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$/kg V)
84.56
78.72
79.94
76.77
62.58
63.58
65.06
63.69
54.67
40.87
Source: London Metal Bulletin
34.94
28.83
26.26
25.04
22.77
22.56
19.54
18.96
8
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ANNUAL REPORT & ACCOUNTS 2008
EVRAZ GROUP S.A.
24
Business
Overview
Evraz, which services
customers in more than
40 countries, is a global
supplier of steel products for
industrial applications. More
than 40% of the Company’s
assets are based in Russia
with 30% located in the USA
and Canada.
MAKING THE WORLD STRONGER
EVRAZ GROUP S.A.
25
Performance in Figures
Revenues by Segment (US$ 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
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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
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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