executive Director James W. Campbell Independent Director Born in 1955. Chairman of the Strategy Committee, Member of the Remu- Mr Arshba joined Evraz in 1998 and served as Evraz’s neration Committee Senior Vice President for Corporate Communications until Born in 1949. December 2003 when he was elected as a deputy of the State Duma of the Russian Federation. Mr Campbell held various positions with Anglo American plc from 1975 until 2002, including posts with Amcoal, Currently serves as a deputy of the State Duma of the RF then part of Anglo American’s coal division, 1984-2002. Federal Assembly, Chair of the State Duma Committee for Between 1999-2002 he was an executive director of Anglo Regulations and Procedural Organisation. American plc; Chairman of Anglo Coal (formerly Amcoal) and Graduated with distinction from the Felix Dzerzhinsky KGB Higher School and holds a Ph.D. in Political Science from the AngloBase Divisions; and a non-executive director of Anglo Platinum, AngloGold and De Beers Centenary AG. Russian Academy of Government Service. He is the Acting Chairman of Highveld Steel and Vanadium Gennady Bogolyubov Non-executive Director Born in 1962. Corporation. Received a B.Sc. in Mathematical Physics from Queen’s University, Belfast, and an M.A. in Engineering Management from Cambridge University, England. Mr Bogolyubov currently acts as Chairman of the Supervi- sory Board of Ukrainian commercial bank, PrivatBank. He has been a member of the Supervisory Board of Ukrnafta, Philippe Delaunois Independent Director the Ukrainian oil and gas company, since 2003. In February Chairman of the Remuneration Committee 2008 he was elected Chairman of the Board of Directors of Consolidated Minerals Limited, producers of manganese ore and other non-ferrous metals. Graduated from Dnepro- petrovsk Engineering and Construction Institute in Ukraine with a degree in Industrial and Civil Construction. Born in 1941. Mr Delaunois was involved in the Belgian steel industry for 35 years, including holding management positions and serv- ing as CEO, 1987-99, at Cockerill Sambre, the Belgian steel group. He was a director of several Belgian and international companies. In 1990-1993 – President of Union Wallonne des Entrepris- es; Honorary Consul of Austria for the Province of Hainaut and Namur. Order of Leopold (Belgium); Chevalier de la Légion d’Honneur (France). He is Chairman of CFE and a director of Mobistar, ING Bel- gium and Suez Energie Services (France). Received a degree in Engineering from the State University at Mons, Belgium, and studied business at Harvard Business School. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 63 Olga Pokrovskaya Non-executive Director Eugene Shvidler Non-executive Director Member of the Audit Committee Born in 1964. Born in 1969. Ms Pokrovskaya held several key ﬁ nance positions in Sibneft post 1997, including serving as Head of Corporate Finance Mr Shvidler worked as a Senior Vice President of Sibneft, beginning in 1995, and served as President of Sibneft from 1998 through 2005. from 2004 until 2006. From 1991 until 1997, she worked as He is Head of Millhouse LLC and a director of Highland Gold a senior audit manager at Arthur Andersen. Mining Ltd. She is Head of Corporate Finance at Millhouse LLC and a Graduated from the I.M. Gubkin Moscow Institute of Oil and director of Highland Gold Mining Ltd. Gas with a Master’s degree in Applied Mathematics. He Graduated with honours from the State Financial Academy holds an MBA in Finance and an M.Sc. in International Tax in 1991. Terry Robinson Independent Director from Fordham University. Eugene Tenenbaum Non-executive Director Chairman of the Audit Committee Member of the Remuneration Committee Member of the Strategy Committee Born in 1964. Chairman of the Group Risk Committee Born in 1944. Mr Robinson served for 20 years at Lonrho PLC, where he was a main Board director for the last 10 years. Since 1992 he has been variously occupied with international business recovery engagements and investment projects including natural resources in the UK, Russia, the CIS and Brazil. He is an independent non-executive director of Katanga Min- Mr Tenenbaum served as the Head of Corporate Finance for Sibneft in Moscow from 1998 through 2001. In 1994-1998 he was a director for corporate ﬁ nance at Salomon Broth- ers. Prior to that, he was engaged in corporate ﬁ nance with KPMG in Toronto, Moscow and London, including three years as national director at KPMG International in Moscow. He was an accountant in the Business Advisory Group at Price Waterhouse in Toronto from 1987 until 1989. ing Limited and an Independent and Senior non-executive He is Managing Director of Millhouse Capital UK Ltd.; a direc- director of Highland Gold Mining Limited. tor of Highland Gold Mining Ltd and a director of Chelsea FC A Fellow of the Institute of Chartered Accountants of England Plc. and Wales. A chartered accountant with a Bachelor’s degree in Com- merce and Finance from the University of Toronto. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 64 Leonid Kachur Senior Vice President, Igor Gaponov Vice President, Information Technologies Business Support and Interregional Relations Born in 1974. Born in 1961. Joined Evraz Group in 2002; previously held various posi- Joined Evraz Group in 1993. Mr. Kachur holds a Master’s tions with UNICON/MS Consulting Group and Deltek Systems degree in Engineering. Pavel Tatyanin Senior Vice President, Corporate Affairs, Chief Financial Ofﬁ cer Born in 1974. Inc. Graduated from Moscow State Academy of Manage- ment. Daniel Harris Vice President, Vanadium Born in 1954. Joined Evraz Group in 2001; previously held various posi- Joined Evraz Group in 2007; previously held various posi- tions with Adamant Financial Corporation. Received a Mas- tions with Strategic Minerals Corporation (USA) and Vametco ter’s degree in Economics from Moscow State University. Minerals Corporation (South Africa). Received a B.Sc. degree in Chemical Engineering from the University of Nevada. Giacomo Baizini Vice President, Product and Resource Management Born in 1970. Natalia Ionova Vice President, Human Resources Joined Evraz Group in 2005. Previously held various posi- Born in 1966. tions with McKinsey’s, JMAC. Received a degree in Physics Joined Evraz Group in 2006; previously held various manage- from Oxford University. Vladimir Bruev Vice President, Mining Born in 1955. Joined Evraz Group in 2004; previously held various posi- ment positions in HR with the NDK Merkury and Russian Gold. Received a degree in Management from the Russian University of Sports and Tourism, holds a Ph.D. in Psychology. Alexey Ivanov Vice President, the Siberian Division tions with MGOK and Sokolov-Sarbajsk GOK. Graduated from Born in 1975. Industrial University in Kazakhstan. Joined Evraz in 2002; previously held various positions with Natalia Cheltsova Vice President, Legal Born in 1974. Joined Evraz Group in 2006; previously held various posi- tions with Ilim Pulp Group. Received a Ph.D. in Law from St. Petersburg State University. Inkombank and Liggett-Ducat. Received a degree in Econom- ics from the Finance Academy under the Government of the Russian Federation, INSEAD. A member of the Chartered Institute of Management Accountants, holds Diploma in Financial Management from the Association of Chartered Certiﬁ ed Accountants. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 65 Giuseppe Mannina Vice President, International Operations and Logistics Senior management changes: Appointments: Igor Markov Departures: Alexey Borisov Vice President, Coal Irina Kibina Vice President, Corporate Affairs & Investor Relations Maxim Kuznetsov Vice President, Steel Vyacheslav Pavlov Vice President, Technical Development Born in 1952. Joined Evraz Group in 2002; previously held various posi- tions with East Metals S.A., Duferco S.A. and Siderius, Inc. Received a degree in Business Administration from the University of Palermo. Igor Markov Vice President, Commercial Activities Born in 1965. Joined Evraz in 1995; previously worked at the Kurchatov’s Institute of Atomic Energy. Graduated from the Moscow Institute of Electronic Engineering. Dmitry Sotnikov Vice President, the Urals Division Born in 1979. Joined Evraz in 2002 and held various positions with the management company, KGOK and NTMK. Received a Mas- ter’s degree in Economics from the Moscow State University and the New Economic School in Russia, a Ph.D. in Econom- ics from the Moscow State University and a Master’s degree in Management from Université Paris Dauphine. Timur Yanbukhtin Vice President, Business Development and Strategic Planning Born in 1964. Joined Evraz Group in 2002; previously held various posi- tions with Yandex LLC, Alfa Bank, Salomon Brothers and Pio- neer Investments. Received a Master’s degree in Economics from Yale University. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 66 Board and Management Remuneration Independent directors serve on the Board pursuant to agree- Mr. Philippe Delaunois, who was appointed an independent ments. These agreements have a one-year term and provide director on 19 January 2007, does not participate in this for identical levels of remuneration and the reimbursement programme. of certain expenses. A director’s remuneration consists of an annual salary of US$150,000 and a payment for committee membership (US$30,000) or chairmanship (US$50,000). Mr. Arshba, as a member of the Russian Parliament, is not entitled to any remuneration. Remuneration of Evraz Group’s senior management consists of: a ﬁ xed base salary according to the uniﬁ ed scale, with grades deﬁ ned for all job categories; variable performance-based compensation: a bonus paid semi-annually (for the ﬁ rst half year in an amount not exceeding 25% of the annual bonus); In 2005, Evraz Group S.A. introduced a long-term incentive programme for independent directors. an annual bonus. Under the 2006 arrangement, the option must be exercised within one year from the 14th day after the announcement of Evraz Group’s results for the previous ﬁ nancial year; otherwise it lapses. The table below provides details regarding the GDR options granted as at 31 December 2008. Name of director Date of grant Date from which exercisable Granted, GDR Option price, US$ per GDR GDR (exercised) Expiry date James W. Campbell 7 June 2005 21 June 2006 25 May 2006 10 May 2007 Terry Robinson 7 June 2005 21 June 2006 25 May 2006 10 May 2007 55,173 36,714 55,173 36,714 14.5 21.79 14.5 21.79 55,172 (21.05.2008) 3 June 2008 36,714 (15.05.2008) 15 May 2008 55,173 (19.02.2007) 3 June 2008 36,714 (23.01.2008) 9 May 2008 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 67 Key Performance Indicators (KPIs) in relation to the annual The CEO of Evraz Group is not granted any speciﬁ c non- bonus depend on the particular functions of a senior man- material remuneration. ager. The principal KPIs applicable to vice presidents respon- sible for production segments (steel, mining, vanadium) are: EBITDA; net proﬁ t; cost per tonne of production; and capex. The bonus for vice presidents in charge of various corporate (non-production) functions depends on EBITDA, share price performance and the meeting of project-related targets (so- called management by objectives, MBO). Senior managers are also entitled to long-term incentives, including the Evraz Stock Option Plan (ESOP) for key employ- ees who have worked in Evraz Group for more than a year and, depending on the job grade, various beneﬁ ts, e.g. life and medical insurance, cell phones, cars (such services are outsourced). Evraz Group’s key management personnel totalled 60, 48 and 46 persons as at 31 December, 2008, 2007 and 2006 respectively. Total compensation received by these individu- als consisted of the following: (US$ million) Salary Performance bonuses Social security taxes Share-based payments Termination beneﬁ ts Other beneﬁ ts Total 2008 2007 2006 22 29 1 18 – 1 71 25 20 1 3 10 1 59 18 21 1 11 – 3 54 Other details regarding the remuneration of directors and managers are provided in the Remuneration Committee Report on page 72. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 68 Risk Management The Group’s business and investment activities are exposed junior managers who will share accountability with senior to various business risks. Some of these risks are inherent management in relation to various aspects of the Group’s in the character and jurisdiction of the Group’s international risk proﬁ le. Such practices will serve to encourage a risk business activities, while others relate to changes in the conscious business culture. global economy and are largely outside management’s control. The Risk Committee and the Audit Committee share a com- mon goal of codifying a Group wide set of risk management With regard to risk management disciplines, the Group’s and internal control policies and procedures. executives seek to ensure management awareness and appropriate risk mitigation planning and actions deﬁ ned and monitored within an enterprise risk management process (ERM). The ERM process is a structured and coordinated company-wide governance approach to identify, quantify, respond to and monitor the consequences of a management agreed schedule that encompasses both internal and exter- We apply the following core principles to the identiﬁ cation, monitoring and management of risk throughout the organi- sation: Risks are identiﬁ ed, documented, assessed, monitored, tested and the risk proﬁ le communicated to the relevant risk management team on a regular basis; nal risks. This process is consistent with the listing rules of Business management and the risk management team the LSE, and is based on the Turnbull Guidance on Internal are primarily responsible for ERM and accountable for all Control. risks assumed in their operations; The ERM process is fully supported by Evraz Group’s Board, the Audit Committee and executive management. Senior management, tasked with the development of the ERM process, identiﬁ ed key risk elements and, in order to further risk management accountability, assigned owner- ship of the relevant risk areas to senior managers according to their designated functions. This exercise commenced in The Board and Audit Committee have an oversight role, to determine that appropriate risk management processes are in place and that these processes are adequate and effective; The Board is responsible for assessing the optimum bal- ance of risk through the alignment of business strategy and risk appetite on an enterprise-wide basis. 2007 and, during 2008, the Board of Evraz reviewed the In 2008, the Group’s key business risk areas were: Group’s risk matrix, presented by the executive management and prepared in conjunction with the Audit Committee. I) External compliance (including environment); II) Reputation; As a result of the ERM process, a Risk Committee was estab- III) Operational; lished and mandated to have oversight of the Group’s risk IV) Financial; proﬁ le and supervise the entire risk management process V) Human Resources; including response procedures. Under the auspices of the VI) Political; Risk Committee, the Group is in the process of communicat- VII) Market Volatility; and ing throughout the management chain with key middle and VIII) Cost competitiveness. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 69 Internal Control Consistent with its governance policies, the Group continues The Company’s internal audit is structured on a regional to improve the process by which the effectiveness of its inter- basis, reﬂ ecting the developing geographic diversity of the nal control system can be regularly reviewed as required by Group’s operations. In the light of this the head ofﬁ ce inter- provision C.2.1 of the Combined Code. The process enables nal audit function has furthered implementation of common the Board of Directors and the Audit Committee to assess internal audit practices throughout the Group. During 2008 the system of internal controls in place within the Group to the internal audit function worked in close cooperation with manage signiﬁ cant business, operational and ﬁ nancial risks Ernst & Young, Evraz’s external auditor, on a joint review of (including social, environmental, safety and ethical risks) internal controls and an appraisement of the general com- petence, independence and professional objectivity of the Group’s internal audit resource. This exercise also served to avoid in the future the duplication of procedures during the separate internal and external audits. throughout the year. This process has the normal limitations, in that any internal control system can only be directed at the management of risk rather than the elimination of risk. An effective internal control system can only provide reasonable and not absolute assurance against material misstatement or loss. Evraz’s Head of Internal Audit has attended all the meetings of the Audit Committee and addressed any reported deﬁ cien- cies in internal control as required by the Audit Committee. The Audit Committee engaged with executive management during the year to monitor the effectiveness of internal con- trol. Deﬁ ciencies that occurred and management’s response to deﬁ ciencies were considered by the Audit Committee during the year, together with agreement regarding follow up response and action in respect of critical internal control deﬁ ciencies. The annual internal audit programme is predominately risk- based and in 2008 incorporated particular assignments and priorities agreed by the Audit Committee. Further, the 2008 annual internal audit scope included a review of the internal control systems of newly acquired subsidiaries as considered appropriate for effective risk management. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 70 The Board Role of the Board Through its broad powers and frequent meetings the During 2008 the composition of the Board was increased Board is deeply involved in managerial decision-making from nine to 10 members. Members of the Board are elected procedures. Such involvement covers different areas of for a one-year term for an unlimited number of times by a Evraz Group’s management activities and reporting: from simple majority of shareholders’ votes at the Annual General regular updates on the ﬁ nancial performance and operat- Meeting which is held on 15 May of each calendar year. ing forecasts to strategic investments and new ﬁ nancing, The practice of Evraz Group S.A. is to have at least three from liquidity position updates to audit committee reports, independent directors matching the independence criteria from management performance assessment to reviews of set out by the corporate governance principles applicable to the Company’s health and safety policy. Save for matters listed companies. speciﬁ cally reserved for the Annual General Meeting (such as election of the new Board members, amendments to the Articles of Association, appointment of auditors), the Articles of Evraz Group S.A. limits the unilateral decision making of the Company’s ofﬁ cers and vests the Board of Directors with ultimate decision-making powers. Board meetings in 2008 Month Scheduled Board Meetings Circular Board Meetings January 23 January – February 14 February 29 February The Board exercises its powers based on the highest corporate governance standards and on what the directors believe to be in the best interests of Evraz Group S.A. and its shareholders to whom it is accountable: discharge of the directors’ liability is subject to shareholders’ approval each year at the Annual General Meeting. The members of the Board have access to all information necessary for the exer- cise of its duties. It should be speciﬁ cally noted that in the March – April May June July 1 April 23 May 19 June 25 July August 28 August – 10, 16 April – – 23 July – case of related-party transactions (such as, for example, the September – 9, 10 September acquisition of several Ukrainian plants and mills from Evraz Group’s major shareholder in September 2008) the ultimate decision as to the beneﬁ ts of the acquisition was taken by a committee formed exclusively of independent directors which only gave a “green light” for the acquisition after care- ful consideration of the fair market terms of the transaction and the receipt of all necessary opinions from the auditors and independent appraisers. October 7 October – November 13 November 5 November December 18 December 1, 16 December MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 71 Meetings’ Attendance 2008 Committees Attended Possible In 2008, the Board had the following standing committees: The Remuneration Committee, The Audit Committee and The Strategy Committee. Abramov Arshba Bogolyubov Campbell Delaunois Frolov Pokrovskaya Robinson Shvidler Tenenbaum 9 6 4 10 11 11 11 11 9 9 11 11 7 11 11 11 11 11 11 11 The above criteria does not apply to Circular Board meetings in view of the fact that even if a director missed a conference call such absent director shall sign the protocol as required by Luxembourg law. Annual General Meeting The 2008 AGM was held on 15 May 2009. All resolutions have been accepted.The shareholders approved the Direc- tors’ Report and the consolidated ﬁ nancial statements for the year ended 31 December 2008, re-elected the Com- pany’s directors, determined the level of the directors’ and CEO’s remuneration and re-appointed Ernst & Young as Evraz’s external auditor. Copies of the AGM documents are available to download from the corporate website: http://www.evraz.com/investor/shareholder_services/agm. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 72 Remuneration Committee Report as of 1 April 2009 More detailed information on the remuneration policy and The committee decided on the bonuses of the CEO-1 level the committee’s duties and responsibilities can be found on for the year 2007, as well as the bonuses for the Chairman the Company’s website in the section on corporate gover- and the CEO. The committee also decided the key perfor- nance: mance indicators (KPIs) for the CEO-1 level for the year Articles of Association article 10 2008. Corporate Governance Code: article 6.4 and 6.5 As far as the remuneration of the independent directors is Policy Governing the Board of Directors: concerned, the Chairman of the Board is responsible and Management Remuneration Policy article 6 and 7 makes recommendations as to the amount of their remu- Since 19 January 2007 the Remuneration Committee has neration to the Annual General Meeting of shareholders. consisted of the following members: The Remuneration Committee, which usually meets before a Board meeting, always presents its conclusion to the Board for ﬁ nal approval. Independent chairman: Philippe Delaunois Independent director: James W. Campbell Non-executive director: Eugene Tenenbaum Chairman and CEO: Alexander Frolov Vice President Human Resources: Natalya Ionova Mr. Dmitry Melnikov, Secretary to the Board, acts as Secre- tary to the Committee. The main objectives are to attract, retain and motivate high quality senior management with a competitive package of incentives and awards linked to performance and the interests of shareholders. The committee seeks to ensure that management is rewarded fairly, taking into account all elements of the remuneration package and in the light of the Group’s performance. The Remuneration Committee met ﬁ ve times in 2008. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 73 Audit Committee Report as of 6 April 2009 The Audit Committee report to the shareholders of Evraz Group S.A. encompasses the committee’s activities from the Role of the Committee date of the last report as of 31 January 2008 to 6th April The Board has delegated to the committee the responsibility 2009. During 2008 and into 2009, Evraz Group, as with the major- ity of global metal and mining corporations, experienced some extreme business challenges and trauma. The chal- lenges initially related to materially increased volume activity accompanied by increases in input prices and selling prices, a situation complicated by major strategic acquisitions in North America and the Ukraine and the assimilation of these for oversight of Evraz Group’s ﬁ nancial controls and report- ing. Such responsibilities include overseeing the planning and process of appropriate reviews and reports of the Group’s ﬁ nancial and operational internal controls and risk management systems conducted by a wholly, management independent, internal audit function reporting to the Audit Committee as provided within the Group’s internal audit charter. companies into the Group’s business control structure. In Further, the committee has responsibility for managing the the latter part of 2008, the severity of the global recession Company’s relationship with its external auditor. added to the business and operational strain. This difﬁ cult scenario tested internal business controls, reporting and forecasting procedures, risk management effectiveness and business and human resource structures and skill sets. In relation to these responsibilities the committee has: Reviewed its Board mandate and the internal audit char- ter. Reviewed the form, content and integrity of the Com- pany’s and Group’s published ﬁ nancial statements While business performance has been negatively affected, (within the period of this report the audited consolidated almost entirely due to the global recession and its particu- Financial Statements for 2007 and the Interim results to lar impact on the metals and mining sector, Evraz Group’s 30 June 2008) including the related press releases. internal controls have demonstrated signiﬁ cant resilience and reliability. Against this background, the Audit Committee has been vigi- lant in exercising its oversight role and has been greatly as- sisted in its work by the competence of the Group’s internal audit function particularly with regard to the department’s risk management expertise in relation to internal controls and its approach to the internal audit programme. Monitored and reviewed arrangements to ensure the objectivity, scope and effectiveness of both the external and internal audit functions, including the proposed and respective programmes of audit work and the quality and independence of the respective audit functions. Costs, skill sets and available man-hours of the internal audit function have been reviewed and accepted as ap- propriate. During 2008, the committee conducted an open tender for the Group audit for the years 2009 and 2010. Based on a pre-determined service and cost points award basis, Ernst & Young, the existing external auditors, were awarded the audit mandate on a ﬁ xed price for the afore- mentioned two years. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 74 The committee established the terms of reference of the Group’s Risk Committee. The Risk Committee is largely an executive committee, chaired by the Chairman of the Report on the Committee’s Activities in 2008 Audit Committee with the Group Chief Executive repre- Meetings and attendance: seven meetings of the Audit senting a key member of the committee. A Group risk Committee, attended by all members, were held during matrix has been developed and management action and the 14-month period. A further two meetings were held in accountability for risk exposure has been appropriately respect of the short list regarding the external audit tender. delegated. The Board has duly reviewed the Group’s risk register. Composition of the Committee The composition of the Audit Committee during the period was: The external auditor, Ernst & Young, the internal auditors and the Group’s Senior Vice President and Chief Financial Ofﬁ cer, attended all 14 regular meetings. At various additional meet- ings the committee received presentations from senior mem- bers of the Group’s ﬁ nance team, the Group Vice President Vanadium division, the Group IT Vice President, the Group Vice President of Corporate Affairs and Investor Relations, Terry Robinson, (Chairman) a ﬁ nancially qualiﬁ ed inde- Head of Group security, Head of Group procurement and the pendent non-executive director. Chairman of the Raspadskaya Audit Committee. Olga Pokrovskaya, a ﬁ nancially qualiﬁ ed non-executive Principal issues considered during the period from 31 Janu- director. ary 2008 to 6 April 2009 were: John Heywood, a ﬁ nancially qualiﬁ ed, Board-nominated (not being a director of Evraz) member of the committee. In addition to the audit committee papers, Mr Heywood receives copies of all Board minutes and has access to all Board papers. Alexey Melnikov, Head of Group internal audit, served as the Committee’s Secretary The composition of the Audit Committee is not compliant with the Combined Code in that membership of the com- mittee is not drawn wholly from the Board’s resource of independent non-executive directors. The Board continues to ensure the Audit Committee’s independence through a rigor- ous regard of the committee’s mandate and its independent authority. Review of the external auditor’s management letter following their full year 2007 audit, together with the Company’s management response and intended action. Review of the interim ﬁ nancial results and accounts presentation. In connection with the review of the 2007 full year and 2008 interim accounts, the committee carefully enquired as to related party transactions. With the exception of raw material purchases from an associate enterprise, Raspadskaya, and Yuzhny Gok, an enterprise in which Lanebrook holds a 46% beneﬁ cial interest but does not have management control, such transactions have been materially reduced. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 75 The Ukraine transaction acquired via Lanebrook, the Reviewed the impairment considerations of the Group’s major shareholder in Evraz Group SA., represented a cash generating units and investments. signiﬁ cant related party transaction and was carefully re- viewed. The audit committee found this transaction to be at arms length. Olga Pokrovskaya, a Millhouse executive and an Evraz Audit Committee member, exempted herself from these discussions and the decision taking process. Reviewed internal audit reports, discussed deﬁ ciencies and agreed management action and corrective action timelines. Review of the Group’s tax and treasury management processes. Review of the Group’s incidence of fraud and activity in hand to manage and reduce such future incidence. The instigation of a Group Fraud and Security Committee with agreed terms of reference. Review of the actions involved in the instigation of the Group’s ‘whistleblowing’ facility and the reports made via the whistleblowing facility. Review of revised manning, organisation and the internal audit function’s internal audit programme to increase the scope to accommodate the expansion of the Group’s operations through acquisitions. Review of the internal audit report on the effectiveness and process in delivering the monthly management infor- mation and Board reports. Reviewed plans for the consolidation and rationalisa- tion of the Group’s IT infrastructure; given the numerous legacy IT platforms in existence through acquisitions. Reviewed the consolidation of the Group’s vanadium ac- Reviewed the Group’s Going Concern assumptions, sensi- tivities and stress testing. In addition, the Audit Committee reviewed and discussed all the programmed internal audit reports concerned with the business and ﬁ nancial internal controls and processes together with initial reviews of the functional internal controls in respect of the acquired subsidiaries. The committee has met with the external auditors, Evraz’s management and with the internal audit team separately for individual discussions. Non-Audit Services As reported in previous years, it is Group policy to engage accountancy ﬁ rms for due diligence work in connection with acquisitions and for tax advice. The committee has given prior written approval to all such engagements and mandate fees where such engagements have involved the Company’s external auditor. In 2008, the interim review and year-end audit fees totalled US$8,558,000; other audit-related services amounted to US$872,000, while non-audit fees were US$1,187,000. Audit Committee Self-Assessment The Audit Committee has prepared a self-assessment questionnaire and conducted assessments with the external auditors, the internal audit function and with Evraz’s man- tivities and improvements in operational internal controls. agement. Reviewed the regulatory correctness of the Group’s trans- fer pricing policies. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. CORPORATE GOVERNANCE 76 Strategy Committee Report In 2008, the Strategy Committee consisted of the following individuals: James W. Campbell (Chairman), Terry Robinson, Pavel Tatyanin and Timur Yanbukhtin. During the ﬁ rst half of 2008, the Committee considered value enhancing international acquisitions and potential op- portunities within Russia and Ukraine designed to increase the underlying net asset value of the Group and advance earnings growth. However, in the second half of the year, as the full effects of the credit squeeze emerged and the business environment in the international steel industry deteriorated, the Com- mittee's function became more integrated with the Board’s primary focus on funding requirements and the ﬁ nancial robustness of the Group. As a result, it became essential for the Group to implement various fundamental internal rationalisation initiatives in order to underpin the future well- being of the business. The improvements in operating efﬁ ciencies, reﬂ ecting this internal process, were primarily focused on the long-term sustainability of the Group as a primary producer of special- ised steel products focused on speciﬁ c markets, commodity steel products focused on international markets and the continuation of the Company’s position as one of the world's leading and most reliable suppliers of vanadium slag. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CORPORATE GOVERNANCE 77 Shareholder Information The Company’s share capital as of 31 December 2008 con- sisted of 122,504,803 issued and fully paid ordinary shares Dividends with a nominal value of two euros (€2) each. The Company’s Final dividends of US$4.20 per ordinary share and Global Depositary Receipts listed and traded on the London US$1.40 per GDR in respect of 2007 approved by share- Stock Exchange represented 30.5% of the issued share holders at the Annual General Meeting held in Luxem- capital. bourg on 15 May 2008. Following the voluntary partial scrip dividend alternative vot- ed for by the Company’s shareholders at the EGM held on 30 January 2009, Evraz Group issued 9,755,347 new shares bringing the subscribed share capital to 132,260,150 Interim dividends of US$8.25 per ordinary share and US$2.75 per GDR in respect of 2008 approved by the Board of Directors meeting held in Luxembourg on 28 August 2008. shares. The new shares were ranked pari passu with the No ﬁ nal dividends will be paid in respect of 2008 as existing ordinary shares of the Company. approved by shareholders at the Annual General Meeting held in Luxembourg on 15 May 2009. Evraz Group plans to resume dividend payments upon completion of the GDR Holders – Geographical Distribution deleveraging plan and market recovery. 36% Continental Europe 29% North America 29% UK & Ireland 5% Russia It should be speciﬁ cally noted that on 16 December 2008 the Board of Directors decided to call for an extraordinary shareholders’ meeting for the purpose of changing the method of payment of the interim dividends approved on 28 August 2008. Under the proposal US$6 per ordinary share or US$2 per GDR would be paid in cash with shareholders offered the option of receiving the remaining US$2.25 per ordinary share /US$0.75 per GDR in cash or in newly issued shares/GDRs at prices of US$22.50 per share/US$7.50 per 1% RoW GDR. At the Extraordinary General Meeting held on 30 January 2009, shareholders approved the proposed modiﬁ cation of the method of payment of the 2008 interim dividends and voted to subscribe to 9,755,347 new shares issued at a price of $22.50 per share (US$7.50 per GDR). ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Management Report Selected Consolidated Financial Information MANAGEMENT REPORT 79 The selected consolidated ﬁ nancial information set forth below shows historic consolidated ﬁ nancial information and other operating information of Evraz Group S.A. as of 31 December 2008, 2007 and 2006 and for the years then ended. The selected consolidated ﬁ nan- cial information has been extracted without material adjustment from, and should be read in conjunction with, the consolidated ﬁ nancial statements as of 31 December 2008, 2007 and 2006 and for the years then ended, prepared in accordance with IFRS. The selected consolidated ﬁ nancial information should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Evraz’s operating results for the periods presented were signiﬁ cantly affected by the Company’s acquisition programme. The operating results of businesses acquired are, in the majority of instances, included in Evraz’s consolidated ﬁ nancial statements for the periods post the respective dates of acquisition. (In millions of US dollars, except share and per share data and as noted) Year ended 31 December 2008 2007 CONSOLIDATED INCOME STATEMENT DATA Revenues Cost of revenues Gross proﬁ t Selling and distribution expenses General and administration expenses Other operating expenses, net Proﬁ t from operations Non-operating income and expense, net Proﬁ t before tax Income tax expense Net proﬁ t Net proﬁ t attributable to equity holders of the parent entity Net proﬁ t attributable to minority interests Net income per share 20,380 (13,308) 7,072 (876) (938) (1,538) 3,720 (577) 3,143 (1,213) 1,930 1,868 62 15.13 12,859 (7,976) 4,883 (538) (682) (195) 3,468 (343) 3,125 (946) 2,179 2,103 76 17.62 Weighted average number of ordinary shares outstanding 123,495,726 119,363,489 Steel segment income statement data Revenues(1) Cost of revenues(1) Gross proﬁ t Selling and distribution expenses General and administration expenses Other operating (expenses) income, net Proﬁ t from operations – Steel Segment Vanadium segment income statement data Revenues(1) Cost of revenues(1) Gross proﬁ t Selling and distribution expenses General and administration expenses Other operating expenses, net Proﬁ t from operations – Vanadium Segment 17,925 (12,546) 5,379 (796) (473) (1,267) 2,843 1,206 (922) 284 (82) (33) 1 170 11,908 (7,856) 4,052 (499) (385) (132) 3,036 583 (466) 117 (58) (16) 2 45 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 80 (In millions of US dollars, except share and per share data and as noted) Mining segment income statement data Year ended 31 December 2008 2007 Revenues(1) Cost of revenues(1) Gross proﬁ t Selling and distribution expenses General and administration expenses Other operating expenses, net Proﬁ t from operations – Minig Segment Other operations income statement data Revenues(1) Cost of revenues(1) Gross proﬁ t Selling and distribution expenses General and administration expenses Other operating expenses, net Proﬁ t from operations – Other Operations CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END) Total assets Equity attributable to equity holders of the parent entity Minority interests Long-term debt, net of current portion CONSOLIDATED CASH FLOWS DATA Net cash ﬂ ows from operating activities Net cash ﬂ ows used in investing activities Net cash ﬂ ows (used in) from ﬁ nancing activities OTHER MEASURES Consolidated Adjusted EBITDA(2) Steel segment Adjusted EBITDA(2) Vanadium segment Adjusted EBITDA(2) Mining segment Adjusted EBITDA(2) Other operations Adjusted EBITDA(2) Net Debt(3) 3,634 (2,348) 1,286 (40) (176) (103) 967 1,022 (749) 273 (119) (44) (27) 83 19,448 4,729 245 6,064 4,569 (3,736) (127) 6,323 4,790 212 1,391 134 9,031 1,903 (1,272) 631 (23) (109) (55) 444 783 (593) 190 (64) (38) (1) 87 18,637 5,950 406 4,653 2,994 (5,650) 2,112 4,305 3,578 74 654 124 6,404 (1) Segment revenues and cost of revenues include inter-segment sales and purchases. (2) Adjusted EBITDA represents proﬁ t from operations plus depreciation, depletion and amortisation, impairment of assets, loss (gain) on disposal of property, plant and equipment and foreign exchange loss (gain). Evraz presents Adjusted EBITDA be- cause Evraz considers Adjusted EBITDA to be an important supplemental measure of its operating performance and Evraz be- lieves Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the same industry. Adjusted EBITDA is not a measure of ﬁ nancial performance under IFRS and it should not be con- sidered as an alternative to net proﬁ t as a measure of operating performance or to cash ﬂ ows from operating activities as a mea- sure of liquidity. Evraz’s calculation of Adjusted EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. Adjusted EBITDA has limitations as an analytical tool and potential investors should not con- sider it in isolation, or as a substitute for analysis of our operating results as reported under IFRS. Some of these limitations include: • Adjusted EBITDA does not reﬂ ect the impact of ﬁ nancing or ﬁ nancing costs on Evraz’s operating performance, which can be signiﬁ cant and could further increase if Evraz were to incur more debt. • Adjusted EBITDA does not reﬂ ect the impact of income taxes on Evraz’s operating performance. • Adjusted EBITDA does not reﬂ ect the impact of depreciation, depletion and amortisation on Evraz’s operating performance. The assets of Evraz’s businesses which are being depreciated and/or amortised will have to be replaced in the future and such depreciation and am- ortisation expense may approximate the cost to replace these assets in the future. Adjusted EBITDA, due to the exclusion of this expense, does not reﬂ ect Evraz’s future cash requirements for these replacements. Adjusted EBITDA also does not reﬂ ect the impact of a loss on disposal of property, plant and equipment. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. Reconciliation of Adjusted EBITDA to proﬁ t from operations is as follows: Year ended 31 December 81 MANAGEMENT REPORT (In millions of US dollars) Consolidated Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation, depletion and amortisation Impairment of assets Loss (gain) on disposal of property, plant & equipment Foreign exchange loss (gain) Consolidated Adjusted EBITDA Steel segment Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation and amortisation Impairment of assets Loss (gain) on disposal of property, plant & equipment Foreign exchange loss (gain) Steel segment Adjustaed EBITDA Vanadium segment Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation and amortisation Impairment of assets Loss (gain) on disposal of property, plant & equipment Foreign exchange loss (gain) Vanadium segment Adjusted EBITDA Mining segment Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation, depletion and amortisation Impairment of assets Loss (gain) on disposal of property, plant & equipment Foreign exchange loss (gain) Mining segment Adjusted EBITDA Other operations Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation and amortisation Impairment of assets Loss (gain) on disposal of property, plant & equipment Foreign exchange loss (gain) Other operations Adjusted EBITDA 2008 3,720 1,215 880 37 471 6,323 2,843 773 821 11 342 4,790 170 43 0 0 (1) 212 967 363 56 15 (10) 1,391 83 33 3 11 4 134 2007 3,468 749 7 26 55 4,305 3,036 469 4 18 51 3,578 45 30 0 0 (1) 74 444 205 2 8 (5) 654 87 37 1 0 (1) 124 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 82 (3) Net Debt represents long-term loans, net of current portion, plus short-term loans and current portion of long-term loans less cash and cash equivalents and short-term bank deposits (excluding restricted deposits). Net Debt is not a balance sheet measure under IFRS and it should not be considered as an alternative to other measures of ﬁ nancial position. Evraz’s calculation of Net Debt may be different from the calculation used by other companies and therefore comparability may be limited. Net Debt is a measure of Evraz’s operating performance that is not required by, or presented in accordance with, IFRS. Although net debt is a non-IFRS measure, it is widely used to assess liquidity and the adequacy of a company’s ﬁ nancial structure. Evraz believes net debt provides an accurate indicator of its ability to meet its ﬁ nancial obligations, represented by gross debt, from its available cash. Net debt allows Evraz to show investors the trend in its net ﬁ nancial condition over the periods presented. However, the use of Net debt effectively assumes that gross debt can be reduced by cash. In fact, it is unlikely that Evraz would use all of its cash to reduce its gross debt all at once, as cash must also be available to pay employees, suppliers and taxes, and to meet other operating needs and capital expenditure requirements. Net debt and its ratio to equity, or leverage, are used to evaluate Evraz’s ﬁ nancial structure in terms of sufﬁ ciency and cost of capital, level of debt, debt rating and funding cost, and whether Evraz’s ﬁ nancial structure is adequate to achieve its business and ﬁ nancial targets. Evraz’s management monitors the Net debt and leverage or similar measures as reported by other companies in Russia or abroad in order to assess Evraz’s liquidity and ﬁ nancial structure relative to such companies. Evraz’s management also monitors the trends in its Net debt and leverage in order to optimize the use of internally-generated funds versus funds from third parties. Net Debt has been calculated as follows: (In millions of US dollars) NET DEBT CALCULATION Add: Long-term loans, net of current portion Short-term loans and current portion of long-term Less: Short-term bank deposits Cash and cash equivalents Net Debt Year ended 31 December 2008 2007 6,064 3,922 (25) (930) 9,031 4,653 2,103 (25) (327) 6,404 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT REPORT 83 The following discussion of Evraz’s ﬁ nancial condition and results of operations should be read in conjunction with the consolidated ﬁ nancial statements as of 31 December 2008 and 2007 and for the years then ended. This section contains forward looking state- ments that involve risks and uncertainties. Evraz’s actual results may differ materially from those discussed in such forward looking statements due to various factors. Overview Evraz is one of the largest vertically integrated steel and mining businesses in the world with operations based in the Russian Federation, the United States, Canada, Ukraine, the Czech Republic, Italy and South Africa. Evraz produced 17.7 million tonnes and 16.4 million tonnes of crude steel in 2008 and 2007 respectively, ranking the Company as the largest producer of steel and steel products in Russia, the larg- est producer of long products in Russia and among the 17 largest steel producers in the world. Evraz also produces signiﬁ cant quantities of iron ore and coal (following upon the acquisition of Yuzhkuzbassugol in June 2007). Most of Evraz’s iron ore production and a signiﬁ cant proportion of its coal production are used in the Group’s steel making operations. The Company listed global depositary receipts ("GDRs"), representing approximately 8.3% of its issued share capital, on the Ofﬁ cial List of the London Stock Exchange ("LSE") on 2 June 2005, thereby raising $422 million from new investors. Each GDR represents an interest of one-third of one share. The total number of GDRs listed on the LSE represented approximately 30.5% of the Company’s issued share capital as of 31 December 2008. Evraz’s principal assets comprise nine steel plants: NTMK, Zapsib, NKMK, Evraz Vitkovice Steel, Rocky Mountain Steel and Claymont Steel (both are parts of Evraz Inc. NA), Evraz Inc. NA Canada (former IPSCO Canada, acquired in June 2008), Dnepropetrovsk Iron and Steel Works (DMZ, acquired in December 2007) and Highveld Steel and Vanadium Corporation (acquisition completed in April 2007); Highveld is also a leading vanadium producer; three steel rolling mills: Evraz Palini e Bertoli, Oregon Steel Portland and Camrose Pipe Corpora- tion (both are parts of Evraz Inc. NA); ﬁ ve iron ore mining and processing facilities: KGOK, VGOK and Evrazruda in Russia, Sukha Balka in Ukraine and Mapochs Mine in South Africa; coal mining assets: Yuzhkuzbassugol (acquired in June 2007) and Mine 12; one of the world’s leading producers of vanadium alloys and chemicals for the steel, chemical, and titanium industries: Strategic Mineral Corpora- tion (Stratcor); together with various trading and logistical assets. Evraz also owns a signiﬁ cant equity interest in a coking coal producer Raspadskaya. In 2008, Evraz’s consolidated revenues amounted to $20,380 million, while the net proﬁ t attributable to equity holders of the parent entity totalled $1,868 million. Reorganisation and Formation of the Company Evraz Group S.A. (“Evraz Group” or “The Company”) was incorporated, under the laws of the Grand Duchy of Luxembourg, on 31 December 2004 as the holding company for Evraz’s assets. Prior to 3 August 2006, Evraz Group’s parent was Crosland Global Limited (“CGL”), an entity under the control of Mr. Alexander Abramov. On 3 August 2006, CGL transferred all its ownership interest in Evraz Group to Lanebrook Limited (Cyprus) which became the ultimate controlling party from that date. The Company’s interests in the majority of its subsidiaries are held indirectly through its ownership of Mastercroft Limited (“Mastercroft”), a limited liability company registered in Cyprus, exceptions being Evraz Vitkovice Steel a.s., Evraz Palini e Bertoli S.p.A., Strategic Minerals Corporation, Highveld Steel and Vanadium Corporation, Evraz Inc. NA, Evraz Inc. NA Canada and Ukrainian assets, all of which are owned directly by Evraz Group. Business Structure Segments Evraz’s business is divided into three principal segments: the steel production segment, comprising the production and sale of semi-ﬁ nished and ﬁ nished steel products, coke and coking prod- ucts and refractory products; the mining segment, comprising the production, enrichment and sale of iron ore and coal; and the vanadium segment, comprising the production and sale of vanadium products. Other operations include management, logistics (including the Nakhodka Sea Port) and supporting activities. Inter-Segment Sales Evraz is a vertically integrated steel and mining group. In 2008, Evraz’s mining segment supplied approximately 73% and 55% of the steel segment’s total iron ore and coal requirements respectively. The coal supplies include purchases from JV Raspadskaya. The steel segment supplies grinding balls, mining uprights and coke to the mining segment for use in operations. Evraz considers that inter-segmental prod- uct sales are generally based on prices equivalent to those that could be commanded from unrelated third parties. These inter-company transactions are eliminated for the purposes of Evraz’s consolidated ﬁ nancial statements, but are included in the presentation of respec- tive segments. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 84 Summary of Acquisitions Evraz has sought to develop an integrated steel and mining business through the purchase of assets that it believes offer signiﬁ cant value creation potential, particularly in the light of the Company’s implementation of improved working practices and operational methods. The following is a summary of the terms of Evraz’s principal steel, mining and vanadium acquisitions. Unless otherwise stated, each ac- quisition was accounted for using the ‘purchase method’ of accounting. Accordingly, the operational results of each such acquisition are included in Evraz’s consolidated income statements from the date the Company acquired control. In certain cases, where Evraz acquired its interests over a period of time, the relevant businesses were accounted for using the equity method until such interests amounted to a controlling ﬁ nancial interest. Evraz’s investment in Raspadskaya is currently accounted for under the equity method. Acquisitions / Start-Ups Prior to 2007 Nizhny Tagil Iron and Steel Plant. NTMK is an integrated steel plant that primarily produces railway and construction long products, pipe blanks and semi-ﬁ nished products. During 1997-2005, Evraz acquired a 92.38% interest in NTMK for a total consideration of $379 million. Evraz acquired a further 2.62% interest for a consideration of $79 million in 2006. In 2007, in accordance with Russian legislation, Evraz conducted a mandatory buy out of the minority shares of NTMK that increased its total holding to 100%. West Siberian Iron and Steel Plant. Zapsib is an integrated steel plant that primarily produces construction long products and semi- ﬁ nished products. During 2001-2005, Evraz acquired a 96.67% interest in Zapsib for a total consideration of $139 million. In 2007, in accordance with Russian legislation, Evraz conducted a mandatory buy out of the minority shares of Zapsib that increased its total holding to 100%. Novokuznetsk Iron and Steel Plant. NKMK is an integrated steel plant that specialises in the production of rolled long metal products for the railway sector as well as semi-ﬁ nished products. NKMK, formed in May 2003, commenced steel operations in October 2003 hav- ing acquired certain property, plant and equipment from OAO Kuznetsk Iron and Steel Plant ("KMK") for a consideration of $45 million subsequent to the dissolution of the latter in bankruptcy proceedings in June 2003. The Company’s effective interest in NKMK as of 31 December 2008 amounted to 100%. Vysokogorsky Mining and Processing Integrated Works. VGOK is an iron ore mining and processing complex that produces sinter from its iron ore resources and from iron ore purchased from other producers. During 1998-2005, Evraz acquired an 87.39% interest in VGOK for a consideration of $2 million. In 2007, in accordance with Russian legislation, Evraz conducted a mandatory buy out of the minority shares of VGOK that increased its total holding to 100%. Nakhodka Commercial Sea Port. The Nakhodka Sea Port is located in the Far East of Russia from where Evraz ships the majority of its export sales. By the end of 2005, Evraz had acquired an ownership interest of 93.61% in Nakhodka Sea Port for a total consideration of $17 million. In 2006, Evraz acquired additional minority interests in Nakhodka Sea Port amounting to 0.6%. In 2007, in accordance with Russian legislation, Evraz conducted a mandatory buy out of the minority shares of the Nakhodka Sea Port that raised its total holding to 100%. Ferrotrade Limited and East Metals S.A. Ferrotrade Limited ("Ferrotrade") and East Metals S.A. (“East Metals”) are export traders that sell Evraz’s steel products overseas. East Metals became the main export trading arm during 2008. The traders’ principal markets are South East Asia, North America and the Middle East. The Company’s effective interest in both Ferrotrade and East Metals as of 31 December 2008 amounted to 100%. Raspadskaya. Raspadskaya, which produces coking coal, is one of the largest coal mines in Russia. On 10 March 2004, as part of a joint venture agreement, Evraz acquired a 50% interest in Corber Enterprises Limited ("Corber"), a joint venture created for the purpose of exercising joint control over the business activities of Raspadskaya, in which Corber owned 72.03% of the ordinary shares, and other subsidiaries of Corber. Evraz acquired its interest for a total consideration of $140 million. Corber acquired a further 4.90% interest in Raspadskaya during 2004-2005 for a total consideration of $6.8 million. On 31 May 2006, Corber acquired a 100% ownership interest in Mezhdurechenskaya Ugolnaya Company - 96 ("MUK-96") from Adroliv, one of Corber’s shareholders, in exchange for 7,200 of its newly issued ordinary shares and 4,800 preferred shares with a par value of 1 US dollar. As part of the consideration, Corber paid preferred dividends of $318 million to Adroliv. The total cost of the business transaction, including the cash consideration and fair value of equity instruments exchanged, amounted to $770 million. On 31 May 2006, Evraz acquired 3,600 newly issued ordinary shares in Corber for a cash consideration of $225 million and retained its 50% ownership interest in Corber. The Company’s effective interest in Raspadskaya as of 31 December 2008 amounted to 40%. Kachkanarsky Ore Mining and Processing Enterprise "Vanady". KGOK is an iron ore mining and processing complex that produces sinter, pellets and concentrate from high-vanadium iron ore. On 21 May 2004, Evraz acquired 83.59% of the ordinary shares of KGOK for a consideration of $190.3 million and purchased restructured debts of KGOK with a fair value of RUR597.0 million (approximately $20.6 million based on the exchange rate as at the date of transaction), the nominal value being RUR1,283.0 million (approximately $44.3 million as at the date of transaction). Evraz acquired further interests in KGOK amounting to 14.12% of the ordinary shares dur- ing 2004-2005 for a total consideration of $32 million. In 2007, in accordance with Russian legislation, Evraz conducted a mandatory buy out of the minority shares in KGOK which raised its total holding to 100%. Evrazruda. Evrazruda is an iron ore mining and processing complex that produces iron ore concentrate and sinter. In March 2005, Evraz acquired a 99.90% interest in Evrazruda for a consideration of $32 million from entities under common control with Evraz and a 0.10% interest from third parties for an additional $32,000. This has resulted in Evrazruda being consolidated with Evraz with effect from 31 December 2001, as it existed at such date, with acquisitions by Evrazruda subsequent to 31 December 2001 being accounted for by Evraz under the purchase method. The Company’s effective interest in Evrazruda as of 31 December 2008 amounted to 100%. Evraz Palini e Bertoli (“Palini”). Palini produces customised, high-quality steel plate products and is located in northern Italy. In August 2005, Evraz acquired a 75% plus one share interest in Clama S.r.l., which owns 100% of Palini. The total cash consideration amounted to $112 million, including transaction costs of $3 million. At the same date, Evraz and Clama’s minority shareholders entered into a put and call option agreement under which Clama’s minority shareholders had a put option and Evraz had a corresponding call op- tion, exercisable in the period from 2007 to 2010, in respect of a 25% less one share interest in Clama. As a result, Evraz effectively acquired a 100% ownership interest in Clama with deferred consideration of $69 million which is equal to the fair value of the ﬁ nancial liability payable under the put option. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 85 Evraz Vitkovice Steel (“Vitkovice”). Evraz Vitkovice Steel is the largest producer of steel plates in the Czech Republic. In November 2005, Evraz acquired 98.96% of the shares in the former Vitkovice Steel for a cash consideration of CZK7,428 million (approxi- mately $298 million based on the exchange rate as at the date of the transaction). The Company’s effective interest in Vitkovice as of 31 December 2008 amounted to 100%. Yuzhkusbassugol (“YuKU”). Yuzhkusbassugol, which produces coking and steam coal, is one of the largest coal mines in Russia. On 30 December 2005, Evraz acquired a 50% ownership interest in YuKU for a cash consideration of $675 million payable to Crondale Overseas Limited, an entity under common control with Evraz. (See “Acquisitions in 2007”). Strategic Minerals Corporation ("Stratcor"). Stratcor is one of the world's leading producers of vanadium alloys and chemicals for the steel and chemical industries. Stratcor encompasses two wholly owned subsidiaries – Stratcor, Inc. with a mill in Hot Springs, Arkansas, USA, and Vametco Minerals Corporation with a mine and a mill in Brits, South Africa. On 23 August 2006, Evraz acquired 72.84% of the ordinary shares of Stratcor, including 69% of the voting shares, for a purchase consideration of $125 million, including transaction costs of $6 million and fair value of the contingent consideration amounting to $21 million. The Company’s effective inter- est in Stratcor as of 31 December 2008 amounted to 72.84%. Evro-Aziatskaya Energy Company (“EvrazEK”). EvrazEK, an energy generating company, supplies natural gas, coke-oven gas, steam and electricity to certain subsidiaries of Evraz and purchases metal products and materials from them. In 2006, Evraz acquired a 100% interest in the entity for $34 million. Acquisitions in 2007 Evraz Inc. NA (“Evraz Inc. NA”, formerly Evraz Oregon Steel Mills). Headquartered in Portland, Oregon, Evraz Inc. NA is one of the most diversiﬁ ed steel operations in North America. Due to a wide range of manufacturing capabilities the company can produce more than 1.5 million metric tons of higher margin specialty and commodity steel products (plate, coiled plate, welded and seamless pipe for oil and gas applications, structural tubing, rail and wire rod/bar) annually. Its predecessor, Oregon Steel Mills, Inc., was a public company and its shares were traded on the New York Stock Exchange from 1988 until the onset of 2007. In January 2007, following a successful tender offer by Evraz Group, the company became a wholly owned subsidiary of Evraz with the name changed to Evraz Oregon Steel Mills, Inc. (“EOSM”). Total cash consideration for the acquisition of 100% ownership interest in EOSM amounted to $2,276 million, including $10 million of transaction costs. Subsequently, EOSM’s securities were de-listed and registration was withdrawn from the NYSE. In June 2008, after the acquisition of Claymont Steel Holdings, Inc. and General Scrap Inc. (see “Acquisitions in 2008”), Evraz decided to consolidate Evraz Oregon Steel Mills, Inc. and certain newly acquired subsidiaries under the new name of Evraz Inc. NA. West Siberian Heat and Power Plant (“ZapSibTETs”). ZapSibTETs was built as a substation of Zapsib which currently consumes 42% of the heat and more than 25% of the electricity produced by the energy plant. The technological processes of Zapsib and ZapSibTETs are closely interconnected. Zapsib supplies coking and blast furnace gas to ZapSibTETs, participates in the steam refrigeration process and provides space for the disposal of ashes. ZapSibTETs can meet up to 85% of Zapsib's electricity requirements and fully satisfy its demand for heat. On 3 May 2007, Evraz acquired a 93.35% ownership interest in ZapSibTETs for a cash consideration of 5,945 million Roubles ($231 million based on the exchange rate as at the date of transaction). In addition, the Group incurred transaction costs of $1 million. In accordance with Russian legislation, an acquirer that purchases more than 30% of the acquiree’s share capital, is obliged to make an offer to acquire the shares held by minority shareholders (“obligatory offer”). In line with this requirement, Evraz made an offer, on 4 June 2007, to acquire the outstanding shares in ZapSibTETs at a price of 10.59 Roubles per share ($0.41 based on the exchange rate as of 4 June 2007). The total purchase consideration for all the outstanding shares that could be acquired amounted to 427 million Roubles ($17 million based on the exchange rate as of 4 June 2007). As a result of the offer the Group acquired 4.44% of the shares in ZapSibTETs and became subject to the provisions of the Russian legislation that permits a shareholder that owns more than 95% of a company’s equity to increase its interest to 100%. On 12 November 2007, the Group commenced a buy out of minority shares which was completed in January 2008. The procedure was carried out in accordance with Russian legislation through manda- tory offers to all minority shareholders. As a result of the buy out, the Company’s effective interest in ZapSibTETs as of 31 December 2008 amounted to 100%. Highveld Steel and Vanadium Corporation Limited ("Highveld"). Highveld is one of the largest steel producers in South Africa and a leading producer of vanadium products. Initially, on 13 July 2006, Evraz acquired a 24.9% ownership interest in Highveld from Anglo American plc for a cash consideration of $216 million, including $10 million of transaction costs, and entered into share option agree- ments with the major shareholders of Highveld to increase this stake to 79% within 24 months. On 20 February 2007, the European Commission approved the proposed acquisition of the controlling interest in Highveld, subject to certain conditions. Evraz was obliged to divest Highveld's vanadium extraction, vanadium oxides and vanadium chemicals plants located at the Vanchem site in Witbank, Republic of South Africa (collectively referred to as the Vanchem operations) along with an equity interest or a portion of the Mapoch iron and vanadium ore mine which guarantees supply of ore to the Vanchem operations. The divestment package also included a fer- rovanadium smelter located on the site of the Highveld steel facility and Highveld's 50% shareholding in SAJV, a joint venture between Highveld and two Japanese partners which own another ferrovanadium smelter at the same site (See “Divestments in 2007- 2008”). On 26 April 2007, Evraz obtained the regulatory approvals of the South African competition authorities and the share options became exercisable. Consequently, the ﬁ nancial position and the results of Highveld’s operations were included in Evraz’s consolidated ﬁ nan- cial statements with effect from 26 April 2007, the date at which the Company effectively exercised control over Highveld’s operations. On 4 May 2007, Evraz exercised its option and acquired a 29% ownership interest in Highveld for a cash consideration of $238 million from Anglo American plc. In addition, Evraz paid transaction costs amounting to $3 million. In accordance with South African legisla- tion, an acquirer that purchases 35% of the acquiree’s share capital is obliged to make an offer to acquire the shares held by minority shareholders. In line with this requirement, the Group made an offer, on 4 June 2007, to acquire the entire share capital of Highveld, other than those shares already held by the Group, at a price of $11.40 per share. On 16 July 2007, the Group increased the offer price from the South African Rands equivalent of $11.40 per share to 93 South African Rands ($13.03 based on the exchange rate as of 4 June 2007) which represented an increase of approximately 14% over the previous offer price. As a result of this offer, the Group acquired 1,880,750 shares in Highveld (1.91% of the share capital) for 175 million South African Rands ($25 million based on the exchange rates as at the dates of the transactions). On 28 September 2007, the Credit Suisse option for the acquisition of a 24.9% ownership interest in Highveld was exercised by the Group for $219 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 86 In 2008, Evraz purchased an additional 4,162,606 common shares in Highveld Steel and Vanadium Corporation Limited at a cost of 535 million South African Rands ($69 million based on the exchange rates as at the dates of the transactions). This purchase in- creased Evraz’s shareholding by 4.2%. As of 31 December 2008, the Company’s effective interest in Highveld amounted to 85.12%. Yuzhkuzbassugol (“YuKU”). On 8 June 2007, Evraz acquired an additional 50% interest in YuKU for a cash consideration of $871 million, including transaction costs of $9 million, thereby increasing its ownership interest in YuKU to 100%. Nikom, a.s (“Nikom”). On 20 December 2007, Evraz acquired a 100% interest in Nikom, a ferrovanadium producer located in the Czech Republic, for a cash consideration of $46 million. Acquisitions in 2008 Claymont Steel Holdings, Inc. (“Claymont Steel”). Claymont Steel is a plate producer located in the United States. On 16 January 2008, Evraz acquired approximately 93.4% of the outstanding ordinary shares of Claymont Steel through a tender offer. Following the acqui- sition of shares in Claymont Steel, the company was merged with the Group’s wholly owned subsidiary and untendered shares were converted into the right to receive $23.50 in cash which was the same price per share paid during the tender offer. In June 2008, Evraz decided to consolidate Claymont Steel with Evraz Oregon Steel Mills, Inc. under the new name of Evraz Inc. NA. The total cash consideration for the acquisition of a 100% ownership interest in Claymont Steel amounted to approximately $420 million. General Scrap Inc. (“GSI”). In June 2008, Evraz acquired the outstanding voting stock of GSI for $25 million. GSI collects, processes, recycles, trades and brokers metal, both ferrous (such as iron and steel) and nonferrous (such as aluminum, copper, stainless steel, nickel, brass, tin, titanium and others). Post acquisition GSI was absorbed into the Oregon Steel division of Evraz Inc. NA. IPSCO’s Canadian plate and pipe business (“Evraz Inc. NA Canada”, formerly “IPSCO Canada”). In March 2008, Evraz entered into an agreement with SSAB, a Swedish steel company, to acquire IPSCO’s Canadian plate and pipe business. IPSCO is a leading North American producer of steel plates, as well as pipes for the oil and gas industry. Under the structure of the transaction, Evraz and OAO TMK (“TMK”), Russia’s leading tubular player, acquired plate and pipe busi- nesses for $4,211 million (excluding transaction costs and any working capital adjustment to the purchase consideration paid by TMK) comprising certain Canadian plate and pipe businesses, a US metal scrap company (together – “IPSCO Inc.”) and US tubular and pipe businesses. Evraz also entered into a back-to-back agreement with TMK and its afﬁ liates, which consisted of an on-sale of the acquired US tubular and pipe businesses, including a 51% interest in NS Group, to TMK for $1,250 million. In addition, Evraz signed an option agreement that gave it the right to sell and gave TMK the right to buy 49% in NS Group for approxi- mately $511 million plus interest at an annual rate ranging from 10% to 12% accrued from 12 June 2008 to the date of exercise of the option. The option to buy 49% in NS Group was excercised in January 2009 for approximately $508 million. The acquisition was completed on 12 June 2008. As a result, the net cost to Evraz of the acquisition of 100% of IPSCO Inc. amounted to $2,450 million, including transaction costs of $65 million and $25 million of working capital adjustment to the purchase consid- eration paid in October 2008. The ﬁ nancial position and the results of operations of IPSCO Inc. were included in Evraz’s consolidated ﬁ nancial statements with effect from 12 June 2008. In 2008, following upon the acquisition of the Canadian operations, Evraz decided to change the name of its subsidiary from “IPSCO Canada” to “Evraz Inc. NA Canada”. Palmrose Limited (Acquisition of Ukrainian assets ). In September 2008, Evraz completed the acquisition, from entities under com- mon control with the Company, of 100% of Palmrose Limited, a Cyprus-based holding company in respect of the following assets in Ukraine: a 95.57% shareholding in Dnepropetrovsk Iron and Steel Works, OAO (“DMZ”). Dnepropetrovsk Iron and Steel Works is a steel pro- ducer with a total annual capacity of 1.8 million tonnes of pig iron and 1.23 million tonnes of crude steel. a 99.25% shareholding in Sukha Balka, OAO (“Sukha Balka”). Sukha Balka is an iron ore mining and processing complex with a total annual production capacity of 3.75 million tonnes of iron ore. a 94.37%, 98.65% and 93.86% shareholding in Bagleykoks, OAO (“Bagleykoks”), Dneprokoks, OAO (“Dneprokoks”) and Dneprodz- erzhinsk Coke Chemical Plant, OAO (“DKHZ”) respectively. The three Ukrainian coking plants have a total annual capacity of 3.52 million tonnes of metallurgical coke. The acquisition was accomplished in two stages. In April 2008, Evraz completed the acquisition of a 51.4% shareholding in Palmrose Limited for a cash consideration of $1,110 million. The second stage, in September 2008, saw Evraz issue 4,195,150 shares in favour of Lanebrook Limited (Cyprus), the ultimate controlling party in respect of Evraz’s assets, in exchange for a 48.6% interest in Palmrose Limited. As a result, Evraz became the owner of a 100% interest in Palmrose Limited with effect from September 2008. Palmrose and its subsidiaries were included in the consolidated ﬁ nancial statements of Evraz as from 11 December 2007 – the date when Lanebrook Limited obtained control over those entities. Divestments in 2007-2008 In July 2007, Evraz sold Transalloys, a wholly owned subsidiary of Highveld Steel and Vanadium Corporation, to Renova Group for $139 million. The plant produces some 50,000 tonnes of medium-carbon ferro-manganese per annum and 160,000 tonnes of silicon- manganese per annum. In February 2008, Evraz sold Rand Carbide, a wholly owned subsidiary of Highveld Steel and Vanadium Corporation, to Silicon Smelt- ers, a subsidiary of FerroAtlantica (Spain), for $39 million. Rand Carbide produced some 55,000 tonnes of ferro-silicon per annum at three electric furnaces and accounted for approximately 50% of the local market. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT Evraz’s disposals of certain vanadium assets in South Africa in accordance with the conditions required by the European Commission and South African competition authorities for approval of its acquisition of a majority interest in Highveld Steel and Vanadium Corpora- tion (see “Acquisitions in 2007”) were completed in August 2008. Under the agreements, Evraz sold Highveld’s Vanchem operations and its 50% shareholding in South Africa Japan Vanadium (Proprietary) Limited, as well as a non-dividend bearing equity interest in Highveld`s Mapochs Mine (Proprietary) Limited. The disposals were implemented with effect from 29 August 2008. The transfer of the assets of the Mapochs Mine from Highveld into Mapochs Mine (Proprietary) Limited remained subject to the conversion of the old order mining rights which Highveld held in relation to the mine, and the consent of the Minister of Minerals and Energy for the transfer thereof. On 9 April 2009, Highveld concluded an agreement to transfer 26% of the ordinary equity interest in Mapochs Mine (Propri- etary) Limited to local partners. This agreement is a part of the Black Economic Empowerment government programme and was signed in order to comply with South African legislation for the mining industry. Results of Operations for the Years Ended 31 December 2008 and 2007 The following table sets out the Company's consolidated income statement data for the years ended 31 December 2008 and 2007 in absolute terms and as a percentage of revenues. 87 (US$ million, except percentages) INCOME STATEMENT DATA Revenues(1) Cost of revenues Gross proﬁ t Selling and distribution costs General and administrative expenses Other operating income and expenses, net Proﬁ t from operations Non-operating income and expenses, net Proﬁ t before tax Income tax expense Net proﬁ t Net proﬁ t attributable to equity holders of the parent entity Net proﬁ t attributable to minority interests Year ended 31 December 2008 2007 2008 vs. 2007 Amount Percentage of revenues Amount Percentage of revenues Change % change 20,380 (13,308) 100.0% (65.3)% 12,859 (7,976) 100.0% (62.0)% 7,072 (876 (938) (1,538) 3,720 (577) 3,143 (1,213) 1,930 1,868 62 34.7% (4.3)% (4.6)% (7.5)% 18.2% (2.8)% 15.4% (6.0)% 9.5% 9.2% 0.3% 4,883 (538) (682) (195) 3,468 (343) 3,125 (946) 2,179 2,103 76 38.0% (4.2)% (5.3)% (1.5)% 27.0% (2.7)% 24.3% (7.4)% 16.9% 16.4% 0.6% 7,521 (5,332) 2,189 (338) (256) 58.5% 66.9% 44.8% 62.8% 37.5% (1,343) 688.7% 252 (234) (18) (267) (249) (235) (14) 7.3% 68.2% 0.6% 28.2% (11.4)% (11.2)% (18.4)% (1) Includes service revenues of $390 million and $232 million for the years ended 31 December 2008 and 2007 respectively. Sales of services consist primarily of heat and electricity supply, port, transportation, steel coating and accounting services. In 2008 approximately 0.6% of Evraz’s revenues was generated through transactions with related parties compared to 4.9% in 2007. In addition, Evraz made signiﬁ cant purchases from related parties. (See Note 16 to the Consolidated Financial Statements). Explanation of One-Off Charges By the end of 2008, Evraz’s activities in most of its operating segments had been adversely affected by the instability in international ﬁ nancial, currency and commodity markets resulting from the global ﬁ nancial crisis. As a result, the Group recognised in its ﬁ nancial state- ments signiﬁ cant extraordinary non-cash items in the total amount of $1,857 million that negatively affected proﬁ tability levels. The key items were: Impairment loss on assets of $880 million. This ﬁ gure, which affected operating proﬁ t, included impairment of goodwill in the amount of $466 million on newly acquired Ukrainian assets, $187 million on newly acquired Claymont Steel and $103 million on Evraz Inc. NA. It also reﬂ ected impairment of assets in the amount of $123 million which included contemplated or planned shutdowns of certain obsolete and inefﬁ cient Russian production facilities (open hearth furnaces, coke batteries, etc.). Revaluation of inventories down to net realisable values. This exercise resulted in an additional charge of $314 million which also af- fected operating proﬁ t. Foreign exchange losses in the amount of $471 million. These losses, which further reduced the operating results, related to the de- preciation of local currencies in Evraz’s areas of operation in Russia, Europe, Canada and South Africa against the US dollar between 31 December 2007 and 31 December 2008. This was reﬂ ected in the accounts of certain subsidiaries which sustained foreign ex- change losses in relation to bank loans denominated in US dollars. The total foreign exchange loss also included Evraz Group losses in respect of intercompany loans issued to subsidiaries in local currencies. Revaluation of investments in Delong Holdings and the Cape Lambert project resulted in a $150 million total mark down to current market values. Evraz also booked a $99 million gain on selected bond repurchases performed during the fourth quarter of 2008, which was partially offset by a $19 million loss in respect of the early repayment of Claymont Steel liabilities at a premium. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 88 Revenues Evraz’s consolidated revenues in 2008 totalled $20,380 million, a 58.5% increase compared to revenues of $12,859 million in 2007. Steel segment sales accounted for the majority of the increase in revenues largely due to the higher average prices of steel products and the contributions from newly acquired operations in North America, South Africa and Ukraine. Evraz’s sales volumes of steel products advanced from 16.4 million tonnes in 2007 to 17.1 million tonnes in 2008. The increase in steel sales volumes primarily reﬂ ects contributions from Evraz’s North American operations (+1.0 million tonnes), which beneﬁ ted from the acquisition of Claymont Steel and Ipsco Canada in 2008, and from a new Ukrainian plant, DMZ (+0.9 million tonnes). The South African operations made an approximate +0.2 million tonnes contribution due to full year consolidation of Highveld in 2008 as against only eight months in 2007. On the other hand, the Russian operations experienced a 14% (or approximately 1.1 million tonnes) reduction in domestic steel sales volumes (excluding inter-segment sales) and a 6% (or 0.3 million tonnes) decrease in export sales vol- umes. These decreases were attributable to the general slowdown in the steel markets during the fourth quarter of 2008 and consequent cuts in production volumes. The following table shows the average price trends of Evraz’s principal products in 2008 and 2007 (encompassing semi-annual break- downs of both the Russian and non-CIS export markets), which illustrates an uneven distribution of revenues during the periods under consideration: (US$ per tonne, except percentages) 2nd half 1st half 2nd half 1st half AVERAGE RUSSIAN AND CIS PRICES FOR EVRAZ'S RUSSIAN AND UKRAINIAN PRODUCTS(1) 2008 2007 1st half 2008 vs. 1st half 2007 2nd half 2008 vs. 2nd half 2007 Year ended 31 December % change Construction products Rebars H-Beams Channels Angles Wire rods Wire Railway products Rails Wheels Flat-rolled products Plates Semi-ﬁ nished products Slabs Pig Iron Pipe blanks Other steel products Grinding balls Rounds 869 1,328 1,021 1,000 963 971 802 1,570 1,050 972 739 1,109 1,210 951 810 1,155 903 831 804 885 775 1,635 888 721 522 733 854 789 609 1,031 762 687 569 657 624 1,427 624 491 344 577 689 613 AVERAGE NON-CIS EXPORT PRICES FOR EVRAZ'S RUSSIAN AND UKRAINIAN PRODUCTS(2) Construction products H-beams Rebars Wire rods Semi-ﬁ nished products Billets Slabs Pig Iron Flat-rolled products Plates 516 851 367 486 893 341 769 735 606 686 701 660 492 725 597 587 508 530 541 404 605 607 972 654 585 546 624 591 1,293 33.4% 18.8% 38.1% 42.1% 47.3% 41.8% 31.1% 26.5% 42.7% 28.8% 34.0% 45.6% 69.2% 47.8% 28.5% 10.0% 602 47.5% 68.3% 425 308 522 567 538 568 486 446 429 457 351 69.6% 69.5% 40.4% 50.6% 46.7% 29.4% 24.7% 53.8% 63.4% 44.4% 40.2% 98.0% 114.8% 92.2% 75.6% 55.1% (13.6)% 45.0% (27.8)% (8.3)% 65.1% (15.6)% 510 42.2% 27.1% MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT (US$ per tonne, except percentages) 2nd half 1st half 2nd half 1st half AVERAGE PRICES FOR EVRAZ'S NON-CIS OPERATIONS PRODUCTS(3) 2008 2007 1st half 2008 vs. 1st half 2007 2nd half 2008 vs. 2nd half 2007 Year ended 31 December % change 89 Construction products Highveld - H-beams Flat-rolled products Vitkovice – plates Palini – plates Evraz Inc. NA – commodity plates Evraz Inc. NA – speciality plates Evraz Inc. NA Canada – commodity plates Highveld – commodity plates Tubular products Evraz Inc. NA – large diameter pipes Evraz Inc. NA Canada – large diameter pipes 1,113 961 1,347 1,255 1,430 1,848 1,406 1,154 1,942 1,712 1,213 1,004 1,005 1,782 1,292 863 1,444 1,576 843 950 891 840 2,033 n/a 798 1,386 n/a 826 16.3% 32.0% 929 821 866 1,289 n/a 809 1,344 n/a 30.6% 22.3% 16.1% 38.2% n/a 6.7% 7.4% n/a 41.8% 40.9% 70.2% (9.1)% n/a 44.6% 40.1% n/a (1) Prices for sales denominated in Roubles and UAH are converted into US dollars at the average monthly exchange rate to the US dollar as stated by the CBR and National Bank of Ukraine. Average US dollar prices are calculated as a weighted average of sales prices in the relevant semi-annual period. (2) Average price data relates to sales by Ferrotrade Limited and East Metals S.A. (3) Prices for sales denominated in Euros, Czech Korunas and South African Rands are converted into US dollars at the average exchange rate to the US dollar for the period under consideration as stated by the relevant Central bank. The following table presents Evraz’s consolidated revenues by segment for 2008 and 2007: (US$ million) REVENUES BY SEGMENT Steel segment To third parties To mining segment To vanadium segment To other operations Total – Steel segment Vanadium segment To third parties To steel segment Total – Vanadium segment Mining segment To third parties To steel segment To other operations Total – Mining segment Other operations To third parties To steel segment To mining segment Total – Other operations Eliminations Consolidated revenues % from steel segment % from vanadium segment % from mining segment % from other operations Year ended 31 December 2008 2007 2008 vs. 2007 Change % Change 17,623 11,743 5,880 178 28 96 103 10 52 75 18 44 17,925 11,908 6,017 618 5 623 919 813 (1) 1,731 104 119 16 239 (1,089) 7,521 1,201 5 1,206 1,290 2,340 4 3,634 266 588 168 1,022 (3,407) 20,380 86.5% 5.9% 6.3% 1.3% 583 583 371 1,527 5 1,903 162 469 152 783 (2,318) 12,859 91.3% 4.5% 2.9% 1.3% 50.1% 72.8% 180.0% 84.6% 50.5% 106.0% 0.0% 106.9% 247.7% 53.2% (20.0)% 91.0% 64.2% 25.4% 10.5% 30.5% 47.0% 58.5% ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 90 The following table presents the geographic breakdown of Evraz’s consolidated revenues in 2008 and 2007 (based on location of cus- tomer) in monetary terms and as a percentage of total revenues. (US$ million, except percentages) 2008 %% of total 2007 %% of total Change % change Year ended 31 December 2008 vs. 2007 Russia Americas Asia Europe CIS Africa Rest of the World Total 7,575 4,538 3,217 2,862 1,429 720 39 37.2% 22.3% 15.8% 14.0% 7.0% 3.5% 0.2% 5,954 2,138 1,900 1,864 641 353 9 46.3% 16.6% 14.8% 14.5% 5.0% 2.7% 0.1% 1,621 2,400 1,317 998 788 367 30 20,380 100.0% 12,859 100.0% 7,521 27.2% 112.3% 69.3% 53.5% 122.9% 104.0% 333.3% 58.5% Revenues from sales outside Russia increased in monetary terms and as a proportion of total revenues. The main drivers of the growth in revenues outside Russia were additional sales volumes from the new operations in North America, South Africa and Ukraine as discussed above. Revenues from sales in Russia increased in monetary terms due to higher average steel prices in 2008 compared with 2007. Steel Segment Steel segment revenues were affected by the positive price dynamic for steel products, particularly during the ﬁ rst nine months of the year, and by the acquisitions of IPSCO Canada in June 2008, Claymont Steel in January 2008, DMZ and Ukrainian coke plants effective December 2007, and Highveld in April 2007. Post-acquisition revenues of IPSCO Canada and Claymont Steel amounted to $1,273 million (7.1% of steel segment revenues) and $464 million (2.6% of steel segment revenues) respectively. Revenues attributable to the acquisition of new Ukrainian assets, excluding intra-segment sales, contributed approximately $1,045 million (5.8% of steel segment revenues) to the increase. Revenues of Highveld in 2008 amounted to $650 million (3.6% of steel segment revenues) against $422 million (3.5% of steel segment revenues) in 2007. Therefore, approximately $3,007 million of the increase in steel segment revenues was due to organic growth and approximately $3,010 million was attributable to acquisitions. The following table provides a breakdown of Evraz’s steel segment sales in 2008 and 2007, noting the contribution made by Claymont Steel, Highveld, IPSCO Canada and DMZ. (US$ million, except percentages) STEEL SEGMENT SALES Construction products(1) of which Highveld of which DMZ Flat-rolled products(2) of which Highveld of which Claymont of which IPSCO Railway products(3) of which DMZ Tubular products(4) of which IPSCO Semi-ﬁ nished products(5) of which DMZ Other steel products(6) of which DMZ Other products(7) of which Ukrainian coke plants of which Claymont of which IPSCO Year ended 31 December 2008 2007 2008 vs. 2007 Amount Percentage of total Amount Percentage of total Change % change 4,850 291 119 3,239 338 435 250 2,226 10 1,861 938 3,512 36 607 15 1,630 386 29 63 27.1% 1.6% 0.7% 18.1% 1.9% 2.4% 1.4% 12.4% 0.1% 10.4% 5.2% 19.6% 0.2% 3.4% 0.1% 9.1% 2.2% 0.2% 0.4% 3,713 164 - 1,968 173 - - 1,697 - 703 - 2,497 - 458 - 872 - - - 31.2% 1.4% - 16.5% 1.5% - - 14.3% - 5.9% - 21.0% - 3.8% - 7.3% - - - 30.6% 77.4% 64.6% 95.4% 31.2% 164.7% 40.6% 32.5% 86.9% 1,137 127 119 1,271 165 435 250 529 10 1,158 938 1,015 36 149 15 758 386 29 63 TOTAL 17,925 100% 11,908 100% 6,017 50.5% (1) Includes rebars, wire rods, wire, H-beams, channels and angles. (2) Includes plates and coils. (3) Includes rails and wheels. (4) Includes large diameter, ERW, seamless pipes and casing. (5) Includes billets, slabs, pig iron, pipe blanks and blooms. (6) Includes rounds, grinding balls, mine uprights and strips. (7) Includes coke and coking products, refractory products, ferroaloys and resale of coking coal MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 91 The proportions of both revenues and sales volumes in respect of construction products decreased despite the additional post acquisi- tion volumes provided by Highveld and DMZ. This reﬂ ected a sharp decline in the sales volumes of construction products at the Russian operations during the fourth quarter of 2008. The proportion of revenues attributable to sales of railway products decreased despite an increase in the proportion of volumes. Revenues were impacted by the fact that railway products were the subject of below average price increases compared to other steel products. The proportion of revenues attributable to sales of ﬂ at-rolled products (primarily plates) increased due to additional sales volumes follow- ing upon the acquisition of Claymont Steel and IPSCO Canada in 2008 and Highveld in 2007. The proportion of revenues attributable to sales of tubular products increased as a result of additional sales volumes following the acquisi- tion of IPSCO Canada in 2008. A decline in the proportion of revenues attributable to sales of semi-ﬁ nished products resulted from substantially lower volumes of export sales of ‘semis’ by the Russian operations (see discussion regarding consolidated revenues above) and the allocation of production ca- pacities in favour of higher margin construction and railway products. Revenues from sales of other steel products decreased as a proportion of steel segment revenues in 2008 compared to 2007 largely due to lower volumes of rounds sold in the Russian market. Revenues attributable to other non-steel sales increased as a proportion of steel segment sales. The increase was attributable to the Ukrainian plants’ sales of coke to third party customers, increased sales of coke from the Russian steel operations due to both volume and price factors and to the respective contributions of Claymont Steel and IPSCO Canada. Steel segment sales to the mining segment amounted to $178 million in 2008 compared with $103 million in 2007. The increase is at- tributable to increased sales by the Russian steel operations to the Russian mining operations and to sales by the Ukrainian steel and coke operations to Sukha Balka. Revenues from sales in Russia amounted to approximately 39% of steel segment revenues in 2008 compared to 47% in 2007. This decrease is primarily attributable to various acquisitions effected by Evraz, as discussed above, although in monetary terms, steel seg- ment revenues in Russia increased from $5,636 million in 2007 to $6,946 million in 2008, largely due to higher average prices for steel products. Vanadium Segment Vanadium segment revenues increased by 106.9% to $1,206 million in 2008 compared to $583 million in 2007. The increase is primarily attributable to the acquisitions of Highveld and Nikom (a subsidiary of Evraz Vitkovice Steel) and to higher average prices for vanadium products in 2008 against 2007. The following table shows the breakdown of Evraz’s vanadium segment sales in 2008 and 2007, noting the contribution made by Highveld and Nikom. (US$ million, except percentages) VANADIUM SEGMENT SALES Vanadium in slag Vanadium in alloys & chemicals of which Highveld of which Nikom of which resale of vanadium products Other revenues TOTAL Year ended 31 December 2008 2007 2008 vs. 2007 Amount Percentage of total Amount Percentage of total Change % change 290 912 471 112 51 4 24.1% 75.7% 39.1% 9.3% 4.2% 0.3% 167 416 260 - - - 28.6% 71.4% 44.6% - - - 1,206 100.0% 583 100.0% 123 496 211 112 51 7 623 73.7% 119.2% 81.2% 106.9% The following table shows the average price trends of Evraz’s vanadium products from 2007 through 2008 (encompassing semi-annual breakdowns): Year ended 31 December % change (US$ per tonne of pure vanadium in the products, except percentages) 2nd half 1st half 2nd half 1st half 2008 2007 1st half 2008 vs. 1st half 2007 2nd half 2008 vs. 2nd half 2007 AVERAGE PRICES FOR EVRAZ'S VANADIUM PRODUCTS(1) NTMK – Vanadium in slag 25,152 Highveld – Vanadium in alloys Stratcor – Vanadium in alloys 53,359 57,167 31,771 55,026 54,550 15,083 33,935 38,387 15,337 39,060 36,751 107.2% 40.9% 48.4% 66.8% 68.5% 39.0% (1) Prices for sales denominated in Roubles are converted into US dollars at the average monthly exchange rate to the US dollar as stated by the CBR. Average US dollar prices are calculated as a weighted average of sales prices in the relevant semi-annual period. (2) Prices for sales denominated in South African Rands are converted into US dollars at the average exchange rate to the US dollar for the period under consideration as stated by the South African Reserve Bank. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 92 Mining Segment Mining segment revenues increased by 91.0% to $3,634 million in 2008 compared to $1,903 million in 2007. This increase largely re- ﬂ ected the acquisitions of YuKU and Sukha Balka in June and December 2007 respectively, and the growth in the average prices of iron ore and coal in 2008 compared to 2007. Sales volumes of iron ore and coal in 2008 increased by 24.0% and 81.3% respectively compared to 2007. The following table shows a breakdown of Evraz’s mining segment sales in 2008 and 2007, noting the contribution made by YuKU and Sukha Balka: (US$ million, except percentages) MINING SEGMENT SALES Iron ore products Iron ore concentrate of which resale of related parties’ products Sinter of which resale of related parties’ products Pellets Other of which Sukha Balka Coal products Coking coal of which YuKU Coal concentrate of which YuKU Steam coal of which YuKU Other revenues of which YuKU TOTAL Year ended 31 December 2008 2007 2008 vs. 2007 Amount Percentage of total Amount Percentage of total Change % change 2,213 625 263 885 57 566 137 137 1,251 259 205 725 725 267 236 170 26 3,634 60.9% 17.2% 7.2% 24.4% 1.6% 15.6% 3.8% 3.8% 34.4% 7.1% 5.6% 20.0% 20.0% 7.3% 6.5% 4.7% 0.7% 100% 1,433 242 - 665 - 524 2 2 384 194 162 158 158 32 24 86 - 75.3% 12.7% - 34.9% - 27.5% 0.1% 0.1% 20.2% 10.2% 8.5% 8.3% 8.3% 1.7% 1.3% 4.5% - 780 383 263 220 57 42 135 135 867 65 43 567 567 235 212 84 26 54.4% 158.3% 33.1% 8.0% n/m n/m 225.8% 33.5% 26.5% 358.9% 358.9% 734.4% 883.3% 97.7% 1,903 100% 1,731 91.0% The following table shows the average price trends of the mining segment’s iron ore products in 2008 and 2007 with half-yearly break- downs: (US$ per tonne, except percentages) 2nd half 1st half 2nd half 1st half AVERAGE PRICES FOR EVRAZ'S MINING SEGMENT PRODUCTS(1) 2008 2007 1st half 2008 vs. 1st half 2007 2nd half 2008 vs. 2nd half 2007 Year ended 31 December % change Iron ore products Concentrate Sinter Pellets Coal products Coking coal Coal concentrate Steam coal Steam concentrate 86 108 103 87 168 32 89 95 116 111 79 157 38 79 70 86 86 44 94 26 n/a 68 83 84 41 77 34 n/a 39.7% 39.8% 32.1% 92.70% 103.9% 11.8% n/a 22.9% 25.6% 19.8% 97.7% 78.7% 23.1% n/a (1) Prices for sales denominated in Roubles and Hryvnia are converted into US dollars at the average semi-annual exchange rate of the Rouble and Hryvnia to the US dollar as stated by the CBR and National Bank of Ukraine respectively. Prior to the acquisition of YuKU in June 2007, substantially all of Evraz’s mining segment sales consisted of iron ore. Evraz also holds a 40.0% equity method accounted interest in Raspadskaya coking coal mine. Revenue attributable to Raspadskaya is therefore not con- solidated in Evraz’s ﬁ nancial statements and the Company’s share of its net proﬁ ts is accounted for as "Share of proﬁ ts (losses) of joint ventures and associates" (See "Non-operating income and expense"). Mining segment sales to the steel segment amounted to $2,340 million (64.4% of mining segment sales) in 2008 compared with $1,527 million (80.2% of mining segment sales) in 2007. Approximately 73% of Evraz’s iron ore requirements were met by the mining segment in 2008 compared with 77% in 2007. Around 55% of Evraz’s coking coal requirements were satisﬁ ed by supplies from Raspadskaya, YuKU and Mine 12 in 2008, as against 58% in 2007. The decrease in the proportion of iron ore supplied by the mining segment is attributable to a higher share of external iron ore at DMZ. About two thirds of DMZ’s iron ore requirement was met by related party UGOK. Approximately 29% of third party sales by the mining segment in 2008 were to customers in Russia compared to 51% in 2007. The in- crease in the proportion of third party sales outside Russia is primarily attributable to the acquisition of Sukha Balka in Ukraine, the resale of iron ore from UGOK, a related party, to export markets and export sales of coal by YuKU for a full year in 2008. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 93 Other Operations Evraz’s revenues in respect of the Company’s other operations segment increased by 30.5% to $1,022 million in 2008 compared to $783 million in 2007. Revenues were largely derived from the following operations (sales ﬁ gures shown below include sales made within the same segment): Nakhodka Sea Port. Sales at Nakhodka Sea Port, which provides various seaport services, amounted to $81 million in 2008 against $44 million in 2007. The increase in sales largely relates to higher volumes of coal handling in 2008 compared to 2007. Inter-segment sales accounted for 26% and 30% of such revenues in 2008 and 2007 respectively. Evraztrans acts as a railway forwarder for Evraz’s steel segment. Sales at Evraztrans amounted to $98 million in 2008 compared with $75 million in 2007. Evraztrans derives the majority of its revenues from inter-segment sales which accounted for 76.9% and 85.5% of revenues in 2008 and 2007 respectively. Metallenergoﬁ nance ("MEF") supplies electricity to Evraz’s steel and mining segments and to third parties. MEF’s sales amounted to $457 million in 2008 compared to $371 million in 2007. Inter-segment sales accounted for 83.1% and 90.9% of MEF’s revenues in 2008 and 2007 respectively. Sinano Shipmanagement ("Sinano") provides sea freight services to Evraz’s steel segment. Sinano’s sales totalled $144 million in 2008 compared with $95 million in 2007. Sinano derives the majority of its revenues from inter-segment sales and the increase in revenues in 2008 reﬂ ected higher export volumes of steel products from Russia. Evro-Aziatskaya Energy Company (“EvrazEK”). EvrazEK is an energy generating company which supplies natural gas, coke-oven gas, steam and electricity to the steel and mining segments. In 2008, EvrazEK generated revenues of $169 million compared to $163 million in 2007. Inter-segment sales accounted for 81.4% and 81.7% of revenues in 2008 and 2007 respectively. West Siberian Heat and Power Plant (“ZapSibTETs”). ZapSibTETs is also an energy generating company which was acquired by Evraz in May 2007. It supplies electricity and heat to Zapsib and to external customers. The revenues of ZapSibTETs amounted to $90 million in 2008 against $52 million in 2007. Inter-segment sales accounted for 34.6% and 24.1% of revenues in 2008 and 2007 respectively. External sales in respect of the other operations segment, consisting primarily of sales of energy by MEF, EvrazEK and ZapSibTETs and the provision of port services by Nakhodka Sea Port, advanced from $161 million in 2007 to $266 million in 2008. This increase in external sales is attributable to third party sales of MEF, Nakhodka Sea Port and Evraztrans. Cost of Revenues and Gross Profit Evraz’s consolidated cost of revenues amounted to $13,308 million in 2008 compared with $7,976 million in 2007. Cost of revenues as a share of consolidated revenues increased from 62.0% in 2007 to 65.3% in 2008. Whereas the average prices of raw materials increased signiﬁ cantly, the growth in Evraz’s own iron ore and coal production served to shield Evraz’s consolidated gross proﬁ t, to a considerable extent, from the impact of such increases. The effect of the strengthening of the average exchange rates of the Russian Rouble, the Czech Koruna and the Euro against the US dollar in 2008 was responsible for cost increases of around 3% in respect of the Russian operations, 16% for Evraz Vitkovice Steel and 6% at Evraz Palini e Bertoli. On the other hand, the weakening of the average exchange rate of the South African Rand against the US dollar had a positive effect of around 19% on Highveld’s costs in 2008 as compared with 2007. The table below sets out the cost of revenues and gross proﬁ t by segment for 2008 and 2007, including percentage of segment revenues. (US$ million, except percentages) Steel segment Cost of revenues Raw materials Transportation Staff costs Depreciation Energy Other(1) Gross proﬁ t Vanadium segment Cost of revenues Raw materials Transportation Staff costs Depreciation Energy Other(1) Gross proﬁ t Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues Percentage of segment revenues Amount Change % change (70.0)% (48.0)% (3.2)% (5.6)% (3.4)% (4.6)% (5.2)% 30.0% (76.5)% (37.6)% (0.2)% (6.5)% (3.2)% (4.9)% (24.1)% 23.5% (7,856) (4,993) (394) (737) (362) (608) (762) 4,052 (466) (151) (2) (59) (26) (41) (187) 117 (66.0)% (41.9)% (3.3)% (6.2)% (3.0)% (5.1)% (6.4)% 34.0% (80.0)% (25.9)% (0.3)% (10.1)% (4.5)% (7.0)% (32.1)% 20.1% (4,690) (3 612) (173) (261) (250) (225) (169) 1,327 (456) (302) 0 (19) (13) (18) (104) 167 59.7% 72.3% 43.9% 35.4% 69.1% 37.0% 22.2% 32.7% 97.9% 200.0% 0.0% 32.2% 50.0% 43.9% 55.6% 142.7% Amount (12,546) (8 605) (567) (998) (612) (833) (931) 5,379 (922) (453) (2) (78) (39) (59) (291) 284 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 94 (US$ million, except percentages) Mining segment Cost of revenues Raw materials Transportation Staff costs Depreciation Energy(2) Other(3) Gross proﬁ t Other operations Cost of revenues Gross proﬁ t Unallocated Cost of revenues Gross proﬁ t Eliminations-cost of revenues Eliminations-gross proﬁ t Consolidated cost of revenues Consolidated gross proﬁ t Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues (64.6)% (18.0)% (6.4)% (12.3)% (9.7)% (6.7)% (11.4)% 35.4% (73.3)% 26.7% - - Amount (2,348) (654) (234) (448) (354) (245) (413) 1,286 (749) 273 (7) (7) 3,264 (143) (13,308) 7,072 (65.3)% 34.7% Amount (1,272) (255) (121) (316) (202) (213) (165) 631 (593) 190 (7) (7) 2,211 (107) (7,976) 4,883 Percentage of segment revenues Change % change (66.8)% (13.4)% (6.4)% (16.6)% (10.6)% (11.2)% (8.7)% 33.2% (75.7%) 24.3% (1,076) (399) (113) (132) (152) (32) (248) 655 (156) 83 84.6% 156.5% 93.4% 41.8% 75.2% 15.0% 150.3% 103.8% 26.3% 43.7% 1,053 36 (5,332) 2,189 47.6% 33.6% 66.9% 44.8% (62.0)% 38.0% (1) Includes repairs and maintenance and auxiliary materials such as refractory products. (2) Includes electricity, heat, natural gas and fuel used in production process, such as fuel oil. (3) Includes auxiliary materials and repairs and maintenance. Steel Segment Steel segment cost of revenues increased by 59.7% from $7,856 million in 2007 to $12,546 million in 2008. Cost of revenues amounted to 70.0% of steel segment revenues in 2008 compared with 66% in 2007. Acquisitions of the new Ukrainian operations (DMZ and coke plants), IPSCO Canada, Claymont Steel and Highveld, together with the higher average prices of raw materials, contributed to the increase in the steel segment cost of revenues in monetary terms in 2008 as compared with 2007. The cost of revenues, including intra-group proﬁ ts, in respect of the Ukrainian assets, amounted to $1,161 million (9.2% of steel segment cost of revenues), while the cost of revenues in respect of Claymont Steel amounted to $348 million (2.8% of steel segment cost of rev- enues). The post-acquisition cost of revenues at IPSCO Canada totalled $916 million (7.3% of steel segment cost of revenues). The cost of revenues in respect of Highveld’s contribution to the steel segment amounted to $323 million (2.6% of steel segment cost of revenues) in 2008 compared with $271million (3.5% of steel segment cost of revenues) in 2007. The primary factors affecting the growth of steel segment cost of revenues in monetary terms in 2008 as compared to 2007 were as fol- lows: Raw material costs rose by 72.3%. This reﬂ ected the higher prices of iron ore, coking coal, scrap, ferroalloys, pig iron and steel semis and the enhanced scale of purchasing subsequent to the acquisitions of new global operations which accounted for +33.7% of the increase. Transportation costs rose by 43.9%. A large part of these costs related to railway tariffs in respect of the transportation of Evraz’s steel products to the relevant ports. The increase is largely attributable to the additional export sales volumes of the Ukrainian operations and to transport costs related to the delivery of raw materials to Russian plants. Staff costs increased by 35.4%. The new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld accounted for +23.7% of the increase. Wages and salaries of production staff at Evraz’s existing operations rose in accordance with the trade union agreement and as a result of the appreciation of the average rates of local currencies against the US dollar. Depreciation costs increased by 69.1%. The new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld accounted for +47.6% of the increase. The remainder of the increase is largely attributable to the commissioning of new equipment at NTMK and Zapsib. Energy costs increased by 37.0%. The acquisitions of the Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld accounted for +23.5% of the increase. The remainder is largely attributable to the increase in energy costs of the Russian operations due to rises in electricity and natural gas tariffs and to the appreciation of the local currencies against the US dollar. A rise of 22.2% in other costs was entirely accounted for by the new operations. These costs consisted primarily of contractor services and materials in respect of maintenance and repairs. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 95 Steel segment gross proﬁ t increased by 32.7% to $5,379 million in 2008 from $4,052 million in 2007, while gross proﬁ t margin amounted to 30.0% of steel segment revenues in 2008 compared with 34% in 2007. Gross proﬁ t margin decreased over the period primarily due to the deterioration in the steel market during the fourth quarter of 2008. Vanadium Segment Vanadium segment cost of revenues increased by 97.9% from $466 million in 2007 to $922 million in 2008. The increase was primarily attributable to the contributions from Highveld Vanchem Operations and Nikom, together with the resale of vanadium products. Cost of revenues amounted to 76.5% of vanadium segment revenues in 2008 compared with 80.1% in 2007. Vanadium segment gross proﬁ t increased by 142.7% from $117 million in 2007 to $284 million in 2008. This resulted in a gross proﬁ t margin of 23.5% of vanadium segment revenues in 2008 as compared with 20.1% in 2007. Mining Segment The mining segment cost of revenues increased by 84.6% from $1,272 million in 2007 to $2,348 million in 2008, representing 64.6% and 66.8% of mining segment revenues in 2008 and 2007 respectively. The primary factors affecting the mining segment cost of revenues between the periods were: Raw material costs increased by 156.5%. Resale of the iron ore products from UGOK in 2008 contributed +128.6% to the increase. Cost of coal purchased from the market for resale by Greyridge, a coal trading arm of Evraz, accounted for a further +18.0%. Transportation costs increased by 93.4%. The transportation costs relating to the resale of iron ore from UGOK and to full year export sales of coal from YuKU contributed +40.5% to the increase. The growth in the transportation of raw iron ore between branches of Evrazruda and YuKU for further processing, which was also subject to increases in railway tariffs, contributed a further +34.7%. Staff costs increased by 41.8%. Staff costs of YuKU and Sukha Balka contributed approximately +31.0%. The remainder of the increase is largely attributable to the wages and salaries of production staff, which rose in accordance with the trade union agreement, and to the appreciation of the average rates of local currencies against the US dollar. Depreciation costs increased by 75.2%. Depreciation charges in respect of YuKU and Sukha Balka contributed approximately +70.8%. The remainder of the increase is attributable to the strengthening of the average rates of local currencies against the US dollar. Energy costs increased by 15.0%. This increase is largely accounted for by YuKU and Sukha Balka. Other costs increased by 150.3%. These costs consisted primarily of contractor services and materials in respect of maintenance and repairs together with certain taxes. YuKU and Sukha Balka contributed +95.8% to the increase. The remainder of the increase is largely attributable to materials and services for repairs at KGOK, which accounted for a further +44.0%. Mining segment gross proﬁ t increased by 103.8% from $631 million in 2007 to $1,286 million in 2008. This resulted in a gross proﬁ t margin of 35.4% of mining segment revenues in 2008 compared with 33.2% in 2007. The increase in the gross proﬁ t margin of the mining segment largely reﬂ ected the growth in the average prices of iron ore and coal in 2008 as against 2007. Other Operations The cost of revenues of the other operations segment increased by 26.3% to $749 million in 2008, representing 73.3% of other opera- tions’ revenues, compared to $593 million, representing 75.7% of other operations’ revenues, in 2007. ZapSibTETs, which was acquired by Evraz in May 2007, accounted for $99 million, or 13.2%, of the other operations segment’s cost of revenues in 2008 compared with $59 million in 2007. The growth in third party sales of the energy companies and Nakhodka Sea Port also contributed to the increase in the segment’s cost of revenues. The major components of cost of revenues at Nakhodka Sea Port are staff costs and cost of inventory; the major component of Evraztrans’ cost of revenues is rent and maintenance of railway cars; the major component of MEF’s cost of revenues is the purchase of electricity from power generating companies; the major components of EvrazEK’s cost of revenues are natural gas for resale to the steel segment and natural gas and steam coal for power generation; the major components of ZapSibTETs’ cost of revenues are steam coal for power generation, depreciation and staff costs; while the major component of Sinano’s cost of revenues is ship hire fees. The gross proﬁ t of the other operations segment increased by 43.7% to $273million in 2008 from $190 million in 2007. The principal contributions to the increase in gross proﬁ t came from Sinano (+28.2%) and Nakhodka Sea Port (+13.1%) reﬂ ecting the growth of the respective operations. Gross proﬁ t margin amounted to 26.7% of the other operations’ revenues in 2008 compared with 24.3% in 2007. Selling and Distribution Costs Selling and distribution costs increased by 62.8% to $876 million, representing 4.3% of consolidated revenues, in 2008 compared to $538 million, representing 4.2% of consolidated revenues, in 2007. Selling and distribution costs largely consist of transportation ex- penses related to Evraz’s selling activities. The following table presents selling and distribution costs by segment for 2008 and 2007, including as a percentage of segment revenues. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 96 (US$ million, except percentages) SELLING AND DISTRIBUTION COSTS BY SEGMENT Steel segment Transportation costs Staff costs Bad debt expense Depreciation Other(1) Vanadium segment Transportation costs Staff costs Bad debt expense Depreciation Other(1) Mining segment Transportation costs Staff costs Bad debt expense Other(1) Other operations Eliminations Total Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues Percentage of segment revenues Amount Amount Change % change (796) (387) (66) (14) (114) (215) (82) (37) (6) - (14) (25) (40) (20) (2) (4) (14) (119) 161 (876) (4.4)% (2.2)% (0.4)% (0.1)% (0.6)% (1.2)% (6.8)% (3.1)% (0.5)% 0.0% (1.2)% (2.1)% (1.1)% (0.6)% (0.1)% (0.1)% (0.4)% (11.6)% (499) (266) (50) (5) (78) (100) (58) (27) (7) - (15) (9) (23) (13) - (5) (5) (64) 106 (4.2)% (2.2)% (0.4)% 0.0% (0.7)% (0.8)% (9.9)% (4.6)% (1.2)% 0.0% (2.6)% (1.5)% (1.2)% (0.7)% 0.0% (0.3)% (0.3)% (8.2)% (297) (121) (16) (9) (36) (115) (24) (10) 1 - 1 (16) (17) (7) (2) 1 (9) (55) 55 (4.3)% (538) (4.2)% (338) 59.5% 45.5% 32.0% 180.0% 46.2% 115.0% 41.4% 37.0% (14.3)% 0.0% (6.7)% 177.8% 73.9% 53.8% 0.0% (20.0)% 180.0% 85.9% 51.9% 62.8% (1) Includes auxiliary materials such as packaging, port services and customs duties. Steel Segment Selling and distribution costs amounted to 4.4% of the steel segment’s revenues in 2008 compared with 4.2% in 2007. The principal fac- tors affecting the steel segment’s selling and distribution costs between the periods were: Transportation costs increased by 45.5% primarily due to the contribution of the new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld. Staff costs increased by 32.0%. The new Ukrainian operations, IPSCO Canada and Claymont Steel contributed approximately +20.5% to the increase. Highveld contributed a further +2.0% due to full year consolidation in 2008 compared with eight months in 2007. The remainder of the increase is largely attributable to higher wages and salaries at existing operations, which rose in accor- dance with the trade union agreement, and to appreciation of the average rates of local currencies against the US dollar. Bad debt expense increased by 180.0% from $5 million in 2007 to $14 million in 2008. This was largely attributable to provisions made against receivables from Russian dealers. Depreciation costs increased by 46.2% primarily reﬂ ecting the new operations. Other selling costs increased by 115.0%. This increase is attributable to expenses related to the additional export sales volumes of the Ukrainian operations (+82.1%) and to third party sales commissions paid by NTMK (+16.6%). The new operations contributed +7.0% to the increase. Vanadium Segment Selling and distribution costs increased by 41.4% to $82 million in 2008 compared to $58 million in 2007, representing 6.8% and 9.9% of vanadium segment revenues in 2008 and 2007respectively. The increase in monetary terms was largely due to the contributions of Highveld vanadium operations and Nikom. Mining Segment Selling and distribution costs amounted to 1.1% of mining segment revenues in 2008 compared with 1.2% in 2007. The principal factors affecting the mining segment’s selling and distribution costs between the periods were: Transportation costs increased by 53.8% primarily due to the contributions of Sukha Balka and YuKU. Staff costs in 2008 were entirely attributable to the new operations, while in 2007 such costs were immaterial. Bad debt expense decreased by 20.0%. Other selling costs increased by 180.0% largely due to export sales of coal from YuKU and iron ore from UGOK and Sukha Balka. Other Operations Selling and distribution costs amounted to 11.6% of other operations’ revenues in 2008 compared with 8.2% in 2007. The increase in selling and distribution costs was largely attributable to the freight and port expenses incurred by Sinano due to increased export sales volumes from Ukraine and exports of coal from Russia. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT General and Administrative Expenses General and administrative expenses increased by 37.5% to $938 million in 2008 compared with $682 million in 2007. As a percentage of consolidated revenues, general and administrative expenses in 2008 and 2007 amounted to 4.6% and 5.3% respectively. The following table presents general and administrative expenses by segment for 2008 and 2007, including as a percentage of segment revenues. 97 (US$ million, except percentages) Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues Percentage of segment revenues Amount Amount Change % change GENERAL AND ADMINISTRATIVE EXPENSES BY SEGMENT Steel segment Staff costs Taxes, other than on income Other(1) Vanadium segment Staff costs Taxes, other than on income Other(1) Mining segment Staff costs Taxes, other than on income Other(2) Other operations Unallocated(3) Eliminations Total (473) (191) (91) (191) (33) (18) (2) (13) (176) (109) (17) (50) (44) (215) 3 (938) (2.6)% (1.1)% (0.5)% (1.1)% (2.7)% (1.5)% (0.2)% (1.1)% (4.8)% (3.0)% (0.5)% (1.4)% (4.3)% (4.6)% (385) (148) (82) (155) (16) (8) (1) (7) (109) (57) (13) (39) (38) (137) 3 (682) (3,2)% (1.2)% (0.7)% (1.3)% (2.7)% (1.4)% (0.2)% (1.2)% (5.7)% (3.0)% (0.7)% (2.0)% (4.9)% (88) (43) (9) (36) (17) (10) (1) (6) (67) (52) (4) (11) (6) (78) - (5.3)% (256) 22.9% 29.1% 11.0% 23.2% 106.3% 125.0% 100.0% 85.7% 61.5% 91.2% 30.8% 28.2% 15.8% 56.9% 0.0% 37.5% (1) Includes depreciation, insurance and bank and other service costs. (2) Includes rent, insurance, bank and other service costs. (3) Relates principally to accounting and consulting fees. Steel Segment General and administrative expenses amounted to 2.6% of steel segment revenues in 2008 compared with 3.2% in 2007. The principal factors affecting the changes in the steel segment’s general and administrative expenses between the periods were: Staff costs increased by 29.1%. The new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld contributed approximately +20.4%. The remainder of the increase is largely attributable to higher wages and salaries at Evraz Inc. NA (excluding Claymont Steel) and Evraz Vitkovice Steel, together with the appreciation of the average rates of local currencies against the US dollar. Taxes, other than on income, including property, land and local taxes, increased by 11.0%. The increase primarily reﬂ ects higher prop- erty, land and pollution taxes in respect of the Russian operations. Other general and administrative expenses increased by 23.2%. The new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld contributed +17.8% to the increase. The remainder of the increase is largely attributable to fees for professional services incurred by the Russian operations. The new Ukrainian operations, IPSCO Canada, Claymont Steel and Highveld respectively accounted for $22 million (4.7%), $19 million (4.1%), $14 million (2.9%) and $32 million (6.7%) of the steel segment’s general and administrative expenses in 2008. Vanadium Segment General and administrative expenses increased by 106.3% to $33 million in 2008 compared with $16 million in 2007, representing 2.7% of vanadium segment revenues in respect of both 2008 and 2007. The increase in general and administrative expenses in 2008 was primarily attributable to the new vanadium operations and to the inclusion of approximately $5 million of staff costs at Stratcor’s Hot Springs site, a cost item that was allocated to cost of revenues in 2007. Mining Segment General and administrative expenses amounted to 4.8% of mining segment revenues in 2008 compared with 5.7% in 2007. The primary factors affecting the changes in the mining segment’s general and administrative expenses between the periods were: Staff costs rose by 91.2%, an increase that was primarily attributable to YuKU and Sukha Balka. Taxes, other than on income, increased by 30.8%, largely accounted for by YuKU. Other expenses increased by 28.2%, primarily attributable to YuKU and Sukha Balka. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 98 Other Operations General and administrative expenses increased by 15.8% to $44 million in 2008 compared with $38 million in 2007, representing 4.3% and 4.9% of the other operations segment’s revenues in 2008 and 2007 respectively. The increase in the segment’s general and admin- istrative expenses is largely due to the full year consolidation of ZapSibTETs in 2008 and to the contribution of Prichaly Kominterna, a new subsidiary which is involved in the construction of new port facilities in Ukraine. ZapSibTETs and Prichaly Kominterna accounted for $6 million (13.7%) and $3 million (7.9%) respectively of the general and administrative expenses of the other operations segment in 2008. Unallocated Unallocated general and administrative expenses are primarily attributable to costs of EvrazHolding and OUS (a subsidiary which provides accounting services to Evraz’s operations in Russia). Most of EvrazHolding’s general and administrative costs relate to wages and salaries in respect of its employees, including Evraz’s senior management. Unallocated general and administrative expenses increased by 56.9% to $215 million in 2008 compared with $137 million in 2007. EvrazHolding and OUS accounted for +31.9% of the increase. The remainder of the increase is primarily attributable to the share option plans of Evraz Group S.A. Other Operating Income and Expenses Other operating expenses, net of other operating income, increased to $1,538 million in 2008, representing 7.5% of consolidated rev- enues, compared with $195 million in 2007, representing 1.5% of consolidated revenues. Other operating income and expenses consist primarily of social and social infrastructure expenses, gains (losses) on the disposal of property, plant and equipment, impairment of as- sets and gains (losses) in respect of foreign exchange rates. Social and social infrastructure expenses include such items as maintenance of medical centres, recreational centres, employee holiday allowances, sponsorship of sports teams and various charitable events. The following table presents other operating income and expenses by segment for 2008 and 2007, including as a percentage of segment revenues. (US$ million, except percentages) Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues Percentage of segment revenues Amount Amount Change % change OTHER OPERATING INCOME AND EXPENSES BY SEGMENT Steel segment Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total – Steel Segment Vanadium segment Foreign exchange gain (loss) Other income (expense), net Total – Vanadium Segment Mining segment Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total – Mining Segment Other operations Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total – Other Operations Unallocated Eliminations (0.5)% (0.1)% (4.6)% (1.9)% 0.0% (7.1)% 0.1% 0.0% 0.1% (0.5)% (0.4)% (1.5)% 0.3% (0.6)% (2.8)% (0.2)% (1.1)% (0.3)% (0.4)% (0.7)% (2.6)% (90) (11) (821) (342) (3) (1,267) 1 - 1 (19) (15) (56) 10 (23) (103) (2) (11) (3) (4) (7) (27) (141) (1) (52) (18) (4) (51) (7) (132) 1 1 2 (27) (8) (2) 5 (23) (55) (2) - (1) 1 1 (1) (9) - (0.4)% (0.2)% 0.0% (0.4)% (0.1)% (1.1)% 0.2% 0.2% 0.3% (1.4)% (0.5)% (0.1)% 0.3% (1.2)% (2.9)% (0.3)% 0.0% (0.1)% 0.1% 0.1% (0.1)% (38) 7 (817) (291) 4 73.1% (38.9)% n/m n/m n/m (1,135) 859.8% - (1) (1) 8 (7) (54) 5 - 0.0% n/m (50.0)% (29.6)% 87.5% n/m 100.0% 0.0% (48) 87.3% - (11) (2) (5) (8) (26) (132) (1) 0.0% n/m n/m n/m n/m n/m n/m Total other operating income and expenses, net (1,538) (7.5)% (195) (1.5)% (1,343) 688.7% MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 99 Total social and social infrastructure expenses increased by 39.0% in 2008 compared to 2007. The increase primarily reﬂ ected social and social infrastructure expenses in Russia, while the new Ukrainian operations accounted for +3.7% of the increase. Impairment of assets increased by $873 million to $880 million in 2008 compared with $7 million in 2007. Impairment in 2008 is largely attributable to impairment of goodwill in the amount of $756 million related to the acquisition of the new operations in North America and Ukraine. Evraz also recognised impairment of assets in the amount of $123 million including impairment due to expected shut downs of certain obsolete and inefﬁ cient Russian production facilities (See “Explanation of One-Off Charges” above). The foreign exchange loss in 2008 related to depreciation of the local currencies of Evraz’s Russian, European, Canadian and South African subsidiaries against the US dollar from 31 December 2007 to 31 December 2008. The majority of Evraz’s credit portfolio is main- tained in US dollars. Consequently, the depreciation of the local currencies of Evraz’s subsidiaries against the US dollar resulted in foreign exchange losses of the subsidiaries in relation to bank loans denominated in US dollars. The total foreign exchange loss also included Evraz’s losses in respect of intercompany loans issued to subsidiaries, in particular IPSCO Canada, in local currencies. Profit from Operations Proﬁ t from operations increased by 7.3% to $3,720 million in 2008, representing 18.3% of consolidated revenues, compared with $3,468 million, representing 27.0% of consolidated revenues, in 2007. The decrease in the share of proﬁ t from operations as a percentage of consolidated revenues is largely attributable to impairment and foreign exchange losses recognised in 2008. The following table provides a breakdown of proﬁ t from operations by segment in 2008 and 2007, including as a percentage of segment revenues. (US$ million, except percentages) PROFIT FROM OPERATIONS BY SEGMENT Steel segment Vanadium segment Mining segment Other operations Unallocated Eliminations Total Steel Segment Year ended 31 December 2008 2007 2008 vs. 2007 Percentage of segment revenues Percentage of segment revenues Amount Amount Change % change 2,843 170 967 83 (363) 20 3,720 15.9% 14.1% 26.6% 8.1% 18.2% 3,036 45 444 87 (146) 2 3,468 25.5% 7.7% 23.3% 11.1% 27.0% (193) 125 523 (4) (217) 18 252 (6.4)% 277.8% 117.8% (4.6)% 148.6% 7.3% Steel segment proﬁ t from operations decreased by 6.4% to $2,843 million in 2008 from $3,036 million in 2007. Proﬁ t from operations as a percentage of steel segment revenues amounted to 15.9% in 2008 compared with 25.5% in 2007. The new operations IPSCO Canada, Claymont Steel and the Ukrainian steel and coke assets contributed $143 million, $66 million and $(694) million respectively to the proﬁ t from operations of the steel segment in 2008. The signiﬁ cant losses attributable to the Ukrainian assets largely reﬂ ected the impairment of goodwill initially recognised on their acquisition. Highveld contributed $287 million in 2008 compared with $117 million in 2007. Vanadium Segment Vanadium segment proﬁ t from operations increased by 277.8% to $170 million in 2008 from $45 million in 2007. Proﬁ t from operations as a percentage of vanadium segment revenues rose from 7.7% in 2007 to 14.1% in 2008. Mining Segment Mining segment proﬁ t from operations increased by 117.8% to $967 million in 2008 from $444 million in 2007. Proﬁ t from operations as a percentage of mining segment revenues increased from 23.3% in 2007 to 26.6% in 2008. Other Operations Other operations segment proﬁ t from operations decreased by 4.6% to $83 million in 2008 compared with $87 million in 2007. Proﬁ t from operations as a percentage of other operations segment revenues decreased from 11.1% in 2007 to 8.1% in 2008. The decrease in operating proﬁ t margin was primarily attributable to losses at EvrazEK. Unallocated Unallocated losses from operations related to unallocated general and administrative expenses as discussed above and to the foreign exchange loss on an intercompany loan to IPSCO Canada denominated in local currency. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 100 Non-Operating Income and Expense Non-operating income and expense includes interest income, interest expense, share of proﬁ ts of associates and joint ventures and gains (losses) on ﬁ nancial assets and liabilities. The table below presents these items for 2008 and 2007, including as a percentage of consolidated revenues. (US$ million, except percentages) Interest income Interest expense Share of proﬁ ts (losses) of associates and joint ventures, net Gain/(loss) on ﬁ nancial assets and liabilities, net Loss on disposal of assets held for sale Excess of interest in the net fair value of acquiree's identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating gain (loss), net Year ended 31 December 2008 2007 2008 vs. 2007 Amount Percentage of revenues 57 (655) 198 (129) (43) 0 (5) 0.3% (3.2)% 1.0% (0.6)% (0.2)% 0.0% 0.0% Amount 41 (409) 88 (71) (6) 10 4 Percentage of revenues Change % change 0.3% (3.2)% 0.7% (0.6)% (0.0)% 0.1% 0.0% 16 (246) 110 (58) (37) 39.0% 60.1% 125.0% 81.7% 616.7% (10) (100.0)% (9) (225.0)% Total (577) (2.8)% (343) (2.7)% (234) 68.2% Interest income increased by 39.0% from $41 million in 2007 to $57 million in 2008, largely due to more efﬁ cient cash management policies. Interest expense increased by 60.1% to $655 million in 2008 compared with $409 million in 2007. The increase primarily resulted from additional borrowings during 2007 and 2008 related to the new acquisitions (See "Liquidity and Capital Resources - Capital Resources”). Share of proﬁ ts of associates and from joint ventures in 2008 and 2007 primarily relates to income (loss) attributable to Evraz’s interest in Raspadskaya ($212 million and $82 million respectively), Kazankovskaya mine - associate of YuKU ($(18) million and $(5) million respec- tively), YuKU pre-acquisition ($(10) million in 2007) and Highveld pre-acquisition ($20 million in 2007). Net loss on ﬁ nancial assets and liabilities amounted to $129 million in 2008 and largely related to revaluations of the investments in Delong ($129 million) and Cape Lambert ($21 million). It also included a trading loss in respect of Raspadskaya shares ($27 million), a gain on the selected bond repurchases ($99 million), a loss on the early settlement of the Claymont Steel bond at a premium ($19 million) and other smaller items. In 2007, such losses related to the recalculation of the liability to minority shareholders in respect of Highveld shares ($34 million), the change in the value of the option to acquire a 24.9% ownership interest in Highveld ($17 million) and a change in the value of the call option in respect of 25% less one share ownership interest in Clama/Palini ($21 million). (See “Summary of acquisi- tions”). Loss on disposal of assets held for sale amounted to $43 million in 2008 and primarily related to the disposal of vanadium assets by Highveld (See “Summary of acquisitions – Divestments”). Income Tax Expense Income tax expense increased by 28.2% to $1,213 million in 2008 compared with $946 million in 2007. Evraz’s effective tax rate, deﬁ ned as income tax expense as a percentage of proﬁ t before tax, increased from 30.3% in 2007 to 38.6% in 2008 due to a higher share of non-deductible expenses in 2008, in particular due to impairment of goodwill related to the acquisition of the new operations in North America and Ukraine. Net Profit Attributable to Equity Holders of the Parent Entity As a result of the factors set forth above, Evraz’s net proﬁ t attributable to equity holders of the parent entity decreased from $2,103 million in 2007 to $1,868 million in 2008. Net Profit Attributable to Minority Interests Net proﬁ t attributable to minority interests decreased from $76 million in 2007 to $62 million in 2008. Net proﬁ t attributable to minority interests as a share of total net proﬁ t decreased from 3.5% in 2007 to 3.2% in 2008. The decrease in the share of net proﬁ t attributable to minority interests largely reﬂ ected the decrease in minority shareholders’ interests. Evraz’s strategy is to reduce the level of minority interests in its subsidiaries. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. The following table presents the Company’s effective ownership interests in its major subsidiaries as of 31 December 2008 and 2007: 101 MANAGEMENT REPORT Subsidiary Mastercroft NTMK Zapsib NKMK Palini Vitkovice Evraz Inc. NA Highveld Stratcor KGOK Evrazruda VGOK Yuzhkuzbassugol Mine 12 Ferrotrade Limited Trade House EvrazHolding Trade House EvrazResource Nakhodka Sea Port Evraztrans Sinano ZapSibTETs EvrazEK Metallenergoﬁ nance Evraz Inc. NA Canada DMZ Sukha Balka Dneprokoks Bagleykoks DKHZ Trade House EvrazResource-Ukraine Liquidity and Capital Resources Capital Requirements Effective ownership interest as of 31 December % 2007 2008 100.00 100.00 100.00 100.00 100.00 100.00 100.00 85.12 72.84 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 76.00 100.00 100.00 100.00 100.00 100.00 96.03 99.42 98.65 94.37 93.86 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.92 72.84 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 76.00 100.00 100.00 100.00 100.00 - 95.57 99.25 98.65 94.37 93.86 - Business activity Location Holding Company Steel production Steel production Steel production Steel production Steel production Steel production Steel and vanadium production Cyprus Russia Russia Russia Italy Czech Republic USA S.Africa Vanadium production USA, S.Africa Iron ore mining and processing Iron ore mining and processing Iron ore mining and processing Coal mining Coal mining Trading Gibraltar Trading Trading Seaport services Freight-forwarding Frieght Utilities supply Utilities supply Utilities supply Steel production Steel production Iron ore mining and processing Coke production Coke production Coke production Trading Russia Russia Russia Russia Russia Russia Russia Russia Russia Cyprus Russia Russia Russia Canada Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine IIn addition to meeting its working capital requirements, Evraz expects that repayments of outstanding debt, capital expenditure and acqui- sitions will represent the Company’s most signiﬁ cant use of funds for a period of several years. The amount and term of Evraz’s obligations in respect of outstanding 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 in order to reduce costs, improve process ﬂ ows and expand the product range. Evraz also plans capital expenditure projects for increasing the propor- tion of higher margin products that the Company produces and sells. In 2008, Evraz’s capital expenditure totalled approximately $1,103 million, including $682 million in respect of its steel segment, $382 million in respect of its mining segment and $9 million in respect of its vanadium segment. Evraz’s capital expenditure plans are subject to change depending, among other things, on the evolution of market conditions and the cost and availability of funds. In 2008, the total consideration paid by Evraz in respect of acquisitions amounted to $1,914 million (net of cash acquired) while the total consideration in respect of purchases of minority interests amounted to $120 million. Capital Resources Historically, Evraz has relied on cash ﬂ ow provided by operations and short-term debt to ﬁ nance its working capital and capital require- ments. Management expects that such sources of funding will continue to be important in the future. At the same time, Evraz intends to increasingly 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 any off-balance sheet ﬁ nancing arrangements. Net cash provided by operating activities amounted to $4,569 million and $2,994 million in 2008 and 2007 respectively. The increase in net cash provided by operating activities in 2008 was primarily due to increased proﬁ t margins and new acquisitions. Cash provided by operating activities before working capital adjustments increased from $3,280 million in 2007 to $4,860 million in 2008. Working capital movement in 2008 was largely driven by new operations and increased prices for raw material inventories, WIP and ﬁ nished goods. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 102 Net cash used in investing activities totalled $3,736 million and $5,650 million in 2008 and 2007 respectively. Substantially all the cash used in investing activities related to purchases of property, plant and equipment, shares in subsidiaries and an interest in a joint venture. Net cash from (used in) ﬁ nancing activities amounted to $(127) million and $2,112 million in 2008 and 2007 respectively. In 2008 and 2007, the most signiﬁ cant credit facilities obtained by Evraz directly from capital markets and from international and Russian banks to ﬁ nance its capital requirements included: Evraz bonds On 24 April and 27 May 2008, Evraz Group S.A. issued notes for the total amount of $1,300 million due in 2013 and notes for the total amount of $700 million due in 2018. The notes due in 2013 bear semi-annual coupon at the annual rate of 8.875% and must be redeemed at their principal amount on 24 April 2013. The notes due in 2018 bear semi-annual coupon at the annual rate of 9.5% and must be redeemed at their principal amount on 24 April 2018. The proceeds from the issue of the notes were used for ﬁ nancing a portion of the cost of the acquisition of IPSCO Inc. Both Evraz Bonds 2013 and Evraz Bonds 2018 are admitted to the Ofﬁ cial List of the U.K. Listing Authority and to trading on the Regulated Market of the London Stock Exchange. VEB Facilities On 21 November 2008, Evraz Group S.A. entered into a $1,006.5 million loan agreement with Russia's State Corporation Bank for Development and Foreign Economic Affairs “Vnesheconombank” (VEB). The loan is granted in ﬁ ve tranches of $201.3 million each to partially reﬁ nance the Company’s principal installments falling due in 2008 and 2009 under the $3,214 million syndicated loan bor- rowed in November 2007. The loan is secured with pledge of 99.999993% of Zapsib’s shares and assignment of receivables under certain Zapsib and NTMK export contracts, and bears interest at 12-month LIBOR plus a margin of 5% per annum. Each tranche is repayable on the ﬁ rst anniversary of its respective disbursement date, with the ﬁ nal repayment in December 2010. On 10 December 2008, Evraz Group S.A. entered into an $800 million loan with VEB. The full facility amount was utilised on 12 December 2008. The facility is secured with pledge of 100% of shares in Evraz Inc. NA Canada, all movable and immovable property of Evraz Inc. NA Canada, as well as suretyships provided by NTMK and Zapsib, and bears interest at 12-month LIBOR plus a margin of 5% per annum. The facility is repayable in one instalment in December 2009. It was utilised to reﬁ nance the two $400 million bridge facilities arranged in June 2008 for the acquisition of the IPSCO Tubulars business from SSAB. Evraz Inc. NA On 14 August 2008, Evraz Inc. NA (formerly Evraz Oregon Steel Mills Inc.), obtained a $725 million syndicated loan. The transaction includes a $550 million ﬁ ve-year asset based revolving credit facility and a $175 million ﬁ ve-year term loan facility. The facilities bear interest at the ﬂ oating rate of LIBOR plus 2.5% p.a. and LIBOR plus 3.25% p.a. respectively and are secured with pledge of various as- sets of Evraz Inc. NA and its subsidiaries. The revolving credit facility was jointly led by RBS Greenwich Capital and GE Capital with RBS Business Capital and GE as co-collateral agents. The Term Loan was led by RBS Greenwich Capital. VTB On 27 October 2008, NTMK and Zapsib both entered into a credit facility agreement amounting to RUR10,000 million arranged by VTB for the purpose of working capital ﬁ nancing. The total credit facility is split equally between NTMK and Zapsib (RUR5,000 million each). The full facility amount was utilised on 27 October 2008 and bears interest at 16.5% p.a. Final maturity date is 27 October 2009. Major Facilities in 2007 On 11 June 2007, Evraz entered into a $200 million credit facility agreement arranged by ABN Amro and Commerzbank AG. The full facility amount was utilised on 13 June 2007, is secured with sales proceeds of Evraz Vitkovice Steel a.s., and bears interest at LIBOR plus a margin of 0.85%. The facility is repayable in 17 equal quarterly installments, with effect from June 2008. This credit re-ﬁ nances the $200 million bridge facility agreement arranged in January 2006 by the same banks for the acquisition of Evraz Vitkovice Steel. On 23 November 2007, Evraz entered into a $3,214 million credit facility agreement arranged by ABN Amro Bank N.V., Barclays Capital, The Bank of Tokyo-Mitsubishi UFJ, BNP Paribas (Suisse) SA, Calyon, Commerzbank AG, Deutsche Bank AG, ING Bank N.V., Sumitomo Mitsui Banking Corp. and UBS. The full facility amount was utilised on 6 December 2007. The facility consists of (i) Tranche A of $2,714 million secured with sales proceeds of East Metals and repayable in 17 equal quarterly installments, with effect from November 2008, and (ii) unsecured Tranche B of $500 million repayable in 12 equal quarterly installments, with effect from February 2008. Both tranches bear interest at the rate of applicable LIBOR plus a margin of 1.8%. The facility was utilised for (a) re-ﬁ nancing of the $1,800 million bridge facility borrowed in January 2007 for the acquisition of Oregon Steel, and (b) partial ﬁ nancing of the new acquisitions in the US and Ukraine. Liquidity As the table below illustrates, Evraz’s estimated liquidity, deﬁ ned as cash and cash equivalents, amounts available under credit facilities and short-term bank deposits with original maturity of more than three months, totalled approximately $2,634 million as of 31 December 2008 and approximately $1,367 million as of 31 December 2007. As of 31 December 2008, Evraz had unutilised borrowing facilities in the amount of $1,679 million, including $991 million of committed facilities and $688 million of uncommitted facilities. Committed facilities consisted of $805 million available under the term loan agreement between Evraz Group and Vnesheconombank (VEB) and also of credit facilities available for Russian, Ukrainian, North American and European operations in the amounts of $98 million, $65 million, $17 million and $6 million respectively. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT Uncommitted facilities consisted of revolving credit lines of $299 million with western banks for export trade ﬁ nancing at East Metals S.A. and also of credit facilities available for South African, Russian, European and North American operations in the amounts of $225 million, $109 million, $46 million and $9 million respectively. Evraz’s current ratio, deﬁ ned as current assets divided by current liabilities, increased from 0.85 as of 31 December 2007 to 0.96 as of 31 December 2008. The increase in the current ratio primarily resulted from increases in short-term investments and accumulated cash despite an increase in short-term loans and current portion of long-term loans in 2008. Evraz’s corporate treasury monitors the ﬁ nancial requirements of Evraz’s various subsidiaries and has a variety of instruments at its dis- posal to ensure that each subsidiary has sufﬁ cient liquidity to meet its obligations and capital requirements. 103 (US$ million) ESTIMATED LIQUIDITY Cash and cash equivalents(1) Amount available under credit facilities Short-term bank deposits Total estimated liquidity As of 31 December 2008 2007 930 1,679 25 2,634 327 1,015 25 1,367 (1) Since 31 December 2008, Evraz has used or agreed to use cash in several ways other than in the ordinary course of business. In January 2009 Evraz received a cash pay- ment from OAO TMK amounting to $508 million in relation to the transaction involving a 49% ownership interest in NS Group. In the ﬁ rst quarter of 2009, Evraz paid dividends in the amount of $56 million. Contractual Obligations and Commercial Commitments The following table sets forth the amount of Evraz’s obligations in respect of loans and borrowings as of 31 December 2008 and 31 December 2007 by period: (US$ million) As of 31 December 2008 As of 31 December 2007 Less than 1 year Total 1-2 years 2-5 years More than 5 years Less than 1 year Total 1-2 years 2-5 years More than 5 years OBLIGATIONS IN RESPECT OF BORROWINGS Short-term loans and borrowings (including current portion of long-term borrowings) Long-term loans and bor- rowings Unamortised debt issue costs(1) 3,924 6,156 (94) 3,924 0 9,986 0 0 0 2,103 2,103 - - - 1,569 3,240 1,347 4,735 (82) 6,756 - - 1,359 2,570 806 - - - (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. Subsequent to 31 December 2008, the Group signed bank loan agreements for $243 million (at the exchange rate as of 26 April 2009), including $100 million in respect of long-term borrowings. As of 31 December 2008 and 31 December 2007, Evraz possessed equipment with a carrying value of $1,131 million and $121 million respectively, pledged as collateral under loans to the Company. In addition, Evraz had pledged ﬁ nished goods with a carrying value of $648 million and $415 million as of 31 December 2008 and 31 December 2007 respectively. In addition, as of 31 December 2008, 100% of the shares of Evraz Inc. NA, Evraz Inc. NA Canada (formerly IPSCO Canada) and West Siberian Iron & Steel Plant were pledged as collateral under bank loans. These three subsidiaries represent 37% of the consolidated assets and 34% of the consolidated revenues of the Group. As of 31 December 2008 and 31 December 2007, Evraz had incurred liabilities in respect of post-employment beneﬁ ts that the Company provides to employees of certain of its subsidiaries pursuant to collective bargaining agreements of $292 million and $347 million respec- tively. These amounts represent the present value of Evraz’s deﬁ ned beneﬁ t obligation less the fair value of plan assets and adjusted for unrecognised actuarial loss and past service costs, discounted to present value. Evraz also makes deﬁ ned contributions to Russia’s state social fund at the statutory regressive rate in force, based on gross salary pay- ments. Evraz is only required to make these contributions as they fall due and the Company does not retain any legal or constructive obligation to pay future beneﬁ ts. These contributions are expensed as incurred. As of 31 December 2008, Evraz had contractual commitments for the purchase of production equipment and construction works for ap- proximately $393 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 104 Future minimum lease payments as of 31 December 2008 were as follows: (US$ million) 2009 2010-2013 2014 Total Less: amounts representing ﬁ nance charges Total As of 31 December 2008 Minimum lease payments Present value of minimum lease payments $20 41 8 69 (14) $55 $15 34 6 55 – $55 Evraz is also involved in a number of social programmes designed to support education, healthcare and the development of the social infrastructure in certain towns where the Company’s assets are located. In 2009, Evraz plans to spend approximately $80 million under these programmes. Evraz has a constructive obligation to reduce environmental pollution and contamination in accordance with an environmental protection programme. During the period 2009 to 2013, Evraz is obligated to spend approximately $213 million on the replacement of old machinery and equipment which will result in reduced pollution. Tax Contingencies The Russian government has initiated reforms of the tax system that have brought about some improvement in the tax climate. Many tax laws and related regulations have been introduced, some of which are subject to varying interpretation and inconsistent enforcement due to the fact that they are not clearly deﬁ ned. Instances of inconsistent opinions between local, regional and federal tax authorities are not unusual. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, Evraz has accrued tax liabilities based on management’s best estimates. Possible liabilities, which were identiﬁ ed 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 ﬁ nancial statements, could total up to approximately $24 million. Inﬂ ation While Evraz’s revenues depend substantially on international prices for metallurgical products, its costs are closely linked to domestic cost factors. Inﬂ ation moderated in Russia during recent years; however it reached 13.3% in 2008 compared with 11.9% in 2007. In 2007 and in the ﬁ rst three quarters of 2008, overall price trends were generally positive, with steel prices growing faster than many relevant cost factors such as raw materials, railway transportation charges, natural gas prices, electricity costs and the general consumer price index. The fourth quarter of 2008 brought a signiﬁ cant drop in prices and demand for metallurgical goods in both Russian and global markets caused by the deepening of the recession and the weakening in international trade. The table below presents changes in consumer price indices from 2004 through 2008 in countries where Evraz has production facilities. 2004 2005 2006 9.0% 9.0% 10.9% 11.7% 13.5% Russian Consumer Price Index, change in RUB(1) Ukrainian Consumer Price Index, change in UAH(1) Committee of Ukraine US Consumer Price Index, change in USD(1) Canadian Consumer Price Index, change in CAD(1) Italian Consumer Price Index, change in EUR(1) Czech Consumer Price Index, change in CZK(1) South African Consumer Price Index, change in ZAR(1) (1) Represents the change from 31 December of the prior year to 31 December of the indicated year. 5.8% 2.2% 2.5% 3.3% 3.6% 2.5% 2.0% 3.3% 2.2% 2.8% 3.4% 2.0% 1.9% 1.8% 9.1% 2.1% 2007 11.9% 2008 13.3% 2004 to 2008 71.2% Source Fedstat 12.8% 12.8% 71.7% State Statistics 4.1% 2.2% 1.8% 2.8% 9% 0.1% 2.3% 3.3% 6.3% 9.5% 14.1% Bureau of Labor Statistics 10.9% Statistics Canada 12.0% Eurostat, Istat,OECD. Stat 17.3% Czech Statistical Ofﬁ ce 35.2% Statistics South Africa The table below presents changes in the nominal exchange rates of national currencies against the US dollar from 2004 through 2008 in countries where Evraz has production facilities. 2004 2005 2006 6.1% 0.5% 9.3% (3.6%) Nominal RUB/$ exchange rate, change(1) Nominal UAH/$ exchange rate, change(1) Nominal CAD/$ exchange rate, change(1) Nominal EUR/$ exchange rate, change(1) Nominal CZK/$ exchange rate, change(1) Nominal ZAR/$ exchange rate, change(1) (1) Represents the change from 31 December of the prior year to 31 December of the indicated year. (13.4)% (10.8)% (9.4)% (9.0)% 11.6% 14.7% 18.1% 17.8% 3.2% 5.1% 0.1% 7.4% 7.8% 0% 2007 7.3% 2008 2004 to 2008 (16.5)% (0.3)% Source CBR 0% (34.4)% (30.8)% National Bank of Ukraine 17.9% (18.9)% 6.1% Bank of Canada 11.8% (5.5)% 10.2% The European Central Bank 15.5% (6.6)% 32.6% Czech National Bank 2.8% (27.1)% (28.5)% The South African Reserve Bank MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 105 Seasonality Seasonal effects have a relatively limited impact on Evraz. Nonetheless, a slowing of demand and a consequent reduction in sales vol- umes, accompanied by an increase in inventories, is typically evident in the ﬁ rst and fourth quarters of the ﬁ nancial year reﬂ ecting the general reduction in economic activity associated with the New Year holiday period in Russia and elsewhere. The Russian construction market, in particular, experiences reduced activity in the winter months and export markets generally tend to slowdown during the ﬁ rst and second quarters of the year. Quantitative and Qualitative Disclosures in respect of Market Risk Overview In the ordinary course of its business Evraz is exposed 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 in respect of any of these risks and does not currently plan to enter into such arrangements. Exchange and Interest Rate Risk Evraz’s presentation currency is the US dollar. The functional currency of Evraz’s Russian subsidiaries is the Rouble, while the functional currencies of Evraz’s subsidiaries located in other countries are the Czech Koruna in respect of Vitkovice, the Euro in respect of Palini, the Rand in respect of Highveld and the South African operations of Stratcor, the Hrivnia in respect of the Ukrainian subsidiaries, the Canadian dollar in respect of Evraz Inc. NA Canada and the US dollar in respect of other subsidiaries. The Rouble is not a fully convertible currency outside the territory of the Russian Federation. Within the Russian Federation, ofﬁ cial ex- change rates are determined daily by the Central Bank of the Russian Federation (the "CBR"). Market rates may differ from the ofﬁ cial rates but the differences are, generally, within narrow parameters monitored by the CBR. Evraz’s products are typically priced in local currencies in respect of domestic sales of Evraz’s operations and US dollars and Euros in respect of international sales. Evraz’s direct costs, including raw materials, labour and transportation, are incurred primarily in the local currencies of the subsidiaries. Other costs, such as interest expense, are incurred largely in Roubles, US dollars and Euros. The mix of Evraz’s revenues and costs is such that appreciation in real terms of the local currencies of its subsidiaries against the US dollar tends to result in an increase in Evraz’s costs relative to its revenues, while depreciation of the local currencies against the US dollar in real terms tends to result in a decrease in Evraz’s costs relative to its revenues. For example, the Rouble appreciated in real terms against the US dollar by 16.7% in 2006 and by 15.0% in 2007 and by (1.1)% in 2008 according to the CBR. However, in recent years the effect of the real appreciation of the Rouble against the US 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 local currencies against the US dollar results in a decrease in the reported US dollar value of Evraz's assets (and liabilities) denominated in local currencies while nominal appreciation of the local currencies against the US dollar results in an increase in the reported US dollar value of Evraz's assets (and liabilities) denominated in local currencies. Moreover, nominal appreciation/depreciation of the local currencies against the US dollar has a similar effect when the income statements of Evraz’s sub- sidiaries are translated into US dollars in connection with the preparation of Evraz’s consolidated ﬁ nancial statements. For example, the average exchange rate of the Rouble against the US dollar appreciated by 4.1%, 6.3% and 3.1% in nominal terms during 2006, 2007 and 2008 respectively, according to the CBR. The following table summarises Evraz’s outstanding interest bearing debt, including loans and other borrowings, by currency and interest rate method as of 31 December 2008 and 31 December 2007 (as opposed to the Obligations in respect of borrowings in “Contractual obligations and commercial commitments”, this table excludes interest payable and unamortised debt issue costs): As of 31 December 2008 As of 31 December 2007 US dollar- denomi- nated Rouble- denomi- nated Euro- denomi- nated 9,267 4,112 5,155 360 342 18 343 134 209 Denomi- nated in other cur- rencies 23 0 23 US dollar- denomi- nated Rouble- denomi- nated Euro- denomi- nated 6,177 1,404 4,773 168 51 117 308 95 213 Total 9,993 4,589 5,405 Denomi- nated in other cur- rencies 145 140 Total 6,798 1,690 5 5,108 (US$ million) Total debt, of which Fixed-rate debt Variable-rate debt A hypothetical, instantaneous and simultaneous 10% appreciation of the Rouble, Euro and the Czech Koruna against the US dollar as of 31 December 2008 would have resulted in an increase of approximately $81 million in borrowings denominated in Roubles, Euros and the Czech Korunas held as of 31 December 2008. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 106 The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held constant, of Evraz’s proﬁ t before tax. In estimating a reasonably possible change for 2007, Evraz assessed the volatility of foreign exchange rates during the three years preceeding the balance sheet date. In 2008, Evraz assessed reasonably possible changes based on the volatility of foreign exchange rates during 2008 2008 2007 Change in exchange rate Effect on PBT Change in exchange rate Effect on PBT % $ million % $ million (8.98) 8.98 (14.32) 14.32 (8.63) 8.63 (10.61) 10.61 (18.52) 18.52 (28.52) 28.52 (11.77) 11.77 (14.73) 14.73 (15.44) 15.44 (87) 87 (26) 26 34 (34) (5) 5 40 (40) 2 (2) 24 (24) (2) 2 (249) 249 (5.80) 4.20 (7.35) 7.35 (5.45) 3.25 (4.10) 4.10 (9.40) 9.40 (17.70) 13.00 – – – – – – (25) 18 (14) 14 17 (10) (3) 3 10 (10) (6) 5 – – – – – – USD/RUB EUR/USD EUR/RUB EUR/CZK USD/CZK USD/ZAR USD/UAH RUB/UAH CAD/USD Reasonably possible changes in ﬂ oating interest rates at the reporting date would have changed proﬁ t before tax (“PBT”) by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. Liabilities denominated in US dollars Decrease in LIBOR Increase in LIBOR Decrease in Prime rate Increase in Prime rate Decrease in Federal Funds Rate Increase in Federal Funds Rate Liabilities denominated in euro Decrease in EURIBOR Increase in EURIBOR Commodity Price Risk 2008 2007 Basis points Effect on PBT Basis points Effect on PBT $ million $ 24 (24) 4 (4) 1 (1) 1 $ (1) (53) 53 (106) 106 (33) 33 (30) 30 $ million $ 24 (14) – – – – 3 $ (1) (125) 75 – – – – (150) 75 Evraz’s revenue is exposed to the market risk of price ﬂ uctuations related to the sale of its steel products. The prices of the steel products sold by Evraz both within Russia and abroad are generally determined by market forces. These prices may be inﬂ uenced by factors such as supply and demand, production costs (including the costs of raw material inputs) and global and Russian economic growth. The prices of the mined products that Evraz sells to third parties are also affected by supply and demand and global and Russian economic growth. Ad- verse changes in respect of 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 ﬂ uctuations in prices for the purchase, processing and production of iron ore, coking coal, ferroalloys and other raw material inputs. Evraz’s exposure to ﬂ uctuations in the price of iron ore and, as a result of the acquisition of YuKU and Mine 12, coking coal, is limited due to its ability to obtain these products from its own production facilities. Where Evraz obtains these products from internal sources, the effect of price ﬂ uctuations is accounted for as an inter-segment transfer and eliminated on consolidation. In addition, any increase in prices for coking coal sourced from Raspadskaya is partially reﬂ ected as an increase in Evraz’s income from afﬁ liates. As Evraz increases the proportion of raw materials acquired from internal sources, the Company’s exposure to commodity price risk as- sociated with the purchase and sale of these products will decline. Evraz’s ongoing process of vertical integration is an important element in the Company’s drive to reduce its exposure to input and output commodity price risk. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. Tariff Risk MANAGEMENT REPORT 107 Evraz is also exposed to uncertainty with regard to the prices of the electricity and natural gas that it consumes in the production of steel and the mining of iron ore and coal. Prices in respect of both electricity and natural gas in Russia and Ukraine are currently below mar- ket prices in Western Europe and are regulated by the Government, thereby limiting Evraz’s exposure to ﬂ uctuations in the cost of these products. Russian Operations The Russian electricity sector is currently characterised by distinctly limited competition and regulated prices. Pricing policy is determined by the Federal Tariffs Service, a governmental agency authorised to regulate prices in respect of the power generated by regional electricity companies, power transmission, dispatch services and inter-regional trade, and is inﬂ uenced by regional energy commissions that are au- thorised to regulate prices within a speciﬁ c 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 deﬁ cits as well as industrial companies granted special access to FOREM. Evraz’s subsidiary MEF has been granted such access to FOREM. In 2007 and in 2008, Evraz’s Russian operations purchased approximately 8,913 million kWh and 8,620 million kWh of electricity, rep- resenting approximately 84% and 80% of their respective requirements, from local electricity companies, former subsidiaries of UES. The latter was the government controlled national holding company for the Russian power sector restructured and liquidated in June 2008. The Government is currently implementing a liberalisation plan for electricity pricing aimed at increasing the proportion of electricity sales made via a market based pricing system. Moreover, according to the Russian Government’s Macroeconomic Long-term Forecast, electric- ity tariffs for industrial users will reach 6.5-6.7 US cents per kWh by 2010. Evraz’s average cost of electricity in Russia was 3.8 US cents per kWh in 2007 and 4.62 US cents per kWh in 2008. Assuming a price of 6.7 US cents per kWh, Evraz’s Russian operations would have incurred additional costs of approximately $266 million and $190 million in the years ended 31 December 2007 and 2008 respectively. Further electricity price increases may occur in the future as the industry is restructured and controlled to a greater extent by the private sector. Evraz’s Russian operations also purchase signiﬁ cant amounts of natural gas, primarily for the production of electricity and heat energy at the Company’s facilities, from Gazprom’s subsidiaries. Gazprom is a state controlled company and is the dominant producer and monopoly distributor of natural gas within Russia. Domestic natural gas prices are regulated by the government and have been rising during recent years. Evraz’s average price for natural gas in Russia reached RUR1,532 per thousand cubic metres and RUR1,943 per thousand cubic metres in 2007 and 2008 respectively. Despite these recent price increases, natural gas prices in Russia remain signiﬁ cantly below west- ern European levels, a factor that helps to provide Evraz with a cost advantage over its competitors. According to the Russian Government’s Macroeconomic Long-term Forecast, domestic gas prices for industrial users will reach $96-99 per thousand cubic metres by 2010. Assuming a price of $99 per thousand cubic metres, Evraz’s Russian operations would have incurred additional costs of approximately $143 million and $60 million in 2007 and 2008 respectively. Ukrainian Operations Evraz, through the purchase of DMZ, DKHZ, Dneprokoks, Bagleykoks and Sukha Balka in 2008, has extended its operations to Ukraine where the electricity and natural gas markets are also characterised by regulated prices. Natural gas prices have been a matter of negotiation between the Russian state-owned monopoly Gazprom and the Ukrainian Government since winter 2005-2006. The latest announced indicative mid-term price level for Russian natural gas for Ukraine is $450 per thousand cubic metres, more than double current Ukrainian prices on the one hand but comparable to current price levels in Eastern European States (e.g. Czech Republic) on the other. Evraz’s Ukrainian operations purchased approximately 148 million cubic metres of natural gas at an average price of UAH1,173 or $222.5 per thousand cubic metres in 2008. Assuming a price of $450 per thousand cubic metres, Evraz’s Ukrainian operations would have incurred additional costs of approximately $34 million in 2008. Higher natural gas prices, inﬂ ation and other factors will encourage the authorities to also increase electricity prices. The estimated mid- term indicative price level for the Ukrainian electricity market of 12 US cents per kWh corresponds to inﬂ ation trends and to current price levels in Eastern European States (e.g. Czech Republic). Evraz’s Ukrainian operations purchased approximately 509 million kWh of elec- tricity at an average price of 7.7 US cents per kWh in 2008. Assuming a price of 12 US cents per kWh, Evraz’s Ukrainian operations would have incurred additional costs of approximately $22 million in 2008. Transportation Evraz is also exposed to ﬂ uctuations in transportation costs. Transportation costs inﬂ uence Evraz’s ﬁ nancial results directly as a compo- nent of raw material costs and the costs of transporting ﬁ nished products to Nakhodka Sea Port or another designated off-take location. Although Evraz’s customers in Russia generally pay the transportation costs of steel and mined products from the production site to the delivery location, the prices that Evraz receives may be adversely affected by transportation costs to the extent that Evraz must be able to reduce the prices that it can charge customers for its products in order to ensure that its products remain competitive with those of other producers that may be located closer to customers and are therefore less impacted by increases in transportation costs. In recent years, the Russian Government has indexed railway tariffs in line with inﬂ ation and Evraz expects this policy to continue in the immediate future. Consequently, Evraz does not currently expect ﬂ uctuations in railway tariffs to have a signiﬁ cant impact on margins. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. MANAGEMENT REPORT 108 Operational Outlook Evraz’s activities in all of its operating segments have been negatively affected by the global ﬁ nancial and economic crisis. In the fourth quarter of 2008, the recession affected most of the Group’s markets and Evraz experienced slower demand for its products. As a result, Evraz’s current liabilities, as of 31 December 2008, were $6,538 million (including loans and borrowings of $3,922 million with maturities in 2009) and exceeded current assets by $247 million. On the other hand, at the end of 2008, Evraz had unutilised borrowing facilities in the amount of $1,679 million and was in full compli- ance with all of its debt covenants. At the time of issue of this analysis, Evraz has reﬁ nanced $241 million of current loans and borrowings through loans with maturities falling due after 31 December 2009. The remaining current maturities are expected to be covered by free cash ﬂ ows and reﬁ nancing of current debts. Taking into consideration the current market situation and expected improvements in market conditions during 2009, management anticipates that the Group will comply with all debt covenants during 2009. Evraz sells its products to shipping, pipe-making, railway transportation, construction, oil and gas industries, all of which have reported substantially lower customer demand due to the ﬁ nancial crisis and the slowing global economy, although railway transportation has re- mained more resilient as a result of its reliance on public spending for infrastructure. Energy prices have fallen dramatically and this may reduce oil and gas exploration and development which, in turn, could impact the Group’s tubular business. The duration of the crisis and the recovery of these industries will have a signiﬁ cant impact on the Group. The worldwide ﬁ nancial crisis may result in a further reduction of the available credit facilities as well as substantially higher interest rates. The reduced cash from operations and the reduced availability of credit may increase the cost, delay the timing of, or reduce planned capital expenditures. These factors may also negatively impact the Group’s ability to make acquisitions. While stabilisation measures aimed at providing liquidity and supporting debt reﬁ nancing have been introduced by governments, there continues to be uncertainty regarding the access to capital and cost of capital for Evraz and its counterparties, which could affect the Group’s ﬁ nancial position, results of operations and business prospects. The unexpected further deterioration in the areas described above could negatively affect the Group’s results and ﬁ nancial position in a manner not currently determinable. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. MANAGEMENT REPORT 109 (This page has been left blank intentionally) ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Consolidated Financial Statements for the year ended December 31, 2008 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 111 5. Goodwill 6. Acquisitions of Minority Interests in Subsidiaries 7. Income and Expenses 8. Income Taxes 9. Property, Plant and Equipment 10. Intangible Assets Other Than Goodwill 11. Investments in Joint Ventures and Associates Corber Enterprises Limited Yuzhkuzbassugol Kazankovskaya Highveld Steel and Vanadium Corporation 12. Disposal Groups Held for Sale 13. Other Non-Current Assets 14. Inventories 15. Trade and Other Receivables 16. Related Party Disclosures 17. Other Taxes Recoverable 18. Short-term Investments 19. Cash and Cash Equivalents 20. Equity Share Capital Earnings Per Share Dividends Legal Reserve Other Movements in Equity 21. Loans and Borrowings 22. Finance Lease Liabilities 23. Employee Beneﬁ ts 24. Share-Based Payments 25. Provisions 26. Other Long-Term Liabilities 27. Trade and Other Payables 28. Other Taxes Payable 29. Financial Risk Management Objectives and Policies Credit Risk Liquidity Risk Market Risk Capital Management 30. Non-Cash Transactions 31. Commitments and Contingencies 32. Subsequent Events 141 142 144 145 147 149 150 150 152 152 154 155 157 158 158 158 160 160 161 161 161 162 162 162 162 163 164 165 169 171 171 172 172 172 172 173 175 177 177 178 179 Contents Independent Auditors’ Report Consolidated Financial Statement Consolidated Income Statement Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity 112 113 113 114 115 117 Notes to the Consolidated Financial Statements Year ended 31 December 2008 1. Corporate Information 2. Signiﬁ cant Accounting Policies 120 120 121 121 Basis of Preparation Signiﬁ cant Accounting Judgements and Estimates 122 124 Foreign Currency Transactions 124 Basis of Consolidation 125 Investments in Associates 125 Interest in a Joint Venture 125 Property, Plant and Equipment 125 Leases 126 Goodwill 126 Intangible Assets Other Than Goodwill 127 Financial Assets 127 Inventories 127 Accounts Receivable 127 Value Added Tax 127 Cash and Cash Equivalents 128 Borrowings 128 Financial Guarantee Liabilities 128 Equity 128 Provisions 128 Employee Beneﬁ ts 129 Share-based Payments 129 Revenue 129 Current Income Tax 130 Deferred Income Tax 130 133 133 134 134 136 137 137 139 139 140 Yuzhkuzbassugol Steel and Mining Businesses in Ukraine Claymont Steel IPSCO Inc. Other Acquisitions Disclosure of Other Information in Respect of Business Combinations Strategic Minerals Corporation Oregon Steel Mills Highveld Steel and Vanadium Corporation 140 3. Segment Information 4. Business Combinations West Siberian Heat and Power Plant ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 112 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Consolidated Income Statement (In millions of US dollars, except for per share information) 113 Notes 2008 2007* 2006 Year ended December 31, Revenue Sale of goods Rendering of services Cost of revenue Gross proﬁ t 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 Other operating income Other operating expenses Proﬁ t from operations Interest income Interest expense Share of proﬁ ts/(losses) of joint ventures and associates Gain/(loss) on ﬁ nancial assets and liabilities, net Gain/(loss) on disposal groups classiﬁ ed as held for sale Excess of interest in the net fair value of acquiree’s identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating gains/(losses), net Proﬁ t before tax Income tax expense Net proﬁ t Attributable to: Equity holders of the parent entity Minority interests Earnings per share: basic, for proﬁ t attributable to equity holders of the parent entity, US dollars diluted, for proﬁ t attributable to equity holders of the parent entity, US dollars 3 3 7 7 7 5, 9, 10 7 7 11 7 12 4 8 20 20 $ 19,990 390 20,380 (13,308) 7,072 (876) (938) (114) (37) (880) (471) 28 (64) 3,720 57 (655) 198 (129) (43) – (5) 3,143 (1,213) $ 1,930 $ 1,868 62 $ 1,930 $ 15.13 $ 15.07 $ 12,627 232 12,859 (7,976) 4,883 (538) (682) (82) (26) (7) (55) 14 (39) 3,468 41 (409) 88 (71) (6) 10 4 3,125 (946) $ 8,166 126 8,292 (5,163) 3,129 (243) (494) (86) (21) (20) 48 18 (33) 2,298 27 (229) 40 26 (77) 1 1 2,087 (637) $ 2,179 $ 1,450 $ 2,103 76 $ 2,179 $ 17.62 $ 17.49 $ 1,377 73 $ 1,450 $ 11.66 $ 11.58 * The amounts shown here do not correspond to the 2007 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Notes 4 and 11) and acquisition of subsidiaries from entities under common control (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 114 Consolidated Balance Sheet (In millions of US dollars) Notes 2008 2007* 2006 Year ended December 31, ASSETS Non-current assets Property, plant and equipment Intangible assets other than goodwill Goodwill Investments in joint ventures and associates Deferred income tax assets Other non-current assets Current assets Inventories Trade and other receivables Prepayments Loans receivable Receivables from related parties Income tax receivable Other taxes recoverable Short-term investments Cash and cash equivalents Assets of disposal groups classiﬁ ed as held for sale Total assets EQUITY AND LIABILITIES Equity Equity attributable to equity holders of the parent entity Issued capital Treasury shares Additional paid-in capital Revaluation surplus Legal reserve Accumulated proﬁ ts Translation difference Minority interests Non-current liabilities Long-term loans Deferred income tax liabilities Finance lease liabilities Employee beneﬁ ts Provisions 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 Income tax payable Other taxes payable Current portion of ﬁ nance lease liabilities Provisions Amounts payable under put options for shares of subsidiaries Dividends payable by the parent entity to its shareholders Dividends payable by the Group’s subsidiaries to minority shareholders 9 10 5 11 8 13 14 15 16 17 18 19 12 20 20 20 4 20 21 8 22 23 25 26 27 21 16 28 22 25 4 Liabilities directly associated with disposal groups classiﬁ ed as held for sale 12 $ 9,012 885 2,387 551 44 278 13,157 2,416 1,369 76 108 137 262 397 589 930 6,284 7 6,291 $ 10,107 806 2,145 592 22 240 13,912 1,619 1,802 196 48 60 86 351 25 327 4,514 211 4,725 $ 3,655 37 112 1,494 11 272 5,581 864 556 82 19 54 51 331 25 842 2,824 105 2,929 $ 19,448 $ 18,637 $ 8,510 $ 332 (9) 1,054 218 30 4,448 (1,344) 4,729 245 4,974 6,064 1,329 40 292 153 58 7,936 1,479 107 3,922 322 156 154 15 63 – 309 11 6,538 – 6,538 $ 320 – 286 211 29 4,108 996 5,950 406 6,356 4,653 1,690 54 347 132 55 6,931 1,242 305 2,103 1,204 76 209 15 55 6 80 16 5,311 39 5,350 $ 318 – 531 – 28 2,750 439 4,066 169 4,235 1,855 277 42 117 39 47 2,377 462 67 741 176 77 96 11 8 175 38 24 1,875 23 1,898 Total equity and liabilities $ 19,448 $ 18,637 $ 8,510 * The amounts shown here do not correspond to the 2007 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Notes 4 and 11), acquisition of subsidiaries from entities under common control (Note 4) and certain reclassiﬁ cations (Note 2). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Consolidated Cash Flow Statement (In millions of US dollars) 115 Notes 2008 2007* 2006* Year ended December 31, Cash ﬂ ows from operating activities Net proﬁ t Adjustments to reconcile net proﬁ t to net cash ﬂ ows from operating activities: Deferred income tax (beneﬁ t)/expense Depreciation, depletion and amortisation Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange (gains)/losses, net Interest income Interest expense Share of (proﬁ ts)/losses of associates and joint ventures, net (Gain)/loss on ﬁ nancial assets and liabilities, net Loss on disposal groups classiﬁ ed as held for sale Excess of interest in the net fair value of acquiree’s identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating (gains)/losses, net Bad debt expense Changes in provisions, employee beneﬁ ts and other long-term assets and liabilities Share-based payments Other 8 7 12 24 Changes in working capital: Inventories Trade and other receivables Prepayments Receivables from/payables to related parties Taxes recoverable Other assets Trade and other payables Advances from customers Taxes payable Other liabillities Net cash ﬂ ows from operating activities Cash ﬂ ows from investing activities Issuance of loans receivable to related parties Proceeds from repayment of loans issued to related parties, including interest Issuance of loans receivable Proceeds from repayment of loans receivable, including interest Purchases of subsidiaries, net of cash acquired Purchases of minority interests Purchase of interest in associates/joint venture Purchases of other investments Sale of other investments Restricted deposits at banks in respect of investing activities Short-term deposits at banks, including interest Purchases of property, plant and equipment and intangible assets Proceeds from disposal of property, plant and equipment Proceeds from sale of disposal groups classiﬁ ed as held for sale, net of transaction costs Dividends and advances in respect of future dividends received Other investing activities, net 4, 11, 13 12 $ 1,930 $ 2,179 $ 1,450 (381) 1,215 37 880 471 (57) 655 (198) 129 43 – 5 59 25 35 12 (87) 749 26 7 55 (41) 409 (88) 71 6 (10) (4) 9 (8) 5 2 (41) 303 21 20 (48) (27) 229 (40) (26) 77 (1) (1) 5 5 17 – 4,860 3,280 1,943 (605) 323 100 165 (355) (3) 238 (203) 51 (2) 4,569 (1) 32 (147) 33 (1,914) (120) – (896) 99 3 29 (1,103) 27 161 70 (9) (111) (80) (66) – 37 3 (9) 4 (74) 10 2,994 (31) 1 (94) 58 (4,755) (421) – (2) 1 (1) 24 (744) 34 223 57 – 208 (140) (16) (25) 113 (1) 96 19 (113) – 2,084 – 6 (20) 3 (113) (96) (736) – – (207) 18 (651) 10 – 212 5 Net cash ﬂ ows used in investing activities (3,736) (5,650) (1,569) * The amounts shown here do not correspond to the 2007 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Notes 4 and 11), acquisition of subsidiaries from entities under common control (Note 4) and certain reclassiﬁ cations. Continued on the next page ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 116 Consolidated Cash Flow Statement (continued) (In millions of US dollars) Notes 2008 2007* 2006* Year ended December 31, 4, 20, 24 20, 24 20 20 4 Cash ﬂ ows from ﬁ nancing activities Issue of shares, net of transaction costs of $1 million, $0 and $0, respectively Repurchase of vested share options Purchase of treasury shares Sale of treasury shares Distribution to a shareholder Proceeds from loans provided by related parties Repayment of loans provided by related parties, including interest Net proceeds/(repayment) from bank overdrafts and credit lines, including interest Proceeds from bank loans and guaranteed notes Repayment of bank loans and guaranteed notes, including interest Restricted deposits at banks in respect of ﬁ nancing activities Dividends paid by the parent entity to its shareholders Dividends paid by the Group’s subsidiaries to minority shareholders Payments under ﬁ nance leases, including interest Payments of restructured liabilities, including interest Net cash ﬂ ows from/(used in) ﬁ nancing activities Effect of foreign exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplementary cash ﬂ ow information: Cash ﬂ ows during the year: Interest paid Interest received Income taxes paid $ (1) (77) (197) 81 (68) – (21) (54) 5,657 (3,949) – (1,276) (81) (20) (121) (127) (103) 603 327 $ 930 $ (565) 44 (1,680) $ 35 (21) (8) 2 – 3 (1) 212 4,638 (1,771) 9 (916) (48) (22) – 2,112 29 (515) 842 $ 327 $ (392) 42 (1,084) $ 26 – – – – 8 – (1) 708 (684) 23 (352) (40) (19) (10) (341) 27 201 641 $ 842 $ (211) 23 (656) * The amounts shown here do not correspond to the 2007 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Notes 4 and 11), acquisition of subsidiaries from entities under common control (Note 4) and certain reclassiﬁ cations. The accompanying notes form an integral part of these consolidated ﬁ nancial statements. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 y t i t n e t n e r a p e h t d e s i l a e r n U l f o s r e d o h y t i u q e o t e b a t u b i r t t A l l a n o i t i d d A l a t o T y t i u q E y t i r o n M i s t s e r e t n i l a t o T e c n e r e f f i d n o i t a l s n a r T l d e t a u m u c c A i s n a g s t ﬁ o r p s e s s o l d n a l a g e L e v r e s e r l s u p r u s n o i t a u a v e R l n i - i d a p l a t i p a c s e r a h s y r u s a e r T d e u s s I l a t i p a c s e t o N 7 5 3 6 $ , 1 7 3 $ 6 8 9 5 $ , 4 9 9 $ 4 2 1 4 $ , – $ 9 2 $ 3 3 2 $ 6 8 2 $ – $ 0 2 3 $ ) d e t r o p e r y l s u o i v e r p s a ( 7 0 0 2 , 1 3 r e b m e c e D t A ) s r a l l o d S U f o s n o i l l i m n I ( y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C ) 0 8 ( ) 0 8 ( – 4 7 9 4 $ , 5 4 2 $ 9 2 7 4 $ , ) 4 4 3 1 ( $ , 8 4 4 4 $ , 117 . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a m r o f s e t o n g n i y n a p m o c c a e h T 0 3 9 1 , ) 1 1 4 2 ( , ) 1 8 4 ( ) 1 ( 8 5 7 ) 8 7 ( – ) 8 1 ( 5 1 2 2 – 9 6 ) 5 6 ( ) 7 9 1 ( ) 6 0 5 1 ( , 2 6 ) 8 7 ( ) 6 1 ( – – ) 2 6 ( ) 3 ( – – – – – – – – 8 5 7 ) 1 ( ) 6 1 ( 3 ) 8 1 ( 5 1 2 2 – 9 6 ) 5 6 ( ) 7 9 1 ( ) 6 0 5 1 ( , – – – – – – – – – – – – – ) 3 3 3 2 ( , ) 0 4 3 2 ( , 8 6 8 1 , ) 5 6 4 ( – ) 0 4 3 2 ( , 7 ) 0 5 1 ( ) 0 5 1 ( – – – ) 0 5 1 ( 7 0 5 1 – – – ) 8 1 4 2 ( , ) 8 7 ( ) 0 4 3 2 ( , ) 0 4 3 2 ( , 9 5 ) 0 6 ( ) 4 ( 9 3 0 2 ) 6 5 ( 2 – 6 5 3 6 , 6 0 4 0 5 9 5 , 6 9 9 0 2 ) 6 3 ( 8 0 1 4 , – – – – – 8 6 8 1 , 8 6 8 1 , – – ) 7 3 ( 3 ) 8 1 ( 5 1 2 – – – ) 1 ( ) 9 3 ( ) 5 4 1 ( ) 6 0 5 1 ( , – – – ) 0 5 1 ( 0 5 1 – – – – – – – – – – – – – – – – – – – – 9 2 – ) 2 2 ( 1 1 2 – – – – – – – – – – – – – – – – – 1 – – – – 7 – 7 – 7 – – – – – – – – – – – – – – – 6 8 2 – – – – – – – ) 1 ( 1 2 6 4 7 – – – 2 – – – – – – – – – – – – – – – – – – – – – – – – – – 0 8 8 0 1 ) 7 9 1 ( – – 0 2 3 – – – – – – – 2 1 – – – – – – – – – – – – 4 4 3 1 3 1 , 7 0 2 , 4 0 2 0 2 , 6 , 4 4 4 4 2 0 2 0 2 0 2 0 2 0 2 0 2 l o r t n o c n o m m o c r e d n u s e i t i t n e m o r f i s e i r a d s b u s i f o n o i t i s u q c A i s e u a v l l i a n o s i v o r p o t s t n e m t s u d A j ) d e t a t s e r s a ( 7 0 0 2 , 1 3 r e b m e c e D t A m o r f d e v o m e r s t e s s a s t e s s a l i l a c n a n ﬁ e a s - r o f - e b a l l i a v a n o s e s s o l t e N l i l a c n a n ﬁ e a s - r o f - e b a l l i a v a n o s e s s o l t e N t ﬁ o r p t e n n i i d e s n g o c e r y t i u q e e t a r x a t n i n o i t c u d e r m o r f g n i t l u s e r t ﬁ e n e b x a t e m o c n i d e r r e f e D y t i u q e n i i d e s n g o c e r n i i y l t c e r i d d e s n g o c e r d o i r e p e h t r o f e s n e p x e d n a e m o c n i l a t o T y t i u q e s e g n a h c e t a r e g n a h c x e f o t c e f f E i s e i r a d s b u s i g n i t s i x e n i s t s e r e t n i y t i r o n m i f o n o i t i s u q c A i s e r a h s f o e u s s i e h t f o t c e p s e r n i s t s o c n o i t c a s n a r T d o i r e p e h t r o f e s n e p x e d n a e m o c n i l a t o T l a t i p a c e r a h s f o e u s s I t ﬁ o r p t e N l s r e d o h e r a h s s t i o t y t i t n e t n e r a p e h t l y b d e r a c e d s d n e d i v i D e v r e s e r l a g e l o t t ﬁ o r p t e n f o n o i t a i r p o r p p A l r e d o h e r a h s a o t y t i l i b a i l f o e u a v l r i a f e h t n i e g n a h C s e r a h s y r u s a e r t f o e s a h c r u P s t n e m y a p d e s a b e r a h S - s n o i t p o e r a h s i f o e s c r e x E s e r a h s y r u s a e r t f o e a S l l r e d o h e r a h s a o t n o i t u b i r t s D i y t i r o n m o t i i s e i r a d s b u s i s ’ p u o r G e h t l y b d e r a c e d s d n e d i v i D l s r e d o h e r a h s e g n a h c o t e u d g n s i r a s t s e r e t n i i y t i r o n m n i i e s a e r c e D p u o r G e h t n h t i i i w p h s r e n w o n i 0 3 $ 8 1 2 $ 4 5 0 1 $ , ) 9 ( 2 3 3 $ 8 0 0 2 , 1 3 r e b m e c e D t A ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 118 ) d e u n i t n o c ( y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C l a t o T y t i u q E y t i r o n M i s t s e r e t n i l a t o T e c n e r e f f i d n o i t a l s n a r T l d e t a u m u c c A i s n a g s t ﬁ o r p s e s s o l d n a l a g e L e v r e s e r l s u p r u s n o i t a u a v e R l n i - i d a p l a t i p a c s e r a h s y r u s a e r T d e u s s I l a t i p a c s e t o N y t i t n e t n e r a p e h t d e s i l a e r n U l f o s r e d o h y t i u q e o t e b a t u b i r t t A l l a n o i t i d d A ) s r a l l o d S U f o s n o i l l i m n I ( 1 3 5 $ – $ 8 1 3 $ 6 6 5 1 1 2 7 7 7 9 7 1 2 , 6 5 9 2 , ) 0 1 ( 8 9 2 4 4 – ) 6 5 4 ( 8 4 2 ) 0 5 ( 5 6 7 ) 8 ( 6 1 – ) 8 5 9 ( 9 – 9 6 7 5 8 ) 0 1 ( 8 9 2 4 4 ) 5 ( ) 5 0 3 ( 0 7 1 – – – – – – – 7 5 5 1 1 2 8 6 7 3 0 1 2 , 1 7 8 2 , – – – 5 ) 1 5 1 ( 8 7 ) 0 5 ( 5 6 7 ) 8 ( 6 1 – ) 8 5 9 ( ) 0 4 ( ) 0 4 ( – – 7 5 5 – 7 5 5 7 5 5 – – – – – – – – – – – – – – – – – 3 0 1 2 , 3 0 1 2 , – – – 5 ) 1 5 1 ( 8 7 ) 0 5 ( 6 7 – – ) 1 ( ) 7 2 ( ) 5 7 6 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 – – 5 3 2 4 $ , 9 6 1 $ 6 6 0 4 $ , 9 3 4 $ 0 5 7 2 $ , – $ 8 2 $ – – $ 1 1 2 – 1 1 2 1 1 2 – – – – – – – – – – – – – – – – – – – – – – – – – – – 5 – – – 3 3 ) 3 8 2 ( – – – – – – – – – – – – – – 8 – – – ) 8 ( – $ 6 5 3 6 $ , 6 0 4 $ 0 5 9 5 $ , 6 9 9 $ 8 0 1 4 $ , – $ 9 2 $ 1 1 2 $ 6 8 2 $ – – – – – – – – – – – – – – – 2 – – – 4 n i t s e r e t n i g n i l l i o r t n o c a f o n o i t i s u q c a n o s u p r u s n o i t a u a v e R l l i * s e t a c o s s a * s e g n a h c e t a r e g n a h c x e f o t c e f f E 6 0 0 2 , 1 3 r e b m e c e D t A 6 4 0 1 6 , 4 4 4 4 4 2 0 2 4 2 , 0 2 0 2 0 2 0 2 i l y t i t n e t e s s a e g n s a f o n o i t i s u q c a n o g n s i r a s t s e r e t n i i i y t i r o n M i i * s e i r a d s b u s i i * s e i r a d s b u s i g n i t s i x e n i s t s e r e t n i y t i r o n m i f o n o i t i s u q c A i * r a e y e h t r o f e s n e p x e d n a e m o c n i l a t o T * t ﬁ o r p t e N i f o n o i t i s u q c a n o g n s i r a s t s e r e t n i i y t i r o n M i n i y l t c e r i d d e s n g o c e r i r a e y e h t r o f e s n e p x e d n a e m o c n i l a t o T * y t i u q e - r e n w o n i e g n a h c o t e u d g n s i r a s t s e r e t n i i y t i r o n m n i i e s a e r c e D p u o r G e h t n h t i i w p h s i t u p d e r i p x e e h t f o t c e p s e r n i s t s e r e t n i y t i r o n m i f o n o i t i n g o c e R * s n o i t p o l s r e d o h e r a h s s t i o t y t i t n e t n e r a p e h t l y b d e r a c e d s d n e d i v i D e v r e s e r l a g e l o t t ﬁ o r p t e n f o n o i t a i r p o r p p A l * r e d o h e r a h s a o t y t i l i b a i l f o e u a v l r i a f e h t n i e g n a h C s e r a h s y r u s a e r t f o e s a h c r u P s n o i t p o e r a h s i f o e s c r e x E s t n e m y a p d e s a b e r a h S - l * r e d o h e r a h s a o t n o i t u b i r t s D i y t i r o n m o t i i s e i r a d s b u s i s ’ p u o r G e h t l y b d e r a c e d s d n e d i v i D l s r e d o h e r a h s i * s e i r a d s b u s n i i s t s e r e t n i y t i r o n m i f o n o i t i n g o c e r e D 0 2 3 $ * 7 0 0 2 , 1 3 r e b m e c e D t A s t n e m e t a t s l i a c n a n ﬁ 7 0 0 2 e h t o t d n o p s e r r o c t o n o d e r e h n w o h s s t n u o m a e h T * - c a l a i t i n i l f o n o i t e p m o c e h t h t i w n o i t c e n n o c n i e d a m s t n e m t s u d a t c e ﬂ e r d n a j . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a m r o f s e t o n g n i y n a p m o c c a e h T . ) 4 e t o N ( l o r t n o c n o m m o c r e d n u s e i t i t n e m o r f i s e i r a d s b u s i i f o n o i t i s u q c a d n a ) 1 1 d n a 4 s e t o N ( g n i t n u o c MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 7 8 8 2 $ , 9 7 1 $ 8 0 7 2 $ , 2 7 $ 1 5 7 1 $ , – $ 2 2 $ – $ 7 4 5 $ – $ 6 1 3 $ l a t o T y t i u q E y t i r o n M i s t s e r e t n i l a t o T e c n e r e f f i d n o i t a l s n a r T l d e t a u m u c c A i s n a g s t ﬁ o r p s e s s o l d n a l a g e L e v r e s e r l s u p r u s n o i t a u a v e R l n i - i d a p l a t i p a c s e r a h s y r u s a e r T d e u s s I l a t i p a c s e t o N 0 9 3 0 9 3 0 5 4 1 , 0 4 8 1 , 2 4 ) 7 9 ( ) 6 0 1 ( 1 8 5 ) 1 ( 5 7 1 6 2 – ) 7 8 3 ( 3 2 3 2 3 7 6 9 2 4 ) 6 5 ( ) 2 4 ( – – – – – – – – 7 6 3 7 6 3 7 7 3 1 , 4 4 7 1 , ) 1 4 ( – ) 4 6 ( 1 8 5 ) 1 ( 5 7 1 6 2 – ) 7 8 3 ( ) 0 5 ( ) 0 5 ( – 7 6 3 – 7 6 3 7 6 3 – – – – – – – – – – – – – – 7 7 3 1 , 7 7 3 1 , ) 2 4 ( – ) 4 6 ( – – ) 1 ( 5 – – – ) 6 ( ) 0 7 2 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6 – – – – – – – – – – – – – – – – – – – – – – 1 – – 1 8 5 – – 7 1 4 2 – – ) 7 1 1 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2 – – – 0 2 , 6 4 6 0 2 0 2 0 2 4 2 4 2 , 0 2 0 2 0 2 y t i t n e t n e r a p e h t d e s i l a e r n U l f o s r e d o h y t i u q e o t e b a t u b i r t t A l l a n o i t i d d A e r u t n e v t n o i j a n h t i i i w e r u t c u r t s p h s r e n w o f o n o i t a s n a g r o e R i l s r e d o h e r a h s y t i r o n m o t i s d o i r e p r o i r p f o s e s s o l f o n o i t a c o l l A l s r e d o h e r a h s s t i o t y t i t n e t n e r a p e h t l y b d e r a c e d s d n e d i v i D e v r e s e r l a g e l o t t ﬁ o r p t e n f o n o i t a i r p o r p p A s n o i t p o e r a h s i f o e s c r e x E s t n e m y a p d e s a b e r a h S - i e t a c o s s a n a y b s t s e r e t n i y t i r o n m i f o n o i t i s u q c A i i y r a d s b u s i s ’ e r u t n e v t n o i j a n i s e r a h s f o e a S l i s e i r a d s b u s n i i s t s e r e t n i y t i r o n m i f o n o i t i n g o c e r e D i s e i r a d s b u s i i s e i r a d s b u s i g n i t s i x e n i s t s e r e t n i y t i r o n m i f o n o i t i s u q c A i r a e y e h t r o f e s n e p x e d n a e m o c n i l a t o T t ﬁ o r p t e N i f o n o i t i s u q c a n o g n s i r a s t s e r e t n i i y t i r o n M i y t i r o n m o t i i s e i r a d s b u s i s ’ p u o r G e h t l y b d e r a c e d s d n e d i v i D l s r e d o h e r a h s i d e s n g o c e r r a e y e h t r o f e s n e p x e d n a e m o c n i l a t o T y t i u q e n i y l t c e r i d ) s r a l l o d S U f o s n o i l l i m n I ( s e g n a h c e t a r e g n a h c x e f o t c e f f E 5 0 0 2 , 1 3 r e b m e c e D t A ) d e u n i t n o c ( y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C 119 . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a m r o f s e t o n g n i y n a p m o c c a e h T 5 3 2 4 $ , 9 6 1 $ 6 6 0 4 $ , 9 3 4 $ 0 5 7 2 $ , – $ 8 2 $ – $ 1 3 5 $ – $ 8 1 3 $ 6 0 0 2 , 1 3 r e b m e c e D t A ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 120 Notes to the Consolidated Financial Statements Year Ended December 31, 2008 1. Corporate Information These consolidated ﬁ nancial statements were authorised for issue in accordance with a resolution of the directors of Evraz Group S.A. on April 27, 2009. Evraz Group S.A. (“Evraz Group” or “the Company”) 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, together with its subsidiaries (the “Group”), is involved in production and distribution of steel and related products. In addi- tion, the Group produces vanadium products and owns and operates certain mining assets. The Group is one of the largest steel producers globally. Prior to August 3, 2006, Evraz Group’s parent was Crosland Global Limited (“CGL” or the “Parent”), an entity under control of Mr. Alexander Abramov. On August 3, 2006, CGL transferred all its ownership interest in Evraz Group to Lanebrook Limited (Cyprus) which became the ultimate controlling party from that date. The major subsidiaries included in the consolidated ﬁ nancial statements of Evraz Group were as follows at December 31: Subsidiary Effective ownership interest, % Business activity Location OAO Nizhny Tagil Iron & Steel Plant OAO West Siberian Iron & Steel Plant OAO Novokuznetsk Iron & Steel Plant Evraz Vitkovice Steel a.s. Highveld Steel and Vanadium Corporation* Dnepropetrovsk Iron and Steel Works Evraz Inc. NA Evraz Inc. NA Canada ZAO Yuzhkuzbassugol* OAO Kachkanarsky Mining-and-Processing Integrated Works OAO Evrazruda Sukha Balka 2008 100.00 100.00 100.00 100.00 85.12 96.03 100.00 100.00 100.00 100.00 100.00 99.42 2007 100.00 100.00 100.00 100.00 80.92 95.57 100.00 – 2006 95.00 100.00 98.75 100.00 24.90 – – – 100.00 50.00 Steel production Steel production Steel production Steel production Steel production Steel production Steel mill Steel mill Coal mining Russia Russia Russia Czech Republic South Africa Ukraine USA Canada Russia 100.00 100.00 99.25 97.11 100.00 – Ore mining and processing Russia Russia Ore mining Ukraine Ore mining In the years ended December 31, 2008, 2007 and 2006, approximately 1%, 5% and 8%, respectively, of the Group’s revenues were gener- ated in transactions with related parties. In addition, a certain part of the Group’s purchases was made in transactions with related parties, including, but not limited to, associates and a joint venture. For detailed information related to such activities refer to Note 16. At December 31, 2008, the Group employed approximately 134,000 employees, excluding joint venture’s and associates’ employees. Going Concern These consolidated ﬁ nancial statements have been prepared on a going concern basis that contemplates the realisation of assets and satisfaction of liabilities and commitments in the normal course of business. The Group’s activities in all of its operating segments have been adversely affected by uncertainty and instability in international ﬁ nancial, currency and commodity markets resulting from the global ﬁ nancial crisis. In the fourth quarter of 2008, the willingness of ﬁ nancial institutions to extend committed ﬁ nance on a long-term basis has reduced signiﬁ cantly. At the same time, the recession affected most of the Group’s markets and the Group experienced lower demand for its products. As a result, at December 31, 2008, the Group’s current liabilities were $6,538 million (including loans and borrowings of $3,922 million with maturities in 2009) and exceeded current assets by $247 million. As of the date of authorisation of issue of these ﬁ nancial statements, the Group reﬁ nanced $241 million of current loans and borrowings through loans with the maturities falling due after December 31, 2009. The remaining current maturities are expected to be covered by free cash ﬂ ows and reﬁ nancing of current debts. As of December 31, 2008, the Group had unutilised borrowings in the amount of $1,679 million, including $991 million of committed facilities and $688 million of uncommitted facilities (Note 21). * Before the purchase of controlling interests in ZAO Yuzhkuzbasugol and Highveld Steel and Vanadium Corporation in 2007 (Note 4), these entities were accounted for under the equity method (Note 11). MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 At the end of 2008, the Group was in full compliance with all of its debt covenants. Taking into consideration the current market situa- tion and expected improvement of the market conditions during 2009, management anticipates that the Group will comply with all debt covenants during 2009. If market conditions do not improve as management expects and the global economic slowdown continues, the Group may be faced with the breach of covenants in respect of certain loans and borrowings. The management monitors the compliance with the debt covenants on an ongoing basis and intends to react to potential non-compliance threat pre-emptively. 121 2. Signiﬁ cant Accounting Policies Basis of Preparation The consolidated ﬁ nancial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated ﬁ nancial statements have been prepared under historical cost convention, except as disclosed in the accounting policies below. Exceptions include, but are not limited to, property, plant and equipment at the date of transition to IFRS accounted for at deemed cost, available for sale investments measured at fair value, assets classiﬁ ed as held for sale measured at the lower of their carrying amount or fair value less costs to sell and post-employment beneﬁ ts measured at present value. Controlling Interests in Subsidiaries Transferred to the Group by Entities under Common Control In April 2008, the Group acquired certain steel, coking coal producing and mining enterprises located in Ukraine, from Lanebrook Limited. The Group applied the pooling of interests method with respect to this acquisition and presented its consolidated ﬁ nancial statements as if the transfer of controlling interests in the subsidiaries had occurred from the date of acquisition of the subsidiaries by the transferring entity, which was December 11, 2007 (Note 4). As a result, the Group has re-presented its ﬁ nancial position at December 31, 2007 and results for the year then ended. Completion of Initial Accounting In 2008, the Group ﬁ nalised its purchase price allocation for the acquisition of ownership interests in Yuzhkuzbassugol and Highveld Steel and Vanadium Corporation Limited. As a result, the Group recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities of these entities at the dates of acquisition and restated consolidated ﬁ nancial statements as of December 31, 2007 and for the year then ended (Note 4). In addition, the consolidated balance sheet at December 31, 2007 as presented in the interim consolidated ﬁ nancial statements for the six-month period ended June 30, 2008 was adjusted in respect of the acquisition of the Ukrainian businesses, for which the initial ac- counting was completed. Changes in Accounting Policies The accounting policies applied are consistent with those of the previous ﬁ nancial year except that the Group has adopted those new/revised standards mandatory for ﬁ nancial years beginning on or after January 1, 2008. In addition, certain standards have been early adopted by the Group. The changes in accounting policies result from adoption of the following new or revised standards and interpretations: The Group has early adopted the revised IAS 23 “Borrowing Costs” as of January 1, 2008. The revised standard requires that all borrow- ing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalised. In accordance with the transitional requirements of this standard, this has been adopted as a prospective change. Therefore, borrowing costs have been capitalised on qualifying assets with a commencement date on or after January 1, 2008. No changes have been made for borrowing costs incurred prior to this date. During 2008, borrowing costs in the amount of $18 million have been capitalised. IFRIC 14 “IAS 19 – The Limit on a Deﬁ ned Beneﬁ t Asset, Minimum Funding Requirements and their Interaction” (effective from January 1, 2008) provides guidance on how to assess the limit on the amount of surplus in a deﬁ ned beneﬁ t scheme that can be recognised as an asset under IAS 19 “Employee Beneﬁ ts”. This Interpretation had no impact on the ﬁ nancial position or performance of the Group. Standards Issued But Not Yet Effective The Group has not applied the following standards and IFRIC Interpretations that have been issued but are not yet effective: IFRS 8 “Operating Segments” (effective from January 1, 2009); IFRS 3 (revised) “Business Combinations” (effective from July 1, 2009); IAS 27 (revised) “Consolidated Financial Statements” (effective from July 1, 2009); Amendments to IFRS 2 “Share-based Payments” – Vesting Conditions and Cancellation (effective from January 1, 2009); IAS 1 (revised) “Presentation of Financial Statements” (effective from January 1, 2009); Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures” – Re- classiﬁ cation of Financial Assets (effective for ﬁ nancial years beginning on or after July 1, 2008); Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” – Eligible Hedged Items (effective from July 1, 2009); Amendments to IAS 32 “Financial Instruments: Presentation” and IAS 1 (revised) “Presentation of Financial Statements” – Puttable instruments and obligations arising on liquidation (effective from January 1, 2009); Amendments to IFRS 1 “First-time Adoption of Internatioanl Financial Reporting Standards” and IAS 27 “Consolidated Financial State- ments” – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (effective from January 1, 2009); IFRIC 13 “Customer Loyalty Programmes” (effective for ﬁ nancial years beginning on or after July 1, 2008); IFRIC 16 “Hedges of a Net Investment in a Foreign Operation” (effective for ﬁ nancial years beginning on or after October 1, 2008); ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 122 IFRIC 17 “Distributions of Non-Cash Assets to Owners” (effective from July 1, 2009); IFRIC 18 “Transfer of Assets from Customers” (effective from July 1, 2009); Notes to the Consolidated Financial Statements (continued) Signiﬁ cant Accounting Policies (continued) Basis of Preparation (continued) Changes in Accounting Policies (continued) Standards Issued But Not Yet Effective (continued) Amendments to IFRS 7 “Improving Disclosures about Financial Instruments” (effective from January 1, 2009); Amendments to standards following the 2007 “improvement to IFRSs” project. The Group expects that the adoption of the pronouncements listed above will not have a signiﬁ cant impact on the Group’s results of opera- tions and ﬁ nancial position in the period of initial application. Signiﬁ cant Accounting Judgements and Estimates Accounting Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimates, which have the most signiﬁ cant effect on the amounts recognised in the consolidated ﬁ nancial statements: The Group determined that the sale of Nerungriugol does not constitute a discontinued operation (Note 12). The Group determined that it obtained an access to the economic beneﬁ ts associated with potential voting rights in respect of 54.1% shares of Highveld Steel and Vanadium Corporation on February 26, 2007 (Note 11). The Group determined that a 49% ownership interest in NS Group does not represent an investment in an associate (Note 4). The Group determined that the probability of Delong put option being exercised is remote and no provision for onerous contract should be booked for that reason (Note 13). Estimation Uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a sig- niﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. Impairment of Property, Plant and Equipment The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cashgenerat- ing unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inﬂ ows that are largely independent of those from other assets or group of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessment of the time value of money and the risks speciﬁ c to the assets. In 2008, 2007 and 2006, the Group recognised an impairment loss of $117 million, $7 million and $20 million, respectively (Note 9). The determination of impairments of property, plant and equipment involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, increased cost of capital, changes in the future availability of ﬁ nancing, technological obsolescence, discontinuance of service, current replacement costs and other changes in circumstances that indicate impairment exists. The determination of the recoverable amount of a cash-generating unit involves the use of estimates by management. Methods used to determine the value in use include discounted cash ﬂ ow-based methods, which require the Group to make an estimate of the expected future cash ﬂ ows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash ﬂ ows. These estimates, including the methodologies used, may have a material impact on the fair value and, ultimately, the amount of any impairment. Useful Lives of Items of Property, Plant and Equipment The Group assesses the remaining useful lives of items of property, plant and equipment at least at each ﬁ nancial year-end and, if ex- pectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period. In 2008, the change in estimates of useful lives of property, plant and equipment resulted in an additional depreciation expense of ap- proximately $22 million. No such changes took place in 2006 and 2007. Fair Values of Assets and Liabilities Acquired in Business Combinations The Group is required to recognise separately, at the acquisition date, the identiﬁ able assets, liabilities and contingent liabilities acquired or assumed in a business combination at their fair values, which involves estimates. Such estimates are based on valuation techniques which require considerable judgement in forecasting future cash ﬂ ows and developing other assumptions. Impairment of Goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash- generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash ﬂ ows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash ﬂ ows. The carrying amount of goodwill at December 31, 2008, 2007 and 2006 was $2,387 million, $2,145 million and $112 million, respec- tively. More details are provided in Note 5. In 2008, the Group recognised an impairment loss in respect of goodwill in the amount of $756 million (Note 5). MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 123 Mineral Reserves Mineral reserves are a material factor in the Group’s computation of depreciation, depletion and amortisation charge. The Group esti- mates its mineral reserves in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Re- serves (“JORC Code”). Estimation of reserves in accordance with JORC Code involves some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires use of subjective judgement and development of assumptions. Site Restoration Provisions The Group reviews site restoration provisions at each balance sheet date and adjusts them to reﬂ ect the current best estimate in accor- dance with IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities”. The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the balance sheet date based on the requirements of the current legislation of the country where the respective operating assets are located. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgement is required in forecasting future site restoration costs. Future events that may affect the amount required to settle an obligation are reﬂ ected in the amount of a provision when there is sufﬁ cient objective evidence that they will occur. Post-employment Beneﬁ ts The Group uses actuarial valuation method for measurement of the present value of post-employment beneﬁ t obligations and related cur- rent service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for beneﬁ ts (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as ﬁ nancial assumptions (discount rate, future salary and beneﬁ t levels, expected rate of return on plan assets, etc.). In addition, post-employment beneﬁ t obligations were calculated taking into consideration that certain of the Group’s subsidiaries plan to discontinue to pay lump-sum amounts at retirement date after 2008-2009 (Note 23). Allowances The Group makes allowances for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the cur- rent overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or speciﬁ c customer conditions may require adjustments to the allow- ance for doubtful accounts recorded in the consolidated ﬁ nancial statements. As of December 31, 2008, 2007 and 2006, allowances for doubtful accounts in respect of trade and other receivables have been made in the amount of $89 million, $79 million and $59 million, respectively (Notes 15 and 16). The Group makes an allowance for obsolete and slow-moving raw materials and spare parts. As of December 31, 2008, 2007 and 2006, the allowance for the obsolete and slowmoving items was $71 million, $12 million and $13 million, respectively (Note 14). In addition, certain ﬁ nished goods of the Group are carried at net realisable value. Estimates of net realisable value of ﬁ nished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration ﬂ uctuations of price or cost directly relating to events occurring subsequent to the balance sheet date to the extent that such events conﬁ rm conditions existing at the end of the period. Litigations The Group exercises judgment in measuring and recognising provisions and the exposure to contingent liabilities related to pending liti- gations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the ﬁ nal settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the support of outside consultants. Revisions to the estimates may signiﬁ cantly affect future operating results. More details are provided in Note 31. Current Taxes Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations and changes occurring frequently. Fur- ther, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group’s entities may not coin- cide with that of management. As a result, tax authorities may challenge transactions and the Group’s entities may be assessed additional taxes, penalties and interest, which can be signiﬁ cant. In Russia and Ukraine the periods remain open to review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. More details are provided in Note 31. Deferred Income Tax Assets Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufﬁ cient taxable proﬁ t 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 expected performance. Various factors are considered to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the ﬁ nancial position, results of operations and cash ﬂ ows may be negatively affected. In the event that the assessment of future utilisation of deferred tax assets must be reduced, this reduction will be recognised in the income statement. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 124 Notes to the Consolidated Financial Statements (continued) Signiﬁ cant Accounting Policies (continued) 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 ﬁ nancial statements. The functional currencies of the Group’s subsidiaries are the Russian rouble, US dollar, euro, Czech koruna, South African rand, Canadian dollar and Ukrainian hryvnia. As at the reporting date, the assets and liabilities of the subsidiaries with the functional currency other than the US dollar, 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 exchange rates that approximate the exchange rates at the dates of the transactions. The exchange dif- ferences arising on the translation are taken directly to a separate component of equity. On disposal of a subsidiary with the functional currency other than the US dollar, the deferred cumulative amount recognised in equity relating to that particular subsidiary is recognised in the income statement. Transactions in foreign currencies in each subsidiary of the Group are initially recorded in the functional currency at the rate ruling at the date of the transaction. Non-monetary items measured 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 func- tional currency rate of exchange ruling at the balance sheet date. All resulting differences are taken to the income statement. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabili- ties arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate. 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 transferred. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency 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. The initial accounting for a business combination involves identifying and determining the fair values to be assigned to the acquiree’s iden- tiﬁ able assets, liabilities and contingent liabilities and the cost of the combination. If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identiﬁ able 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. Minority interest is that portion of the proﬁ t or loss and net assets of subsidiaries attributable to equity interests that are not owned, di- rectly 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 was before March 31, 2004) or the fair values (for business combinations for which agreement date was on or after March 31, 2004) of the identiﬁ able 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 interests 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 subsidiary. Any additional losses are allocated to the Group unless there is a binding obligation of the minority to fund the losses. For the identiﬁ able assets, liabilities and contingent liabilities initially accounted for at provisional values, the carrying amount of identiﬁ - able 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 identiﬁ able assets, liabilities and contingent liabilities 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 identiﬁ able 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. Increases in Ownership Interests in Subsidiaries 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 proﬁ ts, if negative, in the consolidated ﬁ nancial statements. Purchases of Controlling Interests in Subsidiaries from Entities under Common Control Purchases of controlling interests in subsidiaries from entities under common control are accounted for using the pooling of interests method. The assets and liabilities of the subsidiary transferred under common control are recorded in these ﬁ nancial statements at the historical cost of the controlling entity (the “Predecessor”). Related goodwill inherent in the Predecessor's original acquisition is also recorded in the ﬁ nancial statements. Any difference between the total book value of net assets, including the Predecessor's goodwill, and the consider- ation paid is accounted for in the consolidated ﬁ nancial statements as an adjustment to the shareholders' equity. These ﬁ nancial statements, including corresponding ﬁ gures, are presented as if a subsidiary had been acquired by the Group on the date it was originally acquired by the Predecessor. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Put Options Over Minority Interests The Group derecognises minority interests if minority shareholders have a put option over their holdings. The difference between the amount of the liability recognised in the balance sheet over the carrying value of the derecognised minority interests is charged to ac- cumulated proﬁ ts. 125 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 signiﬁ - cant inﬂ uence, but which it does not control or jointly control. Investments in associates are accounted for under the equity method of accounting and are initially recognised at cost including goodwill. Subsequent changes in the carrying value reﬂ ect the post acquisition changes in the Group’s share of net assets of the associate and goodwill impairment charges, if any. The Group’s share of its associates’ proﬁ ts or losses is recognised in the income statement and its share of movements in reserves is recognised in equity. However, when the Group’s share of losses in an associate 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 associ- ates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Interest in a Joint Venture 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 venture. The income statement reﬂ ects the Group's share of the results of operations of the joint venture. Property, Plant and Equipment The Group’s property, plant and equipment, except for the items acquired prior to January 1, 2002, are stated at purchase or construc- tion cost, excluding the costs of day-today servicing, less accumulated depreciation and any impairment in value. Such cost includes the cost of replacing part of plant and equipment when that cost is incurred and recognition criteria are met. The items of property, plant and equipment acquired prior to January 1, 2002 were accounted for at deemed cost being their fair value at January 1, 2002, which is the date of the Group’s transition to IFRS. The Group’s property, plant and equipment include mining assets, which consist of mineral reserves, mine development and construction costs and capitalised site restoration costs. Mineral reserves represent tangible assets acquired in business combinations. Mine develop- ment and construction costs represent expenditures incurred in developing access to mineral reserves and preparations for commercial production, including sinking shafts and underground drifts, roads, infrastructure, buildings, machinery and equipment. At each balance sheet date management makes an assessment to determine whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is the higher of an asset’s fair value less cost to sell and its value in use. The carrying amount is reduced to the recoverable amount, and the difference is recognised as an expense (impairment loss) in the income statement. An impairment loss recognised for an asset in previous years is reversed if there has been a change in the estimates used to determine the asset’s recoverable amount. Land is not depreciated. Depreciation of property, plant and equipment, except for mining assets, is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of items of property, plant and equipment and methods of their depreciation are reviewed, and adjusted as appropriate, at each ﬁ scal year-end. The table below presents the useful lives of items of property, plant and equipment. Useful lives (years) Weighted average remaining useful life (years) Buildings and constructions Machinery and equipment Transport and motor vehicles Other assets 15-60 4-45 7-20 3-15 21 11 12 6 The Group determines the depreciation charge separately for each signiﬁ cant part of an item of property, plant and equipment. Depletion of mining assets including capitalised site restoration costs is calculated using the units-of-production method based upon proved and probable mineral reserves. Maintenance costs relating to items of property, plant and equipment are expensed as incurred. Major renewals and improvements are capitalised, and the replaced assets are derecognised. The Group has the title to certain non-production and social assets, primarily buildings and facilities of social infrastructure, which are carried at their recoverable amount of zero. The costs to maintain such assets are expensed as incurred. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulﬁ llment of the arrangement is dependent on the use of a speciﬁ c asset or assets or the arrangement conveys a right to use the asset. Finance leases, which transfer to the Group substantially all the risks and beneﬁ ts incidental to ownership of the leased item, are capita- lised from the commencement of the lease term 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 ﬁ nance 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. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Signiﬁ cant Accounting Policies (continued) Leases (continued) 126 The depreciation policy for depreciable leased assets is consistent with that for depreciable assets, which are owned. If there is no reason- able 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 beneﬁ ts of ownership of the asset are classiﬁ ed as operating leases. Operat- ing lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Goodwill 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 sub- sidiary or associate at the date of acquisition. Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an acquisition of an associate is included in the carrying amount of the investments in associates. Subsequent to initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is reviewed for impairment annually or more frequently, if events or changes in circumstances indicate that the carrying amount may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit or the group of cash generating units, 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. An impairment loss recognised for goodwill is not reversed in a subsequent period. 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. Sometimes the fair value of the Group’s share of the net assets acquired in a business combination exceeds the cost of acquisition. Such excess is recognised in the consolidated income statement. Intangible Assets Other Than Goodwill Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumu- lated amortisation and any accumulated impairment losses. Expenditures on internally generated intangible assets, excluding capitalised development costs, are expensed as incurred. The useful lives of intangible assets are assessed to be either ﬁ nite or indeﬁ nite. Intangible assets with ﬁ nite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a ﬁ nite life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic beneﬁ ts embodied in the asset are treated as changes in accounting estimates. Intangible assets with indeﬁ nite useful lives are not amortised, they are tested for impairment annually either individually or at the cash generating unit level. The table below presents the useful lives of intangible assets. Useful lives (years) Weighted average remaining useful life (years) Customer relationships Trade names and trademarks Water rights and environmental permits with deﬁ nite lives Patented and unpatented technology 5 5 5 1-15 Contract terms Other 1-49 5-10 11 4 3 3 30 7 Certain water rights and environmental permits are considered to have indeﬁ nite lives as the management believes that these rights will continue indeﬁ nitely. The most part of the Group’s intangible assets represents customer relationships arising on business combinations (Note 10). Emission Rights One of the Group’s subsidiaries participates in the programme for emission reduction established by Kyoto protocol. Emission rights (allow- ances) for each compliance period (one year) are issued at the beginning of year, actual emissions are veriﬁ ed after the end of year. Allowances, whether issued by government or purchased, are accounted for as intangible assets in accordance with IAS 38 “Intangible Assets”. Allowances that are issued for less than fair value are measured initially at their fair value. When allowances are issued for less than fair value, the difference between the amount paid and fair value is recognised as a government grant. Initially the grant is recognised as deferred income in the balance sheet and subsequently recognised as income on a systematic basis over the compliance period for which the allowances were issued, regardless of whether the allowances are held or sold. As emissions are made, a liability is recognised for the obligation to deliver allowances equal to emissions that have been made. This li- ability is a provision that is within the scope of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” and it is measured at the best estimate of the expenditure required to settle the present obligation at the balance sheet date being the present market price of the number of allowances required to cover emissions made up to the balance sheet date. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 127 Financial Assets The Group classiﬁ ed its investments into the following categories: ﬁ nancial assets at fair value through proﬁ t or loss; loans and receiv- ables; held-to-maturity and available-for-sale. When investments are recognised initially, they are measured at fair value plus, in the case of investments not at fair value through proﬁ t or loss, directly attributable transaction costs. The Group determines the classiﬁ cation of its investments after initial recognition. Investments that are acquired principally for the purpose of generating a proﬁ t from shortterm ﬂ uctuations in price are classiﬁ ed as held for trading and included in the category “ﬁ nancial assets at fair value through proﬁ t or loss”. Investments which are included in this category are subsequently carried at fair value; gains or losses on such investments are recognised in income. Loans and receivables are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Non-derivative ﬁ nancial assets with ﬁ xed or determinable payments and ﬁ xed maturity that the management has the positive intent and ability to hold to maturity are classiﬁ ed as held-to-maturity. Held-to-maturity investments are carried at amortised cost using the effective yield method. Investments intended to be held for an indeﬁ nite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classiﬁ ed as available-for-sale; these are included in non-current assets unless management has the express intention of hold- ing 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 determines the appropriate classiﬁ cation of its investments at the time of the purchase and re-evaluates such designation on a regular basis. After initial recognition available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised 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. Reversals of impairment losses in respect of equity instruments are not recognised in the income statement. Impairment losses in respect of debt instruments are reversed through proﬁ t or loss if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the income statement. For investments that are actively traded in organised ﬁ nancial 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 active market, fair value is de- termined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of another instrument, which is substantially the same, discounted cash ﬂ ow analysis or other valuation models. All purchases and sales of ﬁ nancial assets under contracts to purchase or sell ﬁ nancial assets that require delivery of the asset within the time frame generally established by regulation or convention in the market place are recognised on the settlement date i.e. the date the asset is delivered by/to the counterparty. Inventories Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis and includes expenditure incurred in acquiring or producing inventories and bringing them to their existing location and condition. The cost of ﬁ nished 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 estimated costs of completion and estimated costs necessary to make the sale. Accounts Receivable Accounts receivable, which generally are short term, are recognised and carried at the 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 identiﬁ ed. The Group establishes an allowance for impairment of accounts receivable that represents its estimate of incurred losses. The main com- ponents of this allowance are a speciﬁ c loss component that relates to individually signiﬁ cant exposures, and a collective loss component established for groups of similar receivables in respect of losses that have been incurred but not yet identiﬁ ed. The collective loss allow- ance is determined based on historical data of payment statistics for similar ﬁ nancial assets. Value Added Tax The tax authorities permit the settlement of sales and purchases value added tax (“VAT”) on a net basis. The Group’s subsidiaries located in Russia apply accrual method for VAT recognition, under which VAT becomes payable upon invoicing and delivery of goods or rendering services as well upon receipt of prepayments from customers. VAT on purchases, even not settled at the balance sheet date, is deducted from the amount of VAT payable. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. 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. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 128 Notes to the Consolidated Financial Statements (continued) Signiﬁ cant Accounting Policies (continued) Borrowings Borrowings are initially recognised at the fair value of consideration received, net of directly attributable transaction costs. After initial rec- ognition borrowings are measured at amortised cost using the effective interest rate method; any difference between the amount initially recognised and the redemption amount is recognised as interest expense over the period of the borrowings. Prior to 2008, borrowing costs were expensed as incurred. Since January 1, 2008 borrowing costs relating to qualifying assets are capita- lised (Note 2, Changes in Accounting Policies). Financial Guarantee Liabilities Financial guarantee liabilities issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the speciﬁ ed debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issue of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the balance sheet date and the amount initially recognised. Equity Share Capital Ordinary shares are classiﬁ ed as equity. External costs directly attributable to the issue of new shares are shown as a deduction in equity from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital. Treasury Shares Own equity instruments which are acquired by the Group (treasury shares) are deducted from equity. No gain or loss is recognised in income statement on the purchase, sale, issue or cancellation of the treasury shares. 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 bal- ance sheet date. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the ﬁ nancial statements are authorised for issue. Provisions 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 outﬂ ow of resources embodying economic beneﬁ ts 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 reimburse- ment 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 ﬂ ows at a pre-tax rate that reﬂ ects current market assessments of the time value of money and, where appropriate, the risks speciﬁ c 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. Employee Beneﬁ ts Social and Pension Contributions Deﬁ ned contributions are made by the Group to the Russian and Ukrainian state pension, social insurance, medical insurance and unem- ployment funds at the statutory rates in force (approximately 23%), based on gross salary payments. The Group has no legal or construc- tive obligation to pay further contributions in respect of those beneﬁ ts. Its only obligation is to pay contributions as they fall due. These contributions are expensed as incurred. Employee Beneﬁ ts The Group companies provide pensions and other beneﬁ ts to their employees. The entitlement to these beneﬁ ts is usually conditional on the completion of a minimum service period. Certain beneﬁ t plans require the employee to remain in service up to retirement age. Other employee beneﬁ ts consist of various compensations and nonmonetary beneﬁ ts. The amount of the beneﬁ ts is stipulated in the collective bargaining agreements and/or in the plan documents. The liability recognised in the balance sheet in respect of post-employment beneﬁ ts is the present value of the deﬁ ned beneﬁ t 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 deﬁ ned beneﬁ t obligation is calculated annually using the projected unit credit method. The present value of the beneﬁ ts is determined by discounting the estimated future cash outﬂ ows using interest rates of high-quality government bonds that are denominated in the currency in which the beneﬁ ts 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 deﬁ ned beneﬁ t obligation and the fair value of plan assets. The excess of cumulative actuarial gains or losses over the 10% of the higher of deﬁ ned beneﬁ t obligation and the fair value of plan assets are recognised over the expected average remaining working lives of the employees participating in the plan. The past service cost is recognised as an expense on a straight line basis over the average period until the beneﬁ ts become vested. If the beneﬁ ts are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognised immediately. The deﬁ ned beneﬁ t asset or liability comprises the present value of the deﬁ ned beneﬁ t obligation less past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. The Group includes expected return on plan assets in interest expense caption of the consolidated income statement. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Other Costs The Group incurs employee costs related to the provision of beneﬁ ts such as health services, kindergartens and other services. These amounts principally represent an implicit cost of employment and, accordingly, have been charged to cost of sales. 129 Share-based Payments In 2005 and 2006, the Group adopted share option plans, under which certain directors, senior executives and employees of the Group receive remuneration in the form of sharebased payment transactions, whereby they render services as consideration for equity instru- ments (“equity-settled transactions”). The cost of equity-settled transactions with non-executive directors and employees is measured by reference to the fair value of options at the date on which they are granted. The fair value is determined using the Black-Scholes-Merton model, further details of which are given in Note 24. In valuing equity-settled transactions, no account is taken of any conditions, other than market conditions. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity (additional paid-in capital), over the period in which service conditions are fulﬁ lled, ending on the date on which the relevant persons become fully entitled to the award (“the vesting date”). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reﬂ ects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest. Once a share-settled transaction has vested no further accounting entries are made to reverse the cost already charged, even if the instruments that are the subject of the transaction are subsequently forfeited or, in the case of options, are not exercised. In this case, the Group makes a transfer between different components of equity. Where the terms of an equity-settled award are modiﬁ ed, as a minimum an expense is recognised as if the terms had not been modiﬁ ed. In addition, an expense is recognised for any modiﬁ cation, which increases the total fair value of the share-based payment arrangement, or is otherwise beneﬁ cial to the employee as measured at the date of modiﬁ cation. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modiﬁ cation of the original award, as described in the previous paragraph. Cash-settled share-based payment transactions represent transactions in which the Group acquires goods or services by incurring a li- ability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of the Group's shares or other equity instruments. The extended portion of the options under Plan 2005 (Note 24) can be settled in cash. The cost of cash-settled transactions is measured initially at fair value at the grant date using the Black-Scholes-Merton model. This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is remeasured to fair value at each balance sheet date up to and including the settlement date with changes in fair value recognised in the income statement. The dilutive effect of outstanding options is reﬂ ected as additional share dilution in the computation of earnings per share (Note 20). Revenue Revenue is recognised to the extent that it is probable that the economic beneﬁ ts will ﬂ ow to the Group and the revenue can be reliably measured. When goods are sold or services are rendered in exchange for dissimilar goods or services, the revenue 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. The following speciﬁ c recognition criteria must also be met before revenue is recognised: Sale of Goods Revenue is recognised when the signiﬁ cant risks and rewards of ownership of the goods have passed to the buyer and the amount of rev- enue can be measured reliably. The moment of transfer of the risks and rewards of ownership is determined by the contract terms. Rendering of Services The Group’s revenues from rendering of services include electricity, transportation, port and other services. Revenue is recognised when services are rendered. Interest Interest is recognised using the effective interest method. Dividends Revenue is recognised when the shareholders’ right to receive the payment is established. Rental Income Rental income is accounted for on a straight-line basis over the lease term on ongoing leases. Current Income Tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Signiﬁ cant Accounting Policies (continued) 130 Deferred Income Tax 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 ﬁ nancial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or 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 proﬁ t nor taxable proﬁ t or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable proﬁ t will be available against which the deductible tem- porary 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 enacted at the balance sheet date. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 3. Segment Information The Group’s primary reporting format is business segments and its secondary format is geographical segments. The Group’s major business segments are steel production and mining. Steel production segment includes production of steel and related products at eleven steel mills. Mining segment includes iron ore and coal mining and enrichment. Other operations include energy generat- ing companies, sea ports, shipping and railway transportation companies. In 2008, the Group decided to disclose vanadium operations as a business segment which includes extraction of vanadium ore and pro- duction of vanadium products. Vanadium slag arising in steel-making process was also allocated to vanadium segment. The vanadium segment does not meet the criteria of a reportable segment under IFRS. Despite this fact, management has designated the vanadium segment as a reportable segment based on the future plans to develop this business segment. In addition, the Group changed the presentation of certain general and administrative expenses from other operations to unallocated expenses. As a result, the Group represented segment information for 2007 and 2006. In 2006 – 2008, inter-segment operations were made at prevailing market prices at the dates of transactions. The following tables present revenue and proﬁ t information and certain asset and liability information regarding business segments for the years ended December 31, 2008, 2007, and 2006. US$ million Revenue Sales to external customers Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t from operations Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t Assets and liabilities Segment assets Investments in joint ventures and associates Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Year ended December 31, 2008 Steel production Mining Vanadium products Other operations Eliminations Total $ 17,623 302 $ 1,290 2,344 17,925 3,634 $ 1,201 5 1,206 $ 266 756 1,022 $ – (3,407) (3,407) $ 20,380 – 20,380 $ 2,843 $ 967 $ 170 $ 83 $ 20 $ 4,083 – 198 – – – $ 12,791 10 $ 3,684 541 $ 478 – $ 547 – $ 1,881 $ 460 $ 101 $ 70 Other segment information Additions to property, plant and equipment and intangible assets Property, plant and equipment and intangible assets acquired in business combinations Depreciation, depletion and amortisation Impairment of assets $ 761 $ 415 1,289 (798) (821) – (380) (56) $ 9 – (43) – $ 30 – (24) (3) (363) $ 3,720 198 (775) (1,213) $ 1,930 $ 17,500 551 1,397 $ 19,448 $ 2,512 11,962 $ 14,474 $ 1,215 1,289 (1,245) (880) MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Year ended December 31, 2007 Steel production Mining Vanadium products Other operations Eliminations Total 131 $ 11,743 165 11,908 $ 371 1,532 1,903 $ 583 – 583 $ 162 621 783 $ – (2,318) (2,318) $ 12,859 – 12,859 $ 3,036 $ 444 $ 45 $ 87 $ 2 $ 3,614 US$ million Revenue Sales to external customers Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t from operations US$ million Revenue Sales to external customers Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t from operations Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t Assets and liabilities Segment assets Investments in joint ventures and associates Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 20 68 – – $ 11,957 4 $ 4,473 588 $ 469 – $ 692 – $ 1,846 $ 421 $ 116 $ 41 Other segment information Additions to property, plant and equipment and intangible assets Property, plant and equipment and intangible assets acquired in business combinations Depreciation, depletion and amortisation Impairment of assets $ 460 $ 192 3,339 (478) (4) 3,175 (213) (2) $ 7 – (30) – $ 131 306 (36) (1) Year ended December 31, 2006 Steel production Mining Vanadium products Other operations Eliminations Total $ 7,938 76 8,014 $ 121 1,026 1,147 $ 147 – 147 $ 86 518 604 $ – (1,620) (1,620) $ 8,292 – 8,292 $ 1,964 $ 351 $ (2) $ 76 $ (42) $ 2,347 Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t Assets and liabilities Segment assets Investments in joint ventures and associates Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 17 23 – – $ 4,585 233 $ 1,043 1,261 $ 268 – $ 255 – $ 683 $ 169 $ 78 $ 35 Other segment information Additions to property, plant and equipment and intangible assets Property, plant and equipment and intangible assets acquired in business combinations Depreciation, depletion and amortisation Impairment of assets $ 509 $ 133 107 (221) (19) 3 (63) (1) $ – – (7) – $ 29 40 (15) – ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. (146) $ 3,468 88 (431) (946) $ 2,179 $ 17,591 592 454 $ 18,673 $ 2,424 9,857 $ 12,281 $ 790 6,820 (757) (7) (49) $ 2,298 40 (251) (637) $ 1,450 $ 6,151 1,494 865 $ 8,510 $ 965 3,310 $ 4,275 $ 671 150 (306) (20) 132 The additions to the property, plant and equipment and intangible assets based on the location of the Group’s subsidiaries for the years ended December 31 were as follows: Notes to the Consolidated Financial Statements (continued) Segment Information (continued) US$ million Russia Ukraine South Africa USA Czech Republic Canada Other countries 2008 $ 981 2007 $ 586 2006 $ 629 81 53 52 19 15 19 69 62 39 13 5 6 – – 2 31 – 14 $ 1,220 $ 780 $ 676 Distribution of the Group’s revenues by geographical area based on the location of customers for the years ended December 31 was as follows: US$ million Russia USA Canada Ukraine Korea South Africa Taiwan Thailand Germany Austria Italy Kazakhstan Czech Republic United Arab Emirates Vietnam Turkey Great Britain China Poland Philippines Indonesia Slovakia Syria Switzerland Iran Other countries 2008 $ 7,575 3,232 1,283 913 760 649 504 479 417 415 343 327 295 289 234 192 173 172 166 149 143 119 104 94 81 1,272 2007 $ 5,954 1,964 91 186 400 319 373 175 263 173 361 380 277 27 82 87 119 72 179 144 75 33 2 1 461 661 2006 $ 4,217 289 15 33 149 7 572 465 184 24 379 259 263 – 89 188 54 98 77 194 32 19 3 3 292 387 $ 20,380 $ 12,859 $ 8,292 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Carrying amounts of the Group’s assets by geographical area in which the assets are located at December 31 were as follows: 133 US$ million Russia USA Canada Ukraine South Africa Luxembourg Switzerland Czech Republic Italy Cyprus Other countries 2008 $ 8,252 3,604 2,412 1,533 1,052 723 646 613 415 159 39 2007 $ 8,813 3,125 – 3,399 1,515 39 475 577 414 212 68 2006 $ 5,674 159 – – 332 720 51 451 368 252 503 $ 19,448 $ 18,637 $ 8,510 4. Business Combinations Strategic Minerals Corporation On August 23, 2006, the Group acquired 72.84% of ordinary shares of Strategic Minerals Corporation (“Stratcor”), including 69.00% of voting shares, for purchase consideration of $125 million, including transaction costs of $6 million and fair value of contingent consid- eration amounting to $21 million. Stratcor, headquartered in Danbury, Connecticut, USA, is one of the world's leading producers of vana- dium alloys and chemicals for steel and chemical industries. Stratcor has two wholly-owned subsidiaries – Stratcor, Inc. with a mill in Hot Springs, Arkansas, USA, and Vametco Minerals Corporation with a mine and a mill in Brits, South Africa. As a result, the ﬁ nancial position and the results of operations of Stratcor were included in the Group’s consolidated ﬁ nancial statements beginning August 23, 2006. The table below sets forth the fair values of Stratcor consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable 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 72.84% ownership interest Purchase consideration Goodwill In 2006, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow August 23, 2006 $ 81 27 3 57 31 39 238 46 22 39 107 8 $ 123 $ 89 $ 125 $ 36 $ 39 (102) $ (63) In 2007, the Group repaid the outstanding liability for the purchase of Stratcor. For the period from August 23, 2006 to December 31, 2006 Stratcor incurred net loss amounting to $5 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Business Combinations (continued) Strategic Minerals Corporation (continued) 134 Under the share purchase agreement, the Group will pay earn out and synergy payments during the period from 2007 to 2019. The pay- ments depend on the deviation of the average prices for vanadium pentoxide from certain levels and the amounts payable for each year are limited to maximum amounts. Liabilities under earn out and synergy payments were considered as contingent consideration and rec- ognised at fair value which was determined based on expected amounts to be paid, their timing and applicable discount rate. In 2008 and 2007, the change in the fair value of the contingent consideration amounting to $(2) million and $11 million, respectively, was recorded as an adjustment to goodwill recognised on acquisition (Note 5). Under the Black Economic Empowerment Programme, realised by the South-African government in accordance with the Mineral and Pe- troleum Resources Development Act and the Broad-Based Socio Economic Empowerment Charter for the South African Mining Industry, the Group has a commitment to sell an 11% ownership interest in the South-African subsidiary of Stratcor to historically disadvantaged communities not later than April 2014. Oregon Steel Mills On January 12, 2007, the Group acquired approximately 90.65% of the outstanding shares of Oregon Steel Mills, Inc. (“OSM”) through a tender offer. OSM, located in the United States and Canada, produces plates, pipes, rails and other long steel products. In accordance with the US legislation, following the acquisition of the controlling interest in OSM, all the untendered shares were converted into the right to receive $63.25 in cash which is the same price per share paid during the tender offer. As a result, the Group effectively acquired a 100% ownership interest in OSM. On January 23, 2007, OSM was merged with the Group’s wholly owned subsidiary and the merged entity was named as Evraz Oregon Steel Mills, Inc. In 2008, the subsidiary was renamed into Evraz Inc. NA. Total cash consideration for the acquisition of a 100% ownership interest in OSM amounted to $2,276 million, including transaction costs of $10 million. As a result, the ﬁ nancial position and the results of operations of OSM were included in the Group’s consolidated ﬁ nancial statements beginning January 12, 2007. The table below sets forth the fair values of OSM’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Minority interests Net assets Purchase consideration Goodwill In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow January 12, 2007 $ 1,038 373 3 442 131 2 1,989 155 359 235 749 46 $ 1,194 $ 2,276 $ 1,082 $ 2 (2,269) $ (2,267) Certain transaction costs amounting to $4 million were paid in 2006. In 2008, the Group paid $3 million of the transaction costs outstand- ing at December 31, 2007. For the period from January 12, 2007 to December 31, 2007, OSM reported net proﬁ t amounting to $49 million. Highveld Steel and Vanadium Corporation On July 13, 2006, the Group acquired a 24.9% ownership interest in Highveld Steel and Vanadium Corporation Limited (“Highveld”), one of the largest steel producers in South Africa and a leading producer of vanadium products. Cash consideration amounted to $216 million, including $10 million of transaction costs. In addition, the Group entered into option agreements with Anglo South Africa Capital (Proprietary) Limited (“Anglo”) and Credit Suisse International (“Credit Suisse”), the major shareholders of Highveld, to increase this stake to 79% within the next 24 months should such a decision be made by the Board of directors of Evraz Group S.A. and subject to receipt of all necessary regulatory approvals. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 On February 20, 2007, the European Commission approved the proposed acquisition of the controlling interest in Highveld, subject to certain conditions, and the directors resolved to proceed with the purchase transaction at the meeting held on February 26, 2007. These conditions included divestment commitments in respect of certain business of Highveld (Note 12) and a commitment to maintain and strengthen the existing feedstock supply relationships with Vanadium-Tula, Chussovskoy Metallurgical Plant, both located in Russia, and Treibacher (Austria) – the major consumers of the feedstock sold by the Group and Highveld. On April 26, 2007, the Group obtained the regulatory approvals of the South African competition authorities and the share options became exercisable. As a result, the ﬁ nancial position and results of operations of Highveld were included in the Group’s consolidated ﬁ nancial statements beginning April 26, 2007 as the Group effectively exercised control over Highveld’s operations since that date. In the period from July 13, 2006 to April 26, 2007, the Group accounted for its investment in Highveld under the equity method (Note 11). In 2007, the acquisition of a controlling interest in Highveld was accounted for based on provisional values as the Group, as of the date of authorisation of issue of ﬁ nancial statements for the year ended December 31, 2007, did not complete purchase price allocation in accordance with IFRS 3 “Business Combinations”. In 2008, the Group ﬁ nalised its purchase price allocation on the acquisition of Highveld and recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities at April 26, 2007, which were as follows: 135 Carrying amounts immediately before the business combination Notes Provisional fair values Final estimation of fair values US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Assets of disposal groups classiﬁ ed as held for sale Total assets Deferred income tax liabilities Non-current liabilities Current liabilities Liabilities directly associated with disposal groups classiﬁ ed as held for sale Total liabilities 12 12 $ 207 – 2 70 161 75 170 685 36 42 316 24 418 $ 431 419 2 81 168 75 338 1,514 191 54 329 44 618 $ 431 419 2 81 168 75 295 1,471 181 54 329 44 608 Net assets $ 267 $ 896 $ 863 On April 26, 2007, the Group recognised revaluation surplus amounting to $27 million in respect of the change in fair values of identiﬁ able assets, liabilities and contingent liabilities of Highveld allocated to the previously acquired stakes. As a result of completion of the purchase price allocation, the overall value of net assets acquired decreased by $33 million, goodwill increased by $8 million and revaluation surplus decreased by $7 million as compared to the amounts presented in the consolidated ﬁ nan- cial statements of the Group for the year ended December 31, 2007. In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow $ 75 (254) $ (179) For the period from April 26, 2007 to December 31, 2007, Highveld reported net proﬁ t amounting to $101 million. The acquisition of Highveld was achieved in stages. Cost of the business combination at each stage, the provisional values of Highveld’s identiﬁ able consolidated assets, liabilities and contingent liabilities and goodwill are summarised in the table below: US$ million July 13, 2006 (Note 11) February 26, 2007 (Note 11) April 26, 2007 Ownership interest acquired Cost of business combination Fair values of Highveld’s identiﬁ able consolidated assets, liabilities and contingent liabilities Goodwill 24.9% 216 731 34 54.1% 442 802 8 0% – 863 – Total 79% 658 – – Goodwill includes $16 million associated with the disposal group which, subsequent to July 13, 2006, was classiﬁ ed as held for sale (Note 12). On May 4, 2007, the Group exercised its option and acquired a 29.2% ownership interest in Highveld for cash consideration of $238 million from Anglo. In addition, the Group incurred transaction costs amounting to $2 million. In accordance with the South African legislation, an acquirer, which purchases 35% of the acquiree’s share capital, is obliged to offer to minority shareholders to sell their holdings. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Business Combinations (continued) Highveld Steel and Vanadium Corporation (continued) 136 Following this requirement, on June 4, 2007, the Group made an offer to acquire the entire share capital of Highveld, other than those shares already held by the Group, at a price of $11.40 per share. The Group derecognised minority interests in the amount of $181 million representing 21% ownership interest in Highveld and accrued a liability to minority shareholders in the amount of $237 million. The liability was measured at a price of $11.40 per share. The excess of the amount of the liability over the carrying value of the derecognised minority interests amounting to $56 million was charged to ac- cumulated proﬁ ts. On July 16, 2007, the Group increased the offer price from the South African rands equivalent of $11.40 per share to 93 South African rands ($13.03 at the exchange rate as of June 4, 2007). Upon the increase of the offer price, the Group remeasured the liability to minority shareholders and recorded the increase amounting to $34 million as a loss in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2007. As a result of this offer, the Group acquired 1,880,750 shares of Highveld (1.91% of the share capital) for 175 million South African rands ($25 million at the exchange rates as of the dates of the transactions). On August 6, 2007, upon the closing of the offer, the Group recog- nised minority interests in respect of the shares retained by minority shareholders. The difference between the carrying value of minority interests recognised and the liability to minority shareholders, which was derecognised at that date, amounting to $78 million was credited to accumulated proﬁ ts. On September 28, 2007, the Credit Suisse option for the acquisition of 24.9% ownership interest in Highveld was exercised by the Group for $219 million, comprising $207 million offset with the restricted deposit (Note 13) and a cash consideration of $12 million. As the li- ability under this put option was initially measured at $202 million, the Group recorded the increase amounting to $17 million as a loss in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2007. West Siberian Heat and Power Plant On May 3, 2007, the Group acquired a 93.35% ownership interest in OAO West Siberian Heat and Power Plant (“ZapSibTETs”), an energy generating company located in Novokuznetsk, the Russian Federation, for cash consideration of 5,945 million roubles ($231 million at the exchange rate as of the date of the transaction). In addition, the Group incurred transaction costs of $1 million. As a result, the ﬁ nancial position and the results of operations of ZapSibTETs were included in the Group’s consolidated ﬁ nancial statements beginning May 3, 2007. The fair values of the identiﬁ able assets, liabilities and contingent liabilities as at the date of acquisition were as follows: US$ million Property, plant and equipment Other non-current assets Inventories Accounts and notes receivable Cash Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets Fair value of net assets attributable to 93.35% ownership interest Purchase consideration Excess of interest in the net fair value of acquiree’s identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow May 3, 2007 $ 306 1 3 2 13 325 1 60 5 66 $ 259 $ 242 $ 232 $ (10) $ 13 (228) $ (215) The difference between the cash portion of the purchase consideration ($232 million) and amounts paid on acquisition ($228 million) represents translation difference. For the period from May 3, 2007 to December 31, 2007, ZapSibTETs reported net loss amounting to $9 million. In accordance with the Russian legislation, an acquirer, which purchases at least 30% of the acquiree’s share capital, is obliged to offer to other shareholders to sell their holdings (“obligatory offer”). Following this requirement, on June 4, 2007, the Group made an offer to minority shareholders of ZapSibTETs to sell their stakes to the Group at a price of 10.59 roubles per share ($0.41 at the exchange rate as of June 4, 2007). The total purchase consideration for the ownership interests that could be acquired amounts to 427 million Russian roubles ($17 million at the exchange rate as of June 4, 2007). The Group derecognised all minority interests in ZapSibTETs amounting to $17 million and accrued a liability to the minority shareholders in the amount of $17 million. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 137 During the offer the Group acquired 4.44% shares of ZapSibTETs and became subject to the provisions of the Russian legislation allowing a shareholder owning more than 95% of a company to increase its stake to 100%. On November 12, 2007, the Group started the buy out of minority shares and completed the transaction in January 2008. Yuzhkuzbassugol On June 8, 2007, the Group acquired an additional 50% ownership interest in ZAO Yuzhkuzbassugol (“Yuzhkuzbassugol”), the Group’s as- sociate, increasing the Group’s ownership interest in Yuzhkuzbassugol to 100%. Yuzhkuzbassugol is a vertically integrated group being one of the largest coking coal producers in Russia. Cash consideration amounted to $871 million, including transaction costs of $9 million. As a result, the ﬁ nancial position and results of operations of Yuzhkuzbassugol were included in the Group’s consolidated ﬁ nancial state- ments beginning June 8, 2007 as the Group effectively exercised control over Yuzhkuzbassugol’s operations since that date. In the period from January 1, 2007 to June 8, 2007, the Group accounted for its investment in Yuzhkuzbassugol under the equity method (Note 11). In 2007, the acquisition of a controlling interest in Yuzhkuzbassugol was accounted for based on provisional values as the Group, as of the date of authorisation of issue of ﬁ nancial statements for the year ended December 31, 2007, did not complete purchase price allocation in accordance with IFRS 3 “Business Combinations”. In 2008, the Group ﬁ nalised its purchase price allocation on the acquisition of Yuzhkuzbassugol and recognised adjustments to the provi- sional values of identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition. The table below sets forth the fair values of Yuzhkuzbassugol’s consolidated identiﬁ able assets, liabilities and contingent liabilities at June 8, 2007: US$ million Mineral reserves Other property, plant and equipment Investments in associates Notes 11 Other non-current assets Inventories Accounts and notes receivable 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% ownership interest Purchase consideration Carrying amounts immediately before the business combination $ 1,170 663 154 45 35 97 17 2,181 180 298 321 799 9 Provisional fair values $ 1,403 Final estimation of fair values $ 1,661 856 204 45 38 115 17 2,678 192 402 327 921 15 856 18 45 38 105 17 2,740 196 462 326 984 14 $ 1,373 $ 1,742 $ 1,742 $ 871 $ 871 $ 871 $ 871 On June 8, 2007, the Group recognised revaluation surplus amounting to $184 million in respect of the change in fair values of identiﬁ able assets, liabilities and contingent liabilities of Yuzhkuzbassugol allocated to the previously acquired stake. As a result of completion of the purchase price allocation, the revaluation surplus decreased by $15 million as compared to the amounts presented in the consolidated ﬁ nancial statements of the Group for the year ended December 31, 2007. In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow $ 17 (871) $ (854) For the period from June 8, 2007 to December 31, 2007, Yuzhkuzbassugol reported net loss amounting to $96 million. Steel and Mining Businesses in Ukraine On December 11, 2007, Lanebrook Limited (“Lanebrook”), the ultimate parent of the Group, acquired majority shares in selected produc- tion assets in Ukraine which include the following: a 99.25% ownership interest in Sukha Balka iron ore mining and processing complex; a 95.57% ownership interest in Dnepropetrovsk Iron and Steel Works; three coking plants (Bagleykoks – 94.37%, Dneprokoks – 98.65%, and Dneprodzerzhinsk Coke Chemical Plant – 93.86% of shares outstanding). ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Business Combinations (continued) Steel and Mining Businesses in Ukraine (continued) 138 Lanebrook has acquired these production assets (“Palmrose”) on the working capital free and debt free basis. Under the share purchase agreement, the seller had approximately three months (the “Settlement period”) to settle the current assets, liabilities and debt that ex- isted at the acquisition date and receive net settlement from Lanebrook. Total consideration for the acquisition of Palmrose amounted to $2,108 million, comprising cash in the amount of $1,060 million paid by the Group on behalf of Lanebrook and 4,195,150 Evraz Group’s shares with the fair value at the date of acquisition of $1,048 million. In December 2007, the Group signed an agreement with Lanebrook to acquire Palmrose. Under that agreement, total consideration for the acquisition of Palmrose from Lanebrook comprised cash in the amount of $1,110 million and 4,195,150 Evraz Group’s shares that should have been issued for the settlement of this acquisition. On April 14, 2008, the Group acquired a 51.4% share in Palmrose for cash consideration of $1,110 million. In June 2008, that agreement was amended increasing the cash portion of the consideration payable to Lanebrook by $18 million. The Group obtained control over Palmrose on April 14, 2008. The acquisition of 51.4% and 48.6% ownership interests in Palmrose were considered as linked transactions and were accounted for as a single transaction in these ﬁ nancial statements. As a result, on April 14, 2008, the Group effectively acquired 100% ownership interest in Palmrose with a deferred consideration in respect of 48.6% ownership interest. In accordance with the accounting policy (Note 2), the Group accounted for this acquisition by applying the pool- ing of interests method and presented its consolidated ﬁ nancial statements as if the transfer of controlling interest in the subsidiary had occurred from the date of acquisition of the subsidiary by Lanebrook, which was December 11, 2007. As a result, the ﬁ nancial position and the results of operations of Palmrose were included in the Group’s consolidated ﬁ nancial statements beginning December 11, 2007. In the interim consolidated ﬁ nancial statements for the six-month period ended June 30, 2008, the ac- quisition of Palmrose was accounted for based on provisional values as the Group, as of the date of authorisation of issue of the interim ﬁ nancial statements, has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”. In these ﬁ nancial statements, the Group ﬁ nalised its purchase price allocation for the acquisition of Palmrose and recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition. The table below sets forth the fair values of Palmrose’s consolidated identiﬁ able assets, liabilities and contingent liabilities at December 11, 2007: US$ million Mineral reserves Other property, plant and equipment Receivables from the seller Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Minority interests Net assets Purchase consideration Goodwill In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow Initial estimation of fair values Final estimation of fair values $ 429 1,307 822 2,558 57 377 839 1,273 40 $ 1,245 $ 2,108 $ 863 $ 431 1,161 822 2,414 127 306 839 1,272 34 $ 1,108 $ 2,108 $ 1,000 $ - (1,060) $ (1,060) $68 million paid by the Group to Lanebrook in 2008 was recorded as a distribution to a shareholder in the consolidated cash ﬂ ow state- ment. The excess of the consideration paid by the Group to its shareholder over the historical cost of net assets transferred to the Group, in- cluding the Predecessor's goodwill, was charged to accumulated proﬁ ts and recorded as a distribution to a shareholder in the amount of $18 million and $50 million in the consolidated statements of changes in equity for the years ended December 31, 2008 and 2007, respectively. On September 9, 2008, the remaining 48.6% ownership interest in Palmrose was transferred to the Group in exchange for new shares is- sued by Evraz Group S.A. The liability to Lanebrook in respect of the 48.6% ownership interest in Palmrose was measured at the fair value of Evraz Group’s shares and amounted to $972 million as of December 31, 2007. The change in the fair value of that liability was credited to accumulated proﬁ ts in the amount of $215 million and $76 million in the consolidated statements of changes in equity for the years ended December 31, 2008 and 2007, respectively. In addition, in 2008, the Group purchased minority interests in Dnepropetrovsk Iron and Steel Works (0.46%) and Sukha Balka (0.17%) for a total cash consideration of $3 million. The excess of the amounts of consideration over the carrying values of minority interests acquired amounting to $1 million was charged to accumulated proﬁ ts. For the period from December 11 to December 31, 2007, the newly acquired Ukrainian businesses reported net loss amounting to $7 million. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Claymont Steel On January 16, 2008, the Group acquired 16,415,722 shares of Claymont Steel Holdings, Inc. (“Claymont Steel”) through a tender offer, representing approximately 93.4% of the outstanding ordinary shares of Claymont Steel. Claymont Steel is a plate producer located in the United States. In accordance with the US legislation, following the acquisition of the controlling interest in Claymont Steel, all the untendered shares were converted into the right to receive $23.50 in cash which is the same price per share paid during the tender offer. The company then merged with the Group’s wholly owned subsidiary. Total cash consideration for the acquisition of a 100% ownership interest in Claymont Steel amounted to $420 million, including transaction costs of $7 million. As a result, the ﬁ nancial position and the results of operations of Claymont Steel were included in the Group’s consolidated ﬁ nancial state- ments beginning January 16, 2008. In the interim consolidated ﬁ nancial statements for the six-month period ended June 30, 2008, the acquisition of Claymont Steel was accounted for based on provisional values as the Group, as of the date of authorisation of issue of the interim ﬁ nancial statements, has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”. In these ﬁ nancial statements, the Group ﬁ nalised its purchase price allocation on the acquisition of Claymont Steel and recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition. The table below sets forth the fair values of identiﬁ able assets, liabilities and contingent liabilities of Claymont Steel at January 16, 2008: 139 US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets/(liabilities) Purchase consideration Goodwill In 2008, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow Final estimation of fair values $ 161 40 – 52 44 5 302 136 58 59 253 $ 49 $ 420 $ 371 Initial estimation of fair values $ 36 4 4 54 44 5 147 136 2 56 194 $ (47) $ 420 $ 467 $ 5 (420) $ (415) For the period from January 16, 2008 to December 31, 2008, Claymont Steel reported net loss amounting to $4 million. IPSCO Inc. In March 2008, the Group entered into an agreement with SSAB, a Swedish steel company, to acquire IPSCO’s Canadian plate and pipe business. IPSCO is a leading North American producer of steel plates, as well as pipes for the oil and gas industry. Under the structure of the transaction, the Group and OAO TMK (“TMK”), the Russian leading tubular player, acquired plate and pipe businesses for $4,211 million (excluding transaction costs and working capital adjustment to purchase consideration paid by TMK, if any) comprising certain Canadian plate and pipe businesses and a US metal scrap company (together – “IPSCO Inc.”), and US tubular and pipe businesses. The Group has also entered into a back-to-back agreement with TMK and its afﬁ liates, which consisted of an on-sale of the acquired US tubular and pipe businesses, including 51% in NS Group, to TMK for $1,250 million. In addition, the Group signed an option agreement that gave it the right to sell and gave TMK the right to buy 49% in NS Group for approxi- mately $511 million plus interest at an annual rate ranging from 10% to 12% accrued from June 12, 2008 to the date when the option is exercised. The put option could be exercised by the Group in respect of the whole stake held by the Group and not earlier than October 22, 2009. The call option could be exercised by TMK in respect of any shareholding in NS Group starting from June 12, 2008. On June 12, 2008, the acquisition was completed. As a result, the net cost of the acquisition of 100% of IPSCO Inc. for the Group amounted to $2,450 million, including transaction costs of $65 million. The ﬁ nancial position and the results of operations of IPSCO Inc. were included in the Group’s consolidated ﬁ nancial statements begin- ning June 12, 2008. The acquisition of the subsidiary was accounted for based on provisional values as the Group, as of the date of authorisation of issue of these ﬁ nancial statements, has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”. The Group made certain adjustments to the provisional fair values of IPSCO’s consolidated identiﬁ able assets, liabilities and contingent liabilities at June 12, 2008 as compared with those values recorded in the Group’s interim consolidated ﬁ nancial state- ments for the six-month period ended June 30, 2008. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Business Combinations (continued) IPSCO Inc. (continued) 140 The investment in a 49% ownership interest in NS Group was included in short-term investments caption of the consolidated balance sheet as of December 31, 2008. In 2009, TMK exercised its option for a 49% ownership interest in NS Group (Note 18). The table below sets forth the provisional fair values of consolidated identiﬁ able assets, liabilities and contingent liabilities of IPSCO Inc. at the date of acquisition: US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets Purchase consideration Goodwill In 2008, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow Initial estimation of fair values Adjusted provisional fair values $ 726 362 18 432 184 2 1,724 4 221 167 392 $ 1,332 $ 2,450 $ 1,118 $ 333 – 430 210 2 975 8 19 152 179 $ 796 $ 2,413 $ 1,617 $ 2 (1,501) $ (1,499) $938 million of purchase consideration was paid by a bank on behalf of the Group directly to the seller. As of December 31, 2008, ac- counts payable include $11 million of unpaid transaction costs. For the period from June 12 to December 31, 2008, IPSCO Inc. reported net loss amounting to $16 million. Other Acquisitions In 2006, the Group purchased 100% ownership interest in OOO Evro-Aziatskaya Energy Company, OOO Evrazteknika, OOO Ekont and OOO Cheremshanka, all located in the Russian Federation, from the entities under control of an ultimate principal shareholder. The total cash consideration amounted to $34 million. The excess of fair value of identiﬁ able assets, liabilities and contingent liabilities acquired over consideration amounting to $1 million was included in the income statement. Goodwill of $1 million arising on the acquisition of Evro- Aziatskaya Energy Company was recorded in the consolidated balance sheet as of December 31, 2006. On December 20, 2007, the Group acquired 100% in Nikom, a.s., (“Nikom”), a ferrovanadium producer located in the Czech Republic, for cash consideration of $46 million. Goodwill of $40 million arising on the acquisition of Nikom was recorded in the consolidated balance sheet as of December 31, 2007. Disclosure of Other Information in Respect of Business Combinations As the acquired subsidiaries either did not prepare ﬁ nancial statements in accordance with IFRS before the business combinations or applied accounting policies that are signiﬁ cantly different from the Group’s accounting policies, it is impracticable to determine revenues and net proﬁ t of the combined entity for each year presented on the assumption that all business combinations effected during each year had occurred at the beginning of the respective year. Except for the relevant disclosures in respect of Yuzhkuzbassugol and Highveld, it is impracticable to determine the carrying amounts of each class of the acquirees' assets, liabilities and contingent liabilities, determined in accordance with IFRS, immediately before the com- bination, because the acquirees did not prepare ﬁ nancial statements in accordance with IFRS before acquisitions. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 5. Goodwill The table below presents movement in the carrying amount of goodwill. US$ million At December 31, 2005 Goodwill recognised on acquisitions of subsidiaries Translation difference At December 31, 2006 Goodwill recognised on acquisitions of subsidiaries Goodwill previously recognised in investments under the equity method Goodwill allocated to disposal groups classiﬁ ed as held for sale Goodwill in respect of subsidiaries acquired from entities under common control Adjustment to contingent consideration Translation difference At December 31, 2007 Goodwill recognised on acquisitions of subsidiaries Adjustment to contingent consideration Impairment Palmrose Claymont Steel OSM Tubular – Portland Mill Translation difference At December 31, 2008 141 Notes Carrying amount 4 4 11 11 4 4 4 4 $ 67 37 8 112 1,122 42 (16) 863 11 11 2,145 1,489 (2) (756) (466) (187) (103) (489) $ 2,387 Goodwill relates to the assembled workforce and synergy from integration of the acquired subsidiaries into the Group. The carrying amount of goodwill was allocated among cash generating units as follows at December 31: US$ million Evraz Inc. NA (former Oregon Steel Mills) Oregon Steel Portland Mill OSM Tubular – Portland Mill Rocky Mountain Steel Mills OSM Tubular – Camrose Mills Claymont Steel General Scrap (was a part of IPSCO at the time of IPSCO acquisition) Evraz Inc. NA Canada (former IPSCO) Palmrose Dnepropetrovsk Iron and Steel Works Dneprodzerzhinsk Coke Chemical Plant Bagleykoks Dneprokoks Palini e Bertoli Strategic Minerals Corporation Nikom, a.s. Highveld Steel and Vanadium Corporation Evro-Aziatskaya Energy Company 2008 $ 1,183 2007 $ 1,082 2006 $ – 412 – 410 157 184 20 920 99 24 27 32 16 80 45 38 21 1 412 103 410 157 – – – 863 512 114 151 86 84 47 40 28 1 – – – – – – – – – – – – 75 36 – – 1 The cash generating units within Evraz Oregon Steel Mills represent the smallest identiﬁ able groups of assets, primarily individual mills, that generate cash ﬂ ows that are largely independent from other assets or groups of assets. Goodwill was tested for impairment as of December 31, 2008. Events and circumstances that led to recognition of impairment are dis- closed in Note 31, Operating Environment of the Group. $ 2,387 $ 2.,145 $ 112 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Goodwill (continued) 142 For the purpose of impairment testing the recoverable amount of goodwill has been determined based on value in use. Value in use has been calculated using cash ﬂ ows projections based on the actual operating results and business plans approved by management and ap- propriate discount rates reﬂ ecing time value of money and risks associated with respective cash generating units. For mining operations management business plans cover the full life of mines. The key assumptions used by the management in value in use calculation are presented in the table below. For the periods not covered by management business plans, cash ﬂ ow projections have been estimated by extrapolating the respective business plans results using a zero real growth rate. Evraz Inc. NA Evraz Inc. NA Canada Palmrose: Dnepropetrovsk Iron and Steel Works Coking plants Palini e Bertoli Strategic Minerals Corporation Nikom, a.s. Highveld Steel and Vanadium Corporation Period of forecast, years Pre-tax discount rate, % 9 9 5 5 5 5 5 5 12.93-14.95 13.57 16.59 16.76 - 17.19 15.36 14.95 13.59 15.47 Commodity steel products steel products steel products coke steel plates ferrovanadium products ferrovanadium products ferrovanadium products steel products Average price of the commodity per ton $ 924 $ 1,380 $ 522 $ 160 € 612 $ 32,817 $ 27,241 $ 15,213 $ 593 In respect of OSM Tubular – Portland Mill within Evraz Inc. NA, for which an impairment loss was recognised in 2008, the discount rate used in the previous estimate of value in use was 10.4%. The calculations of value-in-use are most sensitive to the following assumptions: Discount Rates Discount rates reﬂ ect the current market assessment of the risks speciﬁ c to each cash generating unit. The discount rates have been determined using the Capital Asset Pricing Model and analysis of industry peers. Reasonable changes in discounts rates could lead to further impairment of goodwill at Palmrose and Evraz Inc. NA cash generating units. A 10% increase in the discount rates would lead to an additional impairment of $201 million. Sales Prices The prices of the products sold by the Group were estimated using industry research. Average 2009 prices are assumed to be 20%-40% lower than average 2008 prices with a higher decline related to lower value added products. The Group expects that in 2009-2010 the nominal prices will grow on average by 7% and in 2012 and thereafter – by 3%. Reasonable changes in the assumptions for products prices could lead to an additional impairment at Palmrose and Evraz Inc. NA cash generating units. If the prices assumed for 2009 and 2010 in the impairment test were 10% lower, this would lead to an additional impairment of $104 million. Sales Volumes The management assumed that the sales volumes would decline on average by 25% during 2009 and would grow evenly during the fol- lowing four years to reach normal asset capacity thereafter. Reasonable changes in sales volumes could lead to an additional impairment at Palmrose and Evraz Inc. NA cash generating units. If the sales volumes were 10% lower than those assumed for 2009 and 2010 in the impairment test, this would lead to an additional impairment of $29 million. Cost Control Measures The recoverable amounts of cash generating units are based on the business plans approved by management. The reasonable devia- tion of cost from these plans could lead to an additional impairment at Palmrose and Evraz Inc. NA cash generating units. If the actual costs were 10% higher than those assumed for 2009 and 2010 in the impairment test, this would lead to an additional impairment of $131 million. 6. Acquisitions of Minority Interests in Subsidiaries Vitkovice Steel In 2006, the Group acquired the remaining minority interests in Vitkovice (1.04%) for cash consideration of $3 million. The excess of the amount of the carrying value of minority interest over consideration amounting to $1 million was included in additional paid-in capital. Minority Interests Derecognised in 2006 In 2006, the new regulations were introduced in the Russian Federation in respect of the companies in which a controlling shareholder owns at least 95% of the share capital as of July 1, 2006. These amendments obliged a controlling shareholder to acquire the company’s shares in case when the minority shareholders are willing to sell their stakes. On the other hand, a controlling shareholder can initiate a forced disposal of the shares held by minority shareholders. As such, a controlling shareholder obtained a call option and minority share- holders obtained a put option for the minority shares in a subsidiary. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 At July 1, 2006, the Group was the owner of 96.68% shares of West Siberian Iron and Steel Plant (“ZapSib”) and 97.72% shares of Kachka- nar Mining-and-Processing Integrated Works (“KGOK”). At this date, the Group derecognised minority interests of $42 million and accrued a liability to minority shareholders in the amount of $106 million. The liability was measured based on the highest price for the shares during the period of six months up to the date of its recognition as required by the regulations. The excess of the amount of the liability over the carrying value of the derecognised minority interests amounting to $64 million was charged to accumulated proﬁ ts. 143 US$ million ZapSib KGOK Minority interests derecognised Fair value of liability at July 1, 2006 Charged to accumulated proﬁ ts $ 26 16 $ 42 $ 64 42 $ 106 $ 38 26 $ 64 In addition, in 2006, the Group recognised a gain from the change in the fair value of the liability to minority shareholders of KGOK and included $12 million in gain/(loss) on ﬁ nancial assets and liabilities in the consolidated income statement for the year ended December 31, 2006. In 2007, the liability to minority shareholders of ZapSib and KGOK as of December 31, 2006 was measured by independent experts. The excess of the new valuation over the liability to minority shareholders recognised as of December 31, 2006 amounting to $24 million was charged to accumulated proﬁ ts in the consolidated statement of changes in equity for the year ended December 31, 2007. In addition, the Group derecognised minority interests in the amount of $3 million in respect of ZapSib’s subsidiaries. Minority Interests Derecognised in 2007 In 2006, the Group acquired a 2.62% minority interest in Nizhny Tagil Iron and Steel Plant (“NTMK”) for cash consideration of $79 million. The excess of the amount of consideration over the carrying value of minority interest acquired amounting to $37 million was charged to accumulated proﬁ ts. In 2006, the Group acquired a 7.61% minority interest in Vysokogorsky Mining-and-Processing Integrated Works (“VGOK”) for cash con- sideration of $14 million. The excess of the amount of consideration over the carrying value of minority interest acquired amounting to $5 million was charged to accumulated proﬁ ts. In 2006, the Group acquired a 0.6% minority interest in Nakhodka Trade Sea Port (”Nakhodka Port”). This acquisition had no signiﬁ cant impact on the Group’s ﬁ nancial statements. In March 2007, the Group made voluntary offers to minority shareholders of NTMK, VGOK and Nakhodka Port) to sell their stakes to the Group. At the dates of voluntary offers, the Group derecognised minority interests in NTMK, VGOK and Nakhodka Port in the amount of $103 million and accrued a liability to minority shareholders in the amount of $174 million. The liabilities were measured based on the expected amounts to be paid to minority shareholders being the highest price for the shares during the period of six months up to the date of its recognition, as required by the legislation. The excess of the amount of the liability over the carrying value of the derecognised minority interests amounting to $71 million was charged to accumulated proﬁ ts. US$ million NTMK VGOK Nakhodka Port Minority interests derecognised Fair value of liability at the date of derecognition Charged to accumulated proﬁ ts $ 92 9 2 $ 103 $ 162 9 3 $ 174 $ 70 – 1 $ 71 In the course of the voluntary offer, the Group acquired minority interests of 1.09%, 0.83% and 1.54% in NTMK, VGOK and Nakhodka Port, respectively, for cash consideration of $37 million, $2 million and $1 million, respectively. As a result, the Group has obtained in each of the above mentioned subsidiaries an ownership interest exceeding 95% of the share capital. As such, the Group became subject to the regulations that require a controlling shareholder to acquire the company’s shares in case when the minority shareholders are willing to sell their stakes. On the other hand, a controlling shareholder can require the minority sharehold- ers to sell their stakes. Buy Out of Minority Shares in Subsidiaries In August 2007, in accordance with Russian legislation allowing a shareholder owning more than 95% of a company to increase its stake to 100%, the Group started the buy out of minority shares of its ﬁ ve Russian subsidiaries (NTMK, ZapSib, KGOK, VGOK and Nakhodka Port). The buy outs have been successfully completed in October 2007. LDPP In 2007, the Group acquired an additional minority interest of 19.9% in OAO Large Diameter Pipe Plant (“LDPP”) for cash consideration of $10 million, which approximates the carrying value of the net assets attributable to the acquired shares. Highveld In 2008, the Group acquired an additional minority interest of 4.2% in Highveld (Note 4) for cash consideration of $69 million. The excess of the amounts of consideration over the carrying values of minority interests acquired amounting to $35 million was charged to accumu- lated proﬁ ts. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Acquisitions of Minority Interests in Subsidiaries (continued) 144 Exercise of Potential Voting Rights The Group exercised options in respect of ownership interests in Caplink Limited and Velcast Limited registered in Cyprus for a total cash consideration of $6 million. The difference between the carrying values of minority interests acquired and the purchase consideration in the amount of $21 million was included in additional paid-in capital and $1 million was charged to accumulated proﬁ ts. 7. Income and Expenses Cost of revenues, distribution costs, administrative expenses and social infrastructure maintenance expenses include the following for the years ended December 31: US$ million Cost of inventories recognised as expense Staff costs, including social security taxes Depreciation, depletion and amortisation 2008 2007 2006 $ (6,373) $ (4,892) $ (2,900) (2,154) (1,215) (1,532) (749) (909) (303) In 2008, the amount of a write-down of ﬁ nished goods to net realisable value together with the allowance for obsolete and slow-moving inventories that were recognised as expense amounted to $314 million. In 2007 and 2006, these write-downs and allowances were not signiﬁ cant. In 2008, other operating expenses included a write-off of a prepayment to the Russian State Mineral Resources Agency amounting to $12 million, which was used to secure the licence to develop the Mezhegey coal deposit. Interest expense consisted of the following for the years ended December 31: US$ million Bank interest Interest on guaranteed notes Finance charges payable under ﬁ nance leases Interest on liabilities relating to employee beneﬁ ts and expected return on plan assets Discount adjustment on provisions Interest on contingent consideration Other Interest income consisted of the following for the years ended December 31: US$ million Interest on bank accounts and deposits Interest on loans receivable Interest on accounts receivable Other 2008 $ (392) (221) (7) (17) (10) (2) (6) 2007 $ (285) (97) (8) (10) (4) (1) (4) 2006 $ (98) (108) (6) (6) (2) (1) (8) $ (655) $ (409) $ (229) 2008 $ 37 15 1 4 2007 $ 24 7 9 1 2006 $ 25 1 – 1 $ 57 $ 41 $ 27 Gain/(loss) on ﬁ nancial assets and liabilities included the following for the years ended December 31: US$ million Impairment of available-for-sale ﬁ nancial assets Gain/(loss) on extinguishment of debts Loss on trading with Raspadskaya shares Change in the fair value of derivatives Impairment of ﬁ nancial instrument relating to the transaction with 49% ownership interest in NS Group Re-measurement of liabilities to minority shareholders at fair value Other Notes 13 21, 26 18 4, 6 2008 $ (150) 80 (27) (10) (3) – (19) 2007 $ – – – – – (72) 1 2006 $ – 13 – – – 12 1 $ (129) $ (71) $ 26 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 8. Income Taxes The Group’s income was subject to tax at the following tax rates: 145 Russia Canada Cyprus Czech Republic Italy South Africa Switzerland Ukraine USA 2008 24.00% 29.32% 10.00% 21.00% 31.40% 28.00% 10.04% 25.00% 35.00% 2007 24.00% – 10.00% 24.00% 37.25% 29.00% 12.60% 25.00% 35.00% 2006 24.00% – 10.00% 24.00% 37.25% 29.00% 11.60% – 35.00% Ferrotrade Limited (Gibraltar) has a Taxation Exemption Certiﬁ cate under which it is currently liable to tax at the ﬁ xed annual amount of £225. This certiﬁ cate is valid through 2010. In November 2008, a reduction of income tax rate from 24% to 20% was announced by the Russian government. The new rate is effective from January 1, 2009. As such, the respective deferred tax assets and liabilities were measured using the announced tax rate. Major components of income tax expense for the years ended December 31 were as follows: US$ million Current income tax expense Adjustment in respect of income tax of previous years Deferred income tax beneﬁ t relating to changes in tax rates Less: deferred income tax recognised directly in equity Deferred income tax beneﬁ t relating to origination and reversal of temporary differences 2008 2007 $ (1,622) $ (1,064) 2006 $ (676) 28 107 (7) 281 31 5 – 82 (2) – – 41 Income tax expense reported in the consolidated income statement $ (1,213) $ (946) $ (637) The major part of income taxes is paid in the Russian Federation. A reconciliation of income tax expense applicable to proﬁ t before income tax using the Russian statutory tax rate of 24% to income tax expense as reported in the Group’s consolidated ﬁ nancial statements for the years ended December 31 is as follows: US$ million Proﬁ t before income tax At the Russian statutory income tax rate of 24% Deferred income tax beneﬁ t resulting from reduction in tax rate, net of amount recognised directly in equity Adjustment in respect of income tax of previous years Effect of non-deductible expenses and other non-temporary differences Effect of the difference in tax rates on dividend income from associates and joint ventures Tax on dividends distributed by the Group’s subsidiaries to parent company 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 Share of proﬁ ts in joint ventures and associates Excess of interest in the net fair value of acquiree’s identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition Utilisation of previously unrecognised tax losses Change in allowance for deferred tax asset Beneﬁ t arising from early payment of income tax Tax paid on dividends to minorities 2008 $ 3,143 (754) 100 28 (363) 23 (153) (102) (11) 25 – 5 (10) 6 (7) 2007 $ 3,125 (750) 2006 $ 2,087 (501) 5 31 (70) 31 (78) (37) (54) (12) 5 – (17) – – – (2) (102) 10 (45) 7 (11) (1) – 6 2 – – Income tax expense reported in the consolidated income statement $ (1,213) $ (946) $ (637) The effect of non-deductible expenses includes $(181) million in respect of impairment of goodwill and $(94) million in respect of non- deductible foreign exchange losses related to Canadian and Luxembourg entities. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Income Taxes (continued) 146 Deferred income tax assets and liabilities and their movements for the years ended December 31 were as follows: Change recognised in income statement Change recognised in equity 2008 Change due to business combina tions Translation difference 2007 Change recognised in income statement Change due to business combina tions Translation difference 2006 $ 1,266 (229) (7) 169 (267) $ 1,600 (60) 1,293 55 $ 312 258 11 57 (37) (43) (59) 1,592 (368) 100 147 24 93 364 (57) 307 44 24 (3) 2 – 23 (10) 13 27 – – – (7) – – – – – – – – 112 – 15 296 10 7 – – 17 – 17 – (43) 226 – (5) 54 106 (315) 1,986 (4) (15) (7) (15) (41) – (41) (5) 70 158 29 108 365 (47) 318 22 (24) 43 (19) (60) 23 (1) 10 12 44 (17) 27 9 240 – 100 1,633 18 111 2 63 194 – 194 – 3 – 3 7 11 22 61 352 (1) 5 5 1 10 1 11 2 30 43 12 32 117 (31) 86 11 $ 1,329 (354) (7) 279 (279) $ 1,690 (78) 1,439 52 $ 277 US$ million Deferred income tax liabilities: Valuation and depre- ciation of property, plant and equipment Valuation and amortisation of intangible assets Undistributed earnings of subsidiaries Other Deferred income tax assets: Tax losses available for offset Accrued liabilities Impairment of accounts receivable Other Valuation allowance Net deferred income tax asset Net deferred income tax liability As of December 31, 2008, 2007 and 2006, deferred income taxes have been provided for in respect of undistributed earnings of the Group’s subsidiaries amounting to $199 million, $1,046 million and $255 million, respectively, as management intended to dividend these amounts. Management does not intend to distribute other accumulated earnings in the foreseeable future. At December 31, 2008, the Group has not recognised a deferred tax liability and deferred tax asset in respect of temporary differ- ences of $4,118 million and $2,770 million, respectively (2007: $3,685 million and $857 million, respectively, 2006: $3,177 million and $353 million, respectively). These differences are associated with investments in subsidiaries and were not recognised as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. The current tax rate on intra-group dividend income varies from 0% to 10%. In the context of the Group’s current structure, tax losses and current tax assets of the different companies may not be set off against cur- rent tax liabilities and taxable proﬁ ts of other companies, except for the companies registered in Cyprus where group relief can be applied. As of December 31, 2008, the unused tax losses carry forward approximated $730 million (2007: $369 million, 2006: $152 million). The Group recognised deferred tax asset of $43 million (2007: $23 million, 2006: $2 million) in respect of unused tax losses. Deferred tax asset in the amount of $57 million (2007: $45 million, 2006: $28 million) has not been recorded as it is not probable that sufﬁ cient taxable proﬁ ts will be available in the foreseeable future to offset these losses. Tax losses of $390 million (2007: $283 million, 2006: $146 million) for which deferred tax asset was not recognised arose in companies registered in Luxembourg, Cyprus and Russia. Losses in the amount of $386 million (2007: $270 million, 2006: $130 million) are available indeﬁ nitely for offset against future taxable proﬁ ts of the companies in which the losses arose and $4 million (2007: $13 million, 2006: $16 million) will expire during 2016 – 2018. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 9. Property, Plant and Equipment Property, plant and equipment consisted of the following as of December 31: 147 US$ million Cost: Land Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Assets under construction Accumulated depreciation and depletion: Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Government grants: Machinery and equipment, net 2008 2007 2006 $ 159 2,379 4,970 429 2,603 102 691 $ 147 2,200 5,153 461 3,170 115 728 $ 62 1,224 2,258 257 350 69 474 11,333 11,974 4,694 (571) (1,217) (133) (359) (35) (324) (1,161) (98) (237) (39) (149) (753) (55) (36) (38) (2,315) (1,859) (1,031) (6) (8) (8) $ 9,012 $ 10,107 $ 3,655 Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $145 million, $114 million and $117 million as of December 31, 2008, 2007 and 2006, respectively. The movement in property, plant and equipment for the year ended December 31, 2008 was as follows: US$ million At December 31, 2007, cost, net of accumulated depreciation and government grants Reclassiﬁ cations Additions Assets acquired in business combination Assets put into operation Disposals Depreciation and depletion charge Impairment loss Transfer to assets held for sale Land $ 147 – – 31 – (2) – – 2 Change in site restoration provision Translation difference – (19) Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Assets under construction Total $ 1,876 $ 3,984 $ 363 $ 2,933 $ 76 $ 728 $ 10,107 160 9 170 162 (10) (178) (16) 1 – (366) (130) (18) 47 629 665 (26) (630) (45) 6 – (753) 3 1 67 (4) (52) (1) – – (63) (3) 32 – 122 (5) (220) (53) – 21 (583) (13) 1 19 11 (1) (22) – 1 – (5) 4 – 1,126 1,218 37 (1,027) (21) – (2) – – (154) 887 – (69) (1,102) (117) 10 21 (1,943) At December 31, 2008, cost, net of accumulated depreciation and government grants $ 159 $ 1,808 $ 3,747 $ 296 $ 2,244 $ 67 $ 691 $ 9,012 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Property, Plant and Eqiupment (continued) 148 The movement in property, plant and equipment for the year ended December 31, 2007 was as follows: US$ million At December 31, 2006, cost, net of accumulated depreciation and government grants Reclassiﬁ cations Additions Assets acquired in business combination Assets put into operation Disposals Depreciation and depletion charge Impairment loss Disposal of assets due to sale of a subsidiary Transfer to assets held for sale Translation difference At December 31, 2007, cost, net of accumulated depreciation and government grants Buildings and constructions Machinery and equip- ment Transport and motor vehicles Mining as- sets Other assets Assets under construction Total $ 1,075 $ 1,497 $ 202 $ 314 $ 31 $ 474 $ 3,655 (3) 2 654 175 (13) (95) (1) (2) (12) 96 – 9 2,359 392 (20) (405) (3) – (8) 163 – 12 107 72 (7) (37) – – – 14 – 34 2,530 34 (3) (98) (1) – – 123 – – 51 16 (2) (21) – – – 1 5 665 238 (689) (4) – (2) – – 41 – 722 6,027 – (55) (656) (7) (2) (21) 444 Land $ 62 (2) – 88 – (6) – – – (1) 6 $ 147 $ 1,876 $ 3,984 $ 363 $ 2,933 $ 76 $ 728 $ 10,107 The movement in property, plant and equipment for the year ended December 31, 2006 was as follows: US$ million At December 31, 2005, cost, net of accumulated depreciation and government grants Reclassiﬁ cations Additions Assets acquired in business combi- nation Assets put into operation Disposals Depreciation and depletion charge Impairment loss Disposal of assets due to sale of a subsidiary Transfer to assets held for sale Change in site restoration provision Translation difference At December 31, 2006, cost, net of accumulated depreciation and government grants Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Assets under construction Total $ 724 $ 1,147 $ 155 $ 281 $ 27 $ 670 $ 3,062 (12) 1 43 289 (5) (45) (1) (1) – 1 81 10 4 55 408 (12) (203) (2) (4) (25) – 119 3 25 1 54 (2) (25) – (21) – – 12 8 17 10 – – (20) – – (21) 13 26 (1) 1 1 9 (1) (8) – – – – 3 (8) 625 5 (763) (10) – (17) (1) (87) – 60 – 673 123 – (30) (301) (20) (27) (148) 16 307 Land $ 58 – – 8 3 – – – – (15) 2 6 $ 62 $ 1,075 $ 1,497 $ 202 $ 314 $ 31 $ 474 $ 3,655 Impairment losses relate to certain items of property, plant and equipment that were recognised as functionally obsolete in the respective ﬁ nancial year. In 2008, impairment losses include $72 million identiﬁ ed as a result of the testing at the level of cash generating units. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 10. Intangible Assets Other Than Goodwill Intangible assets consisted of the following as of December 31: 149 US$ million Cost: Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Accumulated amortisation: Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other 2008 2007 2006 $ 911 $ 714 $ 7 31 63 9 68 53 1,135 (189) (12) (3) (4) (9) (33) (250) $ 885 31 63 10 66 46 930 (87) (6) (2) (3) – (26) (124) $ 806 3 6 10 1 17 44 (1) – – (1) – (5) (7) $ 37 As of December 31, 2008 and 2007, water rights and environmental permits with a carrying value $56 million had an indeﬁ nite useful life. The movement in intangible assets for the year ended December 31, 2008 was as follows: US$ million At December 31, 2007, cost, net of accumulated amortisation Additions Assets acquired in business combination Amortisation charge Emission allowances granted Emission allowances used for the period Impairment loss Translation difference At December 31, 2008, cost, net of accumulated amortisation Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Total $ 627 – 366 (117) – – – (154) $ 722 $ 25 $ 61 – – (6) – – – – – – (1) – – – – $ 7 – – (2) – – – – $ 66 $ 20 $ 806 – 29 (10) – – – (26) 2 7 (8) 12 (1) (7) (5) 2 402 (144) 12 (1) (7) (185) $ 19 $ 60 $ 5 $ 59 $ 20 $ 885 The movement in intangible assets for the year ended December 31, 2007 was as follows: US$ million At December 31, 2006, cost, net of accumulated amortisation Additions Assets acquired in business combination Amortisation charge Emission allowances granted Emission allowances used for the period Impairment loss Translation difference At December 31, 2007, cost, net of accumulated amortisation Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms $ 6 – 697 (87) – – – 11 $ 3 – 28 (6) – – – – $ 6 – 57 (1) – – – (1) $ 9 – – (2) – – – – $ 1 65 – – – – – – Other Total $ 12 $ 37 5 11 (6) 1 (4) (1) 2 70 793 (102) 1 (4) (1) 12 $ 627 $ 25 $ 61 $ 7 $ 66 $ 20 $ 806 In 2007, the Group acquired a 51% ownership interest in Frotora Holdings Ltd. (Cyprus). This purchase did not qualify for a business com- bination as the acquired company does not constitute a business. The company’s assets comprised only rights under a long-term lease of land to be used for a construction of a commercial sea port in Ukraine. These rights were valued at $65 million (at the exchange rate as of the date of the purchase) and included in contract terms category of the intangible assets. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Intangible Assets Other Than Goodwill (continued) 150 The movement in intangible assets for the year ended December 31, 2006 was as follows: US$ million At December 31, 2005, cost, net of accumulated amortisation Additions Assets acquired in business combination Amortisation charge Emission allowances granted Emission allowances used for the period Sale of emission allowances Impairment loss Translation difference At December 31, 2006, cost, net of accumulated amortisation Customer relation-ships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Total $ – – 7 (1) – – – – – $ – $ – – 3 – – – – – – – 6 – – – – – – $ – – 10 (1) – – – – – $ – $ 19 $ 19 – 1 – – – – – – 3 – (4) 15 (9) (4) (9) 1 3 27 (6) 15 (9) (4) (9) 1 $ 6 $ 3 $ 6 $ 9 $ 1 $ 12 $ 37 11. Investments in Joint Ventures and Associates The Group accounted for investments in joint ventures and associates under the equity method. The movement in investments in joint ventures and associates was as follows: Highveld Kazankov- skaya Other as- sociates US$ million Notes Investment at December 31, 2005 Additional investments Share of proﬁ t/(loss) Dividends paid Reorganisation of ownership structure within a joint venture Additional paid-in capital in respect of acquisition of minority interests Sale of shares in a subsidiary to minority shareholders Cost of guarantee issued to a joint venture Translation difference Investment at December 31, 2006 Additional investments Share of proﬁ t/(loss) Dividends paid Assets acquired in business combination Acquisition of controlling interests Translation difference Investment at December 31, 2007 Share of proﬁ t/(loss) Dividends paid Return of capital to a shareholder Assets acquired in business combination Translation difference Investment at December 31, 2008 Corber Enterprises Limited 19 19 4 4 4 Corber $ 229 225 39 – (1) – 58 2 25 577 – 82 (120) – – 34 573 212 (95) (35) – (114) $ 541 Yuzhkuz- bassugol $ 675 – (28) (32) – 1 – – 63 679 – (10) – – (682) 13 – – – – – – $ – 216 17 (9) – – – – 7 231 442 20 (15) – (686) 8 – – – – – – $ – $ – $ – – – – – – – – – – – (5) – 19 – 1 15 (14) – – – (1) $ – $ 2 1 12 (8) – – – – – 7 – 1 (1) 2 (5) – 4 – – – 7 (1) $ 10 Total $ 906 442 40 (49) (1) 1 58 2 95 1,494 442 88 (136) 21 (1,373) 56 592 198 (95) (35) 7 (116) $ 551 Corber Enterprises Limited (“Corber”) is a joint venture established in 2004 for the purpose of exercising joint control over economic activi- ties of Raspadskaya Mining Group. On May 31, 2006, Corber acquired a 100% ownership interest in Mezhdurechenskaya Ugolnaya Company - 96 (“MUK-96”) from Adroliv, one of the Corber’s shareholders, in exchange for Corber’s newly issued 7,200 ordinary shares and 4,800 preferred shares with par value of $1 each. Under the terms of the acquisition, preferred dividends of $318 million were paid by Corber to Adroliv in respect of Corber’s acquisition of MUK-96. MUK-96, an open joint stock company registered in the Russian Federation, is mainly involved in coal mining. MUK-96 holds a 99% owner- ship interest in ZAO Razrez Raspadsky (“Razrez Raspadsky”). Razrez Raspadsky is involved in rendering mining services, including open pit mine works at Raspadskaya mine in the Kemerovo region, the Russian Federation. Prior to the acquisition of MUK-96, one of the Corber’s subsidiaries acquired a 1% ownership interest in Razrez Raspadsky for cash consideration of $2 million. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 The total cost of the business combination, including cash consideration and fair value of equity instruments exchanged, amounted to $770 million. The table below sets forth the fair values of identiﬁ able assets, liabilities and contingent liabilities of MUK-96 and Razrez Raspadsky at the date of acquisition: 151 US$ million Mineral reserves Other property, plant and equipment Inventories Accounts and notes receivable Cash Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets Purchase consideration May 31, 2006 $ 897 77 4 17 34 1,029 18 218 23 259 $ 770 $ 770 In order to retain its 50% ownership interest in Corber, on May 31, 2006, the Group acquired from Adroliv 3,600 newly issued ordinary shares of Corber for cash consideration of $225 million. In addition, in 2006, the Group settled its liabilities under the interest-bearing promissory notes of Mastercroft Mining Limited, the Group’s subsidiary, in the amount of $20 million payable in connection with the acquistion of a 50% ownership interest in Corber in 2004. The table below sets forth Corber’s assets and liabilities as of December 31: US$ million Mineral reserves Other property, plant and equipment Other non-current assets Inventories Accounts and notes receivable Cash Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Minority interests Net assets The table below sets forth Corber’s income and expenses: US$ million Revenue Cost of revenue Other expenses, including income taxes Net proﬁ t Attributable to: Equity holders of the parent entity Minority interests Net proﬁ t 50% of unrealised proﬁ ts on transactions with the joint venture Group’s share of proﬁ ts of the joint venture 2008 $ 935 643 5 56 268 73 2007 $ 1,163 2006 $ 1,148 587 10 51 245 84 474 9 27 365 56 1,980 2,140 2,079 333 188 102 623 277 328 297 107 732 260 52 296 363 711 216 $ 1,080 $ 1,148 $ 1,152 2008 $ 1,200 (362) (311) $ 527 $ 420 107 $ 527 2 $ 212 2007 $ 784 (374) (194) $ 216 $ 170 46 $ 216 (3) $ 82 2006 $ 472 (271) (116) $ 85 $ 79 6 $ 85 – $ 39 On July 7, 2006, the Group guaranteed the liabilities of OAO Raspadskaya, Corber's subsidiary, under a $300 million loan agreement with Natexis Banques Populaires. The loan bore interest of LIBOR plus 0.85% per annum and matured on June 30, 2007. The Group recognised a fair value of the guarantee as a liability in the amount of $2 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Investments in Joint Ventures and Associates (continued) 152 Yuzhkuzbassugol On December 30, 2005, the Group acquired a 50% ownership interest in ZAO Coal Company Yuzhkuzbassugol (“Yuzhkuzbassugol”) for cash consideration of $675 million payable to Crondale Overseas Limited (“Crondale”), an entity under common control with the Group. The Group determined that its ownership interest in Yuzhkuzbassugol represents the purchase of an associate and accounted for the investment under the equity method. The table below sets forth Yuzhkuzbassugol’s assets and liabilities as of December 31, 2006: US$ million Mineral reserves Other property, plant and equipment Investment in an associate Other non-current assets Inventories Accounts and notes receivable Other current assets Cash Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Minority interests Net assets 2006 $ 1,161 658 152 40 27 71 6 18 2,133 216 294 255 765 9 $ 1,359 The table below sets forth Yuzhkuzbassugol’s income and expenses for the periods from its acquisition till the date when the entity became a subsidiary of the Group: US$ million Revenue Cost of revenue Other expenses, including income taxes Net loss Attributable to: Equity holders of the parent entity Minority interests Net loss Group’s share of loss of the associate Kazankovskaya Period from January 1 to June 8, 2007 Year ended December 31, 2006 $ 258 (194) (84) $ (20) $ (20) – $ (20) $ (10) $ 595 (482) (170) $ (57) $ (54) (3) $ (57) $ (28) In 2007, assets acquired in business combination included investment in ZAO Kazankovskaya (“Kazankovskaya”), a coal mining company and an associate of Yuzhkuzbassugol (Note 4). The Group owns 50% in Kazankovskaya. In 2007, the investment in Kazankovskaya was accounted for based on provisional values as the Group, as of the date of authorisation of issue of ﬁ nancial statements for the year ended December 31, 2007, did not complete purchase price allocation in accordance with IFRS 3 “Business Combinations”. In 2008, the Group ﬁ nalised its purchase price allocation on the acquisition of Yuzhkuzbassugol and recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities of Kazankovskaya at the date of acquisition of Yuzhkuzbassugol. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 The table below sets forth the fair values of Kazankovskaya’s identiﬁ able assets, liabilities and contingent liabilities as of June 8, 2007: 153 US$ million Mineral reserves Other property, plant and equipment Inventories Accounts receivable Other current assets Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets The table below sets forth Kazankovskaya’s assets and liabilities as of December 31: US$ million Mineral reserves Other property, plant and equipment Inventories Accounts receivable Other current assets Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets Provisional fair values $ 556 59 1 13 2 631 83 130 11 224 $ 407 Final estimation of fair values $ 69 59 1 13 2 144 83 13 11 107 $ 37 2007 $ 72 59 1 8 3 143 92 10 11 113 $ 30 2008 $ 38 46 2 1 1 88 83 – 13 96 $ (8) The table below sets forth Kazankovskaya’s income and expenses for the periods from acquisition of the controlling interest in Yuzhkuz- bassugol: Notes Year ended December 31, 2008 Period from June 8 to December 31, 2007 US$ million Revenue Cost of revenue Other expenses, including income taxes Net loss Group’s share of loss of the associate including: share of loss allocated against loan receivable from Kazankovskaya 13 $ 15 (24) (27) $ (36) $ (18) (4) $ 7 (11) (5) $ (9) $ (5) – ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Investments in Joint Ventures and Associates (continued) 154 Highveld Steel and Vanadium Corporation On July 13, 2006, the Group acquired a 24.9% ownership interest in Highveld (Note 4). The Group determined that its ownership interest in Highveld represents an investment in an associate and accounted for it under the equity method. The table below sets forth the fair values of Highveld’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: Notes July 13, 2006 US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Assets of disposal groups classiﬁ ed as held for sale Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Liabilities directly associated with disposal groups classiﬁ ed as held for sale Total liabilities Net assets Fair value of net assets attributable to 24.9% ownership interest Purchase consideration Goodwill 5 including goodwill associated with disposal groups subsequently classiﬁ ed as held for sale The table below sets forth Highveld’s assets and liabilities as of December 31, 2006: US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Assets of disposal groups classiﬁ ed as held for sale Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Liabilities directly associated with disposal groups classiﬁ ed as held for sale Total liabilities Net assets $ 419 352 4 74 149 108 170 1,276 32 184 323 6 545 $ 731 $ 182 $ 216 $ 34 $ 16 2006 $ 489 344 2 69 167 74 176 1,321 44 192 275 19 530 $ 791 On February 26, 2007, when the Board of directors of the Company approved the acquisition transaction, the completion of the acquisi- tion of controlling interest in Highveld became probable and the Group recognised liabilities to Anglo and Credit Suisse under the option agreements (Note 4) in the amount of $442 million. As a result, taking into account the eventual exercise of potential voting rights under the option agreements concluded by the Group with Anglo and Credit Suisse in 2006 in respect of an additional 54.1% ownership interest in Highveld, under which the exercise price for put and call options was ﬁ xed and adjusted for dividends to be distributed by Highveld to Anglo and Credit Suisse, the Group, in substance, obtained access to the economic beneﬁ ts associated with that additional ownership interest. Consequently, the Group accounted for a 79% ownership interest in the associate under the equity method beginning February 26, 2007. In 2007, the increase in the beneﬁ cial interest in Highveld was accounted for based on provisional values as the Group, as of the date of authorisation of issue of the ﬁ nancial statements for the year ended December 31, 2007, had not completed valuation of assets of the associate in accordance with IFRS 3. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 In 2008, the Group completed purchase price allocation and recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities of Highveld as of February 26, 2007. 155 US$ million Property, plant and equipment Intangible assets Other non-current assets Inventories Accounts and notes receivable Cash and cash equivalents Assets of disposal groups classiﬁ ed as held for sale Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Liabilities directly associated with disposal groups classiﬁ ed as held for sale Total liabilities Net assets Fair value of net assets attributable to 54.1% beneﬁ cial ownership interest Purchase consideration consisting of a liability under the option agreements Goodwill/(excess of interest in the net fair value of acquiree’s identiﬁ able assets, liabilities and contingent liabilities over the cost of acquisition) Provisional fair values Final estimation of fair values $ 413 385 2 71 184 58 330 1,443 55 180 335 39 609 $ 834 $ 451 $ 442 $ (9) $ 413 385 2 71 184 58 287 1,400 55 169 335 39 598 $ 802 $ 434 $ 442 $ 8 The Group classiﬁ ed assets, including goodwill, and liabilities of the businesses to be disposed of in accordance with the resolution of the European Commission as disposal groups held for sale (Note 12). The table below sets forth Highveld’s income and expenses for the periods from its acquisition till the date when the entity became a subsidiary of the Group: US$ million Revenue Cost of revenue Other expenses, including income taxes Net proﬁ t Group’s share of proﬁ ts of the associate Period from January 1 to April 26, 2007 Period from July 13 to December 31, 2006 $ 351 (276) (42) $ 33 $ 20 $ 481 (376) (37) $ 68 $ 17 12. Disposal Groups Held for Sale The major classes of assets and liabilities of the disposal groups measured at the lower of carrying amount and fair value less costs to sell were as follows as of December 31: US$ million Land Other property, plant and equipment Goodwill Other non-current assets Current assets Assets classiﬁ ed as held for sale Liabilities directly associated with assets classiﬁ ed as held for sale 2008 $ – 7 – – – 7 – 2007 $ 1 139 15 – 56 211 39 2006 $ 5 71 – 9 20 105 23 Net assets classiﬁ ed as held for sale $ 7 $ 172 $ 82 At December 31, 2008 and 2007, receivables in respect of the sold assets in the amount of $10 million and $16 million, respectively, were included in accounts receivable and receivables from related parties, respectively. At December 31, 2006, assets held for sale were mostly represented by OAO Nerungriugol (“Nerungriugol”), a subsidiary, which the Group intended to dispose of in April 2007. In addition, these assets included a few small subsidiaries involved in non-core activities (construction business, trading activity and recreational services), certain assets located at one of the Group’s steel subsidiaries and a parcel of land, which were expected to be sold in 2007. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Investments in Joint Ventures and Associates (continued) Highveld Steel and Vanadium Corporation (continued) 156 Nerungiugol was included in the mining segment of the Group’s operations. The Group recognised a $66 million impairment loss of Nerungriugol’s assets based on intended disposal terms and included it in loss on assets held for sale in the consolidated income state- ment for the year ended December 31, 2006. The other losses on assets held for sale for the year ended December 31, 2006 related to OOO Nikomogneupor, the Group’s subsidiary involved in the production of refractory materials, which was sold in November 2006. In addition, in 2006, the Group recognised an impairment loss of $5 million for write-down of land to fair value which was included in gain/ (loss) on assets held for sale in the consolidated income statement for the year ended December 31, 2006. In 2007, the Group reversed this impairment and recorded the gain on sale of land in the amount of $4 million. On April 25, 2007, the Group completed the sale of Nerungriugol. The total disposal consideration amounted to $84 million. Upon comple- tion of the transaction, the Group recognised additional loss representing the difference between the estimated fair value less cost to sell of the disposal group as of December 31, 2006 and actual proceeds. This additional loss amounting to $3 million was included in the consolidated income statement for the year ended December 31, 2007. The assets held for sale at the date of acquisition of ownership interests in Highveld (Notes 4 and 11) included two divisions of High- veld (Transalloys, producing manganese alloys, and Rand Carbide, producing ferrosilicon and various carbonaceous products). Both divi- sions were included in the steel segment of the Group’s operations. Transalloys division was sold in July 2007 for cash consideration of $139 million, resulting in a loss of $11 million. Rand Carbide was sold in February 2008 for cash consideration of $39 million, which ap- proximated the carrying value of the disposed assets. In addition, in 2007, for the purpose of acquisition of Highveld (Note 4), the Group committed to divest Highveld's vanadium extraction, vanadium oxides and vanadium chemicals plants located at the Vanchem site in Witbank, Republic of South Africa (collectively referred to as the Vanchem operations) along with an equity interest or a portion of the Mapoch iron and vanadium ore mine which guarantees supply of ore and slag to Vanchem operations. The divestment package also included a ferrovanadium smelter located on the site of Highveld steel facility and Highveld's 50% shareholding in SAJV, a joint venture between Highveld and two Japanese partners which own another ferrovanadium smelter at the same site. At December 31, 2007, the assets and liabilities of these business units were classiﬁ ed as assets and liabilities of disposal groups held for sale (Notes 4 and 11). The Highveld divestment package was included in the vanadium segment of the Group’s operations. On April 21, 2008, Highveld concluded agreements with an associated company of Duferco Group, for the sale of the above mentioned vanadium production facilities, together with the 50% shareholding in SAJV, and a 35% non-dividend equity interest in Mapochs Mine (Pty) Ltd. The selling price was $110 million (at the exchange rate as of the date of disposal), transaction costs amounted to $10 million, including $3 million paid in 2007. On August 21, 2008, all regulatory consents were obtained, and the effective date of the disposal was August 29, 2008. In 2008, the Group recognised a loss of $45 million representing the difference between the estimated fair value less costs to sell of the disposal group as of December 31, 2007 and actual proceeds. The table below demonstrates the carrying values of assets and liabilities, at the dates of disposal, of the subsidiaries and other business units disposed of in 2008 and 2007. US$ million Property, plant and equipment Goodwill Other non-current assets Inventory Accounts and notes receivable Assets held for sale acquired in business combinations Total assets Deferred income tax liabilities Current liabilities Total liabilities Net assets Cash ﬂ ow on disposal of subsidiaries and other business units was as follows: US$ million Net cash disposed with subsidiaries Transaction costs Cash received Net cash inﬂ ow 2008 $ 91 13 – 35 33 36 208 10 12 22 2007 $ 74 – 8 – 20 137 239 – 7 7 $ 186 $ 232 2008 $ – (7) 168 2007 $ – (3) 226 $ 161 $ 223 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 13. Other Non-Current Assets Other non-current assets were as follows as of December 31: US$ million Deposit to secure put option for the shares of OAO Vanady Investments in Delong Holdings Limited Investments in Cape Lambert Iron Ore Prepayment for a contribution to a newly established joint venture Deposit to secure put option for the Highveld’s shares Restricted deposits at banks Long-term input VAT Loans issued to related parties Loans receivable Trade and other receivables Deﬁ ned beneﬁ t plan asset Other CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 157 Notes 2008 $ 105 2007 $ 126 2006 $ – 4 29 29 29 23 23 10 28 – 2 2 38 5 40 4 21 – – – – 5 2 46 12 27 – 22 – – – 207 12 19 1 7 – – 26 $ 278 $ 240 $ 272 Deposit to Secure Put Option for the Shares of OAO Vanady On December 20, 2007, the Group signed an option agreement with OOO SGMK-Engineering in respect of shares of OAO Vanady, a vana- dium reﬁ nery located in Russia. Under the agreement, the Group has the right to acquire (the call option) and OOO SGMK-Engineering has the right to sell to the Group (the put option) 90.84% of shares of OAO Vanady for 3,140 million roubles ($107 million at the exchange rate as of December 31, 2008). The options expired on December 31, 2008 and were extended to December 31, 2009. The exercise of the options is conditional upon the receipt of the approval of the regulatory authorities. As of the date of the issuance of these consolidated ﬁ nancial statements, the Group did not apply for this approval and the options were not exercisable. To secure the put option the Group provided the seller with a non-interest bearing deposit in the amount of 3,091 million roubles ($121 million at the exchange rate as of the payment date and $105 million at the exchange rate as of December 31, 2008). The deposit is repayable to the Group if neither the call option nor the put option is exercised before their expiration. Investments in Delong Holdings Limited On February 18, 2008, the Group entered into a share purchase agreement to acquire up to approximately 51.05% of the issued share capital of Delong Holdings Limited (“Delong”), a ﬂ at steel producer, headquartered in Beijing (the People’s Republic of China – “China”), over an agreed period of time. This transaction is subject to anti-trust clearance by the regulatory authorities of China. The share purchase agreement entered into between the Group, Best Decade and the shareholders of Best Decade included an initial sale to the Group of 10.01% of the issued share capital of Delong (the “Initial Sale”) at 3.9459 Singapore dollar (S$) per share (the “Of- fer Price”) or S$211 million ($150 million at the exchange rate as of the date of the transaction). This transaction was completed on February 28, 2008. Best Decade has also granted the Group a call option to acquire an additional 32.08% of the issued share capital of Delong. The Group has granted Best Decade a put option with respect to 32.08% of the issued share capital of Delong, exercisable during the same period. The call option and put option are subject to the satisfaction of certain conditions, including obtaining antitrust approval and clearance from Ministry of Commerce and State Administration of Industry and Commerce of China. Both the call option and the put option have a strike price equal to the offer price of S$3.9459 per share. Total consideration under call and put option is S$677 million ($469 million at the exchange rate as of December 31, 2008). Initially, the options were exercisable within six months after February 18, 2008. In August 2008, this period was extended for a period of another six months and in February 2009 the period of exercise was extended to August 18, 2009. In addition, the beneﬁ cial shareholders of Best Decade have agreed to sell in the future approximately 8.96% of the issued share capi- tal of Delong to the Group at the offer price when certain restrictions in place due to existing ﬁ nancing arrangements are released. The purchase price of additional shares is estimated at S$3.9459 per share or S$189 million ($131 million at the exchange rate as of December 31, 2008). Following completion of these transactions, the Group will control approximately 51.05% of the issued share capital of Delong. In accordance with the Singapore Code on Takeovers and Mergers, the Group will be required to make a mandatory cash offer for the remaining Delong shares at the offer price upon acquisition of 30% of shares in the company. The maximum consideration payable under that mandatory cash offer by the Group will be approximately S$484 million ($336 million at the exchange rate as of December 31, 2008), assuming a full acceptance of the mandatory offer. The investments in Delong were classiﬁ ed as available-for-sale ﬁ nancial assets and measured at fair value based on market quotations. The change in the fair value of these shares was initially recorded in equity. At December 31, 2008, the Group assessed the recoverability of these ﬁ nancial assets and considered them as impaired due to a signiﬁ cant and prolonged decline in the fair value of the investments. The cumulative loss of $129 million, being the difference between the acquisition cost and fair value of the shares at the reporting date, was recognised in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2008, within impairment of available-for-sale ﬁ nancial assets (Note 7). The foreign exchange gain amounted to $2 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Other Non-Current Assets (continued) Investments in Delong Holdings Limited (continued) 158 In addition, the put option agreement for the shares of Delong was considered as onerous contract, in which the unavoidable costs of meeting the obligations exceed the economic beneﬁ ts expected to be received under it. The Group did not recognise any provision for onerous contract, because the probability of the exercise of the put option is assessed as remote. Investments in Cape Lambert Iron Ore In March – June 2008, the Group purchased quoted shares and options to acquire quoted shares of Cape Lambert Iron Ore, an Australian mining company, for a total purchase consideration of $19 million. The Group recognised a gain of $5 million, representing the change in the fair value of options, in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement, within change in the fair value of derivatives disclosed in Note 7. In July 2008, the Group additionally paid $15 million and, thereby, converted all of the options into shares. The shares of Cape Lambert Iron Ore were classiﬁ ed as available-for-sale ﬁ nancial assets and measured at fair value based on market quotations. The change in the fair value of these shares was initially recorded in equity. At December 31, 2008, the Group assessed the recoverability of these ﬁ nancial assets and considered them as impaired due to a signiﬁ cant and prolonged decline in the fair value of the investments. The cumulative loss of $21 million, being the difference between the acquisition cost and fair value of the shares at the reporting date, was recognised in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2008, within impairment of available-for-sale ﬁ nancial assets (Note 7). The foreign exchange loss amounted to $8 million. As of December 31, 2008, investments in Cape Lambert Iron Ore represented a 13.65% ownership interest in the entity. Deposit to Secure Put Option for the Highveld’s Shares Deposit to secure put option for the Highveld’s shares did not earn interest and matured upon the completion of the transaction (Note 4). Loans Issued to Related Parties Amounts receivable from related parties represent rouble-denominated loans granted by Yuzhkuzbassugol to Kazankovskaya (Note 11) in 2004 – 2005. The loans bear interest of 10% per annum and mature in 2013. In 2008, the Group recognised an impairment loss of $4 million in respect of this loan, which was included in other operating expense in the consolidated income statement for the year ended December 31, 2008. 14. Inventories Inventories consisted of the following as of December 31: US$ million Raw materials and spare parts, at cost Work-in-progress, at cost Finished goods: – at cost – at net realisable value Allowance for obsolete and slow-moving items 2008 $ 1,222 490 508 267 2,487 (71) 2007 $ 773 210 648 – 1,631 (12) 2006 $ 431 106 334 6 877 (13) $ 2,416 $ 1,619 $ 864 As of December 31, 2008, 2007 and 2006, certain items of inventory with an approximate carrying amount of $648 million, $415 million and $194 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 21). 15. Trade and Other Receivables Trade and other receivables consisted of the following as of December 31: US$ million Trade accounts receivable Other receivables Allowance for doubtful accounts 2008 $ 1,365 90 1,455 (86) 2007 $ 1,156 723 1,879 (77) 2006 $ 586 29 615 (59) $ 1,369 $ 1,802 $ 556 Ageing analysis and movement in allowance for doubtful accounts are provided in Note 29. 16. Related Party Disclosures For the purposes of these ﬁ nancial statements, parties are considered to be related if one party has the ability to control the other party or exercise signiﬁ cant inﬂ uence over the other party in making ﬁ nancial 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 ef- fected on the same terms, conditions and amounts as transactions between unrelated parties. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Amounts owed by/to related parties at December 31 were as follows: Amounts due from related parties Amounts due to related parties 159 US$ million Corber Evrazmetall-Centre Evrazmetall-Sibir Evrazmetall-Ural Lanebrook Limited Marens Raspadsky Ugol SEAR-MF Sojitz Noble Alloys Corp. Yuzhkuzbassugol Yuzhny GOK Other entities Less: allowance for doubtful accounts 2008 $ – – – – 81 – 1 – – – 37 21 140 (3) $ 137 2007 $ – – – – – 31 – – 2 – – 29 62 (2) $ 60 2006 $ – 1 18 11 – – – – – – – 24 54 – $ 54 2008 $ – – – – – – 56 – 23 – 231 12 322 – 2007 $ 70 – – – 1,022 – 24 19 3 – – 66 1,204 – $ 322 $ 1,204 Transactions with related parties were as follows for the years ended December 31: Sales to related parties Purchases from related parties US$ million Evrazmetall-Centre Evrazmetall-Chernozemie Evrazmetall-Povolzhie Evrazmetall-Severo-Zapad Evrazmetall-Sibir Evrazmetall-Ural Evro-Aziatskaya Energy Company Raspadsky Ugol Sojitz Noble Alloys Corp. Yuzhkuzbassugol Yuzhny GOK Other entities 2008 $ – – – – – – – – 52 – 57 20 $ 129 2007 $ 144 65 65 46 137 157 – – – 1 – 17 $ 632 2006 $ 141 53 62 45 146 150 23 – 18 12 – 14 2008 $ – – – – – – – 354 1 631 77 2007 $ – – – – – – – 192 1 121 – 55 $ 664 $ 1,063 $ 369 $ 523 2006 $ 151 – – – – – 3 – 8 7 – 7 176 – $ 176 2006 $ – – – – – – 104 80 1 279 – 59 In addition to the balances and transactions disclosed in this note, loans due to and receivable from related parties are presented sepa- rately in the consolidated balance sheets and in Note 13. Corber is the Group’s joint venture (Note 11). At December 31, 2007 and 2006, amounts due to Corber represented advances received from the entity in respect of dividends to be declared for 2007. Crondale is an entity under control of an ultimate principal shareholder of the Group. In 2006, the Group fully repaid its liabilities to Cron- dale for the purchase of 50% share in Yuzhkuzbassugol (Note 11). OOO Evrazmetall-Centre, OOO Evrazmetall-Sibir, OOO Evrazmetall-Ural, OOO Evrazmetall-Povolzhie, OOO Evrazmetall-Severo-Zapad, OOO Evrazmetall-Chernozemie were the entities under control of an ultimate principal shareholder of the Group and purchased steel products from the Group. In 2007 and 2006, the Group sold approximately 5% and 7%, respectively, of volume of steel products to these entities. The transactions were made on terms equivalent to those that prevail in arm’s length transactions. In December 2007, the ultimate principal shareholder of the Group sold its ownership interests in these companies and they ceased to be the related parties to the Group. OOO Evro-Aziatskaya Energy Company (“EvrazEK”), an energy generating company, was an entity under common control. In 2006, the Group acquired the entity (Note 4). EvrazEK supplies natural gas, steam and electricity to certain subsidiaries of the Group and purchases steel products and materials from the Group companies. Lanebrook Limited is a controlling shareholder of the Company. The amounts receivable from Lanebrook Limited represent overpayments for the acquired working capital of the Ukrainian businesses (Note 4). In addition, in 2008, the Group acquired a 1% ownership interest in Yuzhny GOK for cash consideration of $38 million. As part of the transaction, the Group signed a put option agreement that gives the Group the right to sell these shares back to Lanebrook Limited for the same amount. The put option expires on December 31, 2009. Marens is an entity under control of ultimate principal shareholders of the Group. In 2007, the Group granted a short-term interest-bearing loan to Marens for ﬁ nancing the construction of the ofﬁ ce building to be rented by one of the Group’s subsidiaries. In 2008, the loan was repaid to the Group. OOO Raspadsky Ugol (“Raspadsky Ugol”), a subsidiary of the Group’s joint venture, sells coal to the Group. Raspadsky Ugol represents approximately 20% of volume of the Group’s coal purchases. The coal was sold at prevailing market prices at the dates of transactions. ZAO SEAR-MF (“SEAR-MF”) is an entity under control of an ultimate principal shareholder of the Group. The accounts payable to SEAR-MF represent zero-interest loans to Yuzhkuzbassugol, which were settled in 2008. Sojitz Noble Alloys Corp. (“Sojitz”), a Japanese trade house, is a minority shareholder of Stratcor, the Group’s subsidiary. Sojitz exercises a signiﬁ cant inﬂ uence over Stratcor. Sojitz acts as a sales agent of Stratcor. At December 31, 2008, 2007 and 2006, other long-term liabili- ties (Note 26) include a $14 million ﬁ nancial liability in respect of the ﬁ xed cumulative preferred dividends of $1 million per year payable to Sojitz. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Related Party Disclosures (continued) 160 Yuzhkuzbassugol, the major coal supplier, was the Group’s associate. The Group sold coal to processing mills of Yuzhkuzbassugol. The transactions were made at prevailing market prices at the dates of transactions. In 2007, Yuzhkuzbassugol became the Group’s subsidiary (Note 4). Yuzhny GOK, the ore mining and processing plant, is an entity under signiﬁ cant inﬂ uence of Lanebrook Limited. The Group sold steel prod- ucts to Yuzhny GOK and purchased iron ore from the entity. The transactions were based on market prices. Compensation to Key Management Personnel Key management personnel totalled 60, 48 and 46 persons as at December 31, 2008, 2007 and 2006, respectively. Total compensa- tion to key management personnel were included in general and administrative expenses in the accompanying income statement and consisted of the following: US$ million Salary Performance bonuses Social security taxes Share-based payments Termination beneﬁ ts Other beneﬁ ts 17. Other Taxes Recoverable Taxes recoverable consisted of the following as of December 31: US$ million Input VAT Other taxes Notes 24 2008 $ 22 29 1 18 – 1 2007 $ 25 20 1 3 10 – 2006 $ 18 21 1 11 – 3 $ 71 $ 59 $ 54 2008 $ 257 140 $ 397 2007 $ 209 142 $ 351 2006 $ 264 67 $ 331 Input VAT, representing amounts payable or paid to suppliers, is recoverable from the tax authorities 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 balance of input value added tax and believes it is fully recoverable within one year. 18. Short-term Investments Short-term investments included the following as of December 31: US$ million Financial instrument relating to the transaction with a 49% ownership interest in NS Group Investments in Yuzhny GOK Bank deposits Financial assets at fair value through proﬁ t or loss Notes 4 16 2008 $ 508 38 25 18 2007 2006 $ – – 25 – $ – – 25 – $ 589 $ 25 $ 25 Financial Instrument Relating to the Transaction With a 49% Ownership Interest in NS Group This ﬁ nancial instrument represents investment amounting to $511 million in a 49% ownership interest in NS Group (Note 4) which was sold on January 30, 2009 for cash consideration of $508 million. The Group recognised an impairment loss of $3 million, which was included in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2008 (Note 7). MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 19. Cash and Cash Equivalents Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of December 31: 161 US$ million US dollar South African rand Russian rouble Euro Canadian dollar Ukrainian hryvnia Czech koruna Other 20. Equity Share Capital Number of shares Authorised ordinary shares of €2 each Issued and fully paid ordinary shares of €2 each 2008 $ 536 177 124 45 27 12 7 2 2007 $ 72 105 55 83 – – 10 2 2006 $ 632 42 110 36 – – 19 3 $ 930 $ 327 $ 842 2008 2007 2006 157,204,326 157,204,326 157,204,326 122,504,803 118,309,653 117,499,606 Shareholders of Evraz Group are entitled to standard rights provided under the laws of Luxembourg to shareholders of stock companies (“société anonyme”). These rights comprise the right to vote at the shareholders meetings and the right to receive dividends. Acquisition of the Ukrainian Businesses On September 9, 2008, the Company issued 4,195,150 shares with par value of €2 each to settle the remaining liability for the acquisition of Palmrose (Note 4). Share premium on this issue, being the difference between the fair value of the shares measured based on market quotations at that date and nominal value of the issued shares, amounted to $746 million. Transaction costs were $1 million. Scrip Dividends On January 30, 2009, the Extraordinary General Meeting approved the modiﬁ cation of the method of payment of the 2008 interim divi- dends: euro equivalent of the outstanding dividends of $2.25 per share could be either exchanged for new shares of Evraz Group S.A. or paid in cash to the shareholders who voted against or abstained from voting. The voluntary partial scrip dividend alternative was voted for in respect of 97,553,473 shares, representing 79.62% of the Company’s share capital, entitling the holders to subscribe to 9,755,347 new shares issued at a price of $22.50 per share. The new shares are ranked pari passu with the existing ordinary shares of Evraz Group S.A. The Company’s major shareholder, Lanebrook Limited, subscribed to 9,193,477 shares, and its holding of the Company’s voting shares after the subscription became 77.60%. Share-based Payment Transactions In 2006, some of the share options granted under the Company’s Incentive Plan 2005 (Note 24) were exercised. The Company issued 595,280 shares with par value of €2 each and received $26 million in cash from the Plan’s participants. Share premium of $24 million arising on the transaction was included in additional paid-in capital. In 2007, the grantees exercised additional share options. The Company issued 810,047 shares with par value of €2 each and received $35 million in cash from the Plan’s participants. Share premium of $33 million arising on the transaction was included in additional paid- in capital. Starting from May 23, 2007, the Group made a decision to cease the issuance of new shares under the share options plans. Since that date the Group acquires its own shares (in the form of global depositary receipts) on the open market for the grantees or repurchases the share options after vesting. In 2008 and 2007, 275,994 and 243,872 share options, respectively, have been repurchased after vesting. The cash spent on repurchase of vested options, amounting to $77 million and $21 million in 2008 and 2007, respectively, was charged to accumulated proﬁ ts. Treasury Shares During 2008 and 2007, the Group purchased 1,037,498 and 55,656 treasury shares, respectively, for $197 million and $8 million, re- spectively, and sold 970,604 and 55,119 treasury shares, respectively, including 253,104 and 55,119 shares, respectively, that were sold to the plan participants at exercise prices determined in the Incentive Plans. The excess of the purchase cost of treasury shares over the proceeds from their sale, amounting to $107 million and $6 million in 2008 and 2007, respectively, was charged to accumulated proﬁ ts. As of December 31, 2008 and 2007, the Group had 67,431 and 537 treasury shares, respectively. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 162 Notes to the Consolidated Financial Statements (continued) Equity (continued) Earnings per Share Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordi- nary shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net proﬁ t attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares. In 2006 – 2008, share options granted to participants of the Group’s Incentive Plans (Note 24) had a dilutive effect. The Group has no other potential dilutive ordinary shares. The following reﬂ ects the income and share data used in the basic and diluted earnings per share computations: Weighted average number of ordinary shares for basic earnings per share Effect of dilution: share options 2008 2007 2006 123,495,726 435,504 119,363,489 903,146 118,118,371 838,450 Weighted average number of ordinary shares adjusted for the effect of dilution 123,931,230 120,266,635 118,956,821 Proﬁ t for the year attributable to equity holders of the parent, US$ million Basic earnings per share Diluted earnings per share $ 1,868 $ 15.13 $ 15.07 $ 2,103 $ 17.62 $ 17.49 $ 1,377 $ 11.66 $ 11.58 The weighted average number of ordinary shares for 2008 and 2007 includes the shares that were issued as part of the cost of a business combination (Note 4). When calculating earnings per share, it was assumed that the shares were issued on the date of acquisition of the Ukrainian businesses (December 11, 2007), since this is the date from which the results of the newly acquired entities were recognised in the consolidated income statement. The fair value of shares issued as a scrip alternative on January 30, 2009 exceeded the cash alternative, thus giving rise to a bonus element in the issue of shares. The per share ﬁ gures for all the periods presented have been restated to include a bonus element of 1,045,216 shares in the calculation of basic earnings per share from the beginning of the earliest period presented. Dividends Dividends declared by Evraz Group S.A. were as follows: Final for 2005 Interim for 2006 Final for 2006 Interim for 2007 Final for 2007 Interim for 2008 Date of declaration To holders registered at Dividends declared, US$ million US$ per share 20/06/2006 14/11/2006 20/06/ 2007 04/10/2007 15/05/2008 29/08/2008 20/06/2006 14/11/2006 20/06/2007 19/10/2007 14/05/2008 18/09/2008 158 229 390 568 497 1,011 1.35 1.95 3.30 4.80 4.20 8.25 Interim dividends for 2008 include $2 million in respect of treasury shares. The ﬁ nal dividends for 2006 and 2005 were distributed from accumulated proﬁ ts to the extent that distributable amounts were available as of December 31, 2006 and 2005, respectively. Distributable proﬁ ts were determined based on separate ﬁ nancial statements of Evraz Group S.A. prepared in accordance with the statutory requirements. The amount of $283 million and $117 million representing the excess of declared dividends over the Company’s distributable accumulated proﬁ ts as of December 31, 2006 and 2005, respectively, reduced additional paid-in capital in 2007 and 2006, respectively. In addition, certain subsidiaries of the Group declared dividends. The share of minority shareholders in those dividends in 2008, 2007 and 2006 was $80 million, $40 million and $50 million, respectively. Legal Reserve According to the Luxembourg Law, the Company is required to create a legal reserve of 10% of share capital per the Luxembourg statu- tory accounts by annual appropriations which should be at least 5% of the annual net proﬁ t per statutory ﬁ nancial statements. The legal reserve can be used only in case of a bankruptcy. Acquisitions of Minority Interests by an Associate In 2006, Yuzhkuzbassugol, the Group’s associate, acquired an additional 13% ownership interest in OAO Kuznetskpogruztrans, Yuzhkuz- bassugol’s subsidiary, for cash consideration of $1 million. The 50% of excess of the carrying value of acquired minority interest over the amount of consideration paid by the associate amounting to $1 million was recorded in additional paid-in capital (Note 11). Sale of Shares in a Joint Venture’s Subsidiary In November 2006, Corber sold 18% shares in Raspadskaya to public investors for cash consideration of $301 million. The 50% of the excess of the amount of consideration over 18% of the net assets of Raspadskaya at the date of the sale amounting to $58 million was included in additional paid-in capital (Note 11). Acquisitions of Minority Interests in Subsidiaries In 2008 and 2006, the Group acquired minority interests in certain subsidiaries (Note 6). The excess of acquired minority interests over the consideration amounting to $21 million and $1 million, respectively, was recorded as additional paid-in capital and the excess of con- sideration over the carrying value of minority interests amounting to $37 million and $42 million, respectively, was charged to accumulated proﬁ ts. The purchase consideration for the minority interests acquired in 2007 (Note 6) approximated the carrying value of the net assets attributable to the acquired shares. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Allocation of Losses of Prior Periods to Minority Shareholders Prior to 2006, losses of the minority in Caplink, the Group’s subsidiary, exceeded the minority interest in Caplink’s consolidated equity. These losses were allocated to the Group, because the minority had no obligations to cover losses. In 2006, the minority shareholder paid $5 million to the charter capital of Caplink and the Group recovered the accumulated losses. 163 21. Loans and Borrowings Short-term and long-term loans and borrowings were as follows as of December 31: US$ million Bank loans 8.875 per cent notes due 2013 8.25 per cent notes due 2015 9.5 per cent notes due 2018 10.875 per cent notes due 2009 Unamortised debt issue costs Interest payable 2008 $ 7,163 1,245 725 560 300 (94) 87 2007 $ 5,748 2006 $ 1,556 – 750 – 300 (82) 40 – 750 – 300 (40) 30 $ 9,986 $ 6,756 $ 2,596 As of December 31, 2008, 2007 and 2006, total interest bearing loans and borrowings consisted of short-term loans and borrowings in the amount of $2,495 million, $1,260 million and $608 million, respectively, and long-term loans and borrowings in the amount of $7,498 million, $5,538 million and $1,998 million, respectively, including the current portion of long-term liabilities of $1,346 million, $804 million and $104 million, respectively. The average effective annual interest rates were as follows in the years ended December 31: Long-term borrowings Short-term borrowings Russian rouble US dollar Euro South African rand Canadian dollar Czech koruna Ukrainian hryvnia 2008 – 6.56% 5.54% – – – – 2007 9.1% 7.9% 5.9% – 7.3% – – 2006 8.6% 8.3% 5.6% – – – – The liabilities are denominated in the following currencies: US$ million Russian rouble US dollar Euro Canadian dollar Czech koruna Ukrainian hryvnia Unamortised debt issue costs 2008 16.50% 6.40% 6.06% – – 3.49% – 2008 $ 364 9,345 348 – 23 – (94) 2007 8.0% 6.2% 5.5% 12.5% – – – 2007 $ 182 6,200 311 5 – 140 (82) 2006 7.1% 6.6% 3.8% – – – – 2006 $ 24 2,308 304 – – – (40) $ 9,986 $ 6,756 $ 2,596 Some of the loan agreements and terms and conditions of guaranteed notes provide for certain covenants in respect of Evraz Group S.A. and its subsidiaries. The covenants impose restrictions in respect of certain transactions and ﬁ nancial ratios, including restrictions in respect of indebtedness and proﬁ tability. At December 31, 2008, the Group’s borrowings included a loan from Unicredit Bank Ukraine and Bank Pekao with the carrying amount of $150 million. In the fourth quarter of 2008, one of the technical loan covenants related to the level of the sales proceeds passing through the lender’s account was breached. On December 30, 2008, the Group obtained a waiver from the lender in respect of this covenant violation. At December 31, 2008, the Group’s borrowings included a loan from Citibank with the carrying amount of $11 million. In the third quarter of 2008, one of the technical loan covenants related to the timing of closing of certain bank accounts was breached by one of the Group’s subsidiaries. On August 29, 2008, the Group obtained a waiver from the lender in respect of this covenant violation. The Group pledged its rights under some export contracts as collateral under the loan agreements. All proceeds from sales of steel pursu- ant to these contracts can be used to satisfy the obligations under the loan agreements in the event of a default. At December 31, 2008, 2007 and 2006, the Group had equipment with a carrying value of $1,131 million, $121 million and $39 million, respectively, pledged as collateral under the loan agreements. In addition, the Group pledged inventory with a carrying value of $648 million, $415 million and $194 million as of December 31, 2008, 2007 and 2006, respectively. In addition, as of December 31, 2008, 100% shares of Evraz Inc. NA, Evraz Inc. NA Canada and West Siberian Iron & Steel Plant were pledged as collateral under bank loans. These three subsidiaries represent 37% of the consolidated assets and 34% of the consolidated revenues of the Group. At December 31, 2008, the total amount of net assets (including intra-group balances) of Evraz Inc. NA, Evraz Inc. NA Canada and West Siberian Iron & Steel Plant was $2,230 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 164 Notes and Bonds Notes to the Consolidated Financial Statements (continued) Loans and Borrowings (continued) In September and December 2003, EvrazSecurities, the Group’s subsidiary, issued notes amounting to $175 million. The notes bore inter- est of 8.875% per annum payable semi-annually and matured on September 25, 2006. On September 25, 2006, EvrazSecurities repaid all its liabilities under the guaranteed notes. In August and September 2004, EvrazSecurities issued notes amounting to $300 million. The notes bear interest of 10.875% per annum payable semi-annually and mature on August 3, 2009. Mastercroft Limited, Ferrotrade Limited, ZapSib, NTMK, NKMK, KGOK, East Metals S.A. and Yuzhkuzbassugol 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 million and KGOK’s liabilities are limited to $202 million. In November 2005, Evraz Group S.A. issued notes amounting to $750 million. The notes bear interest of 8.25% per annum payable semi-annually and mature on November 10, 2015. Mastercroft Limited unconditionally guaranteed the due and punctual payments of all amounts in respect of the notes. In December 2008, the Group re-purchased notes due 2015 with the nominal amount of $25 million for cash consideration of $14 million. As a result, the Group recognised gain on extinguishment of debts in the amount of $11 million within gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2008. On April 24 and May 27, 2008, Evraz Group S.A. issued notes for the total amount of $1,300 million due in 2013 and notes for the total amount of $700 million due in 2018. The notes due in 2013 bear semi-annual coupon at the annual rate of 8.875% and must be re- deemed at their principal amount on April 24, 2013. The notes due in 2018 bear semi-annual coupon at the annual rate of 9.5% and must be redeemed at their principal amount on April 24, 2018. The proceeds from the issue of the notes were used for ﬁ nancing a portion of the cost of the acquisition of IPSCO Inc. (Note 4). In December 2008, the Group re-purchased notes due 2013 with the nominal amount of $55 million for cash consideration of $30 million and notes due 2018 with the nominal amount of $140 million for cash consideration of $77 million. As a result, the Group recognised a gain on extinguishment of debts in the amount of $88 million within gain/(loss) on ﬁ nancial assets and liabilities caption of the consoli- dated income statement for the year ended December 31, 2008. In August 2008, the Group repaid the liabilities of Claymont Steel (Note 4) under the bonds with the nominal value of $105 million due in February 2015 at a premium of 14.75%. This premium together with the transaction costs, amounting to $19 million, was recorded in loss on extinguishment of debts in the consolidated income statement for the year ended December 31, 2008. Loans from the Russian State Banks In November and December 2008, the Group signed loan agreements for $1,807 million with Vnesheconombank (“VEB”) and 10,000 million Russian roubles ($340 million as of December 31, 2008) with VTB. The facilities mature in one year from the dates of dis- bursement. The loans bear interest of one year LIBOR plus 5% per annum (VEB) and 16.50% per annum (VTB). At December 31, 2008, the Group utilised $1,342 million under these loan agreements. These facilities were used for reﬁ nancing of loans due for payment in 2008. Unamortised Debt Issue Costs Unamortised debt issue costs represent agent commission and arrangement costs paid by the Group in relation to the arrangement of loans and issue of notes. Unutilised Borrowing Facilities The Group had the following unutilised borrowing facilities as of December 31: US$ million Unutilised borrowing facilities 22. Finance Lease Liabilities 2008 $ 1,679 2007 $ 1,015 2006 $ 2,428 The Group has several lease agreements under which it has an option to acquire the leased assets at the end of lease term ranging from 1 to 14 years. The estimated remaining useful life of leased assets varies from 3 to 20 years. The leases were accounted for as ﬁ nance leases in the consolidated ﬁ nancial statements. The carrying value of the leased assets was as follows as at December 31: US$ million Machinery and equipment Transport and motor vehicles 2008 $ 16 73 $ 89 2007 $ 17 93 $ 110 2006 $ 10 75 $ 85 The leased assets are included in property, plant and equipment in the consolidated balance sheet (Note 9). MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Future minimum lease payments were as follows at December 31: 165 US$ million Not later than one year Later than one year and not later than ﬁ ve years Later than ﬁ ve years Less: amounts representing ﬁ nance charges 2008 2007 2006 Minimum lease payments $ 20 41 8 69 (14) Present value of minimum lease payments $ 15 34 6 55 – Minimum lease payments $ 22 57 9 88 (19) Present value of minimum lease payments $ 15 46 8 69 – Minimum lease payments $ 16 47 3 66 (13) Present value of minimum lease payments $ 11 39 3 53 – $ 55 $ 55 $ 69 $ 69 $ 53 $ 53 In the years ended December 31, 2008, 2007 and 2006, the average interest rates under the ﬁ nance lease liabilities were 10.0%, 9.6% and 10.4%. 23. Employee Beneﬁ ts Russian Plans In 2008, the Russian subsidiaries of the Group continued to provide regular lifetime pension payments and lump-sum amounts payable at the retirement date. These beneﬁ ts generally depend on years of service, level of remuneration and amount of pension payment under the collective bargaining agreements. Other post-employment beneﬁ ts consist of different compensations and certain non-cash beneﬁ ts. The Group funds the beneﬁ ts when the amounts of beneﬁ ts fall due for payment. In 2006, the Group started the process of changing the system of post-employment beneﬁ ts at its certain Russian subsidiaries. The lifetime pension payments have been cancelled for employees retiring after January 1, 2009 and lump-sum amounts payable at the retire- ment date will be stopped during 2009 – 2010. These beneﬁ ts have been replaced by new deﬁ ned beneﬁ t plans under which the contributions have to be made to a separately adminis- tered non-state pension fund. Under the new plan, the Group matches 100% of the employees’ contributions to the fund up to 4% of their monthly salary. The Group’s contributions become payable at the participants’ retirement dates. Deﬁ ned contribution plans represent payments made by the Group to the Russian Federation state pension, social insurance, medical insurance and unemployment funds at the statutory rates in force, based on gross salary payments. The Group has no legal or constructive obligation to pay further contributions in respect of those beneﬁ ts. Ukrainian Plans The Ukrainian subsidiaries make regular contributions to the State Pension Fund thereby partially compensating preferential pensions paid by the fund to employees who worked under harmful and hard conditions. The amount of such pension depends on years of service and salary. The Ukrainian enterprises gradually increase these compensations and in 2012 they will compensate 100% of preferential pensions. In addition, employees receive lump-sum payments on retirement under collective bargaining agreements. These beneﬁ ts are based on years of service and level of compensation. All these payments are considered as deﬁ ned beneﬁ t plans. USA and Canadian Plans The Group’s subsidiaries in the USA and Canada have non-contributory deﬁ ned beneﬁ t pension plans, post-retirement healthcare and life insurance beneﬁ t plans and supplemental retirement plans that cover all eligible employees. Beneﬁ ts are based on pensionable years of service, pensionable compensation, or a combination of both depending on the individual plan. Certain employees that were hired after speciﬁ ed dates are no longer eligible to participate in the deﬁ ned beneﬁ t plans. Those employees are instead enrolled in a deﬁ ned con- tribution plan and receive a contribution funded by the Group’s subsidiaries equal to 2-3% of annual wages. The new deﬁ ned contribution plan is funded annually, and participants’ beneﬁ ts vest after three years of service. The subsidiaries also offer qualiﬁ ed Thrift (401(k)) plans to all of their eligible employees. Other Plans Deﬁ ned beneﬁ t pension plans and a deﬁ ned contribution plan are maintained by the subsidiaries located in South Africa, Italy and the Czech Republic. Deﬁ ned Contribution Plans The Group’s expenses under deﬁ ned contribution plans were as follows: US$ million Expense under deﬁ ned contribution plans 2008 $ 283 2007 $ 220 2006 $ 181 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Employee Beneﬁ ts (continued) 166 Deﬁ ned Beneﬁ t Plans The Russian, Ukrainian and the Other deﬁ ned beneﬁ t plans are mostly unfunded and the USA and Canadian plans are partially funded. The components of net beneﬁ t expense recognised in the consolidated income statement for the years ended December 31, 2008, 2007 and 2006 and amounts recognised in the consolidated balance sheet as of December 31, 2008, 2007 and 2006 for the deﬁ ned beneﬁ t plans were as follows: Net benefit expense (recognised in cost of sales and general and administrative expenses) Year ended December 31, 2008 US$ million Current service cost Interest cost on beneﬁ t obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Curtailment gain Russian plans Ukrainian plans $ (8) (11) – (2) 1 13 $ (4) (4) – – (11) – USA & Canadian plans $ (11) (24) 25 (13) – – Other plans $ (1) (3) – 1 – – Total $ (24) (42) 25 (14) (10) 13 Net beneﬁ t expense $ (7) $ (19) $ (23) $ (3) $ (52) Year ended December 31, 2007 US$ million Current service cost Interest cost on beneﬁ t obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Russian plans $ (5) (9) – (1) 1 Net beneﬁ t expense $ (14) $ – Ukrainian plans USA & Canadian plans Year ended December 31, 2006 US$ million Current service cost Interest cost on beneﬁ t obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Russian plans $ (4) (6) – 1 (9) Net beneﬁ t expense $ (18) $ – Ukrainian plans USA & Canadian plans Actual return on plan assets was as follows: US$ million Actual return on plan assets including: USA & Canadian plans Russian plans Benefit liability December 31, 2008 US$ million Beneﬁ t obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost Beneﬁ t asset Beneﬁ t liability Russian plans $ 150 (1) 149 (31) 18 – $ 136 $ (8) (15) 15 – – $ (8) $ – (1) 1 2 – $ 2 2008 $ (101) (101) – $ 475 (324) 151 (59) – 4 $ – – – – – $ – – – – – $ 72 – 72 (12) (15) – $ 45 Ukrainian plans USA & Canadian plans Other plans $ (1) (1) – – – Total $ (14) (25) 15 (1) 1 $ (2) $ (24) Other plans $ – – – – (1) Total $ (4) (7) 1 3 (10) $ (1) $ (17) 2007 $ 19 18 1 Other plans $ 20 – 20 (5) – – 2006 $ 2 2 – Total $ 717 (325) 392 (107) 3 4 $ 96 $ 15 $ 292 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 December 31, 2007 US$ million Beneﬁ t obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost 167 Russian plans $ 183 Ukrainian plans $ 56 (2) 181 (24) 22 – 56 – – USA & Canadian plans $ 275 (199) 76 18 – Other plans $ 21 – 21 (3) – Total $ 535 (201) 334 (9) 22 Beneﬁ t liability $ 179 $ 56 $ 94 $ 18 $ 347 December 31, 2006 US$ million Beneﬁ t obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost Beneﬁ t liability Movements in benefit obligation US$ million At December 31, 2005 Interest cost on beneﬁ t obligation Current service cost Past service cost Change in liability due to business combinations Beneﬁ ts paid Actuarial (gains)/losses on beneﬁ t obligation Translation difference At December 31, 2006 Interest cost on beneﬁ t obligation Current service cost Change in liability due to business combinations Beneﬁ ts paid Actuarial (gains)/losses on beneﬁ t obligation Curtailment gain Translation difference At December 31, 2007 Interest cost on beneﬁ t obligation Current service cost Past service cost Change in liability due to business combinations Beneﬁ ts paid Actuarial (gains)/losses on beneﬁ t obligation Curtailment gain Translation difference Russian plans Ukrainian plans USA & Canadian plans $ 89 (1) 88 (13) 22 $ 97 $ – – – – – $ – $ 36 (23) 13 1 – $ 14 Russian plans Ukrainian plans USA & Canadian plans $ 79 6 4 (13) 1 (6) 10 8 89 9 5 70 (12) 11 1 9 182 11 8 (1) – (21) 13 (14) (28) $ – – – – – – – – – – – 56 – – – – 56 4 4 33 – (5) 17 – (37) $ 72 $ – 1 – – 38 (1) (2) – 36 15 8 235 (13) (13) – 7 275 24 11 – 229 (21) (35) – (8) Other plans $ 6 – 6 – – Total $ 131 (24) 107 (12) 22 $ 6 $ 117 Other plans $ 2 Total $ 81 – – 1 3 – – – 6 1 1 14 (1) 3 – (2) 22 3 1 – – (2) 2 – (6) 7 4 (12) 42 (7) 8 8 131 25 14 375 (26) 1 1 14 535 42 24 32 229 (49) (3) (14) (79) At December 31, 2008 $ 150 $ 475 $ 20 $ 717 The amount of contributions expected to be paid to the deﬁ ned beneﬁ t plans during 2009 approximates $55 million. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 168 Changes in the fair value of plan assets US$ million At December 31, 2005 Change in plan assets due to business combinations Expected return on plan assets Contributions by employer Beneﬁ ts paid Actuarial gains/(losses) on plan assets At December 31, 2006 Change in plan assets due to business combinations Expected return on plan assets Contributions by employer Beneﬁ ts paid Actuarial gains/(losses) on plan assets Translation difference At December 31, 2007 Change in plan assets due to business combinations Expected return on plan assets Contributions by employer Beneﬁ ts paid Actuarial gains/(losses) on plan assets Curtailment gain Translation difference At December 31, 2008 Notes to the Consolidated Financial Statements (continued) Employee Beneﬁ ts (continued) Russian plans Ukrainian plans USA & Canadian plans $ – 1 – 6 (6) – 1 – – 13 (12) – – 2 – – 21 (21) – (1) – $ 1 $ – – – – – – – – – – – – – – – – 5 (5) – – – $ – $ – 20 1 2 (1) 1 23 153 15 13 (13) 4 4 199 235 25 17 (21) (125) – (6) $ 324 Other plans $ – – – – – – – – – 1 (1) – – – – – 2 (2) – – – $ – Total $ – 21 1 8 (7) 1 24 153 15 27 (26) 4 4 201 235 25 45 (49) (125) (1) (6) $ 325 The major categories of plan assets as a percentage of total plan assets were as follows at December 31: USA & Canadian plans: Equity funds and investment trusts Corporate bonds and notes Shares Property Cash 2008 2007 2006 76% 11% 4% 4% 5% 58% 22% 8% 9% 3% 6% 25% 67% 2% – The following table is a summary of the present value of the beneﬁ t obligation, fair value of the plan assets and experience adjustments for the current year and previous four annual periods. US$ million Deﬁ ned beneﬁ t obligation Plan assets (Deﬁ cit)/surplus Experience adjustments on plan liabilities Experience adjustments on plan assets 2008 $ 717 325 (392) (38) 16 2007 $ 535 201 (334) (18) 5 2006 $ 131 24 (107) 11 – 2005 $ 81 – (81) – – 2004 $ 52 – (52) – – MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 The principal assumptions used in determining pension obligations for the Group’s plans are shown below: 169 2008 2007 2006 Russian Plans 8.5% Ukrainian plans USA & Canadian plans 10.85% 5.75-7.5% Other plans 4.3% Russian Plans 6.8% Ukrainian plans USA & Other Canadian plans plans 8% 5.0-6.4% 4.7-8.3% Russian Plans 6.8% USA & Other Canadian plans plans 5.8% 3.9-4.0% 12% 6% 6% – – 6.75-8.5% – 12% – 7.8-8.5% – 12% 7.8% 7-10% 10% 0-7.75% 3-4% – 8-10% 3.9% 3.2% – 5% 5% – – 5% – 0% 3-4% 7-10% 0-3% 3-5% – 5% 5% – 0% 4% – – 0-3% 3-4% – Discount rate Expected rate of return on assets Future beneﬁ ts increases Future salary increase Healthcare costs increase rate The expected long-term rate of return on deﬁ ned beneﬁ t pension plan assets represents the weighted-average asset return for each fore- casted asset class return over several market cycles. A one percentage point change in the assumed rate of increase in healthcare costs would have insigniﬁ cant effects on the Group’s current service cost and the deﬁ ned beneﬁ t obligation. 24. Share-based Payments On April 25, 2005 and September 5, 2006, the Group adopted Incentive Plans under which certain members of the Board of Direc- tors, senior executives and employees (“participants”) may acquire shares of the Company. The exercise price of the options granted on June 15, 2005 under the Incentive Plan 2005 was ﬁ xed at $27.75 and $43.5 per share. Share options granted on September 5, 2006 under the Incentive Plan 2006 can be exercised for $65.37 per share. The options become exercisable from eight months to three years from the grant date. The vesting dates under Plan 2005 are determined by the reference to the grant date, which is June 15, 2005, and become vested on the ﬁ rst, second and third anniversary of the grant date. Under Plan 2006, the vesting date for each tranche is the date falling 15 days after the date when the Board of directors decides to announce annual results. The actual and expected vesting dates are as follows: Incentive Plan 2006 Incentive Plan 2005 December 15, 2005 June 15, 2006 May 11, 2007 June 15, 2007 April 16, 2008 June 15, 2008 May 12, 2009 – – 99,282 – 148,904 – 248,183 496,369 63,685 555,170 – 750,000 – 1,250,000 – 2,618,855 The plans are administrated by the Board of Directors of the Company. The Board of Directors has the right to accelerate vesting of the grant. In general, in the event of a participant’s employment termination, all options granted to that participant, whether vested or not, expire on termination date. Under Plan 2005, unless otherwise determined by the Board of directors, all options which are not vested on the grantee’s termination date become vested and remain exercisable within the period of one year. The options which are vested on the grantee’s termination date remain exercisable and expire automatically as of the date of expiration. All options granted to the participants, whether vested or not, become immediately exercisable in the event of a change in the controlling shareholder. In 2008 and 2006, the vesting date of the share options held by certain participants resigned from the Group was accelerated. On April 21, 2008, the Board of Directors resolved to delay the exercise of 17.5% of the options under Incentive Plan 2005. The extended portion has been granted in the form of global depositary receipts (“GDR”) that are purchased and held by the Group on behalf of the par- ticipants for a period of up to 15 months starting from the end of April 2008. Subject to participants’ instructions, during the period from April 21, 2009 to July 21, 2009, the Group will sell these GDRs to the participants at a ﬁ xed price of $14.5 or will sell them in the market and transfer the difference between the market price and option price to the participants. If the market price is below $100 per GDR, then a participant may claim indemniﬁ cation from the Company of the margin between the actual sale price and the price of $100 per GDR. In addition, the participants have the right to receive dividends in respect of the extended portion and the right to vote under these GDRs. This modiﬁ cation of Incentive Plan 2005 was treated as a cash-settled award. At December 31, 2008, the liability in respect of that award was $33 million. This amount was recognised in the consolidated income statement. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 170 There have been no other modiﬁ cations or cancellations to the plans during 2006 – 2008. The revised expected time schedule of exercise of the share options outstanding at December 31, 2008 is presented below: Notes to the Consolidated Financial Statements (continued) Share-based Payments (continued) Number of shares Immediately exercisable April 16, 2009 April 21, 2009 Incentive Plan 2006 Incentive Plan 2005 – 122,086 – 122,086 5,029 – 243,225 248,254 The Group accounted for its share options at fair value pursuant to the requirements of IFRS 2 “Share-based Payment”. The weighted aver- age fair value of options granted during 2006 and 2005 was $14.15 and $10.88 per share, respectively. The fair value of options under the extended portion was $272.34 per share. The fair value of these options was estimated at the date of grant using the Black-Scholes- Merton option pricing models with the following inputs, including assumptions: Incentive Plan 2006 Incentive Plan 2005 Dividend yield (%) Expected volatility (%) Risk-free interest rates (%) Expected life of options (years) Market prices of the shares at the grant dates The liability under cash-settled award was measured using the following assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rates (%) Expected life of options (years) Market prices of the shares at the reporting date 4 – 6 45.37 5.42 – 5.47 0.7 – 2.7 $66.06 December 31, 2008 n/a 84.10 2.59 0.3 $25.32 6 – 8 55.00 4.36 – 4.59 0.5 – 3 $42.90 The industry average volatility has been used for valuation of the share options granted in 2005, while for the share options granted in 2006 the historical volatility has been taken. The expected volatility reﬂ ects the assumption that it is indicative of future trends which may not necessarily be the actual outcome. The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share options during the years. Outstanding at January 1 Granted during the year Forfeited during the year Exercised during the year: by issue of shares by sale of shares by the Company’s parent by purchase of shares on the open market by repurchase of vested share options 2008 No. 2008 WAEP 2007 No. 2007 WAEP 2006 No. 2006 WAEP 933,284 $ 48.72 2,266,580 $ 48.29 2,567,131 $ 43.10 – (33,846) (529,098) – – (253,104) (275,994) – 45.13 47.55 – (224,258) (1,109,038) (810,047) – (55,119) (243,872) – 65.37 44.48 496,369 (137,955) (658,965) (595,280) (63,685) – – 65.37 43.50 41.98 Outstanding at December 31 370,340 $ 50.71 933,284 $ 48.72 2,266,580 $ 48.29 Vested at December 31 Exercisable at December 31 92,751 5,029 $ 45.96 43.50 176,842 42,619 $ 45.00 44.02 813,915 537,703 $ 43.50 43.50 The weighted average share price at the dates of exercise was $310.22, $111.33 and $69.92 in 2008, 2007 and 2006, respectively. The weighted average remaining contractual life of the share options outstanding as at December 31, 2008, 2007 and 2006 was 0.30, 0.54 and 0.82 years, respectively. In the years ended December 31, 2008, 2007 and 2006, compensation expense, arising from the share option plans, was as follows: US$ million Expense arising from equity-settled share-based payment transactions Expense arising from cash-settled share-based payment transactions 2008 $ 2 33 $ 35 2007 $ 5 – $ 5 2006 $ 17 – $ 17 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 25. Provisions In the years ended December 31, 2008, 2007 and 2006, the movement in provisions was as follows: 171 US$ million At December 31, 2005 Additional provisions Increase from passage of time Effect of change in the discount rate Change in provisions due to business combinations Utilised in the year Translation difference At December 31, 2006 Additional provisions Increase from passage of time Change in provisions due to business combinations Utilised in the year Unused amounts reversed Translation difference At December 31, 2007 Additional provisions Increase from passage of time Effect of change in the discount rate Effect of changes in estimated costs and timing Utilised in the year Unused amounts reversed Translation difference At December 31, 2008 Site Restoration Costs Site restoration costs $ 13 Legal claims $ 5 Other provisions $ 11 Total $ 29 2 2 16 4 – 1 38 7 4 82 (2) – 5 134 41 9 (10) 11 (5) – (27) $ 153 4 – – – (6) – 3 10 – 13 (2) (9) – 15 6 – – – (3) (13) (1) $ 4 4 – – – (10) 1 6 14 – 50 (25) (7) – 38 36 – – (1) (9) (3) (2) 10 2 16 4 (16) 2 47 31 4 145 (29) (16) 5 187 83 9 (10) 10 (17) (16) (30) $ 59 $ 216 Under the legislation, mining companies and steel mills have obligations to restore mining and certain other sites. As of December 31, 2008, 2007 and 2006, the Group accrued a provision for site restoration costs in the amount of $153 million, $134 million and $38 million, respectively. The liabilities were measured based on estimates of restoration costs which are expected to be incurred in the future discounted at the annual rate ranging from 6.85% to 8.5% in 2007 and 2006. In 2008, the discount rates varied from 6.85% to 11.90%. 26. Other Long-Term Liabilities Other long-term liabilities consisted of the following as of December 31: US$ million Earn out and synergy payments Dividends payable under cumulative preference shares of a subsidiary to a related party Employee income participation plans and compensations Tax liabilities Restructured liabilities assumed in business combination Other liabilities Less: current portion Gain on Extinguishment of Debts Notes 4 16 27 2008 $ 34 14 16 18 – 7 89 (31) $ 58 2007 $ 34 14 15 13 127 7 210 (155) $ 55 2006 $ 22 15 9 1 – 1 48 (1) $ 47 In 2006, the Group repaid its liabilities under the Settlement Agreement to Sibtek Insaat Ticaret below their carrying value. Gain aris- ing from the repayment of liabilities under the Settlement Agreement was included in gain on extinguishment of debts in the amount of $13 million in the consolidated income statement for year ended December 31, 2006. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 172 27. Trade and Other Payables Trade and other payables consisted of the following as of December 31: US$ million Trade accounts payable Promissory notes with current maturities Accrued payroll Termination beneﬁ ts Other long-term obligations with current maturities Other payables Maturity proﬁ le of the accounts payable is shown in Note 29. 28. Other Taxes Payable Notes to the Consolidated Financial Statements (continued) Other Long-Term Liabilities (continued) Notes 2008 $ 1,094 5 208 2 31 139 26 2007 $ 729 4 201 – 155 153 2006 $ 308 – 102 13 1 38 $ 1,479 $ 1,242 $ 462 Taxes payable were mainly denominated in roubles and consisted of the following as of December 31: US$ million Social insurance taxes VAT and related ﬁ nes and penalties Property tax Land tax Personal income tax Other taxes, ﬁ nes and penalties 2008 $ 31 72 15 9 10 17 2007 $ 39 113 15 10 13 19 2006 $ 27 27 12 10 8 12 $ 154 $ 209 $ 96 29. Financial Risk Management Objectives and Policies Credit Risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁ nancial loss to the Group. Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and trade accounts receivable. To manage credit risk related to cash, the Group maintains its available cash, mainly in US dollars, in reputable international banks, Rus- sian afﬁ liates of international banks and major Russian banks. Management periodically reviews the creditworthiness of the banks in which it deposits cash. The Group’s trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. There are no signiﬁ cant concentrations of credit risk within the Group. The Group deﬁ nes counterparties as having similar characteristics if they are related entities. The major customers are Russian Railways and Carbofer (3.9% and 4.4% of total sales, respectively). Concentration of credit risk did not exceed 5% of gross monetary assets at any time during the year. Some part of the Group’s sales is made on terms of letter of credit. In addition, the Group requires prepayments from certain customers. The Group does not require collateral in respect of trade and other receivables, except when a customer asks for a payment period which is longer than normal terms. In this case, the Group requires bank guarantees or other liquid collateral. The Group developed standard payment terms and constantly monitors the status of accounts receivable collection and the creditworthi- ness of the customers. Certain of the Group’s long-standing Russian customers for auxiliary products, such as heat and electricity, represent municipal enter- prises and governmental organisations that experience ﬁ nancial difﬁ culties. The most part of doubtful debts allowance consists of receiv- ables from such customers. The Group has no practical ability to terminate the supply to these customers and negotiates with regional and municipal authorities the terms of recovery of these receivables. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 The maximum exposure to credit risk is equal to the carrying amount of ﬁ nancial assets, which is disclosed below. 173 US$ million Restricted deposits at banks Financial instruments included in other non-current assets Long-term and short-term investments Trade and other receivables Loans receivable Receivables from related parties Cash and cash equivalents 2008 $ 2 – 622 2007 $ 5 3 25 1,409 1,829 113 156 930 60 88 327 2006 $ 219 – 25 556 26 55 842 $ 3,232 $ 2,337 $ 1,723 Receivables from related parties in the table above do not include prepayments in the amount of $19 million, $18 million and $0 million as of December 31, 2008, 2007 and 2006, respectively. The ageing analysis of trade and other receivables, loans receivable and receivables from related parties is presented in the table below. US$ million Not past due Past due less than six months between six months and one year over one year 2008 2007 2006 Gross amount $ 1,035 736 500 166 70 Impairment Gross amount $ 1,834 222 133 16 73 $ (8) (85) (13) (7) (65) Impairment Gross amount $ 519 177 101 13 63 $ (3) (76) (4) (4) (68) Impairment $ (2) (57) (3) (7) (47) $ 1,771 $ (93) $ 2,056 $ (79) $ 696 $ (59) In the years ended December 31, 2008, 2007 and 2006, the movement in allowance for doubtful accounts was as follows: US$ million At January 1 Charge for the year Utilised Translation difference At December 31 2008 $ 79 35 (7) (14) $ 93 2007 $ 59 15 – 5 2006 $ 54 7 (6) 4 $ 79 $ 59 Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. The Group’s approach to managing liquidity is to ensure that it will always have sufﬁ cient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by maintaining adequate cash reserves and borrowing facilities, by continuously monitoring forecast and actual cash ﬂ ows and matching the maturity proﬁ les of ﬁ nancial assets and liabilities. The Group prepares a ﬁ nancial plan on a monthly basis which ensures that the Group has sufﬁ cient cash on demand to meet expected operational expenses, ﬁ nancial obligations and investing activities as they arise. In 2008, in response to the global ﬁ nancial crisis, the Group introduced a daily monitoring of cash proceeds and payments. The Group maintains credit lines and overdraft facilities that can be drawn down to meet short-term ﬁ nancing needs. As these facilities were signiﬁ cantly reduced, the Group plans to replace them with term loans. In addition, the Group’s objective is to reﬁ nance its short-term debt by long-term borrowings. The Group developed standard payment periods in respect of trade accounts payable and monitors the timeliness of payments to its sup- pliers and contractors. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 174 All of the Group’s ﬁ nancial liabilities represent non-derivative ﬁ nancial instruments. The following tables summarise the maturity proﬁ le of the Group’s ﬁ nancial liabilities based on contractual undiscounted payments, incluing interest payments. Notes to the Consolidated Financial Statements (continued) Financial Risk Management Objectives and Policies (continued) Liquidity Risk (continued) Year ended December 31, 2008 US$ million FIXED –RATE DEBT Loans and borrowings Principal Interest Finance lease liabilities Financial instruments included in long-term liabilities Total ﬁ xed-rate debt VARIABLE-RATE DEBT Loans and borrowings Principal Interest Finance lease liabilities Total variable-rate debt NON-INTEREST BEARING DEBT Financial instruments included in long-term liabilities Trade and other payables Payables to related parties Dividends payable Total non-interest bearing debt Year ended December 31, 2007 US$ million FIXED –RATE DEBT Loans and borrowings Principal Interest Finance lease liabilities Financial instruments included in long-term liabilities Total ﬁ xed-rate debt VARIABLE-RATE DEBT Loans and borrowings Principal Interest Finance lease liabilities Total variable-rate debt NON-INTEREST BEARING DEBT Financial instruments included in long-term liabilities Trade and other payables Payables to related parties Amounts payable under put options for shares of subsidiaries Dividends payable Total non-interest bearing debt On demand Less than 3 months 3 to 12 months 1 to 2 years 2 to 5 years After 5 years Total $ 8 – – 1 9 414 – – 414 6 519 104 320 949 $ 1,333 $ 1,338 $ 4,587 $ 61 54 2 – $ 1,727 357 3 16 $ 120 239 3 4 633 7 13 117 2,103 366 1,986 627 59 4 690 – 670 56 – 726 1,004 1,445 1,907 146 11 121 11 131 20 1,161 1,577 2,058 – 49 24 – 73 – – – – – – – – – – 366 8 29 1,741 9 – – 9 – – – – – 1,649 23 63 6,322 5,406 457 46 5,909 6 1,238 184 320 1,748 $ 1,372 $ 1,533 $ 3,337 $ 1,943 $ 4,044 $ 1,750 $ 13,979 On demand Less than 3 months 3 to 12 months 1 to 2 years 2 to 5 years After 5 years Total $ – – – – – – – – – 6 145 76 6 96 329 $ 42 23 1 – 66 398 84 4 486 127 695 68 – – 890 $ 268 108 4 15 395 1,356 235 13 $ 412 110 4 1 527 947 190 15 $ 176 202 8 13 399 2,393 234 30 1,604 1,152 2,657 – 46 2 – – 48 1 – – – – 1 – – – – – – $ 792 $ 1,690 191 8 32 634 25 61 1,023 2,410 14 1 1 16 – – – – – – 5,108 744 63 5,915 134 886 146 6 96 1,268 $ 329 $ 1,442 $ 2,047 $ 1,680 $ 3,056 $ 1,039 $ 9,593 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. Year ended December 31, 2006 US$ million FIXED–RATE DEBT Loans and borrowings Principal Interest Financial instruments included in long-term liabilities Total ﬁ xed-rate debt VARIABLE–RATE DEBT Loans and borrowings Principal Interest Finance lease liabilities Total variable-rate debt NON–INTEREST BEARING DEBT Trade and other payables Payables to related parties Amounts payable under put options for shares of subsidiaries Dividends payable Total non-interest bearing debt CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 On demand Less than 3 months 3 to 12 months 1 to 2 years 2 to 5 years After 5 years Total 175 $ – – 1 1 – – – – 67 25 – 62 154 $ 155 $ 9 23 – 32 24 18 4 46 250 – – – 250 $ 48 99 7 154 631 40 12 683 29 – 175 – 204 $ 117 117 6 240 265 24 14 303 – – – – – $ 577 243 9 829 $ 780 249 21 $ 1,531 731 44 1,050 2,306 130 16 33 179 – – – – – 25 1 3 29 – – – – – 1,075 99 66 1,240 346 25 175 62 608 $ 328 $ 1,041 $ 543 $ 1,008 $ 1,079 $ 4,154 Payables to related parties in the tables above do not include advances received in the amount of $138 million, $86 million and $151 million as of December 31, 2008, 2007 and 2006, respectively. In addition, payables to related parties in the table as of December 31, 2007 do not include a liability to Lanebrook in respect of the 48.6% ownership interest in Palmrose, which was settled by the issue of shares (Note 20). Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the Group’s income or the value of its holdings of ﬁ nancial instruments. The objective of market risk management is to manage and control market risk exposures, while optimising the return on risk. Interest Rate Risk The Group borrows on both a ﬁ xed and variable rate basis and has other interest-bearing liabilities, such as ﬁ nance lease liabilities and obligations under cumulative preference shares of one of the Group’s subsidiary. The Group incurs interest rate risk on liabilities with variable interest rate. The Group’s treasury function performs analysis of current inter- est rates. Depending on that, the management makes decisions whether it would be more beneﬁ cial to obtain ﬁ nancing on a ﬁ xed-rate or variable-rate basis. In case of changes in the current market ﬁ xed or variable rates the management may consider reﬁ nancing of a particu- lar debt on more favourable terms. Due to the ongoing world liquidity crisis the Group has a limited ability to negotiate interest rates. The Group does not have any ﬁ nancial assets with variable interest rate. Fair Value Sensitivity Analysis for Fixed Rate Instruments The Group does not account for any ﬁ xed rate ﬁ nancial assets or liabilities at fair value through proﬁ t or loss. Therefore, a change in interest rates at the reporting date would not affect the Group’s proﬁ ts. The Group does not account for any ﬁ xed rate ﬁ nancial assets as assets available for sale. Therefore, a change in interest rates at the reporting date would not affect the Group’s equity. Cash Flow Sensitivity Analysis for Variable Rate Instruments Based on the analysis of exposure during the years presented, reasonably possible changes in ﬂ oating interest rates at the reporting date would have changed proﬁ t before tax (“PBT”) by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) Financial Risk Management Objectives and Policies (continued) Market Risk (continued) Interest Rate Risk (continued) Cash Flow Sensitivity Analysis for Variable Rate Instruments (continued) 176 In estimating reasonably possible changes for 2007 and 2006 the Group assessed the volatility of interest rates during the three years preceding the balance sheet dates. In 2008, the Group assessed reasonably possible changes based on the volatility of interest rates during 2008. Liabilities denominated in US dollars Decrease in LIBOR Increase in LIBOR Decrease in Prime rate Increase in Prime rate Decrease in Federal Funds Rate Increase in Federal Funds Rate Liabilities denominated in euro Decrease in EURIBOR Increase in EURIBOR 2008 2007 2006 Basis points Effect on PBT Basis points US$ million Effect on PBT US$ million Basis points Effect on PBT US$ million (53) 53 (106) 106 (33) 33 (30) 30 $ 24 (24) 4 (4) 1 (1) 1 $ (1) (125) 75 – – – – (150) 75 $ 24 (14) – – – – 3 $ (1) (100) 50 – – – – (50) 150 $ 9 (5) – – – – 1 $ (3) Currency Risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group’s subsidiaries. The currencies in which these transactions primarily are denominated are US dollars and euro. The Group does not have formal arrangements to mitigate currency risks of the Group’s operations. However, management believes that the Group is secured from currency risks as foreign currency denominated sales are used to cover repayment of foreign currency denomi- nated borrowings. The Group’s exposure to currency risk determined as the net monetary position in respective currencies was as follows: US$ million USD/RUR EUR/USD EUR/RUR EUR/CZK USD/CZK USD/ZAR USD/UAH RUR/UAH CAD/USD 2008 $ 967 180 (390) 48 (216) (7) (203) 12 1,611 2007 $ 430 193 (313) 71 (102) 36 – – – 2006 $ 147 185 (245) 56 (180) (88) – – – Sensitivity Analysis The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held constant, of the Group’s proﬁ t before tax. In estimating reasonably possible changes for 2007 and 2006 the Group assessed the volatility of foreign exchange rates during the three years preceding the balance sheet dates. In 2008, the Group assessed reasonably possible changes based on the volatility of foreign exchange rates during 2008. USD/RUR EUR/USD EUR/RUR EUR/CZK USD/CZK USD/ZAR USD/UAH RUR/UAH CAD/USD 2008 2007 2006 Change in exchange rate % Effect on PBT US$ million Change in exchange rate % Effect on PBT US$ million Change in exchange rate % Effect on PBT US$ million (8.98) 8.98 (14.32) 14.32 (8.63) 8.63 (10.61) 10.61 (18.52) 18.52 (28.52) 28.52 (11.77) 11.77 (14.73) 14.73 (15.44) 15.44 (87) 87 (26) 26 34 (34) (5) 5 40 (40) 2 (2) 24 (24) (2) 2 (249) 249 (5.80) 4.20 (7.35) 7.35 (5.45) 3.25 (4.10) 4.10 (9.40) 9.40 (17.70) 13.00 – – – – – – (25) 18 (14) 14 17 (10) (3) 3 10 (10) (6) 5 – – – – – – (6.10) 4.50 (9.25) 9.25 (7.00) 4.70 (3.50) 3.50 (8.40) 10.10 (15.00) 15.00 – – – – – – (8) 7 (17) 17 17 (11) (2) 2 15 (18) 13 (13) – – – – – – MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 Fair Value of Financial Instruments The carrying amounts of ﬁ nancial instruments, such as cash, short-term and long-term investments, short-term accounts receivable and payable, short-term loans receivable and payable, promissory notes, and restructured taxes, approximate their fair value. The following table shows ﬁ nancial instruments whith carrying amounts different from fair values. 177 US$ million Long-term ﬁ xed-rate bank loans Long-term variable-rate bank loans 8.875 per cent notes due 2013 8.25 per cent notes due 2015 9.5 per cent notes due 2018 10.875 per cent notes due 2009 2008 2007 2006 Carrying amount $ 423 4,686 1,260 718 567 314 Fair Value $ 354 3,824 668 374 284 302 Carrying amount $ 436 3,998 – 742 – 314 Fair Value $ 423 3,910 – 747 – 316 Carrying amount $ 462 472 – 740 – 314 Fair Value $ 406 472 – 776 – 330 $ 7,968 $ 5,806 $ 5,490 $ 5,396 $ 1,988 $ 1,984 The fair value of the notes was determined based on market quotations. The fair value of long-term ﬁ xed-rate bank loans was calculated based on the present value of future principal and interest cash ﬂ ows, discounted at the Group’s market rates of interest at the reporting dates. The discount rates used for valuation of ﬁ nancial instruments were as follows: Currency in which ﬁ nancial assets are denominated USD EUR RUR 2008 10.0 – 16.8% 6.6% 23.0% 2007 7.7% 6.5% 9.1% 2006 7.9% 5.8% – Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise the return to shareholders. The Board of directors reviews the Group’s performance and establishes key performance indicators. In addition, the Group and certain of its subsidiaries are subject to externally imposed capital requirements (loans and bonds covenants) which are used for capital monitoring. There were no changes in the objectives, policies and processes during 2007. Capital includes equity attributable to the equity holders of the parent entity. Revaluation surplus which is included in capital is not subject to capital management because of its nature (Note 4). The Group manages its capital structure and makes adjustments to it by issue of new shares, dividend payments to shareholders, pur- chase of treasury shares. The Group monitors the compliance of the amount of legal reserve with the statutory requirements and makes appropriations of proﬁ ts to legal reserve. In addition, the Group monitors distributable proﬁ ts on a regular basis and determines the amounts and timing of dividends payments. The capital requirements imposed by certain loan agreements include the following: consolidated equity less goodwill should be at least $2,000 million. 30. Non-cash Transactions Investing and ﬁ nancing transactions that did not require the use of cash or cash equivalents were as follows in the years ended December 31: US$ million Liabilities for purchases of property, plant and equipment Liabilities for purchases of shares in subsidiaries and other entities Issue of shares to settle the liability for the acquisition of the Ukrainian businesses Loans provided in the form of payments by banks for the subsidiaries acquired by the Group Reﬁ nancing of a bridge loan Offset of restricted deposit with amounts payable to Credit Suisse for the purchase of 24.9% of Highveld’s shares Offset of loan receivable with amounts payable for the purchase of non-current assets Offset of income tax payable against other taxes Loans paid by banks to vendors for property, plant and equipment Notes 4 4 4, 13 2008 $ 124 15 757 938 – – – 52 – 2007 $ 50 38 – – 1,535 207 13 – – 2006 $ 20 6 – – – – – – 11 ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. Notes to the Consolidated Financial Statements (continued) 178 31. Commitments and Contingencies Operating Environment of the Group The Group is one of the largest steel producers globally and is the largest steel producer in Russia. Its major subsidiaries are located in Russia, Ukraine, the European Union, the USA, Canada and the Republic of South Africa. Russia and Ukraine are considered to be developing markets with higher economic and political risks. The Russian and Ukrainian econo- mies are characterised by relatively high inﬂ ation and the existence of currency controls, which cause the national currency to be illiquid outside of the respective countries. These two countries continue to implement economic reforms and the development of legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian and Ukrainian economies is largely dependent upon these reforms and developments and the effectiveness of economic, ﬁ nancial and monetary measures undertaken by governments. The developing economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. The ongoing global ﬁ nancial crisis has resulted in capital markets instability, signiﬁ cant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia and Ukraine. The volatile global economic climate is having signiﬁ cant negative effects on the Group’s business in North America and Europe. The Group sells its products to shipping, pipe-making, railway transportation, construction, oil and gas industries, all of which have re- ported substantially lower customer demand due to the ﬁ nancial crisis and the slowing global economy. Energy prices have fallen dramati- cally and this may reduce oil and gas exploration and development, which in turn could impact the Group’s tubular business. In addition to slackening demand by the end customers, some of the Group’s customers are experiencing difﬁ culty in obtaining credit, which has further reduced their purchases from the Group even beyond that resulting from the decline in their sales. The duration of the crisis and the recovery of these industries will have a signiﬁ cant impact on the Group. The worldwide ﬁ nancial crisis may result in a further reduction of the available credit facilities as well as substantially higher interest rates. The reduced cash from operations and the reduced availability of credit may increase the cost, delay the timing of, or reduce planned capital expenditures. These factors may also negatively impact the Group’s ability to make acquisitions. While the stabilisation measures aimed at providing liquidity and supporting debt reﬁ nancing have been introduced by the governments, there continues to be uncertainty regarding the access to capital and cost of capital for the Group and its counterparties, which could affect the Group’s ﬁ nancial position, results of operations and business prospects. The unexpected further deterioration in the areas de- scribed above could negatively affect the Group’s results and ﬁ nancial position in a manner not currently determinable. Taxation Russian and Ukrainian 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, signiﬁ cant additional taxes, penalties and interest may be assessed. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabili- ties based on the management’s best estimate of the probable outﬂ ow of resources embodying economic beneﬁ ts, which will be required to settle these liabilities. Possible liabilities, which were identiﬁ ed by management at the balance sheet date as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in the accompanying ﬁ nancial statements could be up to approximately $24 million. Contractual Commitments At December 31, 2008, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $393 million. 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 2009, the Group plans to spend approximately $80 million under these programmes. Environmental Protection In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantiﬁ cation of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmen- tal technologies, the quality of information available related to speciﬁ c sites, the assessment stage of each site investigation, preliminary ﬁ ndings and the length of time involved in remediation or settlement. Management believes that any pending environmental claims or proceedings will not have a material adverse effect on its ﬁ nancial position and results of operations. The Group has a constructive obligation to reduce environmental polutions and contaminations in the future in accordance with an en- vironmental protection programme. In the period from 2009 to 2013, the Group is obligated to spend approximately $213 million under this programme. 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 signiﬁ cant effect on the Group’s operations or ﬁ nancial position. The Group, together with several other corporations and individuals, was named as a defendant in a civil action related to bankruptcy proceedings at KGOK that occurred between 1999 and 2003, prior to the Group’s acquisition of KGOK and the alleged conversion and violations of the United States Racketeer Inﬂ uenced and Corrupt Organisations Act (“RICO”). This law suit was ﬁ led in November 2004 in the United States District Court for the District of Delaware (the “District Court”). The plaintiffs seek damages in excess of $500 million. MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 179 On April 26, 2005, the plaintiffs ﬁ led another suit with the Delaware Chancery Court (the “Chancery Court”) against the same defendants, including the Group, based on the same factual allegations. However, in October 2005, the Chancery Court granted the defendant’s mo- tion to stay the action pending the developments of the litigation between the parties in the District Court. In April 2006, the District Court dismissed the claim based on a decision that the plaintiffs’ claim arises from the conduct of business in Russia and, therefore, the Russian jurisdiction is an adequate forum for the plaintiffs’ claim, however, the District Court did not issue an injunction sought by the defendants that would bar plaintiffs from pursuing any additional litigations in the United States. Upon getting such a decision in the District Court, the plaintiffs ﬁ led an appeal on that decision and the defendants cross-appealed on the injunction issue. The plaintiffs made another attempt to continue the proceeding in the Chancery Court, which was not upheld: in August 2006 the Chancery Court has issued his opinion deny- ing the plaintiffs' motion to lift the stay. In May 2007, the plaintiffs’ appeal was dismissed. During 2008 the plaintiffs wrote to the Delaware District Court concerning the English High Court decision held that litigation of a dispute between two other defendants in the Delaware District Court action (Messrs. Chernoi and Deripaska) should proceed in England because of the risk that Russian courts would not provide an adequate forum for that litigation. In their letter, the plaintiffs asked the Delaware Dis- trict Court to postpone its decision on the injunction issue, and suggested that the English High Court’s judgment may have some impact on the matters already decided by the Delaware District Court and afﬁ rmed by the Court of Appeals. In September 2008, the Delaware District Court denied the plaintiffs’ request for related discovery, holding that it would be irrelevant to the pending injunction motion. The plaintiffs further wrote to the Delaware District Court in 2009, inquiring about the status of the pending injunction motion. To date, the Delaware District Court has taken no action in response to the plaintiffs’ letter. As a result, the federal action under the RICO statute is over. The case is now before the District Court exclusively on the narrow issue of whether to grant the injunction barring the plaintiffs from pursuing their claims in any other courts of the United States, including the pending action in the Chancery Court. Consequently, management believes that the ultimate resolution of the lawsuit will not have a signiﬁ cant impact on the ﬁ nancial position of the Group. Therefore, no provision is recognised in the ﬁ nancial statements in respect of this case. The Group is involved in several litigations that may have an impact on the assets of Vitkovice Steel, the Group’s subsidiary ac- quired in 2005. Accounts receivable of Vitkovice Steel include 409 million Czech koruna ($21 million at the exchange rate as of December 31, 2008) due from OSINEK, the former parent company of Vitkovice Steel. The recoverability of this receivable is subject to successful resolution of the dispute between OSINEK and ArcelorMittal Ostrava a.s. over the price of pig iron supplied in 2003 and in the period from January 1 to February 20, 2004. Management believes that this receivable will be recovered. Stratcor, the Group’s subsidiary, together with IBM Corporation, Anglo American Plc., Gold Fields Ltd., UBS AG and some other companies, acts as a defendant in an action ﬁ led in 2004. Plaintiffs allege that the defendants engaged in a conspiracy with the Apartheid-era govern- ment of South Africa in violation of international law and participated in genocide, expropriation and other wrongful acts. Plaintiffs sought unspeciﬁ ed compensatory damages and exemplary damages of $10,000 million. The Group’s potential losses under this litigation were limited to the net assets of Stratcor being $81 million as of December 31, 2008. On March 9, 2009, the court dismissed that action based upon the plaintiffs’ failure to prosecute the case. 32. Subsequent Events Borrowings Subsequent to December 31, 2008, the Group signed bank loan agreements for $243 million (at the exchange rate as of April 26, 2009), including $100 million in respect of long-term borrowings. Repurchase of Notes Starting from January 1, 2009 till the date of authorisation of issue of these ﬁ nancial statements, the Group re-purchased notes due 2009, 2013, 2015 and 2018 with the nominal amount of $381 million for cash consideration of $294 million. Subsequent Pledges Subsequent to December 31, 2008, the Group pledged certain items of inventory with an approximate carrying value of $260 million as collateral against loans provided to the Group. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 180 Responsibility Statement of the Directors in respect of the Annual Report and the Financial Statements We conﬁ rm that to the best of our knowledge: the ﬁ nancial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabili- ties, ﬁ nancial position and proﬁ t of the Company and the undertakings included in the consolidation taken as a whole; the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Alexander Frolov Chief Executive Ofﬁ cer 30 April 2009 MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 181 Abbreviations and Acronyms AGM – Annual General Meeting LIBOR – The London Interbank Offered Rate BRIC – Brazil, Russia, India and China LSE – London Stock Exchange plc CAD – The Canadian dollar CEO – Chief Executive Ofﬁ cer M or mln – Million Mt – Million tonnes CIS – The Commonwealth of Independent States p.a. – Per annum, annually CO2 – Carbon dioxide CZK – The Czech koruna RoW – Rest of the world RZD – Joint Stock Company “Russian Railways” EBITDA – Earnings Before Interest, Taxes, Depreciation RUB – The Russian rouble and Amortisation EGM – Extraordinary General Meeting S$ – The Singapore dollar t – Tonne. In this document, unless stated otherwise, all ref- ERM – Enterprise Risk Management erences to “tonnes” are to metric tonnes. One metric tonne EU – European Union EUR or € – The Euro EURIBOR – The Euro Interbank Offered Rate GDP – Gross Domestic Product GDR – Global Depositary Receipts HRC – Hot rolled coil IAS – International Accounting Standard IFRS – International Financial Reporting Standards kt – Thousand tonnes kWh – Kilowatt-hour is equal to one thousand kilograms, or 2,204.6 pounds UK – United Kingdom of Great Britain and Northern Ireland US or USA – The United States of America UAH – The Ukrainian hryvnia USD, US$ or $ – The US dollar V – Vanadium VAT – Value added tax VEB – Russia's State Corporation Bank for Development and Foreign Economic Affairs “Vnesheconombank” ZAR – The South African rand ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 182 Glossary of Selected Terms Angle Concentrate Angle shaped section for construction A product resulting from ore enrichment, with a high grade Billet of extracted mineral A usually square, semi-ﬁ nished steel product obtained by Construction products continuous casting or rolling of blooms. Sections, rails, wire Include beams, channels, angles, rebars, wire rods, wire rod and other rolled products are made from billets and other goods Blast furnace Consumption The blast furnace is the classic production unit to reduce The physical use of steel by end users iron ore to molten iron, known as hot metal. It operates as a counter-current shaft system, where iron ore and coke is charged at the top. While this charge descends towards the bottom, ascending carbon containing gases and coke re- duces the iron ore to liquid iron. To increase efﬁ ciency and Crude steel Steel in its solidiﬁ ed state directly after casting. This is then further processed by rolling or other treatments, which can change its properties productivity, hot air (often enriched with oxygen) is blown Ferroalloy into the bottom of the blast furnace. In order to save coke, A metal product commonly used as a raw material feed coal or other carbon containing materials are sometimes in steelmaking, usually containing iron and other metals, injected with this hot air Bloom A usually square, semi ﬁ nished product obtained by contin- uous casting or rolling of ingots. Blooms are used to make to aid various stages of the steelmaking process such as deoxidation and desulfurisation, and add strength. Examples: ferrochrome, ferromanganese, ferrosilicon and ferrovanadium billets and in the manufacture of structural steel products Flat products or Flat-rolled steel products Brownﬁ eld project A development or exploration project in the vicinity of an existing operation Channel U shaped section for construction Coke A product made by baking coal without oxygen at high tem- peratures. Unwanted gases are driven out of the coal. The unwanted gases can be used as fuels or processed further to recover valuable chemicals. The resulting material (coke) has a strong porous structure which makes it ideal for use in a blast furnace Include commodity plate, specialty plate and other prod- ucts in ﬂ at shape such as sheet, strip and tin plate Greenﬁ eld project The development or exploration of a new project not previ- ously examined Iron ore Chemical compounds of iron with other elements, mainly oxygen, silicon, sulphur or carbon. Only extremely pure (rich) iron-oxygen compounds are used for steelmaking. Since the iron is chemically bound to the accompanying elements, energy is needed to break these bonds. This makes ore-based steel production more energy intensive than production based on recycled steels, where only melt- ing is usually required MAKING THE WORLD STRONGER EVRAZ GROUP S.A. 183 Long products Sinter Include bars, rods and structural products that are “long” An iron rich clinker formed by heating iron ore ﬁ nes and- rather than “ﬂ at” and are produced from blooms or billets coke in a sinter line, to be used for blast furnace. A process Open-hearth furnace A vessel used to produce steel, which has been largely superseded by substantially more efﬁ cient basic oxygen furnace (BOF) Other steel products Include rounds, grinding balls, mine uprights, strips etc. Pellets An enriched form of iron ore shaped into small balls or pel- lets. Pellets are used as raw material in the steel making process Pig iron The solidiﬁ ed iron produced from a blast furnace used for steel production. In liquid form, pig iron is known as hot metal Railway products Include rails, rail fasteners, wheels, tyres and other goods for the railway sector Rebar Reinforcing bar, a commodity grade steel used to strength- en concrete in highway and building construction Scrap that combines iron-bearing particles recovered from envi- ronmental control ﬁ lters into small pellets. The pellets can be used as charge in a blast furnace Slab A common type of semi-ﬁ nished steel product which can be further rolled into sheet and plate products Slag Slag is a byproduct generated when non-ferrous sub- stances in iron ore, limestone and coke are separated from the hot metal in metallurgical production. Slag is used in cement and fertiliser production as well as for base course material in road construction Tubular products Include large diameter line pipes, ERW pipes and casings, seamless pipes and other tubular products Vanadium A grey metal that is normally used as an alloying agent for iron and steel. It is also used to strengthen titanium-based alloys Vanadium pentoxide The chemical compound with the formula V2O5: this orange solid is the most important compound of vanadium. Iron containing recyclable materials (mainly industrial or Upon heating, it reversibly loses oxygen household waste) ) that is generally remelted and pro- cessed into new steel Semi-ﬁ nished steel products The ﬁ rst solid product forms in the steel making process such as slabs, blooms, billets or pipe blanks that are further processed into more ﬁ nished products including beams, bars, sheets, tubing etc. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. 184 Information in respect of the Company Evraz Group S.A. is the parent company of the Evraz group of companies. All references to “Evraz”, the “Company”, the “Group”, ‘we’ or ‘us’ relate to Evraz Group S.A. and its consolidated subsidiaries. Further Information GDR Programme The Bank of New York Mellon Depositary Receipts Division 101 Barclay Street 22nd ﬂ oor New York, NY 10286 USA The registered address of Evraz Group S.A. is 1 Allee Schef- www.adrbny.com fer L-2520, Luxembourg, tel. +352 24 14 33 1. The Company is registered with the Luxembourg Register of Commerce and Companies under Number B105615. London Stock Exchange symbol: ‘EVR’. The Bank of New York Mellon Shareowner Services PO Box 11258 Church Street Station EvrazHolding LLC is a centralised management company New York, NY 10286-1258 USA overseeing the management of Evraz’s assets. www.stockbny.com EvrazHolding in Russia: Address: External Auditor Ernst & Young LLC 15 Dolgorukovskaya str., bld. 4-5, Sadovnicheskaya Nab., 77, bld. 1 Moscow 127006 tel. +7 495 234 4631 www. evraz.com Evraz is a Component of the Following Recognised Market Indices: Dow Jones Emerging Markets Metals & Mining Titans 30 Index Dow Jones Emerging Markets Basic Materials Titans 30 Index S&P Russia 10 Index FTSE Russia IOB Index (10 constituents ) The DAXglobal Russia+Index (Bloomberg ticker: DXRPUS) Russian Industrial Leaders Index, 30 components, (RUXX), calculated by Dow Jones Indexes Moscow 115035 Russia www.ey.com/russia Availability of Annual Report Evraz Group’s Annual Report for 2008 and those for previ- ous years can be downloaded from the website www.evraz.com/investor/reports. To obtain a copy of the Company’s Annual Report, free of charge, or to submit any queries, please contact: Investor Relations: tel. +7 495 232 1370, ir@evraz.com MAKING THE WORLD STRONGER EVRAZ GROUP S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 185 Cautionary Statements The Evraz Group S.A. Annual Report and Accounts for 2008 contains certain “forward looking statements” which include all statements other than the statements of historical facts that relate to Evraz’s plans, ﬁ nancial position, objec- tives, goals, strategies, future operations and performance together with the assumptions underlying such matters. The Company generally uses words such as “estimates”, “ex- pects”, “believes”, “intends”, “plans”, “may”, “will”, “should” and other similar expressions to identify forward looking statements. Evraz Group has based these forward looking statements on the current views of its management with regard to future events and performance. These views reﬂ ect mangement’s best judgement but involve uncertainties and are subject to certain known and unknown risks together with other impor- tant factors outside the Company’s control, the occurrence of which could cause actual results to differ materially from those expressed in Evraz’s forward looking statements. Competitive Position Statements referring to Evraz’s competitive position reﬂ ect the Company’s beliefs and, in some cases, rely on a range of sources, including investment analysts’ reports, independent market studies and the Company’s internal estimates of market share based on publicly available information regard- ing the ﬁ nancial results and performance of various market participants. Rounding Certain ﬁ gures included in this document have been subject to rounding adjustments. Accordingly, ﬁ gures shown for the same category presented in different tables may vary slightly and ﬁ gures shown as totals in certain tables may not be an arithmetic aggregation of the ﬁ gures that precede them. ANNUAL REPORT & ACCOUNTS 2008 EVRAZ GROUP S.A. www. evraz.com

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