Evercore Annual Report 2009

Plain-text annual report

Annual Report and Accounts 2009 Bridging the Infrastructure Gap Contents I. Company Overview Who We Are Key Events Corporate Structure Major Assets Operations Map Production by Region Key Performance Indicators 2005–2009 II. Messages Chairman’s Statement Chief Executive’s Report III. Economic and Industry Overview Global Macroeconomic Environment Steel Industry Iron Ore Market Coking Coal Market Vanadium Market IV. Business Overview Our Strategy Our Business Steel Steel: Russia Steel: Ukraine Steel: North America, Western Europe and South Africa Mining Mining: Coal Mining: Iron Ore Vanadium Outlook for 2010 Key Investment Projects 2010 V. Corporate Responsibility Introduction Economic Prosperity Health and Safety Environment Our People 4 6 7 8 9 10 12 14 16 18 20 22 24 26 27 28 29 30 32 34 35 35 37 38 41 41 42 43 44 45 46 48 49 51 53 54 VI. Corporate Governance Introduction The Board of Directors and Senior Management The Board (Elected on 17 May 2010) Senior Management (As of 31 May 2010) Role of the Board Board and Management Remuneration Board Committee Reports Risk Management Internal Control Shareholder Information VII. Management Report and Financial Statements Management Report Responsibility Statement of the Directors in Respect of the Annual Report and the Financial Statements Selected Consolidated Financial Information Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements for the Year Ended 31 December 2009 Contents Independent Auditors’ Report in Respect of Consolidated Financial Statements for the Year Ended 31 December 2009 Consolidated Financial Statements for the Year Ended 31 December 2009 Parent Company Financial Statements of Evraz Group S.A. for the Year Ended 31 December 2009 Contents Responsibility Statement of the Directors Independent Auditors’ Report Parent Company Financial Statements Abbreviations and Acronyms Glossary of Selected Terms 56 58 59 60 64 70 72 74 77 80 81 86 88 89 90 93 126 127 129 130 234 235 236 237 238 257 258 I. Company Overview The American Recovery and Reinvestment Act of 2009 revealed plans to spend US$27.5 billion on highway and bridge construction projects. Evraz’s North American division is one of the world’s largest producers of infrastructure plate which is used for the construction of roads and bridges. Evraz supplied the steel used to build the infrastructure for the APEC -2012 summit to be staged on Russky Island, off the coast of Vladivostok, in the Far East of Russia. The rebars, channels and sheet piles will be utilised in various projects including runway reconstruction at Vladivostok International Airport and the construction of a bridge from Vladivostok to Russky Island across the Eastern Bosphorus strait. Annual Report & Accounts 2009 Evraz Group S.A. Who We Are Evraz Group is a vertically-integrated steel, mining and vanadium business and, based on 2009 crude steel production volumes, is ranked the 14th largest steel company in the world. Our Business Evraz is a global industrial enterprise that spans four continents and employs approximately 110,000 people. During 2009, Evraz produced 15.3 million tonnes of crude steel and sold 14.3 million tonnes of steel products. Self- coverage in relation to the Company’s iron ore and coking coal requirements amounted to 96% and 74% respectively. Our principal activities include the manufacture and sale of steel and steel products, iron ore mining and enrichment, coal production and processing, the manufacture and sale of vanadium products, trading and logistics. As a leading supplier to major industrial sectors, Evraz operates in all infrastructure-related steel markets. Evraz is the world’s largest producer of rails and one of the leading producers of construction steel. Our Vision Evraz remains focused on its primary objective of sustaining the Company’s position as one of the most cost-efﬁ cient integrated steel producing and mining enterprises in the world. Evraz’s strategy is focused on achieving ongoing improvements in operating efﬁ ciency, cost control and synergies derived from asset consolidation, while maintaining the Company’s prime positions in the railway and construction steel products markets in Russia and the CIS, the ﬂ at products markets in Europe and the US and the global vanadium market. The consistent implementation of these strategic objectives continued throughout 2009. Our Story Originally founded in 1992 as a small metal trading company in Russia, Evraz has developed into a multinational corporation through progressively extending its steel and mining operations around the globe. We believe our greatest responsibility to our shareholders, our employees, our customers, the communities that we operate within and other relevant constituencies is to deliver maximum value while aligning our activities to a framework of sustainability that is integral to the ongoing development of our business. 6 I Annual Report & Accounts 2009 Evraz Group S.A. Key Events 2009 January An Extraordinary Shareholders’ Meeting approved the modiﬁ cation of the method of payment of the 2008 interim dividend. As a result, 9,755,347 new shares were issued in favour of those shareholders who supported the 2008 partial scrip interim dividend payment. 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. April Highveld agreed to sell 26% of Mapochs Mine to local partners in accordance with the South African Government’s Black Economic Empowerment programme and South African legislation in respect of the mining industry. sales of the Company’s steel products to domestic customers. November Evraz exercised control over Vanady-Tula. As of 31 December 2009, the Company’s nominal ownership interest in Vanady-Tula was 84.84% November-December Lenders under syndicated loan facilities and holders of Evraz notes due 2013, 2015 and 2018 approved amendments of debt covenants, allowing appropriate headroom and ﬂ exibility to progress Evraz’s current strategy. December Evraz repaid to “Vnesheconombank” (“VEB”) the US$800 million loan granted in December 2008. May The Annual General Meeting of shareholders approved the proposal not to pay a ﬁ nal dividend for 2008. Dividend payments will only resume upon sustainable market recovery and progress in deleveraging. Evraz secured a US$225 million four-year committed revolving credit facility in respect of Evraz Inc. NA., its wholly-owned US subsidiary. June Evraz’s steelmaking capacity utilisation in Russia was restored to 100% following the resumption of operations at Blast Furnace No. 3, idled in October 2008, at the Zapsib steel mill, Novokuznetsk, Russia. 2010 March Evraz won the licence to develop the Mezhegey coking coal deposit (estimated category A+B+C1 reserves of 213.5 million tonnes of hard coking coal) in the Republic of Tyva, Russia. July Evraz raised US$965 million through the issue of US$650 million 7.25% convertible bonds due 2014 and US$315 million of new equity. The conversion price for the bonds is US$21.12 per GDR, while the issue price of the new equity was US$16.50 per GDR. Evraz’s subsidiary, OOO EvrazHolding Finance, announced the issue of a 15 billion Rouble-denominated bond (approx. US$506 million) at an annual rate of 9.25% due in 2013. August Evraz announced the lapse of the option to raise its stake in Delong Holdings Ltd., the Singapore-listed Chinese steel manufacturer, from the current 15% to 51%. April Evraz sold the Koksovaya coal mine, a subsidiary of Evraz’s Yuzhkuzbassugol, to the Raspadskaya coal company in order to derive maximum synergies from the future development of the coal ﬁ eld. September Evraz Inc. NA received a signiﬁ cant Large Diameter Pipe order from TransCanada Corporation in relation to the Keystone Gulf Coast Expansion Project (Keystone XL). October Evraz’s subsidiary, OOO Sibmetinvest, launched a 20 billion Rouble (approx. US$680 million) ﬁ ve-year bond issue at an annual rate of 13.5%. May At the Company’s AGM, shareholders approved the Board’s proposal not to pay a dividend in respect of 2009. The number of directors was reduced from ten to nine. Details of the Board’s composition can be found in the Corporate Governance section. Evraz acquired Carbofer Metall, one of the largest steel distributors in Russia, in order to increase direct Evraz fully repaid a US$1,007 million loan to VEB utilising a US$950 million loan from Gazprombank which will mature in 2015. 7 Annual Report & Accounts 2009 Evraz Group S.A. Corporate Structure Key subsidiaries and jointly controlled entities as of 31 December 2009 North America Evraz Inc. NA*a 100% Evraz Inc. NA Canada*b 100% STEEL IRON ORE COAL VANADIUM SALES, SERVICES AND LOGISTICS COKE Stratcor*e 72.84% Europe NTMK 100% KGOK 100% Dneprokoks 98.65% Nikom 100% TC EvrazHolding 100% Palini e Bertoli 100% VGOK 100% Bagleykoks 94.37% Vítkovice*100% Sukha Balka 99.42% DKHZ 93.86% Evraztrans f 76% East Metals 100% EvrazMetall 100% Asia DMZ 96.03% Zapsib 100% NKMK 100% Africa Highveld*c 85.12% 8 Evrazruda 100% Yuzhkuzbassugol 100% Raspadskaya d 40% Vanady-Tula g 84.84% Nakhodka Sea Port 100% EvrazEK 100% Sinano 100% MEF 100% * Interests in subsidiaries marked with an asterisk (*) are held directly by Evraz Group S.A., the parent company a 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). b 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. d 40% interest in Raspadskaya is held by its management, while 20% is free ﬂ oat. e Strategic Minerals Corporation comprises two divisions: Stratcor, Hot Springs (Arkansas, USA) and Vametco Alloys, Brits (South Africa). c Highveld Steel and Vanadium Corporation produces both steel and vanadium products. Highveld’s shares have a primary listing on the Johannesburg Stock Exchange. f The remaining 24% in EvrazTrans is held by its management. g 84.84% is the Company’s nominal ownership interest while effective interest is 100% Annual Report & Accounts 2009 Evraz Group S.A. I Major Assets Dnepropetrovsk Iron and Steel Works (“DMZ”), Ukraine, an integrated steel mill specialising in the manufacture of pig iron, steel and rolled products. Novokuznetsk Iron and Steel Plant (“NKMK”) specialises in the production of rolled long metal products for the railway sector and semi-ﬁ nished products. Evraz Inc. NA together with Evraz Inc. NA Canada represents one of the most diversiﬁ ed steel manufacturers in North America. Evraz’s facilities in the USA and Canada, established 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 commodity steel products. 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. EvrazMetall (formerly known as Carbofer Metall), Russian steel distribution network. Vanady-Tula, the largest Russian producer and one of the leading world producers of vanadium products. Evraz Highveld Steel and Vanadium Corporation Limited (“Highveld”), one of the largest steel producers in South Africa with primary positions in medium and heavy structural sections and ultra thick plate and a leading producer of vanadium slag. Vysokogorsky Ore Mining and Processing Enterprise (“VGOK”) produces sinter from its iron ore resources, as well as iron ore concentrate, limestone, crushed stone and other products. Evraz Palini e Bertoli in northern Italy produces customised, high-quality steel plate products. West Siberian Iron and Steel Plant (“Zapsib”), an integrated steel plant that primarily produces construction long products and semi-ﬁ nished products. Evraz Vitkovice Steel, the largest producer of steel plates in the Czech Republic. Yuzhkuzbassugol Coal Company (“Yuzhkusbassugol”), one of the largest coal companies in Russia that produces both coking and steam coal. Ukrainian coking plants – Bagleykoks Coke Chemical Plant (“Bagleykoks”), Dnepropetrovsk Coke Chemical Plant (“Dneprokoks”) and Dneprodzerzhinsk Coke Chemical Plant (“DKHZ”) – supply their coke production to DMZ and various local steelmakers in Eastern Europe. Evrazruda Iron Ore Mining and Processing Complex (“Evrazruda”) produces iron ore concentrate and sinter, operating mines in Kemerovo region, the Republic of Khakassia and south Krasnoyarsk Krai. Kachkanarsky Ore Mining and Processing Enterprise Vanady (“KGOK”) produces sinter, pellets and concentrate from vanadium-rich iron ore. Nakhodka Commercial Sea Port (“NMTP”), one of the largest ports in the Far East of Russia, from where Evraz ships the majority of its exports. Nizhny Tagil Iron and Steel Plant (“NTMK”), an integrated steel plant that primarily produces railway and construction long products, pipe blanks and semi-ﬁ nished products. 9 Annual Report & Accounts 2009 Evraz Group S.A. US and Canada Operations Map Annual Report & Accounts 2009 Evraz Group S.A. I Ukraine Western Europe South Africa Camrose Works Regina Steel Claymont Steel Stratcor Rocky Mountain Steel Calgary Works Red Deer Works Oregon Steel Nikom Vitkovice Steel Palini e Bertoli East Metals Mapochs Mine Highveld Vametco Steel Production Iron Ore Mining and Enrichment Coal Mining Coke Production Vanadium Production Logistics Russia DMZ Bagleykoks DKHZ Sukha Balka Dneprokoks Moscow Vanady -Tula KGOK VGOK NTMK Raspadskaya Yuzhkuzbassugol Zapsib NKMK Evrazruda Nakhodka Sea Port 10 11 Annual Report & Accounts 2009 Evraz Group S.A. Annual Report & Accounts 2009 Evraz Group S.A. I Production by Region (share of Evraz’s production of steel rolled products in the region) Production, Mining and Vanadium Segments (thousand tonnes, unless indicated otherwise) Russia Mining segment: Iron ore concentrate 5,648 Sinter 4,077 Pellets 5,515 Coking coal mined 10,300 Steam coal mined 4,146 Vanadium segment*: Vanadium in slag 11,871 Vanadium in alloys and chemicals 1,014 Ukraine Mining segment: Lumping ore 1,678 Europe Vanadium segment*: Vanadium in alloys and chemicals 1,381 North America Vanadium segment*: Vanadium in alloys and chemicals 1,654 South Africa Mining segment: Iron ore ﬁ nes 490 Vanadium segment*: Vanadium in alloys and chemicals 6,653 * 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. North America 33% Tubular 32% Flat-rolled 19% Railway 16% Construction South Africa 50% Flat-rolled 26% Construction 21% Semi-ﬁnished 3% Other 12 Europe 87% Flat-rolled 10% Construction 2% Other 13 Ukraine 71% Semi-ﬁnished 28% Construction 1% Other Russia 49% Semi-ﬁnished 33% Construction 11% Railway 3% Flat-rolled 4% Other Annual Report & Accounts 2009 Evraz Group S.A. Key Performance Indicators 2005–2009 Revenues (US$ million) Adjusted EBITDA (US$ million) 20,380 6,215 12,859 8,292 9,772 6,508 4,305 2,642 1,859 1,237 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 CAPEX(US$ million) Operating Cash Flow (US$ million) 1,103 4,563 695 651 744 2,994 441 2,084 1,496 1,700 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 14 Annual Report & Accounts 2009 Evraz Group S.A. I Steel Sales Volumes (million tonnes) Assets (US$ million) 16.0 16.4 17.0 23,424 12.9 14.3 18,637 19,451 8,510 6,754 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Revenues by Region 2009 Debt (US$ million) Total debt Net debt 7,923 7,226 9,986 9,031 6,756 6,404 2,596 2,350 1,693 1,730 2005 2006 2007 2008 2009 30.2% Russia 24.8% Americas 24.8% Asia 10.5% Europe 5.6% CIS (excl. Russia) 3.9% Africa 0.2% Rest of the World 15 II. Messages Evraz Vitkovice Steel supplied approximately 10,000 tonnes of shipbuilding plates for the construction of Oasis of the Seas – the world’s largest and longest passenger vessel. Oasis of the Seas, a ﬂ oating city, has 16 decks (360 metres long; 47 metres wide) a passenger capacity of 6,300 and a 3,000-strong crew. Evraz supplied steel for the construction of a runway extension in Adler, in Southern Russia, and a freight sea port on the river Mzimta in preparation for the Sochi 2014 Olympic Games. Annual Report & Accounts 2009 Evraz Group S.A. Chairman’s Statement 18 Dear Stakeholders, To describe 2009 as a challenging year for the global steel sector, of which Evraz is an integral part, might be perceived as something of an understatement. Many of the events that accompanied the worldwide ﬁ nancial and economic downturn, which commenced in the late summer of 2008, were unprecedented, enveloping entire sectors of industry, including sectors that represented the steel industry’s customer base. Against this background, we were most notably affected by the abrupt slow-down in infrastructure spending in the markets where our production facilities are located. These circumstances called for swift and decisive actions on the part of Evraz’s management. I am pleased to report that we stood up to the challenge and took the opportunity to improve efﬁ ciency, reduce costs and reorganise our business. Since mid-2009 we have seen a measured recovery in the global economy which, in turn, led to an increase in steel demand. This has allowed us to fully utilise our steelmaking capacities. It should be emphasised, however, that market visibility remains low. Our key strategic priorities remain unchanged: cost leadership, an appropriate level of vertical integration into raw materials, geographic diversiﬁ cation, a manufacturing focus on infrastructure and the development of downstream operations in regions where value added products enjoy high consumption. Despite current volatility, there is widespread acknowledgement of the long-term growth potential inherent in infrastructure markets. The need for new construction in the emerging world and reconstruction in the developed world encompasses the unfolding industrialisation and urbanisation processes in China, India and other emerging economies and the US$2 trillion worth of repair work estimated to be required in both North America and Europe: all drivers of world demand for industrial steel. Tens of billions of dollars are dedicated to the construction of roads, bridges and other transportation projects, with Annual Report & Accounts 2009 Evraz Group S.A. particular emphasis on high-speed rail networks. At Evraz, our preparations for the ongoing development of high- speed rail facilities include a large-scale modernisation of our rail mills. achievements would not have been possible without the hard work and commitment of our employees around the world and I would like to take this opportunity to thank each of them for their invaluable contributions. II 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. I am conﬁ dent that we will succeed in these endeavours and successfully overcome those challenges that lie ahead. Alexander Abramov Chairman of the Board Our products are used in a number of recent and ongoing landmark infrastructure projects, including the Soccer World Cup stadiums and the associated infrastructure in South Africa, the 2014 Olympic Games site in Sochi, Russia, and the construction of the infrastructure required to host the Asia-Paciﬁ c Economic Cooperation summit in the Russian Far East in 2012, including a bridge from the city of Vladivostok to Russky Island across the Eastern Bosphorus strait. Energy and ecology represent other important sources of demand. Ongoing shale gas exploration and extraction projects in Western Canada and other parts of North America have led to substantial demand for Evraz’s casing and tubing products manufactured at our North American operations. Our steel also features in a number of “green” energy projects including wind turbines used throughout much of Europe. Evraz remains totally committed to its corporate principles in respect of safe, sustainable and socially responsible development. We constantly endeavour to mitigate any negative impacts on the environment and good progress was achieved in 2009 with the closure of the most harmful production units with regard to air pollution. Evraz’s key environmental objectives include consistent reductions in emissions and energy consumption, the appropriate treatment of gaseous and liquid waste and the effective processing of by-products. 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 occupational and social needs of its employees and support social projects for the beneﬁ t of the residents of those regions in which we operate. Evraz has always taken the view that employees represent our most important asset and are integral to the Company’s long-term success. It is clear that our 19 Annual Report & Accounts 2009 Evraz Group S.A. Chief Executive’s Report 20 Dear Stakeholders, Despite the serious challenges faced by Evraz and the global steel industry in 2009, we successfully navigated the downturn and ended the year with relatively high operating rates across our key production facilities. Our strategic disciplines of cost leadership, vertical integration, geographic diversiﬁ cation and product mix improvement, in concert with high efﬁ ciency, proved critical at a time of global recession. Earlier years represented periods of rapid growth: upstream vertical integration accompanied by downstream geographical expansion. Now is the time to focus on our operations, improve efﬁ ciency and integrate the acquired assets. Low-cost production has always represented a cornerstone of our corporate strategy, the key rationale behind much of our decision making. This has been achieved through the production of semi-ﬁ nished steel at the most cost- efﬁ cient locations and the expansion of our activities into raw materials. Our focus on cost leadership and efﬁ ciency became all the more important as the need to improve competitiveness gathered momentum in the face of the global economic downturn. In order to implement our strategy of operating in regions synonymous with the consumption of high value-added products we had acquired a number of “proﬁ tability champions,” operating in mature markets, which possessed the inherent asset qualities and operational ﬂ exibility to enable them to overcome any short-term reversals. At the onset of the global economic crisis during the second half of 2008, management developed and executed an action plan speciﬁ cally designed to reduce the Company’s cost structure and reinforce its balance sheet. We have delivered on these priorities and, at the same time, the Company has signiﬁ cantly strengthened its operating base. II During 2010 we will continue to focus on achieving efﬁ ciency gains and operational improvements. We are embarking on a major reconstruction of our Russian rail mills which will herald the production of higher margin products, including the manufacture of 100 metre high- speed rails. The introduction of a pulverised coal injection process, scheduled for completion in 2012, will increase our energy efﬁ ciency, eliminate the need for natural gas and reduce our coking coal consumption by almost 20%. The wider global economy and, in turn, the steel industry, continue to face challenges and despite positive pricing and volume dynamics in certain markets, the pattern and resilience of the global economic recovery remain questionable. We are, however, strongly of the opinion that the quality of Evraz Group’s asset base, the competitive advantages derived from vertical integration and our geographic breadth leaves the Company, under the stewardship of a highly experienced management team, well positioned to maximise the beneﬁ ts of more favourable markets in the future. Alexander Frolov Chief Executive Ofﬁ cer Annual Report & Accounts 2009 Evraz Group S.A. We succeeded in reducing our cost of revenue by 35% compared with the level of 2008. Selling, general and administrative expenses were reduced by 28%. Our cost saving efforts beneﬁ ted from the devaluation of the Russian Rouble, the Ukrainian Hryvnia, the Czech Koruna and certain other operating currencies against the US dollar. Our continued focus on prudent ﬁ nancial management allowed us to release US$654 million from working capital. We also decreased our capital expenditure to effective maintenance levels of US$441 million. Our Russian steelmaking operations have been running at full capacity since 1 July 2009 reﬂ ecting the improved demand for steel products from South East Asia, the Middle East and North Africa. This, coupled with increased prices, helped to raise our EBITDA margin from 10% in the ﬁ rst half of 2009 to 15% in the second half. Prices for semi-ﬁ nished and ﬁ nished products rose steadily during the second half of 2009, in line with higher raw material prices. This trend continued into the ﬁ rst four months of 2010. Beneﬁ ting in part from the signiﬁ cant scale of our vertical integration, Group EBITDA margins increased, although further gains in the fourth quarter of 2009 and ﬁ rst quarter of 2010 were limited by global increases in scrap prices. The rapid expansion of our business during recent years was partially ﬁ nanced through borrowings which resulted in a relatively high debt level at the onset of 2009. We emphasised deleveraging as a key priority and a US$2 billion reduction in indebtedness during the course of 2009 bears witness to our resolute approach in this regard. The reﬁ nancing of short-term debt through longer- term maturities was another priority and short-term indebtedness has been reduced. A successful capital raising transaction in July 2009, Rouble bond placements in October 2009 and March 2010 and the overwhelming approval of debt covenant amendments by our bondholders and syndicate bank lenders in November 2009, reﬂ ected the conﬁ dence of investors and debtholders alike in the Company’s prospects. 21 III. Economic and Industry Overview Evraz provided more than 30,000 tonnes of steel products in 2009 for the following power plants: Sayano-Shushenskaya (Khakassiya region), Boguchanskaya (Krasnoyarsky region), Beloyarskaya (Sverdlovsky region) and Novovoronezhskaya (Voronezhsky region). Evraz’s subsidiary, Highveld Steel and Vanadium Corporation, supplied more than 40,000 tonnes of steel products to Eskom’s Medupi and Kusile power stations in South Africa. These power stations, still under construction, will be the largest consumers of structural and plate steel in South Africa for the next ﬁ ve years. Investments in energy efﬁ ciency represent an important aspect of the US stimulus package under the American Recovery and Reinvestment Act. Annual Report & Accounts 2009 Evraz Group S.A. Global Macroeconomic Environment The year 2009 witnessed the most severe global economic recession in 60 years, with global real GDP declining by 1.9%. The US and the European Union posted declines in real GDP of 2.4% and 4.2% respectively. Russia was heavily impacted by the global recession and real GDP declined by circa 8% in 2009. Although the economic crisis originated in the banking sector, it quickly spread to the real economy reﬂ ecting the shortage of credit and weakening consumer conﬁ dence. Industrial production declined by 9% across the globe in 2009 (US –9.7%, EU –3.3%, Russia –10.8%). The steel industry, being one of the basic suppliers of raw materials to the automotive, construction and other industrial and consumer sectors, was signiﬁ cantly affected by the rate of economic and industrial decline. The global economy started to recover in the fourth quarter of 2009 (+0.5% in real GDP), helped by government announcements of stimulus packages, particularly with regard to the measures taken by the US and China. Swift action by the Asian authorities in response to the global malaise proved highly effective in stimulating domestic demand and the Asian economies – led by China – were the ﬁ rst to reach the turning point of the economic downturn. China achieved impressive growth of 8.7% in real GDP in 2009. Share of World Crude Steel Production Source: Worldsteel 46.4% China 11.3% EU 7.2% Japan 4.9% Russia 4.9% India 4.8% US 2.4% Ukraine 18.1% ROW Total Production: 1,224 mt Share of Iron Ore Production Source: Morgan Stanley Research, March 2010 24.5% China 22.8% Australia 15.9% Brazil 12.5% India 5.7% Russia 3.9% Ukraine 14.7% ROW Total Production: 1,675 mt Share of Coking Coal Production Source: CRU Coking Coal Market Outlook, October 2009 60.8% China 15.9% Australia 6.1% Russia 5.4% USA 3.1% Canada 8.7% ROW 24 Total Production: 695.3 mt Annual Report & Accounts 2009 Evraz Group S.A. Vanadium Market In the wake of the downturn in the steel industry, the price of FeV fell sharply from a high of around US$90/kg in March 2008 to US$20/kg in December 2009. The price subsequently recovered to US$32/kg as of March 2010. III Almost 90% of vanadium is traded in the form of ferrovanadium, which is used as an additive to increase the strength of steel. The market, therefore, closely correlates to the steel industry. World resources of vanadium exceed 63 mt with output in 2009 totalling 54,000 tonnes of vanadium content (–3% versus 2008). Production is highly concentrated in three countries: China (20 kt), South Africa (19 kt) and Russia (14 kt). Price of FeV 80 CIF Source: Datastream US$/kg 100 80 60 40 20 0 29 Jan-08 Jul-08 Feb-09 Sep-09 Mar-10 Vanadium Production Breakdown Source: US Geological Survey 37% China 35% South Africa 26% Russia 2% Other Countries Total Production: 54,000 t of Vanadium Content Annual Report & Accounts 2009 Evraz Group S.A. Real GDP Growth Source: Global Insight, March 2010 11.2 8.7 3.7 2.3 2.0 10.8 7.5 3.1 1.7 1.6 9.6 6.0 1.8 0.6 0.0 7.6 7.9 6.2 10.7 9.1 China Russia World EU-27 USA III 1.2 (0.6) (1.9) (1.9) (3.2) (3.3) (5.0) (9.8) (3.0) (3.8) (5.0) (2.0) (2.6) (4.3) (10.9) (8.9) 0.5 0.1 (2.3) (2.9) 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Industrial Production Dynamics Source: Global Insight, March 2010 16.4 15.9 3.8 2.3 1.4 12.9 9.0 12.4 6.1 5.5 4.7 6.4 5.7 2.5 0.7 (0.4) (0.2) (2.0) (3.2) (6.3) (6.6) (6.7) (9.1) (11.6) (13.7) (14.3) (16.8) (12.5) (12.9) (15.4) (16.6) (8.5) (9.4) (10.9) (12.8) China Russia World EU-27 USA 17.9 (1.5) (2.5) (4.7) (6.4) 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 % 15.0 10.0 5.0 0.0 (5.0) (10.0) (15.0) % 20.0 10.0 0.0 (10.0) (20.0) 25 Annual Report & Accounts 2009 Evraz Group S.A. Steel Industry Crude steel output, according to Worldsteel, decreased by 7.9% in 2009 from 1,329 mt in 2008 to 1,224 mt. In contrast, the fourth quarter of 2009 brought a 22.2% increase in crude steel production compared with the same period in 2008, indicating recovery in the wider economy. In line with the macroeconomy, demand for steel began to recover in the second half of 2009. Capacity utilisation ratios recovered to 72% in December 2009, having reached a low of 58% in December 2008. Among the principal crude steel producers, China achieved a staggering 13.5% increase in output to 567.8 mt in 2009 compared with 2008. However, the EU: 138.8 mt (–29.9%), Japan: 87.5 mt (–26.3%), Russia: 59.9 mt (–12.5%) and the US: 58.2 mt (–36.3%) reported steep production declines in 2009. India and the Middle East recorded positive growth for the year. As a result, China’s share of global crude steel production increased signiﬁ cantly from 38% in 2008 to almost 46% in 2009, while the respective shares of Europe, Japan, the US and Russia all declined. The trend in steel prices during 2009 mirrored the trend in demand, recovering during the second half of the year having fallen during the ﬁ rst two quarters. On average, semi-ﬁ nished steel prices were signiﬁ cantly lower in 2009 than in 2008 (e.g. average CIS export FOB Black Sea Port prices for slabs fell by 52% from US$761/t to US$366/t, while prices for billets fell by 48% from US$745/t to US$391/t). Source: Worldsteel, CRU Global Crude Steel Production Source: Worldsteel Utilisation Rate, % 95 Total Prodution Capacity Utilisation 90 85 80 75 70 65 60 55 50 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 mt 400 300 200 100 0 26 Annual Report & Accounts 2009 Evraz Group S.A. Iron Ore Market Global iron ore production fell by 3% to 1,675 mt in 2009. The major iron ore producers – China: 411 mt (+12% versus 2008), Australia: 382 mt (+9%), Brazil: 266 mt (–23%) and India: 210 mt (–2%) – accounted for 76% of total production worldwide. In addition to being the world’s largest producer of iron ore, China was also the world’s largest iron ore importer, with estimated purchases of 560 mt in 2009 (+26% versus 2008) equivalent to half the volume of global imports. The three largest producers in the industry were Vale (20% market share), Rio Tinto (13%) and BHP Billiton (8%). Iron ore industry revenue slumped by around 38% in 2009 reﬂ ecting reduced demand for iron ore and the fall in prices. Spot price (China CIF, 63.5% Fe) reached a two-year low of US$65/t in November 2009, even lower than the contract prices negotiated for the year. Prices remained depressed until May 2009 when they began a steady climb to reach US$105/t by December 2009, almost 77% higher than contract prices. III Iron Ore Spot Prices vs. Negotiated Contract Prices Source: CRU Steelmaking Raw Materials Monitor, March 2010 Brazilian FOB China CIF (Spot, 63.5% Fe) Australian FOB Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Mar-10 US$/t 250 200 150 100 50 0 27 Annual Report & Accounts 2009 Evraz Group S.A. Coking Coal Market Global coking coal production fell by 8% to 695 mt in 2009. The principal coking coal producers – China: 423 mt (+5.7% versus 2008), Australia: 111 mt (+1.3%), the US: 38 mt (–23%) and Russia: 42 mt (–7.6%) – accounted for 88% of total production worldwide. As with iron ore, the coking coal spot price (Australian spot) reached its low in May 2009 (US$115/t), lower than the negotiated contract price. The price subsequently recovered by almost 48% to reach US$170/t in December 2009. In Russia, coking coal production, following the drop in steel production, bottomed out in December 2008 at 3.1 mt. During the course of 2009, coking coal production volumes gradually recovered to reach 5.8 mt by December 2009, a year-on-year increase of 84%. The key driver behind the surge in coking coal prices was the growth in Chinese steel production. China, having been a modest net importer of coking coal (less than 4 mt in 2008), emerged as the world’s second largest importer of coking coal in 2009 with net imports of approximately 33 mt due to the continuing increase in domestic steel production and limited growth in coking coal output. Spot vs. Contract Hard Coking Coal Prices Source: CRU Steelmaking Raw Materials Monitor, March 2010 Australian Contract FOB Australian Spot FOB Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Mar-10 US$/t 500 400 300 200 100 0 28 IV. Business Overview Plate produced by Evraz Vitkovice Steel is used in the construction of towers for wind power generators in Germany, the Czech Republic, Poland and various other countries. The United Kingdom is the world leader in offshore wind power generation. To comply with Government targets the UK will require 7,500 offshore wind turbines by 2020. As a major manufacturer of tubing and casing for the oil and gas industry, Evraz is beneﬁ ting from the mounting belief that shale gas is set to provide an increasingly important source of energy in the US and Canada. Evraz’s products are widely used in shale gas exploration projects which currently account for almost half of the demand for the Company’s tubing and casing output in North America. During the past decade exploratory interest has spread to potential gas shales in Canada, Europe, Asia and Australia. Annual Report & Accounts 2009 Evraz Group S.A. Our Strategy Advance Long and Rail Product Leadership in Russia and the CIS Evraz’s key markets in long and railway products are signiﬁ cantly inﬂ uenced by infrastructure development. Given that infrastructure has suffered from a prolonged period of under-investment in both Russia and North America, Evraz is well positioned to beneﬁ t from any recovery in demand. In Russia, the government has focused on various infrastructure initiatives, encompassing construction and railway modernisation, in order to support economic growth targets. These projects, which will have a direct bearing on the demand for long and railway products, include: National “Affordable Housing” project in Russia that (cid:129) foresees the construction of up to 80 million square metres of residential property per annum Sochi 2014 Winter Olympic Games and 2012 APEC (cid:129) (Asia-Paciﬁ c Economic Cooperation) Summit Russian Railways modernisation programme with an (cid:129) investment budget in excess of US$10 billion through 2020 In North America, demand for rail products is set to beneﬁ t from President Obama’s plans which envisage expenditure of more than US$13 billion on high speed railway expansion through 2015. As Russia’s largest producer of construction steel products and the major supplier to Russian Railways, Evraz is committed to meeting consumers’ requirements for innovative products and has announced an investment programme focused on the modernisation of the Company’s domestic rail production facilities. Enhance Cost Leadership Position In addition to Evraz’s strategic location in the lowest cost regions for steel production (Russia and Ukraine), management is constantly focused on ways in which to enhance the Company’s cost leadership position through maximisation of internal resources and the introduction of improved procedures. The prospective 32 beneﬁ ts are perceived as a key driver in terms of future competitiveness. Evraz continued to implement measures designed to cut costs and improve productivity throughout 2009. These included: Production chain restructuring Product portfolio optimisation Reduction of ﬁ xed costs and adoption of best (cid:129) (cid:129) (cid:129) management practices (cid:129) (cid:129) Deployment of operational improvement programmes Programmes designed to increase labour productivity Such measures, which are ongoing, also included programmes designed to optimise capital expenditure such as: Project selection based on capital rationing: early payback Project selection based on strategic targets: cost (cid:129) period, high proﬁ tability index and low CAPEX (cid:129) reduction/increased productivity (cid:129) (cid:129) CAPEX and timescale Elaboration of alternative investment projects Constant focus on potential for reduction in project As a low cost steel producer, Evraz was able to take advantage of a strategic opportunity to increase proﬁ table export sales and capitalise on the premium prices commanded by semi-ﬁ nished products on the global steel markets. Expand Presence in International Flat and Tubular Markets Evraz has succeeded in acquiring high-quality asset portfolios in Europe and North America in relation to the manufacture of plate and welded pipes. These assets are well-positioned to beneﬁ t from the growth of infrastructure and energy systems. Evraz’s product mix in North America is signiﬁ cantly exposed to infrastructure expenditure which is strongly supported by the US government within the framework of the approved anti-recession programme. Such expenditure Annual Report & Accounts 2009 Evraz Group S.A. is also perceived as politically and economically desirable following a decade of under-investment. These markets, which are protected and historically stable, possess the potential for superior growth and could emerge as key drivers of future proﬁ tability. In order to improve its position as a ﬂ at steel producer, Evraz intends to optimise global slab ﬂ ows. In response to international demand for ﬂ at products, Evraz’s Russian plants are constantly increasing their range of steel grades, particularly the grades for high margin products, e.g. API-grade slab. Internally produced API-grade slab (used for large diameter pipe production) will be shipped from Russia to Evraz’s North American and European operations, enhancing overall slab ﬂ ows and reﬂ ecting the beneﬁ ts of vertical integration. Evraz’s global reach as a ﬂ at producer permits the monitoring of local markets, the utilisation of diversiﬁ ed sales channels and the shipment of high margin rolled steel products to appropriate outlets. Complete Vertical Integration and Grow Competitive Mining Platform Evraz has emerged as one of the world’s ‘Big Three’ steel producers based on the scale of vertical integration in terms of iron ore, coking coal and coke. This degree of vertical integration allows Evraz to beneﬁ t from any surge in raw material prices, courtesy of higher steel prices, while enjoying ﬁ xed costs in respect of its consumption of coking coal and iron ore. The enhancement of vertical integration processes proved a key driver behind the production levels and ﬁ nancial performance of the mining division. Current demand for raw materials and the anticipated levels of future demand adds impetus to further expansion of the Company’s mining platform. In order to secure raw material supplies in the long term, Evraz is planning to develop certain strategic mining projects in Russia: the Mezhegey high-quality hard coking coal deposit (Tyva region) and the Sobstvenno-Kachkanarskoye iron ore deposit (Ural). 33 Achieve World Leadership in Vanadium Operations The increase in demand for vanadium is supported by several fundamental macroeconomic drivers. These are: the anticipated increase in worldwide steel production (cid:129) when the global economy recovers from the 2008-2009 reversal; the anticipated increase in vanadium usage rates by the (cid:129) steel production sector in emerging markets (China, CIS, etc.) to the levels associated with industrially developed countries (North America, Western Europe). The vanadium division’s strategic activities in 2009 included: IV the acquisition of Vanady-Tula, the largest Russian (cid:129) producer and one of the world’s leading producers of ferrovanadium, thus ﬁ nalising the vertical integration of Evraz’s vanadium assets; signiﬁ cant cost reductions while expanding the range of (cid:129) vanadium products and maintaining high quality; management of production and inventories to match (cid:129) market demand and reduce volatility in world market pricing; an increase in the overall share of the vanadium market (cid:129) as the result of an aggressive sales strategy. Having optimised productivity, while maintaining key personnel, Evraz is currently one of the lowest cost vanadium producers in the world. Further expansion of Evraz’s presence in the world vanadium market is envisaged in 2010 with the Company’s competitive advantage expected to ﬁ nd reﬂ ection in increased production and sales. This will entail maximising the conversion of vanadium steel slags and “ in-house” marketing of the ﬁ nal products made from such slags. Annual Report & Accounts 2009 Evraz Group S.A. Our Business Evraz is a global vertically integrated steel and mining business. Evraz is a prominent player in the European plate market. The Company has three principal operating segments: Steel, Mining and Vanadium. Evraz’s manufacturing facilities produce a wide range of products focused on infrastructure related products. In 2009, the Company’s share of the Russian market in beams, channels and rebars totalled 89%, 50% and 20% respectively. Evraz accounts for 100% of rail sales in Russia and ranks second in the country’s rail wheel market. Evraz is also a major supplier of semi-ﬁ nished products, slabs and billets to world markets. Evraz is the No 1 producer of rails in the USA, the second largest producer of plate in terms of capacity and is acknowledged as a primary North American producer of tubular products, particularly in respect of LD pipes and OCTG pipes. Evraz’s mining operations ensure high levels of self- sufﬁ ciency in respect of supplies of iron ore and coking coal required for the Company’s steelmaking processes. The Company is the leader in the world vanadium market and produces various vanadium products including ferrovanadium, Nitrovan® vanadium and vanadium oxides and chemicals that are used in steelmaking and other applications. Revenues by Segment 2009 (US$ million) 8,978 Steel 1,456 Mining 363 Vanadium 765 Other Operations Adjusted EBITDA by Segment 2009 (US$ million) 903 Steel 279 Mining 10 Vanadium 167 Other Operations 34 Annual Report & Accounts 2009 Evraz Group S.A. Steel Steel: Russia IV General Overview 2009 The year 2009 was marked by a signiﬁ cant decrease in demand for steel products and consequent price declines. The economic downturn that commenced in 2008 and continued through the ﬁ rst half of 2009 made the tasks of maintaining sales, reducing costs and controlling working capital more important than ever. The closure of inefﬁ cient production facilities (such as open-hearth furnaces at NTMK) has allowed Evraz to reduce costs substantially and run the Company’s remaining facilities at full capacity. Other measures, such as staff reduction and the improvement of labour productivity, have further reduced costs. Evraz managed (to some extent) to pass on the negative price trend to its suppliers and negotiate better payment terms with its counterparties. All this helped to maintain the Company’s status as a low-cost producer. Selected Initiatives: • Production chain optimisation at NTMK All open-hearth furnaces and the related production units (two old blast furnaces, two coke batteries and blooming) at NTMK were closed by the end of 2008. As a result of the closure of inefﬁ cient facilities and the consequent reduction in costs, Evraz managed to partially compensate for the reduction in capacity through enhanced production processes. The improvements in blast furnace and convertor shop operations saw NTMK’s annual steel production capacity expand to 4.0 million tonnes in 2009. • Restart of blast furnace No. 3 at Zapsib In July 2009 Blast Furnace No. 3, idled in October 2008 to match production with market demand, was restarted at the Company’s Zapsib plant, increasing total pig iron capacity by 2.16 million tonnes per annum. This signalled the return of Evraz’s Russian steelmaking division to full capacity. As a result, Evraz was able to increase exports of semi-ﬁ nished products (slabs and billets) in response to the demand in Asian markets. • Upgrade of NTMK wheel shop Reconstruction of a wheel shop at NTMK continued. Having upgraded the wheel rolling mill and installed new turning lathes in previous years, Evraz commenced the 35 replacement of NTMK’s quenching equipment. The ﬁ rst phase of the project was successfully accomplished in 2009 enabling Evraz to produce ‘hard’ wheels (with hardness up to 320 HB under Russian Railways classiﬁ cation). Following completion of the project in 2010, NTMK’s wheel shop will be the most advanced facility of its kind in Russia and the CIS. • Continued reconstruction of NTMK BOF shop Evraz embarked on the modernisation of the NTMK converter shop, involving the replacement of all four converters, in 2006. Due to improved technology the initial capacity target was reached in 2008 following the replacement of three out of the four converters. In order to further increase converter shop capacity, the replacement of the fourth converter will now be accompanied by the refurbishment of the continuous caster No. 3 and the commissioning of a new ladle furnace. The project, expected to be completed by the end of 2010, is designed to increase NTMK’s converter shop capacity to 4.5 million tonnes of steel per annum. • API-grade slabs NTMK launched a project that will enable the plant to produce American Petroleum Institute certiﬁ ed (API quality) slabs for Evraz Vitkovice Steel in the Czech Republic and for the Group’s North American operations. NTMK has been supplying slab to other Evraz plants for a considerable time but completion of the project in 2010 will enable NTMK to produce API slabs in industrial quantities. This cooperation is scheduled to expand in terms of both volume and complexity (more demanding steel grades) through 2010. • Utilisation of waste at Zapsib To reduce costs Zapsib started to use skip coke for cast iron production and ferriferous waste rather than long-range concentrate. The savings derived from these initiatives amounted to approximately US$12 million. • NKMK energy saving programme The programme included measures such as the restriction of maximum energy consumption per hour, the optimisation of equipment utilisation and reductions in Annual Report & Accounts 2009 Evraz Group S.A. energy losses, compressed air losses and levels of fuel consumption etc. • Non-core asset optimisation programme at Zapsib and NKMK The optimisation of service facilities and non-core assets served to focus managerial efforts on core assets. A joint enterprise was created to rationalise Zapsib’s and NKMK’s respective service centres in relation to equipment maintenance. • Blast furnace and coke production was concentrated at Zapsib To improve Zapsib’s and NKMK’s respective production units it was decided to allocate blast furnace and coke production to Zapsib and concentrate rail production at NKMK. • Coke production optimisation at Siberian plants Coke production in respect of NKMK and Zapsib was merged into a single unit with subordination to Zapsib as the main supplier. This aspect of rationalisation effectively led to the creation of a separate business unit that improved efﬁ ciency and allowed management to focus on other issues. Environmental projects continued to represent key priorities at Evraz throughout 2009. Key Targets 2010 Cost reduction and enhanced productivity will command the same priority status in 2010 as was the case during 2009. NTMK is set to meet these goals through the introduction of further technological improvements and best management practices. It is vital for NTMK to increase its steel making capacity and delivery of the BOF reconstruction project on time is therefore a key priority. Evraz faces the need to strengthen its market position and several initiatives have been launched to achieve this objective. In 2010 NTMK will extend its product range with new beams (40K, 60, 70), channels and other 36 long products. The wheel shop upgrade should allow NTMK to certify wheels in Europe and the USA and enter new markets. NTMK will also expand its production of API-grade slabs thereby entering the market for premium slabs. Zapsib will focus on productivity and capacity increases through various debottlenecking measures which, following the restart of blast furnace No.3 in July 2009, will bring about an increase in steel production in 2010 compared to the level achieved in 2009. Some of the key tasks for Zapsib will be to increase the productivity of sintering and blast furnace plants, relaunch the oxygen converter plant and raise the productivity of light section mills through the introduction of slitting and short changeover processes. Early in 2010 Evraz’s Board of Directors approved the Group’s major investment project – the US$440 million reconstruction of the NKMK rail workshop. When the reconstruction is completed in 2012, NKMK will be able to produce 25-metre and 100-metre high-speed rails. The rail mill capacity is expected to reach approximately one million tonnes of high-speed rails, including 450,000 tonnes of 100-metre rails, a length of rail that is not currently produced in Russia. The installation of a new automatic rail rolling mill as well as rail hardening and straightening equipment will lead to a signiﬁ cant improvement in rail quality and will meet international requirements in relation to surface and latent defects and straightness. Environmental projects will retain prioritiy status at Evraz throughout 2010 and beyond. Key Targets 2010 Ongoing cost reductions and greater productivity will remain key priorities. Speciﬁ c focus will be brought to bear on improvements in blast furnace efﬁ ciency in terms of production indicators, coke consumption and iron losses. The repair work will be ﬁ nalised in 2010 with beneﬁ ts set to ﬂ ow from the complete renewal of Mill 550 where the production of channels, with the necessary requirements to enter European markets, is due to commence. IV Annual Report & Accounts 2009 Evraz Group S.A. Steel: Ukraine General Overview 2009 Improvements in the efﬁ ciency and reliability of the main production chain were the priorities at Dnepropetrovsk Iron and Steel Works (“DMZ”) in Ukraine. Various repairs were implemented during the year, including ‘third grade’ repairs in respect of two blast furnaces and complex repairs with regard to the oxygen converter workshop and rolling mill No. 1. All in all, approximately 70% of equipment involved in the main production chain underwent improvements during 2009. DMZ expanded its product range through the introduction of two new products – contact rail for underground and angle 125, thus increasing Mill 550’s share of high margin products and effectively doubling its capacity by the end of the year. Increasing the efﬁ ciency of the blast furnace process led to considerable improvements in key indicators such as the average daily production of pig iron and coke and iron ore consumption per tonne of pig iron. 37 Annual Report & Accounts 2009 Evraz Group S.A. Steel: North America, Western Europe and South Africa The year 2009 saw the continuous integration of Evraz Group’s international assets. The integration agenda was inevitably affected by the downturn in all of the Company’s key markets. However, Evraz’s business model, based on the vertical integration of strong businesses that enjoy a high degree of geographical diversiﬁ cation, has proved sustainable in the face of exceptional economic adversity. Our international focus on the production of a selective range of infrastructure related steel products has beneﬁ ted from increased spending on the part of national governments intent on upgrading domestic infrastructure within programmes designed to stimulate economic activity in order to combat the global ﬁ nancial crisis and economic downturn. It has become clear that the geographic spread of Evraz’s manufacturing operations proved highly advantageous with turbulence in certain markets offset, in varying measure, by more robust economic environments elsewhere. The stronger steel markets of North America, which proved the last to enter the downturn, enabled us to mitigate the adverse conditions encountered in the CIS during the ﬁ rst quarter of 2009. Similarly, recovering markets in Asia in the second quarter of 2009 served to counterbalance the worsening markets of Central and Western Europe and North America. Against this background the focus was on cost reduction and working capital management. Our businesses in Europe, North America and South Africa are characterised by a variable cost dominated structure which provides a certain level of protection against ﬂ uctuations in demand. Management’s drive to capitalise on increased global infrastructure spending supported by efﬁ cient cost structures served to signiﬁ cantly reduce the negative effect of the global economic downturn on the Company’s international operations. 38 North America While addressing various challenges attendant to the decline in demand faced by Evraz and the entire steel industry, the Company’s North American division, Evraz Inc. NA (EINA), focused on the integration of Evraz’s previously independent assets in North America and the identiﬁ cation and extraction of potential synergies. Such focus will be further reinforced in 2010. Evraz Inc. NA lost no time in adjusting its production model to accommodate the radically altered economic scenario. Several mills (i.e. Evraz Camrose and Evraz Regina Steel 2 inch pipe mill) were closed, while others operated on reduced shifts. In the wake of the recovery currently under way, management recently reversed the process and more shifts have been added to the plate mill in Portland and the pipe mills in Evraz Red Deer and Evraz Calgary. Despite tough economic conditions, Evraz ensured full utilisation of its ﬂ agship large-diameter pipe mill – Regina Spiral. Courtesy of a large TransCanada order, the mill will run at full capacity through 2010. A targeted reduction programme saw the stock of raw materials and ﬁ nished goods reduced by almost 50% during the course of 2009. In view of the scale of the asset base there is still signiﬁ cant potential for further integration within Evraz North America. The beneﬁ ts of consolidated purchasing practices became evident in 2009, while the ﬁ nance function has been brought together at the Portland headquarters. Evraz Inc. NA has already utilised some notable synergies, particularly with regard to sourcing. Evraz Regina Steel qualiﬁ ed as a supplier of military armour grade slabs to the Portland rolling mill and also became an alternative supplier of commodity slabs. In turn, the Portland plate mill became a primary supplier of Evraz Surrey cut-to-length facility, which was historically supplied by Evraz Regina. The Portland rolling mill also became an alternative supplier to Evraz’s ERW pipe facilities in Canada. Annual Report & Accounts 2009 Evraz Group S.A. IV Due to logistical factors and complementary technology, Evraz’s Russian steel mill NTMK is a natural supplier of slabs to the Portland rolling mill and, during 2009, the two mills established strong technological ties and combined supply chain management. The API project at NTMK, launched to ensure a stable supply of slabs for API quality linepipe application, will therefore beneﬁ t EINA in addition to Evraz Vitkovice Steel in Europe. Special management attention was given to improving the safety and environmental situation at Evraz Claymont Steel. Key Targets 2010 The year 2010 will herald further integration of Evraz’s North American operations with particular focus on the following: Western Europe Evraz Palini e Bertoli The recent economic turmoil had extremely negative consequences for the European steel market and demand from both stockholders and end users proved exceptionally weak during 2009. Major industrial customers, encompassing construction, machinery, yellow goods, etc., slowed down production. Plate prices in Europe decreased by more than 50% compared with the levels of 2008. As a result, the optimisation of costs and working capital represented a major challenge for our Italian mill. Evraz Palini e Bertoli has close links with NTMK which was the principal supplier of slabs to the mill in 2009. The integration of NTMK and Evraz Palini e Bertoli into a seamless supply chain allowed us to dramatically decrease raw material stocks and cut the cost per tonne of slab production. Further development of cross border operations between (cid:129) the US and Canada. Creation of product-centric divisions: Flat, Tubular and Long products During 2009 the investment focus was on relatively small projects with short payback periods. Three such projects (involving a thickness and width gauger, an oxycutter and a new overhead crane) will be implemented in 2010. Supply chain optimisation encompassing reduction (cid:129) of inventory levels and optimising product mix in each division. Under this initiative Evraz Inc. NA will continue its efforts to optimise the procurement function and production planning processes (cid:129) The API-grade slab sourcing initiative will remain a priority for Evraz Inc. NA, with the focus moving ahead to the supply of higher quality products and the development of new products to meet North American demand Tubular Division will focus on winning new deals for (cid:129) the LD pipe business and endeavour to capitalise on expectations of strong OCTG and ERW markets Environmental Commitment will continue to be a (cid:129) priority for management underlined by the successful completion of the clean-up project at Claymont and the commencement of another project to upgrade the Air Pollution Control system Evraz Vitkovice Steel In addition to the adverse market factors common throughout Europe in 2009, issues transpired between Evraz Vitkovice Steel and ArcelorMittal Ostrava (AMO) in relation to the supply of pig iron. AMO, being the sole supplier of pig iron to Evraz Vitkovice Steel and therefore enjoying a monopolistic position, endeavoured to raise the price of the product to levels that proved detrimental to Evraz Vitkovice Steel’s operational proﬁ tability. Due to low domestic demand, Evraz Vitkovice Steel had to look for market opportunities outside the Czech Republic. Integration of the European sales force with Evraz Palini e Bertoli under the leadership of Evraz East Metals S.A. served to strengthen Evraz Vitkovice Steel’s presence in other European markets. Evraz Vitkovice Steel’s products (primarily sheet piles) were also supplied to Russia and, in 2010, supplies of quality sheet piles for construction of the Sochi 2014 Olympics infrastructure will be ongoing. Evraz Vitkovice Steel has embarked on the development of API quality linepipe plate which will be produced from its 39 Annual Report & Accounts 2009 Evraz Group S.A. own steel and also rolled from slabs sourced internally, i.e. from Evraz’s NTMK steel mill in the Urals. South Africa Evraz Vitkovice Steel also launched a global project focused on cost optimisation. This extensive programme, which covers operational procedures, transportation, energy, maintenance and the utilisation of labour, will continue in 2010 and is targeted to generate savings in excess of $20 million. South Africa’s economy proved far from immune to the ﬁ nancial and industrial malaise synonymous with 2009. Domestic demand was limited, while opportunities in Sub- Saharan Africa were few and far between. Evraz Highveld reacted to the challenges by adjusting its operational model and looking for new sales opportunities outside its traditional markets. Key targets 2010 Although the European steel market is slowly recovering, Evraz remains focused on achieving further cost reductions. Evraz Vitkovice Steel’s two principal goals are: extensive reductions in key costs associated with pig iron, energy, technical gases and transportation and a complete restructure of the maintenance organisation with the aim of reducing costs, improving the reliability of equipment and enhancing the transparency of the maintenance budgeting process. Major operational developments approved for 2010 include an investment in an ultrasonic testing line to facilitate the production of API-grade quality plates and the recently completed reconstruction of the heavy section mill which will raise output by around 10%. Evraz Palini e Bertoli remains one of Evraz’s most efﬁ cient mills and management is currently preparing a major extension of operations with the potential to boost output by as much as 30%. Evraz Highveld controls its resource base through its ownership of the Mapochs Mine (Proprietary) Limited – iron ore complex in South Africa – and is thus competitive in both local and global markets. Evraz uses its global sales network to facilitate exports of Evraz Highveld’s products and, in the ﬁ rst half of 2009, around 50% of output took the form of semi-ﬁ nished products (slabs) for export. During the second half of 2009, Evraz’s sales force focused on opportunities in South and North American markets that subsequently saw exports of slabs give way to exports of higher value ﬁ nished products such as plates and structural steel. Particular attention was paid to inventory levels with certain obsolete/slow moving inventory items (i.e. excess scrap) sold. The Work in Progress inventory level was reduced as was its composition. Key targets 2010 Having successfully adjusted its operational model in response to market challenges, one of the priorities for Evraz Highveld’s management team, recently strengthened through the appointments of a new Chief Executive and a new Chief Operating Ofﬁ cer, will be to maintain stable output and full utilisation of the mill. Two major investments, aimed at maintaining high output, have been approved: the relaunch of a billet caster in March 2010, and the start of the induction furnace (already under way). Achieving compliance with the current environmental legislation remains a priority. 40 Annual Report & Accounts 2009 Evraz Group S.A. Mining Mining: Coal General Overview 2009 Throughout 2009 the operational activities of Yuzhkuzbassugol, our Siberian coal mining division, were focused on the task of meeting the demand for coal from Evraz’s facilities. Coking coal output increased by 13.6% compared with 2008. Given the difﬁ cult economic environment, signiﬁ cant attention was paid to cost reduction: the implementation of energy saving programmes; the optimisation of repairs and services; cuts in administrative expenses. An infrastructure upgrade was carried out in 2009 to support the maintenance of production capacities at required levels. This included: reconstruction of the pump and ﬁ lter plant at the Abashevskaya mine, construction of an energy complex for heat supply to the mine works at the Ulianovskaya mine (2nd stage), construction of a gas suction plant at the Yubileinaya mine, construction of a ground mobile pumping station and ground gas suction ventilation system at the branch of the Gramoteinskaya mine and the reconstruction and repair of surface buildings and facilities on the Kusheyakovskaya mine branch. The introduction of a defrosting unit at the Kuznetskaya enrichment plant served to further increase production during the winter months. Plant operations were complicated by mining and geological breakdowns resulting in output losses and gas profusion that constrained drivage. Reduced mine workings led, in turn, to disruptions at the front of the working face. Degasiﬁ cation activities are carried out to minimise the impact of gas on the mine works. In 2009 Yuzhkuzbassugol acquired the right to develop mineral resources in the Alardinsky Novy ﬁ eld. The new ﬁ eld is an extension of the Alardinskaya mine and, after the resources have been extracted from the old ﬁ eld, the mine works will continue in the new ﬁ eld. Key Targets 2010 In 2010 Yuzhkuzbassugol plans to increase both coal production volumes and developed reserves. To this end, 41 degasiﬁ cation and optimisation programmes are under preparation. Cost optimisation programmes will continue in 2010. The emphasis will be on 1) the development of recycling programmes to cut drivage costs; 2) optimisation of equipment to reduce repair costs; 3) further implementation of energy-saving programmes; 4) improved methodology, incorporating total cost of ownership estimates, in respect of inventory purchasing. Operational growth during 2010 will effectively underwrite increased levels of production. Several projects due to be realised in 2010 to further reinforce vertical integration will serve to ensure a stable supply of raw materials to Evraz’s metallurgical plants. IV Geological exploration works in the Yerunakovsky area, a preliminary to the planned construction of the Yerunakovskaya VIII mine, will continue through 2010 with the ﬁ rst GZh coal scheduled to be mined in 2015. The health and safety of employees will remain a constant priority. Taking a 7-10 year perspective, the purchase of high-quality coal stock will allow the Company to gradually replace the coal stock currently provided by Yuzhkuzbassugol. In March 2010, Evraz won the tender to develop the Mezhegey coal deposit for a consideration of US$32 million. This deposit is located 800 km east of the city of Novokuznetsk, in the central part of the Republic of Tyva, East Siberia. It is a world class deposit with estimated category A+B+C1 reserves totalling 213.5 million tonnes of hard coking coal (grade Zh under Russian classiﬁ cation). Due to the long-term nature of the project there will be no requirement for substantial capital expenditure over the next two years, a factor that complements the Company’s current cash management policy. Annual Report & Accounts 2009 Evraz Group S.A. Mining: Iron Ore General Overview 2009 Despite the difﬁ cult market conditions of 2009, Evraz’s iron ore facilities succeeded in maintaining production output for shipment to the Group’s metallurgical plants while, at the same time, initiating various measures designed to cut costs and improve quality. Evraz’s production within its Iron Ore segment accounted for 96% of the Company’s metallurgical requirements. Key investment projects during 2009 were focused on lowering operational costs, reducing losses and enhancing the quality of iron ore feedstock for steel production. Modernisation of indurating machine No.1 at (cid:129) Kachkanarsky Ore Mining and Processing Enterprise (“KGOK”) which resulted in lower gas consumption rates in pellet production the iron concentration in the commercial concentrate to 61%(+3 b.p.) Implementation of prevention technology for iron ore (cid:129) concentrate with lime at the Abagursky enrichment plant served to stabilise Evrazruda’s production volumes during the winter period while also increasing the metallurgical value of the concentrate supplied to Zapsib Key Targets 2010 Exploration of KGOK’s Sobstvenno-Kachkanarskoye (cid:129) ﬁ eld designed to sustain iron ore production and facilitate further increases in volume in order to match heightened demand from the Company’s metallurgical operations Production of lime-prevention concentrate at VGOK will (cid:129) facilitate supplies to consumers throughout the year and avoid the costly construction of a drying complex Modernisation of dry magnetic separation (DMS) (cid:129) at KGOK’s enrichment plant which resulted in a 10% reduction in iron tailing losses during DMS and higher pellet output without the additional input of raw materials Reconstruction of Evrazruda’s Abagurskaya enrichment (cid:129) plant will increase the iron concentration in the commercial concentrate from 60.3% to 61.7% Implementation of automated informative electric power (cid:129) accounting system (AIEPAS) at KGOK. This will enable KGOK to reduce overall electrical-energy consumption by 3.4% resulting in an estimated annual saving of more than US$3 million Optimisation of ventilation air heating system at the (cid:129) Magnetitovaya mine at Vysokogorsky Ore Mining and Processing Enterprise (VGOK) and optimisation of boiler compartment work at VGOK’s enrichment plant, both of which will result in lower gas and energy consumption. The project will be ﬁ nalised in 2010 Implementation of smooth-start system for the main (cid:129) compressors at VGOK’s Yestuninskaya and Yuzhnaya mines in order to reduce energy consumption and prevent premature equipment amortisation Partial reconstruction of the Mundybashevskaya (cid:129) enrichment plant at the Evrazruda Iron Ore Mining and Processing Complex (“Evrazruda”) resulted in raising Investments in the development of Evrazruda’s (cid:129) Sheregeshsky, Abakansky and Kazsky open pits designed to increase annual production capacity Enlargement of the iron ore enrichment facilities at the (cid:129) Yubileynaya mine, within the Sukha Balka Iron Ore Mining and Processing Complex (“Sukha Balka”), using the unique technology of dry magnetic separation of martite- hematite ores Development of railway infrastructure at the Sukha Balka (cid:129) mines to match the increasing volumes of commercial production A major goal at Mapochs Mine (Proprietary) Limited, the iron ore complex in South Africa, is to achieve production levels that would not only guarantee supplies to Evraz Highveld and other local clients but would also permit the partial export of iron ore output. Meanwhile, a new mining plan is being created in line with an exploration programme which will signiﬁ cantly aid estimates of available ore resources. 42 Annual Report & Accounts 2009 Evraz Group S.A. Vanadium General Overview 2009 The vanadium segment mirrored the steel industry’s problems in 2009 and experienced a sharp decrease in demand reﬂ ecting the global economic reversal. The vanadium business, in particular, was characterised by irregular and unpredictable demand. The principal operational challenges faced by Evraz’s management team during the ﬁ rst half of 2009 included high inventories of ﬁ nished products which, against a background of low market demand, exacerbated the need to operate all facilities at intermittent and below capacity levels while, at the same time, retaining key personnel and focusing on cost controls. Demand improved at the mid-year stage and, as inventories were brought in line to match consumption, the focus switched to restarting the facilities and regaining pre-crisis levels of capacity and operational efﬁ ciency. By the end of 2009 much of the vanadium industry was operating at near normal levels. Evraz, capitalising on its low cost competitive position and ability to accelerate production in response to customer requirements, succeeded in increasing its share of the world vanadium market as the year progressed. The product range was expanded with the emphasis, in response to European demand, on certain higher quality vanadium products such as low-manganese and low-aluminum FeV grades and powder FeV for wire production. The acquisition of Vanady-Tula towards the end of 2009 effectively ﬁ nalises Evraz’s vertical integration of its vanadium assets within the CIS. The acquisition is expected to yield signiﬁ cant synergies and will leave the Company well positioned to further expand its share of the global vanadium market. Having lowered expenses, optimised productivity and retained key personnel, Evraz remains one of the lowest cost producers of vanadium in the world. In addition to this competitive edge, the Company is now positioned to leverage its international presence through its expanded range of high quality vanadium products. 43 Key Targets 2010 During 2010 the Company will seek to utilise its competitive advantages in order to further expand its presence in the world vanadium market. The principal areas of focus will include: Maximising vanadium output at all of the Company’s (cid:129) production facilities (cid:129) Furthering market penetration and focus through the consolidation of all steel sector sales through one channel: Evraz’s East Metals S.A. Improving sales to the steel industry through increased (cid:129) conversion of vanadium slag to ﬁ nal FeV products IV Enhanced marketing of Evraz’s value added Nitrovan (cid:129) product for the steel industry ® Increasing market share of high value vanadium products (cid:129) to chemical and titanium / aerospace industries via Evraz Strategic Minerals Corporation’s operation in North America Ongoing cost optimisation and improvements in (cid:129) efﬁ ciency at all facilities Evraz is conﬁ dent that the advantages of constant supplies of vanadium slag from Evraz Highveld and NTMK, a low cost and efﬁ cient operational base and focused marketing expertise, will enable the Company to offer its enhanced range of vanadium products at highly competitive prices. Annual Report & Accounts 2009 Evraz Group S.A. Outlook for 2010 Between January and May 2010 we have seen improvements in demand in all our markets. Steel prices rose globally, hand in hand with raw material prices, primarily iron ore, coal and scrap. This trend will translate into improved results for the Company due to our high level of vertical integration. We note, however, that the growth trend has reversed recently following a correction in prices that commenced in May 2010. The Russian market has shown encouraging signs during 2010; demand is gradually recovering and construction steel sales volumes and prices are higher than in 2009. We believe that a softening of the market in the summer of 2010, largely reﬂ ecting export trends, is unlikely to persist in the longer term. although infrastructure investments, driven by an array of government initiated economic stimulus packages, should provide underlying strength. We are conﬁ dent that our vertical integration model will continue to underwrite the fundamental strength of our business. Evraz Group’s EBITDA for the ﬁ rst quarter of 2010 amounted to US$424 million. Reﬂ ecting the further growth in steel prices, second quarter EBITDA is expected to be in the range of US$725-825 million. Short-term debt as of 30 June 2010 is expected to approximate US$1.6-1.7 billion, following a series of reﬁ nancing activities during the ﬁ rst half of 2010. The North American market has also demonstrated marked improvements since the start of the year and this, in turn, will allow us to increase capacity utilisation rates at our US and Canadian plants. Due to the high volatility and low visibility of the market, we cannot commit to any ﬁ rm guidance regarding the second half of 2010 and full year 2010 ﬁ nancial results. In the medium-term we expect global demand for long steel and structural ﬂ at products to remain volatile, 44 Annual Report & Accounts 2009 Evraz Group S.A. Key Investment Projects 2010 CAPEX in 2010 is expected to be around US$800 million vs. US$441 million in 2009. Approximately US$450 million of 2010 CAPEX to be directed to increasing productivity and development projects, key projects being: Project Total CAPEX Cumulative CAPEX by 31.12.09 2010 CAPEX Project Targets Reconstruction of rail mill at NKMK Reconstruction of rail mill at NTMK Pulverised coal injection (PCI) at NTMK and ZSMK BOF workshop recon- struction at NTMK Reconstruction of CCM Slab No. 3 at NTMK Reconstruction of wheel and tyre mill (heat treat- ment shop) at NTMK US$440m US$30m US$220m US$55m US$28m US$27m US$320m US$0m US$10m US$260m US$230m US$20m US$60m US$5m US$40m (cid:129) Capacity of 950k tonnes of high-speed rails, including 450k tonnes of 100 metre rails (cid:129) On-stream by 2013 (cid:129) Production of higher-quality rails (cid:129) 550k tonnes capacity (cid:129) On-stream by 2012 (cid:129) Lower coke consumption from 420 to 320 kg/tonne (cid:129) No need for gas consumption (cid:129) On-stream by 2013 (cid:129) Modernisation of production (cid:129) Increasing capacity from 3.8 to 4.2 mtpa (cid:129) On-stream by 2010 (cid:129) Modernisation of production (cid:129) Further increase in steelmaking capacity from 4.2 to 4.5 mtpa (cid:129) On-stream by 2010 US$100m US$87m US$13m (cid:129) Production of higher-quality wheels (cid:129) On-stream by 2010 Development of Mezhegey coal deposit TBD US$1m Less than US$50m, including license cost (cid:129) Maintaining self-sufﬁ ciency in high-quality hard coking coal after depletion of existing deposits (cid:129) On-stream by 2015 IV 45 V. Corporate Responsibility Plate, produced by Evraz Highveld Steel and Vanadium Corporation, was used to construct the new stadiums for the 2010 Soccer World Cup in South Africa. The plate was used to produce roof structures, tubular and box girders and various other architectural features. Evraz supplies steel for the construction of the infrastructure for the Sochi-2014 Olympic Games in Southern Russia. The steel was used for the construction of an imposing ice hockey arena, an ice palace for ﬁ gure skating, a biathlon and ski complex and various other projects. policies will serve to enhance proﬁ tability and underwrite future success. Consequently, Evraz is committed to encouraging innovation throughout the Group in order to continue 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 International Council on Mining and Metals Sustainable Development Framework. Engagement with stakeholders We recognise the importance of an ongoing and consistent dialogue with our employees and customers, local communities and authorities and suppliers and partners in order to form constructive mutually beneﬁ cial relationships. Our people are committed to acting in a professional manner, with integrity and in compliance with legal and regulatory requirements and good governance. We endeavour to meet and surmount market challenges by achieving continuous improvements in performance. Through sustainable compliance with internal, local and international regulations, Evraz endeavours to make a positive contribution to society. Annual Report & Accounts 2009 Evraz Group S.A. Introduction We believe that Evraz’s commitment to maximising shareholder value is synonymous with the sustainability of our business which, in turn, is dependent on the manner in which the Company’s activities impact the environment, consumers, employees, economies, the communities we work within and all other stakeholders. Evraz has deﬁ ned the following priorities in relation to corporate responsibility: Economic – contributing to the sustainability of regional (cid:129) and national economies Environmental – endeavouring to reduce the adverse (cid:129) environmental impact of the Company’s activities Social – focusing on the safety and development of (cid:129) employees and support for local communities The Company’s Code of Business Conduct and Code of Ethics constitute the framework for the management of sustainable development at Evraz, while our social funding and community activities are governed by the Social Investment Guidelines. In addition, individual entities within the Group have their own speciﬁ c policies in relation to health, safety and the environment which are fully compliant with, and in many instances go beyond, local legislation. Evraz understands that its business activities are capable of having signiﬁ cant effects on the areas in which it operates, in relation to people and 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 creation of a proﬁ table enterprise. The Company believes that the implementation of sound ﬁ nancial, environmental, social, health and safety and quality attentive management 48 Annual Report & Accounts 2009 Evraz Group S.A. Economic Prosperity The proﬁ tability of our Company does not merely represent the means to reward shareholders and develop the business. Our steel production and mining activities contribute to the economic sustainability of the regions where we operate, support local communities and fund corporate social programmes. 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 demonstrate the Group’s respect for the communities within which we operate. Economic Contribution Steel is one of the basic materials used in the construction 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 42,000 tonnes of crude steel and 39,000 tonnes of rolled products during 2009. All of Evraz’s steelmaking facilities and Strategic Minerals Corporation (Stratcor), our US based vanadium producer, have established 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. In 2009, Evraz’s CAPEX totalled US$441 million, including US$264 million in respect of its steel segment and US$148 million in respect of its mining segment. As a major employer and corporate taxpayer, Evraz contributes to all the economies within which the Company operates. Community Support Evraz is strongly committed to its social investment programmes 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 environment and improve the well-being of employees will not be immediately apparent to local 49 Social investment priorities: Youth: initiatives and projects which assist in the (cid:129) development of young people Education: enabling individuals of all ages to acquire new (cid:129) knowledge, abilities and skills Citizenship: fostering favourable neighbourhood values (cid:129) and safe environments in local communities Total social and social infrastructure expenditure, which includes such items as maintenance of medical centres, recreational centres, employee holiday allowances and the sponsorship of sports teams and charitable events, amounted to US$53 million in 2009. Evraz seeks an active dialogue with the residents of the areas in which it operates in order to discuss speciﬁ c projects within the priority areas of Evraz’s Social Investment Programme. The Company has established local Supervisory Boards, including representatives from the community, which decide which projects would be most appropriate and should therefore receive funding. To further communication with local communities with regard to social investment spending, Evraz has established corporate charity funds at certain operating locations. Our employees are also involved in various charitable initiatives and are active members of local business communities. In 2009, Evraz’s community investments in Russia amounted to approximately US$8.5 million (RUB269.8 million). Evraz is involved in various national and civil projects together with charity undertakings. Most of the projects are focused on stimulating sport and education initiatives, supporting and enriching children’s lives, the advancement of living conditions in the towns V The charitable organisations supported by Strategic Minerals Corporation in South Africa are largely focused on the provision of medical resources and youth development schemes for sick and underprivileged children. The charities that Stratcor regularly contributes to in the US include: the American Cancer Society, the Arkansas Children’s Hospital, the Arkansas Santa Train and Boy Scout of America, Garland County Local Area Schools. The primary focus of Evraz’s support activities in South Africa related to Black Economic Empowerment and resulted in the transfer of a 26% equity interest in Mapochs Mine (Proprietary) Limited to local partners (as announced in April 2009). Highveld Steel and Vanadium Corporation is extensively engaged in community support, including the furtherance of educational programmes. Highveld is also involved in tackling the problems associated with HIV and AIDS and supports the anti-HIV programme under which Highveld’s employees and their spouses receive treatment. Contributions to such causes from Highveld in 2009 amounted to some US$150,000 (ZAR1.3 million). Annual Report & Accounts 2009 Evraz Group S.A. where Evraz’s subsidiaries are situated and improving the quality of life of the Group’s employees and citizens. Some of the most important social projects include “Yards” and “New Year in Every House”. The “Beloved Children” programme seeks to organise medical and educational assistance, as well as psychological support, for children with infantile cerebral paralysis with help also available to parents. Evraz Vitkovice Steel established the Evraz Charity Fund in the Czech Republic in 2006 to support the long-term development of the Moravian-Silesian region. During 2009, the Fund supported 39 projects in association with non-proﬁ t organisations in the region and made donations totalling approximately US$471,500 (CZK9 million). The Fund’s focus was on regional projects providing medical, educational and psychological assistance to children with various diseases. Evraz Vitkovice Steel also joined Evraz Group’s “Beloved Children” charity programme in 2009. Evraz plays an active role in a wide range of social support programmes in North America and Canada. The focus is primarily on the well-being of young children, youth and underprivileged families. The importance of such programmes cannot be overestimated and we believe that such support helps people to achieve certain goals and encourages them in their endeavours to turn hope into reality. In 2009, Evraz Inc. NA’s charitable contributions totalled US$481,345. The most important of the aforementioned programmes are: “One Life Makes a Difference” – direct funding to post-secondary educational institutions, “The Lieutenant Governor’s Leadership Forum”, “Breakfast for Learning”, “The Nexen Discovery Fund” (Evraz Regina Steel & Tubular, Canada); “Junior Achievement of Southern Alberta” (Evraz Red Deer Tubular Works, Canada); “Hearts of Steel”, “Junior Achievement”, “Hispanic Education – in support of the Pueblo Hispanic Education Foundation’s scholarship programme” (Evraz Rocky Mountain Steel, USA); “In the Spirit of the Season” (Evraz Claymont Steel, USA) and “School Gift Drive, Boy Scouts” (Evraz Oregon Steel & Tubular, USA). 50 Annual Report & Accounts 2009 Evraz Group S.A. Health and Safety The health and safety of Evraz’s employees is of paramount importance. Much of the Company’s business, in relation to the manufacture of steel and mining operations, involves production. Such activity can prove hazardous and, against this background, the health and safety of employees remains the ultimate priority at all times. To endeavour to ensure employees’ safety the Company acts in compliance with the health and safety laws and regulations applicable in the countries in which it operates and constantly seeks ways to improve the well-being of its employees. and organises relevant training for employees and management. Some of the measures taken in 2009 included the installation of a large ventilator and gas suction system at the Alardinskaya mine in order to improve aeration and facilitate degasiﬁ cation. Underground wireless communication systems were installed at three mines: “Yubileynaya 2”, “Tomusinskaya 5-6” and “Yerunakovskaya-8”. A similar wireless communication system was installed at the Yesaulskaya mine in 2010 and further installations at other assets are ongoing. Investments into occupational health and safety in Russia totalled approximately US$42 million (RUB1.3 billion) in 2009. As of 2009, Evraz’s Russian subsidiaries have implemented the Occupational Health and Safety management system. The Company carefully monitors any signs of risks and strongly encourages employees to immediately report the slightest signs of danger to the management and to suggest any course of action which might make their jobs safer. During the past two years the Company has implemented numerous precautionary measures designed to improve industrial safety at Yuzhkuzbassugol. Approximately US$13 million (RUB400 million) was invested in preventative measures focused on the aeration and degasiﬁ cation of the mines. Some US$8 million (RUB250 million) was invested in alarm and control systems, while US$1.5 million (RUB50 million) was variously utilised in the interests of collective and personal safety. The Company consistently seeks to improve working conditions, carries out timely inspections of equipment associated with the health and safety of employees In May 2010 Evraz introduced a safety monitoring system at Yuzhkuzbassugol Coal Company. This system essentially tracks the effectiveness of current safety precautions and procedures and produces monthly data to facilitate any V Lost Time Incident Frequency Rate/ Fatalities Rate of the Group (Per 1 mln hours worked) Lost Time Incident Frequency Rate/ Fatalities Rate at Steel Assets (Per 1 mln hours worked) LTIFR FIFR LTIFR FIFR 1.47 1.24 1.20 2.39 2.60 3.47 0.71 0.13 0.17 2007 2008 2009 0.02 2007 0.10 2008 0.02 2009 51 Annual Report & Accounts 2009 Evraz Group S.A. adjustments or additions to the range of safety measures currently in place at Yuzhkuzbassugol. The monthly ﬁ ndings are based on an analysis of various indicators ranging from data regarding the implementation of speciﬁ c safety measures to the performance of supervisory bodies. The Company was quick to respond with speciﬁ c measures designed to improve health and safety systems. The situation has been carefully monitored and the Company has taken all necessary steps to minimise the possibility of any recurrence of such an accident, including: During the same month Evraz installed a new gas suction system – designed to extract mixtures of methane-air from the working face – at Yuzhkuzbassugol’s Abashevskaya mine. In addition to the overall monitoring precautions, the gas suction system possesses an “anti-blowing” gas exhaust network. Evraz’s Zapsib, Yesaulskaya mine and Abashevskaya central enrichment plant were estimated the best in Novokuznetsk in 2009 with regard to the industrial safety of employees. The Yestyuninskaya Mine In December 2009 an industrial accident occurred at the Yestyuninskaya mine in the Ural Mountains in Russia due to explosives detonating while being transported through the mine shaft in trolleys. (cid:129) in-depth investigations; several institutional arrangements have been changed (cid:129) to ensure safe delivery and handling of explosives; further improvement of monitoring systems; design of a dedicated underground car to transport explosives; (cid:129) Russian scientiﬁ c research institute NIIOGR was employed to carry out an independent assessment, compile a programme of actions designed to improve safety and develop new systems to monitor industrial safety in line with international best practices; administrative proceedings against senior managers (cid:129) and employees for failing to provide adequate safety arrangements; implementation of intense safety training for employees (cid:129) and the introduction of unscheduled monitoring checks. Lost Time Incident Frequency Rate/ Fatalities Rate at Mining Assets (Per 1 mln hours worked) LTIFR FIFR 9.40 2.62 2007 52 4.31 0.18 2008 5.29 0.45 2009 Annual Report & Accounts 2009 Evraz Group S.A. Environment Evraz employs its best endeavors to comply with all environmental laws and regulations applicable in the territories within which it operates. The Group is aware of the possible environmental consequences of its production processes and energy consumption and pays constant attention to various aspects of the environment with a view to the prevention or minimisation of any adverse inﬂ uences. One of Evraz’s key objectives is to achieve a consistent reduction in waste emissions alongside the introduction of modern, environmentally-friendly technologies. 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 furnaces at the Russian steel plants had been completed. This commitment to eco-friendly technology is ongoing and, in 2009, environmental expenses at Evraz’s Russian assets exceeded US$130 million (RUB4 billion). Switching NKMK’s steel production from blast furnaces to electric arch furnaces reduced the negative environmental effects. Repairs to NKMK’s coke-oven batteries and gas- handling equipment, the optimisation of coking processes, the cleansing of coke gas and further hermetic sealing of equipment all served to improve the plant’s ecological parameters. Zapsib’s gas and dust handling equipment also proved the subject of major capital repairs. The reconstruction of the ﬁ lter area of coke production, involving the chemical cleansing of the steam and air station and certain technological adjustments in relation to reverse-ﬂ ow regeneration, resulted in a signiﬁ cant improvement in water management. The supervisory inspections in respect of the Company’s steel plants in 2009 conﬁ rmed that they fulﬁ ll all environmental requirements. Evraz strives to implement environmental policies that are fully compliant with ISO 14001. Steelmaking facilities NTMK and Zapsib in Russia, the Sukha Balka iron ore complex in Ukraine, Evraz Vitkovice Steel in the Czech Republic and Highveld in South Africa have established environmental management systems in accordance with ISO 14001 and received relevant certiﬁ cates of compliance. The Company’s commitment to the well-being of the environment is fully shared by its employees and 2009 saw several of the Group’s subsidiaries undertake voluntary projects, ranging from river bank protection to garbage collection, for the beneﬁ t of the natural surroundings and local communities. V Russian and Ukrainian Assets: Emissions Dynamics* (oxides of nitrogen (NOx), oxides of sulphur (SOx), carbon monoxide (CO), volatile organic compounds (VOC)) North American Assets: Emissions Dynamics* (oxides of nitrogen (NOx), oxides of sulphur (SOx), carbon monoxide (CO), volatile organic compounds (VOC)) 100.0 96.4 91.2 74.6 137.7 119.4 100.0 % 150 120 90 60 30 0 2006 2007 2008 2009 2007 2008 2009 * 2006–2007 data do not include Ukrainian assets * 2007 data do not include Canadian assets % 120 90 60 30 0 53 Annual Report & Accounts 2009 Evraz Group S.A. Our People Our employees represent the Company’s most important asset and, as such, are vital to its success. Evraz’s human resources team endeavours to attract, develop and retain the best possible talents drawn from many parts of the world. We are helped in this regard by the Company’s emphasis on the creation of a transparent corporate culture which encourages open dialogue between employees and management. The Group’s employees totalled approximately 110,000 as of 31 December 2009. The Company’s recruitment focus is as much on youth as it is on experienced market professionals, the all important factor being ability. Against this background the Company liaises with various institutions in Russia such as the Moscow State University, the Higher School of Economics, the Moscow Institute of Steel and Alloys and the Moscow State Mining University. In South Africa, Vametco Alloys provides bursaries to several universities including the Ramadikela School in the Rankotea community. HR Strategy Evraz’s focus on the efﬁ cient utilisation of labour continued during 2009. The Company’s global priorities included further improvements in the efﬁ ciency of the Group’s facilities through optimising staff costs, eliminating duplications and implementing strategic outsourcing programmes. The criterion was to retain talent while deploying adequate manpower to operate at reduced production rates. Hand in hand with the global nature of the Company’s activities goes the challenge of integrating the Group’s various assets. One of the most important aspects of Evraz’s human resource policy is employee development through regular training programmes designed to improve employees’ qualiﬁ cations and managerial skills and facilitate talent recognition. Assessments and appraisal sessions are held regularly to provide management with feedback on individual progress and to share information with regard to best practices. Hiring the Best Evraz Group constantly endeavours to employ ‘the best’: talented people with the qualiﬁ cations and skill sets that will beneﬁ t the Company and serve to underwrite individual career prospects. To this end the Company recruits from various universities, offers competitive salaries and places considerable importance on the need to provide employees with opportunities to further their education. 54 Evraz is an active participant in various career fairs and internship opportunities are available to students. Care of People Evraz has assets in numerous parts of the world and employs people of various races and nationalities. The Company is committed to the principle of equality of treatment and opportunity for all employees, irrespective of his/her race, nationality, political beliefs, age, sex or religion, while ensuring the provision of a work environment free from any form of discrimination or harassment as outlined in the Company’s Code of Ethics. The Black Economic Empowerment (BEE) programme, designed to support historically disadvantaged people and local communities, remains our key priority in South Africa. The transfer of a 26% interest in Mapochs Mine (Proprietary) Limited to local partners in April 2009 represented an important step in relation to the BEE programme’s objectives. The Transformation Committee, led by Bheki Shongwe, the Chairman of the Board of Evraz Highveld Steel and Vanadium Corporation, is responsible for the development and implementation of the BEE transformation agenda, including the recruitment, training and promotion of employees drawn from black communities. Evraz Group has utilised all possible measures to support those employees who were made redundant. These included early retirement incentives, ﬁ nancial compensation, training grants, start-up business incentives, health insurance and, in Russia for example, mortgage support programmes. Similarly, Evraz Highveld employed Annual Report & Accounts 2009 Evraz Group S.A. instructors and invested approximately US$5 million (ZAR40 million) in training schemes. Due to the shortage of skilled individuals in the country, Evraz Highveld has continued to train apprentices and multi-skilled workers in preparation for a market recovery. Recreational activities, sporting events and team building exercises are regular occurrences throughout the Group. Certain activities were frozen in 2009 as a result of the Company’s global cost cutting agenda but will be reinstated when appropriate. Social Support Programmes Despite difﬁ cult economic conditions Evraz continued to invest substantial sums in social support programmes during 2009. Beneﬁ ts provided by Evraz and the scale of such beneﬁ ts differ according to the country in which the Company’s operations are located. The most popular forms of beneﬁ t include: medical insurance, dental insurance, life insurance, short- and long-term disability insurance, educational assistance, paid vacation entitlement, paid holidays, travel allowances, health programmes and pension schemes. Choices with regard to insurance policies, some of which extend to family members, and pension plans are normally available and such schemes are usually subsidised by the employer alongside employee contributions. Disability beneﬁ ts provide a proportion of income replacement in the event of illness or disability, while payments with regard to vacations are made in accordance with the labour laws applicable to the relevant jurisdiction. The global economic downturn led to lower demand for steel, lower production and, in turn, lower wages for many employees who, as a result, encountered difﬁ culties in meeting their liabilities. To alleviate such hardship Evraz pledged to offer interest-free loans to employees in relation to certain commitments and necessities such as mortgages, education and medical treatment. Cooperation with Labour Unions Evraz Group respects the right of each employee to openly discuss any concerns and make relevant suggestions to the Company’s management. In keeping with this, Evraz Group supports a constructive and mutually beneﬁ cial dialogue with the labour unions associated with the Company’s employees. The events of 2009 led to closer cooperation between the labour unions and the Company and more frequent meetings, many of which were also attended by state and municipal authorities. The Company’s interaction with labour unions is conducted on a non-discriminatory basis with total integrity and in compliance with all regulations. V Number of Employees by Segment 2009 51% Steel 44% Mining 4% Sales, Logistics & Other 1% Vanadium Number of Employees according to Geographical Location 2009 78% Russia 13% Ukraine 6% Americas 2% Africa 1% Europe 55 VI. Corporate Governance Russian Railways intends to build high-speed railway networks between Nizhny Novgorod, Moscow, St Petersburg and Helsinki in addition to the link between Moscow and Adler in Southern Russia for the Sochi Olympic Games 2014. US President Barack Obama announced that US$8 billion of economic recovery funds plus US$1 billion a year for the next ﬁ ve years will be dedicated to intercity passenger rail projects with high-speed rail the priority. Evraz is the largest producer of rails in the world, being the only producer in Russia and the CIS and the largest producer in North America. to discuss the Company’s operations and a wide range of issues including governance. Approximately 300 individual/ group meetings, conferences and other public events involving the investment community took place during 2009. In addition to the Evraz Group S.A. Articles of Association and internal rules and regulations, our governance principles are detailed in the Company’s Corporate Governance Code 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 2009 Evraz Group S.A. Introduction Evraz Group S.A., incorporated as a société anonyme under the laws of the Grand Duchy of Luxembourg, operates in accordance with Luxembourg law and adheres to all applicable laws and regulations incumbent upon the Company, attendant to the listing of its Global Depositary Receipts on the Ofﬁ cial List of the UK Listing Authority, with particular regard to the UK Corporate Governance Code (formerly the Combined Code). Evraz Group endeavours to constantly enhance its corporate governance procedures in order to maximise shareholder value, provide for business prosperity over the long-term and maintain the trust and goodwill of the Company’s internal and external stakeholders. These key objectives represent central aspects of our corporate culture. An ongoing dialogue with stakeholders is an essential aspect of corporate activity. We use various communication channels including, in terms of ﬁ nancial calendar reporting and disclosure, announcements made via the London Stock Exchange (the LSE), the Annual Report and Accounts, the Annual General Meeting (the AGM) and the Company’s website www.evraz.com. The Chairman of the Board, the Chief Executive, senior management and the investor relations team regularly engage with institutional investors 58 Annual Report & Accounts 2009 Evraz Group S.A. The Board of Directors and Senior Management The following table lists the Company’s directors and senior management as of 31 May 2010 Name Alexander Abramov Alexander Frolov Otari Arshba Karl Gruber Olga Pokrovskaya Terry Robinson Eugene Shvidler Eugene Tenenbaum Gordon Toll Leonid Kachur Pavel Tatyanin Alexey Agoureev Giacomo Baizini Vladimir Bruev Igor Gaponov Daniel Harris Natalia Ionova Alexey Ivanov Alexander Kuznetsov Konstantin Lagutin Igor Markov Dmitry Sotnikov Timur Yanbukhtin Director Chairman of the Board Member of the Remuneration Committee Director Chief Executive Ofﬁ cer Non-executive director Independent non-executive director Non-executive director Member of the Audit Committee Independent non-executive director Chairman of the Audit Committee Member of the Strategy Committee Non-executive director Non-executive director Member of the Remuneration Committee Independent 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 Vice President Initially elected or appointed Director since April 2005 Chairman since December 2008 Director since April 2005 Chief Executive Ofﬁ cer since January 2007 May 2005 May 2010 August 2006 April 2005 August 2006 August 2006 May 2010 June 2002 November 2004 August 2009 August 2006 March 2006 March 2006 November 2007 June 2006 June 2009 July 2009 January 2010 April 2008 June 2009 February 2007 VI Dmitry Melnikov has been Secretary to the Board since 2007. 59 Annual Report & Accounts 2009 Evraz Group S.A. The Board Elected on 17 May 2010 Annual Report & Accounts 2009 Evraz Group S.A. Alexander Abramov Alexander Frolov Otari Arshba Karl Gruber Director, Chairman of the Board Member of the Remuneration Committee Born in 1959. In 1992, Mr Abramov founded EvrazMetal company, a predecessor of Evraz Group. CEO of Evraz Group until 1 January 2006, Chairman of the Board until 1 May 2006. Served as non-executive director until his re-appointment as Chairman of the Board on 1 December 2008. A director of OOO Invest AG, a member of the Bureau of the Board of Directors and a member of the Board of Directors of the Russian Union of Industrialists and Entrepreneurs, an independent non- governmental organisation. Graduated with honours from the Moscow Institute of Physics and Technology in 1982 and holds a Ph.D. in Physics and Mathematics. Director, Chief Executive Ofﬁ cer Non-executive director Independent non-executive director Born in 1964. Born in 1955. Mr Frolov joined EvrazMetal, a predecessor of Evraz Group, in 1994 and subsequently held various positions within the Company. Chairman of the Board from 1 May 2006 until 1 December 2008. Mr Arshba joined Evraz in 1998 and served as Evraz’s Senior Vice President for Corporate Communications until December 2003 when he was elected a Deputy of the State Duma of the Russian Federation. A director of OAO Raspadskaya and ZAO Raspadskaya Coal Company, OAO OUK Yuzhkuzbassugol and ZAO Yuzhkuzbassugol Coal Company, ZAO Kazankovskaya Coal Company, Evraz Vitkovice Steel, Evraz Inc. NA and Highveld Steel and Vanadium Corporation. Graduated with honours from the Moscow Institute of Physics and Technology in 1987 and received a Ph.D. in Physics and Mathematics in 1991 from the Moscow Institute of Physics and Technology. He currently serves as a Deputy of the State Duma of the RF Federal Assembly and Chair of the State Duma Committee on Rules of Procedure and Administration. Graduated with distinction from the Felix Dzerzhinsky KGB Higher School and holds a Ph.D. in Political Science from the Russian Academy of Government Service. Born in 1952. Mr Gruber joined Evraz’s Board in May 2010 following the AGM. He has extensive experience in the international metallurgical plant business. Mr Gruber held various management positions, including eight years as a member of the Managing Board of VOEST- ALPINE Industrieanlagenbau (VAI), ﬁ rst as Executive Vice President of VAI and then as Vice Chairman of the Managing Board of Siemens VAI. He also served as Chairman on the Boards of Metals Technologies (MT) Germany and MT Italy. Graduated from Technical High School in 1973 with a diploma in mechanical engineering. VI 60 61 Annual Report & Accounts 2009 Evraz Group S.A. Annual Report & Accounts 2009 Evraz Group S.A. Olga Pokrovskaya Terry Robinson Eugene Shvidler Eugene Tenenbaum Gordon Toll Departures Gennady Bogolyubov James W. Campbell Philippe Delaunois Non-executive director Member of the Audit Committee Born in 1969. Ms Pokrovskaya held several key ﬁ nance positions in Sibneft post 1997, including serving as Head of Corporate Finance from 2004 until 2006. From 1991 until 1997, she worked as a senior audit manager at Arthur Andersen. She is Head of Corporate Finance at Millhouse LLC and a director of Highland Gold Mining Ltd. Graduated with honours from the State Financial Academy in 1991. Independent non-executive director Chairman of the Audit Committee Member of the Strategy Committee 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 and Deputy Chairman of Katanga Mining Ltd., and an Independent and the Senior non-executive director of Highland Gold Mining Ltd. He is a Fellow of the Institute of Chartered Accountants of England and Wales. Non-executive director Born in 1964. Mr Shvidler was appointed a Senior Vice President of Sibneft in 1995 and served as President of Sibneft from 1998 through 2005. He is Head of Millhouse LLC and a director of Highland Gold Mining Ltd. Graduated from the I.M. Gubkin Moscow Institute of Oil and Gas with a Master’s degree in Applied Mathematics. He holds an MBA in Finance and an M.Sc. in International Taxation from Fordham University. Non-executive director Member of the Remuneration Committee Born in 1964. Mr Tenenbaum served as the Head of Corporate Finance for Sibneft in Moscow from 1998 through 2001. During 1994- 1998 he was a corporate ﬁ nance director at Salomon Brothers. 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. He is Managing Director of MHC (Services) Ltd., a director of Highland Gold Mining Ltd., and a director of Chelsea FC Plc. A Canadian Chartered Accountant with a Bachelor’s degree in Commerce and Finance from the University of Toronto. Independent non-executive director Born in 1947. Mr Toll joined Evraz’s Board in May 2010 following the AGM. Mr Toll is Chairman of Ferrous Resources Limited, an iron ore development company in Brazil. His career has included the roles of Deputy Chairman, Ivanhoe Mines, Group Mining Executive, Rio Tinto and key positions with BHP Iron Ore, followed by executive appointments with Texasgulf Inc and Atlantic Richﬁ eld Coal. Mr Toll was formerly Chairman of Fortescue Metals Group Limited. He is a member of the Australian Institute of Mining and Metallurgy and a member of the Institute of Directors, UK. Graduated from University of Queensland, Australia in 1968 with a degree in Mining Engineering and received a Master’s degree in Business Science in 1981 from Columbia University, New York. VI 62 63 Annual Report & Accounts 2009 Evraz Group S.A. Senior Management As of 31 May 2010 Alexander Frolov Chief Executive Ofﬁ cer Annual Report & Accounts 2009 Evraz Group S.A. Leonid Kachur Senior Vice President, Business Support and Interregional Relations Pavel Tatyanin Senior Vice President, Head of International Business Giacomo Baizini Vice President, Corporate Affairs and Chief Financial Ofﬁ cer Born in 1964. Born in 1961. Born in 1974. Born in 1970. 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 2006 and continued to serve as Chairman of the Board until 1 December 2008. Graduated with honours from the Moscow Institute of Physics and Technology in 1987 and received a Ph.D. in Physics and Mathematics in 1991 from the Moscow Institute of Physics and Technology. A director of OAO Raspadskaya and ZAO Raspadskaya Coal Company, ZAO Yuzhkuzbassugol Coal Company and OAO OUK Yuzhkuzbassugol, ZAO Kazankovskaya Coal Company, Evraz Vitkovice Steel, Evraz Inc NA and Highveld Steel and Vanadium Corporation. Mr Kachur joined Evraz in 1993 and, as Vice President for Business Support and Interregional Relations, is responsible for safety and security issues within the Group. Prior to his appointment as Head of Business Support and Interregional Relations in 2000, Mr Kachur held various positions within the Group. From 1995 to 2000 he was Chief Executive of security enterprise, Interlock, and was responsible for security matters within Evraz. Between 1993 and 1995 he was Deputy Chief Executive, with responsibility for general issues, at EvrazMetal, a predecessor of Evraz. Prior to joining Evraz, Mr Kachur was involved in production and process management at the Russian Automobile Plant ZIL. Mr Kachur graduated from Moscow State Industrial University in 1979 with a degree in Engineering. Mr Baizini is responsible for ﬁ nance, treasury, controlling, reporting, IR, taxation, insurance, legal matters, IT and environmental policy. Before taking over as CFO in July 2009 he was responsible for business development in Asia-Paciﬁ c, sales and operations planning and coordinating aspects of international integration. Between 1998 and 2005, Mr Baizini was a consultant with McKinsey’s Milan and Tokyo ofﬁ ces where his principal focus was on electric utilities. He also co-led the successful development of McKinsey’s IT consulting arm in Japan. From 1994 to 1998 Mr Baizini was a consultant with JMAC, the Japanese consulting ﬁ rm, where he specialised in cost reduction and operational efﬁ ciency programmes in relation to both manufacturing and service industries. Mr Baizini holds a degree in Physics from Oxford University. Mr Tatyanin was appointed Senior Vice President and Head of International Business in July 2009. His responsibilities include the ﬁ nancial performance of Evraz’s steel and mining operations in North America, Europe and Africa together with the global vanadium business. He is also responsible, in an international context, for trading in steel and other commodities, strategic development and M&A transactions. Mr Tatyanin joined Evraz in April 2001 and, between 2002 and 2004, held the posts of Deputy Chief Financial Ofﬁ cer and Director for Corporate Finance. He served as Senior Vice President and Chief Financial Ofﬁ cer from 2004 to 2009. Before joining Evraz, Mr Tatyanin held various positions in the ﬁ nancial sector. He was Vice President of Adamant Financial Corporation, responsible for M&A transactions and asset restructuring, between 1999 and 2001 and, during the period 1997 to 1999, was Vice President of United Financial Group, Deutsche Bank’s Investment Banking division. Mr Tatyanin graduated with honours from Moscow State University in 1995 with a degree in Accounting and Economics and studied Economics in Ruhr-Universität Bochum, Germany. He received a Master’s degree with honours in International Business from Moscow State University in 1997. VI 64 65 Annual Report & Accounts 2009 Evraz Group S.A. Annual Report & Accounts 2009 Evraz Group S.A. Alexander Kuznetsov Vice President, Strategic and Operational Planning Igor Gaponov Vice President, Information Technologies Alexey Ivanov Vice President, Head of the Siberia Division Konstantin Lagutin Vice President, Head of Iron Ore Division Natalia Ionova Vice President, Human Resources Dmitry Sotnikov Vice President, Head of the Urals Division Born in 1978. Born in 1974. Born in 1975. Born in 1966. Born in 1966. Born in 1979. Mr Kuznetsov joined Evraz in 2002 and was appointed Vice President for Strategic and Operational Planning in July 2009 with responsibilities for strategic development, sales and operational planning, project management and valuation. Prior to this Mr Kuznetsov held various positions within the Company and served as Director for Strategic Planning and Investment Analysis between 2008-2009. He was formerly Head of the Financial Analysis and Valuation Department with responsibilities for ﬁ nancial analysis, the valuation of investment projects and M&A transactions (2006-2008). During the years 2002-2006 Mr Kuznetsov was Manager of the Capital Markets and International Investments Department and was involved in all of the Company’s M&A transactions. Mr Kuznetsov graduated with honours from the Moscow Institute of Physics and Technology in 2001 with a degree in Applied Mathematics and Physics. He also received a Master’s degree in Economics from the New Economic School in 2002. Mr Gaponov joined Evraz in 2002 and, prior to his appointment as Vice President, Information Technologies in 2006, he combined the positions of Vice President for IT of Evraz Group with Director for IT at ZSMK, NKMK and Evrazruda. Between 2003 and 2005 he served as Director for Information Technologies. He was the former Head of Evraz Group’s Enterprise Resource Planning System department and was also responsible for IT business projects at NTMK. Before joining Evraz, Mr Gaponov was responsible for IT projects with Deltek Systems Inc., the State contractors based in McLean, USA (1999-2000) and prior to that he worked with UNICON/MS Consulting Group (1995-1999). Mr Gaponov graduated from the Moscow State Academy of Management in 1997 with a degree in Economics and Mathematics from the Faculty of Economic Cybernetics. Mr Ivanov joined Evraz in 2002. Prior to his appointment as Head of the Siberia Division in May 2009, he served as Senior Deputy CFO responsible for supervising Controlling and Treasury functions (2008- 2009) and was Director of Controlling through 2002-2009. Between 1998 and 2002 Mr Ivanov held various positions in Liggett-Ducat where his responsibilities included production, controlling and logistics. He was formerly Head of the Credit Department at Inkombank (1997-1998). Mr Ivanov graduated from INSEAD in 2002. He holds a degree in Finance from the Financial Academy of the Government of the Russian Federation and has been a member of the Chartered Institute of Management Accountants since 2004. In 2008 Mr Ivanov received a diploma in Human Resources from the Australian Professional Association. 66 Ms Ionova joined Evraz in 2006 as Vice President for Human Resources and is responsible for all issues related to human resources within the Group. Mr Sotnikov joined Evraz in 2002 and, prior to his appointment as Vice President, Head of the Urals Division in May 2009, he held various positions within Evraz. Prior to joining Evraz, Ms Ionova served as Head of Human Resources at NDK Merkury where her responsibilities included analysis of the holding company’s personnel structure and the implementation of more effective work systems (2003-2006). Ms Ionova previously held the positions of Deputy Head of Human Resources ( 1999 -2003) and Manager for Human Resources (1997-1999) at NDK Merkury. Between 1995 and 1997 Ms Ionova served as Manager for Human Resources at Russian Gold. From January 2009 to May 2009 he was Deputy Vice President, Evraz Steel Divison. Between 2006 and 2009 he served as Director for Project Management, EvrazHolding and before this he was Director for Development, NTMK (2005-2006) and Director for Development, Kachkanarsky GOK “Vanady” (2004-2005). From 2002 to 2004 Mr Sotnikov was Head of Project Financing and Investment Project Analysis at EvrazHolding, Evraz’s managing company. Ms Ionova was voted Russia’s Best Human Resources Director at the Aristos Awards 2009. Ms Ionova graduated from the Management Faculty of the Russian State University of Physical Training, Sports and Tourism in 1987 and holds a Ph.D. in Psychology. Mr Sotnikov received a degree in Economics from the Moscow State University and the New Economic School in Russia and a Ph.D. in Economics from the Moscow State University. Mr Lagutin joined Evraz in January 2010 having served, during the preceding ﬁ ve years, as an executive director of Belon which, in 2006, was the ﬁ rst coal producer in Russia to go public. During that period Mr Lagutin was responsible for the company’s day-to-day operations and key investment projects. Mr Lagutin was twice awarded the Order of the Honour by the Governor of Kuzbass for his achievements in the region while at Belon. Prior to this Mr Lagutin held executive positions in the Russian oil and energy sector where his experience encompassed operations management, production, marketing and sales of non-fuel petroleum products. In 1998-2000 he was General Director of the Ryazan Reﬁ nery, in 2000-2001 and 1995-1998 he held various positions at Alfa -Eco and previously served as Head of the Moscow ofﬁ ce of Global Natural Resources, Inc. Mr Lagutin graduated with honours from the Military Institute of the RF Ministry of Defence in 1990. He received an Executive MBA degree from the Fuqua School of Business, Duke University, North Carolina, USA, in 2003. 67 VI Annual Report & Accounts 2009 Evraz Group S.A. Annual Report & Accounts 2009 Evraz Group S.A. Daniel Harris Vice President, Vanadium Assets Timur Yanbukhtin Vice President, Business Development, International Business Alexey Agoureev Vice President, Public Relations Igor Markov Vice President, Commercial Affairs Born in 1954. Born in 1964. Born in 1962. Born in 1965. Mr Harris has held the post of Vice President, Vanadium Assets since 2007 when he joined Evraz following the acquisition of Strategic Minerals Corporation. He was appointed President of Strategic Minerals Corporation in September 2009. Mr Harris has 32-years’ experience in the vanadium sector and was formerly Vice President in charge of operations at Strategic Minerals Corporation, in the US, a position he held since 2002. Prior to this he served as Vice President and Chief Financial Ofﬁ cer of Strategic Minerals Corporation (2000-2002) and was Managing Director of Vametco Minerals Corporation, the South African subsidiary of Strategic Minerals (1997-2000). Mr Harris also held various management positions during his 16 years at Stratcor’s Hot Springs, Arkansas plant, commencing in 1977. These included General Manager for Vanadium Operations, Plant Manager for Hot Springs Operations and Project and Process Engineer for Vanadium Operations. Mr Harris graduated from the University of Nevada, Mackey School of Mines, with a degree in Chemical Engineering in 1977. Mr Yanbukhtin, who was appointed Vice President, Business Development, International Business in October 2009, joined Evraz in 2002. Between 2002 and 2005 he served as Head of Capital Markets at EvrazHolding. Mr Yanbukhtin was appointed Vice President and Head of Corporate Finance in 2005, and Vice President for Strategy and Business Development in 2007. During these years Mr Yanbukhtin was actively involved in various corporate ﬁ nance transactions including the Company’s IPO, Eurobond issues and global M&A activity. Mr Agoureev joined Evraz in August 2009 as Group Vice President for Public Relations, responsible for all issues related to the media and public relations. His other responsibilities include liaison with governmental authorities and internal communications throughout the Group. Prior to joining Evraz, Mr Agoureev held various positions in public relations. From 2003 to 2009 he served as Deputy Director General for PR and Social Affairs at JSC Volga (Balakhna Paper Mill) and as Head of Information Projects at the Ost-West Group. Before joining Evraz Mr Yanbukhtin was Director for Business Development at Yandex (2000-2002) and prior to this he held various positions in Corporate Finance at Pioneer Investments, Salomon Brothers and Alfa Bank. Between 1984 and 2003 he held various positions in Russia and abroad within the ITAR-TASS News Agency and was appointed Deputy Chief Editor for International Relations in 1999. Mr Yanbukhtin graduated from the Moscow State University in 1986 with a degree in Economics. In 1994 he received a Master’s degree in International and Development Economics from Yale University. Mr Agoureev graduated with honours from the Moscow State Linguistic University in 1984 with a degree in Linguistics. Mr Markov was appointed Vice President for Commercial Affairs in 2008 responsible for sales and distribution. Prior to this Mr Markov, who joined EvrazMetal, a predecessor of Evraz Group, in 1995, held various positions within the Company. Between 2006 and 2008 he served as Procurement Director responsible for the provision of equipment, machinery and raw materials for the Group’s plants. During the period 2003-2006 Mr Markov was Head of EvrazResource responsible for the Company’s coal business. Before joining the Group Mr Markov worked at the Kurchatov Institute of Atomic Energy. Mr Markov graduated from the Moscow Institute of Electronics and Mathematics in 1988. Senior Management Changes 1 January 2009 – 31 May 2010 Appointments Departures Alexey Agoureev Vice President, Public Relations Natalia Cheltsova Vice President, Legal Affairs Maxim Kuznetsov Vice President, Metallurgical Assets Giuseppe Mannina Vice President, International Operations and Logistics VI Giacomo Baizini Vice President, Corporate Affairs and Chief Financial Ofﬁ cer Alexey Ivanov Vice President, Head of the Siberia Division Alexander Kuznetsov Vice President, Strategic and Operational Planning Konstantin Lagutin Vice President, Head of Iron Ore Division Dmitry Sotnikov Vice President, Head of the Urals Division Pavel Tatyanin Senior Vice President, Head of International Business 68 69 Annual Report & Accounts 2009 Evraz Group S.A. Role of the Board each year at the Annual General Meeting. The members of the Board have access to all information necessary for the exercise of their duties. Members of the Board are elected for a one-year term for an unlimited number of times by a simple majority of shareholders’ votes at the Annual General Meeting which is held on 15 May of each calendar year or on the following Monday should 15 May of a particular year fall on a weekend. The practice of Evraz Group S.A. is to have at least three independent directors matching the independence criteria set out by the corporate governance principles applicable to listed companies. The criteria in respect of the independence of the Group’s directors can be found on the Company’s website under the Policy Governing the Board of Directors. Any shareholder holding at least ﬁ ve percent of the Company’s share capital may propose a candidate or candidates for election to the Board. Such suggestions and proposals should reach the Board at least two months prior to the meeting. The selection of directors is based on the contributions they can make to Evraz’s business. Directors should display integrity, represent diverse professional backgrounds and combine a broad spectrum of experience and expertise. Evraz provides new directors with an orientation programme to familiarise them with Evraz’s business, strategy, co-directors, managers and other relevant aspects of the Company. The Chairman is responsible for creating a climate of trust within the Board, and ensures that continuing education is available, so that directors can improve and update their knowledge and skills in any area the Board thinks necessary. The Policy Governing the Board of Directors can be found on the Company’s website. Through its broad powers and frequent meetings the Board is deeply involved in managerial decision-making procedures. Such involvement covers different areas of Evraz Group’s management activities and reporting. Save for matters speciﬁ cally reserved for the Annual General Meeting (e.g. election of the new Board members, amendments to the Articles of Association, appointment of auditors, etc.) 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. The Board is vested with broad powers to effectively oversee the business of Evraz, map out its strategic goals and review management performance. The Board may grant special powers and delegate daily management to the CEO and senior managers of Evraz Group S.A. and/or its subsidiaries and afﬁ liates; in so doing, the Board is responsible for overseeing their performance to ensure that shareholders’ interests are met and that Evraz complies with applicable laws and regulations. Transactions valued at more than EUR30 million and related party transactions are within the Board of Director’s competence. The agenda of the Board meeting is determined by the Chairman. Any director may suggest reasonable items to be included in the agenda. The ﬁ nal agenda is sent to the Board members not later than ﬁ ve days prior to the Board meeting.The Secretary to the Board assists in convening Board meetings and general shareholders’ meetings and prepares and distributes related papers and the minutes of meetings. The Board establishes the agenda of the general shareholders’ meeting. Any shareholder holding at least ﬁ ve percent of the Company’s share capital may suggest to the Board items for inclusion on the agenda of the Annual General Meeting. Such suggestions and proposals should reach the Board at least two months prior to the meeting. 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 and its shareholders to whom it is accountable: discharge of the directors’ liability is subject to shareholders’ approval 70 Annual Report & Accounts 2009 Evraz Group S.A. Board Meetings in 2009 Board Meetings’ Attendance 2009* Scheduled Board Meetings Circular Board Meetings Meetings Attended Month January February March April May June July January 22 February 17 March 24 April 27 May 21 – July 28 – – – – May 28 June 4, June 22 – August August 27 August 4, August 11 September – September 14 October October 8 October 28, October 30 Tenenbaum Abramov Arshba Bogolyubov Campbell Delaunois Frolov Pokrovskaya Robinson Shvidler 10 4 3 10 10 10 10 10 10 9 November November 10 November 13 December December 15 – * Attendance records are not applicable to Circular Board Meetings in view of the fact that, under Luxembourg law, a director is required to sign the protocol even if he/she did not participate in such a meeting Directors’ Interests Mr Alexander Abramov, Chairman of Evraz Group, has a 24.15% beneﬁ cial interest in the Company and Mr Alexander Frolov, Chief Executive of Evraz Group, has a 12.05% beneﬁ cial interest in the Company. Mr Shvidler, a non-executive director, has a beneﬁ cial interest in approximately 3.43% of the Company’s outstanding shares. VI 71 Annual Report & Accounts 2009 Evraz Group S.A. Board and Management Remuneration The remuneration of Evraz Group’s senior management consists of: a ﬁ xed base salary according to the uniﬁ ed scale, with (cid:129) grades deﬁ ned for all job categories; (cid:129) a variable performance-based bonus. Annual management bonuses are based on Key Performance Indicators and targets which are deﬁ ned at the beginning of each year. Some of these targets and indicators may be linked to a measure of team or corporate performance, as well as individual performance, depending upon the employee’s position. Targets are reviewed by a senior management committee to ensure equity and alignment with corporate objectives. Exceptional performance against goals can result in the actual bonus exceeding 100% of the target bonus. Unsatisfactory performance in relation to any particular goal can result in no bonus being paid in respect of that goal. Bonuses are calculated and paid each calendar year following ﬁ nalisation of the previous year’s ﬁ nancial statements depending on the Company’s annual results. The Company is not currently operating any valid stock option plans. The Company’s former employee stock option plans comprised: 1) the 2005 Programme valid 2005-2009 (56 participants); and 2) the 2006 Programme valid 2006-2009 (60 participants). Participants in the stock option programmes included directors and senior employees who, at the time of allotment, had worked at Evraz Group for more than a year. (For further details See Note 24 to the FS.) The Company’s remuneration policy in respect of the Board of Directors is based on the following principles: the Chairman of the Remuneration Committee proposes the level of fees at a meeting of the Committee and, subject to approval, the proposal is put forward for the Board to consider. Subject to Board approval the proposed fees are put to shareholders at the AGM for ﬁ nal approval. Apart from an increase in the fee for the chairmanship of the Audit Committee, there has been no revision of fees since 2005. Independent directors serve on the Board pursuant to agreements. These agreements have a one-year term and provide for identical levels of remuneration and the reimbursement of certain expenses. A director’s remuneration consists of an annual salary of US$150,000 and a payment for committee membership (US$24,000) or chairmanship (US$100,000 in respect of the Audit Committee chairmanship and US$50,000 for the chairmanship of other committees). The fees payable for the chairmanship of a committee exclude the right to claim the membership fee, and any director elected chairman of more than one committee is only entitled to receive fees in respect of one chairmanship. Mr Arshba, as a member of the Russian Parliament, is not entitled to any remuneration. The Chairman of the Board and the CEO are also entitled to a performance-related bonus, which is paid at the sole discretion of the Board and is linked to the key performance indicators. Mr Alexander Frolov, as the Chief Executive Ofﬁ cer and Member of the Board of Directors, is entitled to the following remuneration: 1) the director’s fee as stated above plus any applicable fees for participation in the work of the Board committees; 2) a bonus subject to the discretion of the Remuneration Committee of the Company and approval by the Board of Directors of the Company. The bonus is subject to the achievement of a performance condition based on the target value ﬁ gures set out by the Board of Directors. Mr Arshba, as a member of the Russian Parliament, is not entitled to any remuneration. 72 Annual Report & Accounts 2009 Evraz Group S.A. Share Ownership by Senior Management As of 1 April 2010, the following senior managers had beneﬁ cial interests in Evraz stock held as GDRs*: Out of this amount the Board of Directors remuneration in relation to performing the Board of Directors responsibilities did not exceed US$3 million in 2007-2009. Name Leonid Kachur Pavel Tatyanin Timur Yanbukhtin Total holding, GDRs 915,450 89,475 42,300 The CEO of Evraz Group is not granted any speciﬁ c non- material remuneration. For more information regarding remuneration please see the Company’s Management Remuneration Policy. * Including GDRs awarded under the Company’s stock option plans Key management personnel* totalled 58, 60 and 48 persons as of 31 December 2009, 2008 and 2007 respectively. Total remuneration received by these individuals consisted of the following: Committees In 2009, the Board had the following standing committees: the Remuneration Committee, the Audit Committee and the Strategy Committee. US$ million Salary Performance bonuses Social security taxes Share-based payments Termination beneﬁ ts Other beneﬁ ts 2009 $ 18 10 1 3 – 1 2008 $ 22 2007 $ 25 29 1 18 – 1 20 1 3 10 – $ 33 $ 71 $ 59 * Key management personnel include the following positions within the Group: (cid:129) (cid:129) directors of Evraz Group S.A., top managers of major subsidiaries VI 73 Annual Report & Accounts 2009 Evraz Group S.A. Board Committee Reports Audit Committee (As of 31 January 2010) The Audit Committee report to the shareholders of Evraz Group S.A. encompasses the committee’s activities from the date of the last report as of 6 April 2009 to 31 January 2010. As stated in the aforementioned report of 6 April 2009, Evraz Group’s internal controls have demonstrated signiﬁ cant resilience and reliability, notwithstanding the severity of the global recession, the respective impacts on ﬁ nancial and commercial markets and the consequent challenges experienced by the Company, albeit in common with other constituents of the metals and mining sector. The relatively sedate pace of economic recovery serves to underline the ongoing importance of dependable business and ﬁ nancial controls and timely reporting and forecasting procedures in order to underwrite effective risk management. Against this background, the Audit Committee has maintained its vigilance in exercising its oversight role in respect of ﬁ nancial reporting, internal controls and risk management. In performing this duty, the committee has been assisted by the competence of the restructured management team, the ﬁ nancial management team and the internal audit department. Role of the Committee The Board has delegated to the committee the responsibility for oversight of Evraz Group’s ﬁ nancial and operational internal controls and the Group’s ﬁ nancial statements. In relation to these responsibilities the committee has: Reviewed its Board mandate and the Internal Audit (cid:129) Charter. (The Company’s Internal Audit Charter can be found on the Company’s website.) Reviewed the form, content and integrity of the (cid:129) Company’s and Group’s published ﬁ nancial statements; Established the terms of reference of the Group’s Risk (cid:129) Committee, an executive committee composed of the Group’s senior functional and operational executives, including the Group Chief Executive, and co-opted the Chairman of the Audit Committee as Chairman of the Group’s Risk Committee. John Heywood, a member of the Audit Committee, has also been co-opted to the Group’s Risk Committee. Composition of the Committee The composition of the Audit Committee during the period was: Terry Robinson (Chairman), a ﬁ nancially qualiﬁ ed (cid:129) independent non-executive director; Olga Pokrovskaya, a ﬁ nancially qualiﬁ ed non-executive (cid:129) director; John Heywood, a ﬁ nancially qualiﬁ ed, Board-nominated (cid:129) (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 the Group’s 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 committee 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 rigorous regard of the committee’s mandate and its independent authority. Report of the Committee’s Activities in 2009 Meetings and attendance: six meetings of the Audit Committee, attended by all members, were held during the 10-month period. Monitored and reviewed arrangements to ensure the (cid:129) objectivity, scope and effectiveness of both the external and internal audit functions; The external auditor, Ernst and Young, the internal auditors and the Group’s Senior Vice President and Chief Financial Ofﬁ cer, and additionally on his appointment as Senior Vice 74 Annual Report & Accounts 2009 Evraz Group S.A. President, Head of International Business, attended all six regular meetings. Post his appointment, the Vice President, Corporate Affairs and Chief Financial Ofﬁ cer attended two meetings. At various additional meetings the committee received presentations from the Head of Accounting and Reporting, senior members of the Group’s ﬁ nance team and the Director of Investor Relations. Instigated a Group Fraud and Security Committee with agreed terms of reference. Reviewed the follow-up actions consequential from (cid:129) matters raised via the Group’s ‘whistleblowing’ facilities. Reviewed the manpower resource and organisation of (cid:129) the Group’s internal audit function. Principal activities and issues considered during the period from 6 April 2009 to 31 January 2010 were: Review of the 2008 Financial Statements, the (cid:129) Management Report, the preliminary results press and stock exchange release and the analysts’ presentation. Review of the external auditor’s management letter (cid:129) following their full year 2008 audit, together with the Company’s management response and intended action. Review of the interim ﬁ nancial results and the interim (cid:129) results statement and analysts’ business and ﬁ nancial presentation together with the associated presentations as with the annual ﬁ nancial statements referred to above. Review of the methodology and result of the Property, (cid:129) Plant and Equipment revaluation. In connection with the review of the 2008 full year and (cid:129) 2009 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, a Ukraine iron ore producer enterprise in which Lanebrook holds a 46% beneﬁ cial interest but does not have management control; a transaction fee related to the acquisition of the Ukraine Steel and Iron Ore interests, approved by the independent non-executive directors, and the sale agent fees of a minority shareholder in Stratcor, other related party transactions are minimal. (cid:129) Reviewed internal audit reports, discussed deﬁ ciencies and agreed management action and corrective action timelines. 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, the Group engages accountancy ﬁ rms for due diligence work in connection with acquisitions and listing documentation and for tax advice. Where such services are provided by the external auditors, the committee has agreed fee limits with management in respect of non-audit services. When these limits have been exceeded, prior approval to such engagements, together with fee mandates, have been requested by management and approved on proper enquiry by the Audit Committee. In the year to 31 December 2009, the interim review and year-end audit fees totalled US$6,926,861; other audit- related services amounted to US$374,276, while non-audit fees were US$123,296. VI Audit Committee Self-Assessment The Audit Committee undertook a self-assessment of its own activity and conducted assessments with the external auditors, the internal audit function and with Evraz’s management. Review of the Group’s incidence of fraud and activity (cid:129) in hand to manage and reduce such future incidence. For more information on the Audit Committee and Audit Committee’s activities please visit the Company’s website. 75 Annual Report & Accounts 2009 Evraz Group S.A. Remuneration Committee (As of 31 December 2009) More detailed information on the remuneration policy and the Committee’s duties and responsibilities can be found on the Company’s website. With regard to the remuneration of the independent directors, the Chairman of the Board is responsible and makes recommendations as to the amount of such remuneration to shareholders at the Annual General Meeting. Articles of Association as of 31 July 2009: Corporate Governance Code: Policy Governing the Board of Directors: Management Remuneration Policy article 10 article 6.5 article 6 and 7 The Remuneration Committee, which usually meets before a Board meeting, always presents its conclusion to the Board for ﬁ nal approval. In 2009, the Remuneration Committee consisted of the following members: Strategy Committee Philippe Delaunois, Chairman of the Committee, (cid:129) Independent non-executive director; (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) to the Committee. James W. Campbell, Independent non-executive director; Eugene Tenenbaum, Non-executive director; Alexander Abramov, Chairman of the Board; Natalia Ionova, Vice President, Human Resources. Alexander Frolov, CEO, attends the meetings. Dmitry Melnikov, Secretary to the Board, acts as Secretary In 2009, the Strategy Committee consisted of the following members: James W. Campbell, Chairman of the Committee; Terry Robinson, Independent director; Pavel Tatyanin, Senior Vice President, Head of (cid:129) (cid:129) (cid:129) International Business; (cid:129) International Business. Timur Yanbukhtin, Vice President, Business Development, During a year when the Group was intent on deleveraging and reinforcing its balance sheet, the Committee’s functions effectively mirrored the Board’s focus on ﬁ nancial management, particularly with regard to debt reﬁ nancing, working capital reductions and investments designed to enhance returns from existing production systems. It is pleasing to note that, notwithstanding the rigorous ﬁ nancial constraints, the Board approved signiﬁ cant investments in new capital projects with a view to the Group fully capitalising, in the long term, on the prospective growth of certain market sectors. The Strategy Committee meetings were basically integrated with the meetings of the Board of Directors. For more information on the Strategy Committee please visit the Company’s website. The principal 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 2009. The committee approved some changes at the CEO-1 level. Given the economic situation that the Company faced in 2009, the committee decided to offer participants of the 2007 stock option programme a cash compensation spread over the following three years instead of vesting them the shares in the Company (represented by GDRs). The committee decided on the bonuses of the CEO-1 level for the year 2008, as well as the bonuses for the CEO. 76 Annual Report & Accounts 2009 Evraz Group S.A. Risk Management The Group’s business and operations are exposed to various business risks. While a number of these risks are operational or procedural in nature, several of these risks are inherent in the character and jurisdiction of the Group’s international business activities, while others relate to changes in the global economy and are largely outside management’s control. supervisory personnel. Such practices serve to encourage a risk conscious business culture. The Risk Committee and the Audit Committee share a common goal of codifying a Group-wide set of risk management and internal control policies and procedures. With regard to risk management disciplines, the Group’s executives seek to ensure management awareness and appropriate risk mitigation planning and actions, deﬁ ned and monitored within an enterprise risk management process (ERM). As a structured and coordinated Group- wide governance approach, the Group’s executives have created an ERM process designed to identify, quantify, respond to and monitor the consequences of an executive agreed risk schedule that encompasses both internal and external critical risks. This process is consistent with the listing rules published by the UK Financial Services Authority and is based on the Turnbull Guidance on Internal Control. 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 ownership of the relevant risk areas to senior managers according to their designated functions. As a result of the ERM process, a Risk Committee, under the chairmanship of the Audit Committee Chairman and including within its membership the Group CEO and Vice Presidents, is established and mandated to have oversight of the Group’s risk proﬁ le and supervise the entire risk management process including response procedures. During 2009, the Risk Committee reviewed and updated the Group’s risk matrix with related risk mitigating actions. The Group’s executive management is charged with embedding the agreed internal controls and mitigating actions throughout the entirety of the Group’s business and operations and through all levels of management and 77 We apply the following core principles to the identiﬁ cation, monitoring and management of risk throughout the organisation: Risks are identiﬁ ed, documented, assessed, monitored, (cid:129) tested and the risk proﬁ le communicated to the relevant risk management team on a regular basis; Business management and the risk management team are (cid:129) primarily responsible for ERM and accountable for all risks assumed in their operations; The Board, the Audit Committee and the Risk Committee (cid:129) 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 (cid:129) balance of risk through the alignment of business strategy and risk tolerance on an enterprise-wide basis. In 2009, principal risks and uncertainties facing the Group were: i) External compliance a. Borrowing covenants Compliance with ﬁ nancial covenants in respect of loans and borrowings were at risk as a result of the market downturn. The Group effectively mitigated such risk through its ﬁ nancial planning process. At the year end 2009 management had successfully reset certain of the Group’s borrowing covenants with its lenders and bondholders. b. Fiscal The tax compliance and tax management process in each of the tax jurisdictions within which the Group conducts VI Annual Report & Accounts 2009 Evraz Group S.A. its business or has any potential exposure is controlled to ensure that the Group, with the assistance of its own inhouse tax advisers and, where appropriate, with external advice, is in full compliance with the taxation submissions and returns demanded by the taxation legislation and legal precedents in the various pertinent tax jurisdictions. The Group mitigates such risk by maintaining comprehensive tax registers detailing tax liabilities, timelines and tax risks and with a process active management and technical review. c. Reporting timelines Statutory Financial Statements and Tax reporting. The risk of failure with regard to these processes is managed through careful planning in respect of each reporting project, daily monitoring of the actual closing process by management, and timely concentration of available resources on areas where issues are anticipated. ii) Reputation Risk of loss of business and trading reputation. The Group pro-actively addressed and managed situations which directly and indirectly related to its reputation. iii) Operational a. Risk of plant and equipment stoppages and downtime i. The Group is focused on standardisation, streamlining and automation of the production processes. The Group has developed a critical incident response process. ii. The Group continues to improve its operational motivation system, the emphasis being on safe production, the reduction of stoppage incidents and downtime, and the on-going training of personnel in emergency response. iii. The Group has improved equipment maintenance procedures through the acceleration of repair schedules. Planned investment in the replacement of non-optimal production equipment has been effected on the basis of best industry practice. iv. The Group has speciﬁ c and various disaster recovery and business continuity plans in position or in formulation. b. Environment Environmental risks expose companies to potentially signiﬁ cant obligations. The exposure is twofold: (1) obligation to third parties for bodily injury or property damage caused by pollution and (2) obligation to governments or third parties for the cost of removing pollutants together with severe punitive damages. The Group mitigates these risks through the provision of all essential regulatory documentation and compliance with all operating permissions in respect of all environmental impact activities in 2010 and beyond, regulatory standards for air pollutant emissions, regulatory standards for water pollutant dumping and ﬁ xed limits for waste disposal. c. Security and fraud Risk of management fraud, employee fraud, and illegal and unauthorised acts, any or all of which could lead to reputation degradation in the marketplace, loss of assets and/or ﬁ nancial losses. Security function is responsible for the prevention and detection of illegal actions and ﬁ ling conﬁ rmed cases with the law enforcement authorities. Fraud risk factors and causes are communicated to functional management for corrective and preventive control measures. iv) Liquidity Risk that the Group fails to generate from trading or externally secure, on acceptable business terms, adequate liquidity to meet its ﬁ nancial obligations or business needs consistent with the Group’s overall commercial objectives. The Group mitigates this risk through its ﬁ nancial planning process to ensure sufﬁ cient and appropriate liquidity and/or funding for its operating and investing activities. v) Market Volatility a. Competitor actions. Risk that major competitors or new entrants to the market take actions to establish and sustain competitive advantage over the Group or threaten its ability to survive. 78 Annual Report & Accounts 2009 Evraz Group S.A. b. Industry cyclicality. Risk that the industry will lose its attractions due to changes in the key factors for competitive success within the industry, the capabilities of existing and potential competitors and the Group’s strengths and weaknesses relative to competitors. b. Excessive headcount and low productivity. The Group mitigated this risk through initiatives designed to reduce the cost of labour per unit of production, including personnel motivation, lean management, technological improvement and a reduction in lost working hours. c. Industrial relations. Despite the availability of various forms of social partnership and a relatively stable enterprise climate, the potential for tension within labour groups exists. Constraints associated with the Group’s ﬁ nancial position in 2009 served to limit the provision of social support to employees. The Group mitigated this risk through the introduction of social programmes which demonstrated the ﬁ nancial contributions made by the Group as a socially responsible employer, participation in industry associations in order to ensure effective internal and external communication and the promotion of employer’s interests and by concluding collective bargaining agreements with various trade unions. viii) Political The risk of adverse consequences from speciﬁ c or general political actions in a country in which the Group has a signiﬁ cant business investment and/or has a signiﬁ cant volume of business, or where the Group has entered into an agreement with a counterparty subject to the laws of that country. The Group conducts its business with a proper understanding of the various national political environments and considers this risk to be low. VI The Group mitigated this risk through enhanced strategic planning which drew on information and analytical support with regard to strategic goals, marketing, peer group analysis, SWOT and a portfolio of strategic initiatives. vi) Cost competitiveness Risk that increases in the costs of raw materials, labour transportation and energy will prevent the Group from realising its competitive advantage. The Group managed this risk through the development and implementation of the energy savings programme, further vertical integration investment in relation to its raw material inputs, monitoring the effectiveness of the purchasing process, reviewing the maintenance and performance metrics of key production, plant and equipment, recycling waste materials, an on- going review and renegotiation of transport tariffs and improved productivity initiatives supported by appropriate investment. vii) Human Resources Risk of ineffective leadership with the result that managers and employees receive inadequate or inappropriate directives as to the scope of their individual responsibilities and/or business aims and do not receive the appropriate training or resources necessary to make effective decisions in a required manner. a. Leadership risk. The Group mitigated this risk through improvement of communication practices, enhancement of the corporate culture in accordance with the Group’s codes of conduct and ethics and development of the motivation system through the provision of proper training and succession planning. 79 Annual Report & Accounts 2009 Evraz Group S.A. Internal Control Consistent with its governance policies, the Group continues to improve the process through which the effectiveness of its internal control system can be regularly reviewed as required by provision C.2.1 of the UK Corporate Governance Code (former Combined Code). Evraz’s Head of Internal Audit has attended all the meetings of the Audit Committee and addressed any reported deﬁ ciencies 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 control. 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 2009 incorporated particular assignments and priorities agreed by the Audit Committee. Further, the scope of the 2009 annual internal audit included a review of the internal control systems of newly acquired subsidiaries as considered appropriate for effective risk management. The Company’s internal audit is structured on a regional basis, reﬂ ecting the developing geographic diversity of the Group’s operations. In the light of this the head ofﬁ ce internal audit function has furthered implementation of common internal audit practices throughout the Group. During 2009 the internal audit function worked in close cooperation with Ernst & Young, Evraz’s external auditor, on a joint review of internal controls and an appraisement of the general competence, independence and professional objectivity of the Group’s internal audit resource. For more information on the Company’s Internal Control processes please visit the Company’s website. 80 Annual Report & Accounts 2009 Evraz Group S.A. Shareholder Information Share Capital Evraz has an authorised capital of €514,408,652 represented by 257,204,326 shares of €2 each. The Company’s subscribed share capital is ﬁ xed at €291,914,242 represented by 145,957,121 ordinary shares with a nominal value of €2 each. All shares have the same rights and are equal. The Company, as of 31 December 2009, does not have any other class of shares, either authorised or outstanding, nor are any of the Company’s shares party to any cross shareholding arrangements. The Company held no Treasury shares as of 31 December 2009. Global Depositary Receipts (GDRs), valued on the basis of one GDR equating to one third of one ordinary share, are listed on the London Stock Exchange. GDRs, as of 31 December 2009, represented 28.76% of the Company’s issued share capital. In 2009, the Company issued convertible bonds. Evraz’s controlling shareholder Lanebrook (together with an afﬁ liate) subscribed for US$200 million of convertible bonds. The remaining bonds were acquired by more than 100 international investors. The bonds can be converted into the Company’s global depositary receipts (GDRs) at the option of bondholders with effect from 11 September 2009 until 6 July 2014. Shareholder Structure Shareholder Lanebrook Limited BNY (Nominees) Limited*, including shares owned by Lanebrook Limited in the form of GDRs TOTAL (145,957,121 shares) % of shares (as of 31 December 2009) 71.24% 28.76%** 1.15% 100% * The Bank of New York Mellon serves as Depositary for the Company’s GDR programme ** One share is represented by three GDRs Major Shareholders Lanebrook Limited has informed the Company that Lanebrook is controlled by Greenleas International Holdings Limited and Crosland Global Limited. Mr Alexander Abramov, Evraz’s Chairman of the Board of Directors, has a beneﬁ cial interest in 66.7% of Crosland Global Limited (which represents a 24.15% beneﬁ cial interest in the Company) and Mr Alexander Frolov, Evraz’s Chief Executive Ofﬁ cer and member of the Board of Directors, has a beneﬁ cial interest in 33.3% of Crosland Global Limited (which represents a 12.05% beneﬁ cial interest in the Company). Crosland Global Limited has a beneﬁ cial interest in 50% of Lanebrook (which represents a 36.20% beneﬁ cial interest in the Company). Mr Shvidler, a non-executive director, has a beneﬁ cial interest in approximately 3.43% of the outstanding shares of Evraz through an indirect interest in Lanebrook. None of the Company’s current shareholders has voting rights which differ from those of any other holders of the Company’s shares. Changes to Evraz Group’s Issued Share Capital Date Issued shares 31 December 2005 Total number of shares Notes 116,904,326 31 December 2006 117,499,606 595,280 117,499,606 Employee stock option plan 31 December 2007 9 September 2008 31 December 2008 January 2009 July 2009 12 August 2009 810,047 118,309,653 Employee stock option plan 118,309,653 4,195,150 122,504,803 Acquisition of Ukrainian assets 9,755,347 6,363,638 7,333,333 122,504,803 132,260,150 Partial scrip (2008 interim) dividend 138,623,788 Equity offering (incl. over-allotment) 145,957,121 In favour of Lanebrook (under equity and convertible bond offerings) 31 December 2009 145,957,121 81 VI Annual Report & Accounts 2009 Evraz Group S.A. GDRs Performance in 2009 Evraz’s GDR price rose steadily during 2009 and touched a 12-month high of US$32.15 before ending the year at US$28.25, +228% compared with 2008’s close of US$8.60, thereby outperforming the majority of both its peers and respective markets. This performance reﬂ ected the upturn in equity and commodity markets with second half strength beneﬁ ting from the improved outlook for global commodity demand. Price Growth vs. Market Since last year’s close Evraz Indexes RTS Index MICEX Index BE500 Steel Index Russian Steel Peers Mechel Severstal NLMK Evraz GDR Listing Bloomberg Ticker Reuters Ticker LSE Ticker GDR Price At Year End (US$) Low (US$) High (US$) EVR LI EVR-LN EVR Daily Average Volume (000s) Total GDRs Outstanding (MM) Market Cap. at Year End (US$ MM) Evraz Credit Rating Rating Agency Outlook Moody’s Standard & Poor’s Fitch Stable Stable Stable Watch Negative Watch Negative 82 % + 228 + 129 + 121 + 74 + 371 + 247 + 201 2008 8.60 3.90 114.09 883 367.5 3,160.6 2009 28.25 6.40 32.15 1,061.0 437.9 12,369.9 Type Outlook Long-Term Rating Senior Unsecured Debt Probability of Default LT Foreign Issuer Credit LT Local Issuer Credit LT Issuer Default Rating Senior Unsecured Debt ST Issuer Default Rating Rating as of 31 May 2009 Stable B1 B2 B1 B B B+ B+ B Annual Report & Accounts 2009 Evraz Group S.A. GDR Price on LSE in 2009 US$ 36 30 24 18 12 6 0 02-Jan 03-Mar 05-May 03-Jul 02-Sep 30-Oct 31-Dec Relative Price Performance vs. Peers and Indexes Rebased to 100 600 500 400 300 200 100 0 MM 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Volume GDR Price Evraz BE500 Steel* MICEX RTS Mechel Severstal NLMK 02-Jan 03-Mar 05-May 03-Jul 02-Sep 30-Oct 31-Dec * The Bloomberg Europe Steel Index (BE500 Steel) includes all steel companies in the Bloomberg Europe 500 Index Institutional GDR Holders – Geographic Distribution (As at January 2010) 41% Europe 24% UK&Ireland 22% Noth America 13% Russia GDR Holders by Type (As at January 2010) 44.2% Institutional Investors 27.5% Unidentified 25.4% Strategic Holders 2.9% Broker Holders VI 83 and Mr Campbell for their valuable contribution to the Company’s development. Copies of the AGM documents are available to download from the corporate website. Dividend Information In December 2008 the Board of Directors approved changes in Evraz’s dividend policy. Evraz announced that, beginning with the ﬁ nal dividend for 2008, dividend payments would not exceed 25% of its consolidated net income, as calculated under IFRS. Since the Company’s initial public offering in June 2005, the Company’s dividend policy had been to pay no less than 25% of its consolidated net income through the cycle. The change reﬂ ects the Company’s intention to ensure prudent cash management in the current challenging market environment. The Company did not recommend any dividends in respect of the year to 31 December 2009. Future dividends will depend on the Company’s performance, the deleveraging process and the pace of market recovery. Annual Report & Accounts 2009 Evraz Group S.A. Annual General Meeting The annual shareholders meetings are held in Luxembourg on the date set by the Articles of Association of Evraz Group S.A. Currently, the date is 15 May. If the day is a legal holiday, the annual general meeting will be held on the next following business day. All other general shareholders meetings are deemed to be extraordinary shareholders meetings. The extraordinary shareholders meetings can be convened by the Board on dates other than the annual shareholders meeting as often as the Board deems necessary, and/or determined by business needs. In addition, one or more shareholders jointly holding at least ﬁ ve percent of the share capital may request that a general shareholders meeting be convened. The Policy governing the Annual General Meeting can be found on the Company’s website. In 2009, two extraordinary general meetings were held. The EGM convened on 30 January 2009 approved the modiﬁ cation of the method of payment of the 2008 interim dividends, proposed by the Board of Directors in December 2008. Following the EGM decision, 9,755,347 new shares were issued in favour of those shareholders who supported 2008’s partial scrip interim dividend. Following the successful placement by Evraz Group of convertible bonds and shares, the extraordinary general meeting of Evraz’s shareholders held on 31 July 2009 resolved, among other issues, to increase the authorised share capital of Evraz Group S.A. to €514,408,652, represented by 257,204,326 shares of €2.0 each, from €314,408,652. The 2009 AGM was held on 17 May 2010. All resolutions were accepted. Shareholders approved the Directors’ Report and the consolidated ﬁ nancial statements for the year ending 31 December 2009, the new composition of the Board of Directors, determined the level of the directors’ and CEO’s remuneration and re-appointed Ernst & Young as Evraz’s external auditor. The Company and shareholders express their gratitude to non-executive independent directors Mr Delaunois 84 Annual Report & Accounts 2009 Evraz Group S.A. 2010 Investor Calendar 15 January 27-28 January 3-5 February 25-26 February 31 March April 14-17 April 15 April 21-22 April 26-27 April 28-29 April 11-13 May 17 May 17 May 24 May 25 May 10 June 28-30 June 15 July 2 September September 8-9 September 13-14 September 15-17 September 22-23 September 15 October 15 November Publication of 4th Quarter 2009 and Full Year 2009 Operational Results Deutsche Bank 8th Annual Russia One-on-One Conference, London Troika Dialog: The Russia Forum 2010, Moscow Morgan Stanley Basic Materials Conference, New York Publication of 2009 Financial Results; Investor/Analyst Conference Call Non-Deal Roadshow, Europe and the USA Raiffeisen Institutional Investors Conference, Zuers Publication of 1st Quarter 2009 Operational Results ING Metals and Mining Forum, London Morgan Stanley EMEA Conference, London Morgan Stanley EMEA Conference, New York Merrill Lynch Global Metals & Mining Conference, Miami Annual General Meeting of Shareholders, Luxembourg Publication of 1st Quarter 2010 Trading Update Barclays Capital Emerging Markets Credit Conference Uralsib Capital Metals and Mining Mini-conference, London BCP Securities Annual Investor Conference, Moscow Renaissance Capital 14th Annual Investor Conference, Moscow Publication of 2nd Quarter 2010 Operational Results Publication of 1st Half 2010 Financial Results Non-Deal Roadshow, Europe and the USA HSBC's 10th Annual CEEMEA Investor Forum, London Unicredit EMEA Conference, London Deutsche Bank Global Equity Markets Conference, New York Credit Suisse Steel & Mining Conference, London Publication of 3rd Quarter 2010 Operational Results Publication of 3rd Quarter 2010 Trading Update 29 November-1 December Goldman Sachs EEMEA Conference, London 85 VI Annual Report & Accounts 2009 Management Report Annual Report & Accounts 2009 Management Report VII. Management Report and Financial Statements 8686 87 87 VII Annual Report & Accounts 2009 Management Report Management Report D E T A D I L O S N O C L A I C N A N I F R O F S T N E M E T A T S D E D N E R A E Y E H T 9 0 0 2 , 1 3 R E B M E C E D 8888 Annual Report & Accounts 2009 Management Report 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 consolidated ﬁ nancial statements of Evraz Group S.A., prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, ﬁ nancial position and proﬁ t or loss of Evraz Group S.A. and the undertakings included in the consolidation taken as a whole (the “Group”); • the management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face. By order of the Board Alexander Frolov Chief Executive Ofﬁ cer Evraz Group S.A. 21 April 2010 89 89 VII I I II II III III IV IV V V VI VI VII VII VII VIII a a b b c c Annual Report & Accounts 2009 Management Report Selected Consolidated Financial Information The selected consolidated ﬁ nancial information set forth below shows historical consolidated ﬁ nancial information and other operating information of Evraz Group S.A. as of December 31, 2009 and 2008 and for the years then ended. The selected consolidated ﬁ nancial information has been extracted without material adjustment from, and should be read in conjunction with, the consolidated ﬁ nancial statements for the year ended December 31, 2009, prepared in accordance with IFRS. The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4 to the 2009 consolidated ﬁ nancial statements). 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 affected by the Company’s acquisitions and disposals of assets. 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. US$ million, except for WANOS and per share data 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 Weighted average number of ordinary shares outstanding 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 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 Mining 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 9090 Year ended December 31, 2009 2008 9,772 (8,756) 1,016 (623) (645) (795) (1,047) (553) (1,600) 339 (1,261) (1,251) (10) (9.30) 134,457,386 8,978 (8,122) 856 (617) (372) (707) (840) 363 (362) 1 (20) (25) (4) (48) 1,456 (1,368) 88 (59) (90) (153) (214) 20,380 (13,463) 6,917 (856) (895) (1,534) 3,632 (581) 3,051 (1,192) 1,859 1,797 62 14.55 123,495,726 17,925 (12,662) 5,263 (777) (472) (1,268) 2,746 1,206 (922) 284 (82) (33) 1 170 3,634 (2,387) 1,247 (40) (138) (98) 971 Annual Report & Accounts 2009 Management Report US$ million, except for WANOS and per share data 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 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 from (used in) investing activities Net cash ﬂ ows from (used in) 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) Year ended December 31, 2009 765 (552) 213 (80) (27) (29) 77 23,424 10,284 324 5,931 1,700 183 (2,149) 1,237 903 10 279 167 7,226 2008 1,022 (749) 273 (119) (44) (27) 83 19,451 4,672 245 6,064 4,563 (3,736) (127) 6,215 4,671 200 1,395 150 9,031 Notes: (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, foreign exchange loss (gain) and revaluation deﬁ cit. Evraz presents Adjusted EBITDA because Evraz considers Adjusted EBITDA to be an important supplemental measure of its operating performance and Evraz believes 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 considered as an alternative to net proﬁ t as a measure of operating performance or to cash ﬂ ows from operating activities as a measure 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 consider 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 amortisation 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. Reconciliation of Adjusted EBITDA to proﬁ t (loss) from operations is as follows: US$ million Consolidated Adjusted EBITDA reconciliation (Loss) proﬁ t from operations Add: Depreciation, depletion and amortisation Impairment of assets Loss on disposal of property, plant & equipment Foreign exchange (gain) loss Revaluation deﬁ cit Consolidated Adjusted EBITDA Steel segment Adjusted EBITDA reconciliation (Loss) proﬁ t from operations Add: Depreciation and amortisation Impairment of assets Loss on disposal of property, plant & equipment Foreign exchange (gain) loss Revaluation deﬁ cit Steel segment Adjusted EBITDA 91 91 Year ended December 31, 2009 (1,047) 1,632 163 81 (156) 564 1,237 (840) 1,151 168 56 (54) 422 903 2008 3,632 1,195 880 37 471 – 6,215 2,746 751 821 11 342 – 4,671 VII I II III IV V VI VII VII a b c Annual Report & Accounts 2009 Management Report US$ million Vanadium segment Adjusted EBITDA reconciliation (Loss) proﬁ t from operations Add: Depreciation and amortisation Foreign exchange gain Revaluation deﬁ cit Vanadium segment Adjusted EBITDA Mining segment Adjusted EBITDA reconciliation (Loss) proﬁ t from operations Add: Depreciation, depletion and amortisation Impairment of assets Loss on disposal of property, plant & equipment Foreign exchange gain Revaluation deﬁ cit Mining segment Adjusted EBITDA Other operations Adjusted EBITDA reconciliation Proﬁ t from operations Add: Depreciation and amortisation Impairment of assets Loss on disposal of property, plant & equipment Foreign exchange loss Revaluation deﬁ cit Other operations Adjusted EBITDA Year ended December 31, 2009 (48) 54 – 4 10 (214) 368 (5) 19 (1) 112 279 77 58 – 6 – 26 167 2008 170 31 (1) – 200 971 363 56 15 (10) – 1,395 83 49 3 11 4 – 150 Note: (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 optimise the use of internally-generated funds versus funds from third parties. Net Debt has been calculated as follows: US$ million Net Debt Calculation Add: Less: Long-term loans, net of current portion Short-term loans and current portion of long-term loans Short term bank deposits Cash and cash equivalents Net Debt 9292 Year ended December 31, 2009 2008 5,931 1,992 (22) (675) 7,226 6,064 3,922 (25) (930) 9,031 Annual Report & Accounts 2009 Management Report Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 December 31, 2009 and 2008 and for the years then ended. This section contains forward looking statements 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 a large vertically integrated steel, mining and vanadium business with operations based in the Russian Federation, the United States, Canada, Ukraine, the Czech Republic, Italy and South Africa. Evraz produced approximately 15.3 million tonnes and 17.7 million tonnes of crude steel in 2009 and 2008 respectively. According to the World Steel Association, Evraz was ranked the 15th largest steel producer in the world based on its 2008 crude steel production. Management estimates that Evraz ranks as the largest producer of steel by volume in Russia and is the largest Russian producer of long products such as beams, rebars and rails, by volume. Evraz also sold 18.4 thousand tonnes of vanadium equivalent in 2009 (including inter-segment sales of 0.3 thousand tonnes of vanadium equivalent). Evraz listed global depositary receipts (“GDRs”), representing approximately 8.3% of its issued share capital, on the Ofﬁ cial List of the London Stock Exchange on June 2, 2005. Each GDR represents an interest of one-third of one share. The total number of GDRs listed on the LSE represented approximately 29% of the Company’s issued share capital as of December 31, 2009. Evraz’s principal assets comprise nine integrated 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 (formerly IPSCO Canada, acquired in June 2008), Dnepropetrovsk Iron and Steel Works (DMZ) and Highveld Steel and Vanadium Corporation; Highveld is also a leading vanadium producer; three steel rolling mills: Evraz Palini e Bertoli, Oregon Steel Portland and Camrose Pipe Corporation (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 asset Yuzhkuzbassugol; one of the world’s leading producers of vanadium alloys and chemicals for the steel, chemical, and titanium industries: Strategic Mineral Corporation (Stratcor); the largest Russian ferrovanadium producer Vanady-Tula (acquired in November 2009); together with various trading and logistical assets. Evraz also owns a 40% equity interest in a coking coal producer Raspadskaya. In 2009, Evraz’s consolidated revenues amounted to $9,772 million, while the net loss attributable to equity holders of the parent entity totalled $1,251 million. Reorganisation and Formation of the Company Evraz Group S.A. (“The Company”) was incorporated, under the laws of the Grand Duchy of Luxembourg, on December 31, 2004 as the holding company for Evraz’s assets. Prior to August 3, 2006, the Company’s parent was Crosland Global Limited (“CGL”), an entity under the control of Mr. Alexander Abramov. On August 3, 2006, CGL transferred all its ownership interest in the Company to Lanebrook Limited (Cyprus) which became the ultimate controlling party from that date. The Company’s interests in its subsidiaries are held either directly: Evraz Vitkovice Steel a.s., Evraz Palini e Bertoli S.p.A., Strategic Minerals Corporation, Evraz Inc. NA Canada and Ukrainian assets, or through its ownership of Mastercroft Limited (“Mastercroft”), a limited liability company registered in Cyprus. 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 products, 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 2009, Evraz’s mining segment supplied approximately 77% and 58% of the steel segment’s total iron ore and coking coal requirements respectively. The coking coal supplies include purchases from JV Raspadskaya. The steel VII 93 93 Annual Report & Accounts 2009 Management Report segment supplies grinding balls, mining uprights and coke to the mining segment for use in operations. Evraz’s inter-segmental product sales are based on prices equivalent to those that could be commanded from unrelated third parties. Inter-company transactions are eliminated for the purpose of the preparation of Evraz’s consolidated ﬁ nancial statements but are included in the presentation of respective segments. 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 acquisition 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 2009 • 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 having 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 December 31, 2009 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%. • East Metals S.A. East Metals S.A. (“East Metals”) is an export trader that sells Evraz’s steel products overseas. Principal markets of the traders are South-East Asia, North America and the Middle East. The Company’s effective interest in East Metals S.A., as of December 31, 2009, amounted to 100%. 9494 Annual Report & Accounts 2009 Management Report • Raspadskaya. Raspadskaya, which produces coking coal, is one of the largest coal mines in Russia. On March 10, 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 May 31, 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 May 31, 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 December 31, 2009 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 May 21, 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 RUB597.0 million (approximately $20.6 million based on the exchange rate as at the date of transaction), the nominal value being RUB1,283.0 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 during 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 December 31, 2001 as it existed at such date, with acquisitions by Evrazruda subsequent to December 31, 2001 being accounted for by Evraz under the purchase method. The Company’s effective interest in Evrazruda as of December 31, 2009 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 option, exercisable in the period from 2007 to 2010, in respect of a 25% less one share interest in Clama. On October 23, 2007 Evraz executed this call option and as a result, effectively acquired a 100% ownership interest in Clama. The consideration paid for the shareholding was set at approximately EUR76 million ($107 million at the exchange rate as of the date of the transaction). • 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 (approximately $298 million based on the exchange rate as at the date of the transaction). The Company’s effective interest in Vitkovice as of December 31, 2009 amounted to 100%. • Yuzhkusbassugol (“YuKU”). Yuzhkusbassugol, which produces coking and steam coal, is one of the largest coal mines in Russia. On December 30, 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. On June 8, 2007, Evraz acquired an additional 50% ownership interest in YuKU for a cash consideration of $871 million, including transaction costs of $9 million, increasing its ownership interest in YuKU to 100%. 95 95 VII Annual Report & Accounts 2009 Management Report • 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 August 23, 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 interest in Stratcor as of December 31, 2009 amounted to 72.84%. • 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 tonnes 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 delisted and registration was withdrawn from the NYSE. On January 16, 2008, Evraz acquired approximately 93.4% of the outstanding ordinary shares of Claymont Steel, a US-based plate producer, through a tender offer. Following the acquisition 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 is the same price per share paid during the tender offer. The total cash consideration for the acquisition of a 100% ownership interest in Claymont Steel amounted to approximately $420 million. In June 2008, Evraz acquired the outstanding voting stock of General Scrap Inc. (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 Evraz Oregon Steel Mills, Inc. In June 2008, after the acquisition of Claymont Steel Holdings, Inc. and General Scrap Inc., Evraz consolidated Evraz Oregon Steel Mills, Inc. and certain newly acquired subsidiaries under the new name of Evraz Inc. NA. • 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 July 13, 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 agreements with the major shareholders of Highveld to increase this stake to 79% within 24 months. On February 20, 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 ferrovanadium 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. On April 26, 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 nancial statements with effect from April 26, 2007, the date at which the Company effectively exercised control over Highveld’s operations. On May 4, 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 legislation, 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 June 4, 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 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 based on the exchange rate as of June 4, 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 September 28, 2007, the Credit Suisse option for the acquisition of a 24.9% ownership interest in Highveld was exercised by the Group for $219 million. 9696 Annual Report & Accounts 2009 Management Report 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 increased Evraz’s shareholding by 4.2%. In July 2007, Evraz sold Transalloys, a business unit of Highveld Steel and Vanadium Corporation, to Renova group for $139 million. The plant produced 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 business unit of Highveld Steel and Vanadium Corporation, to Silicon Smelters, 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. In August 2008, Evraz completed the disposal of vanadium assets in South Africa in accordance with the conditions attached to the approval by the European Commission and South African competition authorities of its acquisition of a majority interest in Highveld Steel and Vanadium Corporation. Under the agreements, Evraz sold Highveld’s Vanchem operations, its 50% shareholding in South Africa Japan Vanadium (Proprietary) Limited and a non-dividend bearing equity interest in Highveld`s Mapochs Mine (Proprietary) Limited. The disposal was implemented with effect from August 29, 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 April 9, 2009, Highveld concluded an agreement to transfer 26% of the ordinary equity interest in Mapochs Mine (Proprietary) 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. As of December 31, 2009, the Company’s effective interest in Highveld amounted to 85.12%. • Nikom, a.s (“Nikom”). On December 20, 2007, Evraz acquired a 100% interest in Nikom, a ferrovanadium producer located in the Czech Republic, for a cash consideration of $46 million. • 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 and 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 businesses 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 approximately $511 million plus interest at an annual rate ranging from 10% to 12% accrued from June 12, 2008 to the date of exercise of the option. The option to buy 49% in NS Group was exercised in January 2009 for approximately $508 million. The acquisition was completed on June 12, 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 consideration 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 June 12, 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”. 97 97 VII Annual Report & Accounts 2009 Management Report • Palmrose Limited (Acquisition of Ukrainian assets). In September 2008, Evraz completed the acquisition, from entities under common 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 producer 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 Dneprodzerzhinsk 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. Purchase of controlling interests in Palmrose from entities under common control was accounted for using the pooling of interests method. Palmrose and its subsidiaries were included in the consolidated ﬁ nancial statements of Evraz as from December 11, 2007 – the date when Lanebrook Limited obtained control over those entities. Acquisitions in 2009 • Vanady-Tula. On December 20, 2007, Evraz signed an option agreement with OOO SGMK-Engineering (“SGMK”) in respect of shares of OAO Vanady-Tula (“Vanady-Tula”), the largest producer of ferrovanadium in Russia. Under the agreement, Evraz had the right to acquire (the call option) and SGMK had the right to sell (the put option) 90.84% of shares in Vanady-Tula for RUB3,140 million ($108 million based on the exchange rate as of November 2, 2009, the date of the business combination). The options, the exercise of which was conditional upon the approval of the regulatory authorities, were extended to December 31, 2009. To secure the put option, Evraz provided SGMK with a non-interest bearing deposit in the amount of RUB3,091 million ($121 million based on the exchange rate as at the payment date and $105 million based on the exchange rate as of December 31, 2008) – Note 13 to the 2009 consolidated ﬁ nancial statements. The deposit would have been repayable to Evraz if neither the call option nor the put option were exercised before their expiration. During 2008 and 2009, Evraz purchased minority shares in Vanady-Tula and immediately prior to the business combination held a 1.88% ownership interest in the entity. The consideration paid for these shares was $2 million. On November 2, 2009, Evraz obtained the necessary regulatory approvals. The share options became exercisable and economic beneﬁ ts have been effectively transferred to the Company since that date. As a result, the ﬁ nancial position and results of Vanady-Tula’s operations were included in the consolidated ﬁ nancial statements of the Company with effect from November 2, 2009, since when Evraz has effectively exercised control over the entity’s operations. • Carbofer. On October 15, 2009, Evraz acquired a 100% interest in a holding company owning steel dealers throughout Russia (formerly known as Carbofer). Carbofer, with six steel trading companies and 35 steel service centres located throughout the country, is one of the largest steel distribution networks in Russia. The purchase consideration amounted to $11 million. 9898 Annual Report & Accounts 2009 Management Report Results of Operations for the Years Ended December 31, 2009 and 2008 The following table sets out the Company’s consolidated income statement data for the years ended December 31, 2009 and 2008 in absolute terms and as a percentage of revenues. US$ million 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 Year ended December 31, 2009 2008 2009 vs 2008 Amount 9,772 (8,756) 1,016 (623) (645) (795) Percentage of revenues Amount Percentage of revenues Change % Change 100% 20,380 100% (10,608) (52.1)% (89.6)% (13,463) (66.1)% 4,707 (35.0)% 10.4% 6,917 33.9% (5,901) (85.3)% (6.4)% (6.6)% (856) (895) (8.1)% (1,534) (4.2)% (4.4)% (7.5)% 233 250 739 (27.2)% (29.9)% (48.2)% (Loss) proﬁ t from operations (1,047) (10.7)% 3,632 17.8% (4,679) n/m Non-operating income and expenses, net (553) (5.7)% (581) (2.9)% 28 (4.8)% (Loss) proﬁ t before tax (1,600) (16.4)% 3,051 15.0% (4,651) Income tax expense Net (loss) proﬁ t 339 3.5% (1,192) (5.8)% 1,531 (1,261) (12.9)% 1,859 Net proﬁ t attributable to equity holders of the parent entity (1,251) (12.8)% 1,797 Net proﬁ t attributable to minority interests (10) (0.1)% 62 9.1% 8.8% 0.3% (3,120) (3,048) (72) n/m n/m n/m n/m n/m Note: (1) Includes service revenues of $267 million and $390 million for the years ended December 31, 2009 and 2008 respectively. Sales of services consist primarily of heat and electricity supply, port charges, transportation and steel coating. In 2009 approximately 0.3% of Evraz’s revenues were generated through transactions with related parties compared to 0.4% in 2008. In addition, Evraz made signiﬁ cant purchases from related parties. (See Note 16 to the Consolidated Financial Statements.) Revenues Evraz’s consolidated revenues in 2009 totalled $9,772 million, a 52.1% decrease compared to revenues of $20,380 million in 2008. Steel segment sales accounted for the majority of the decrease in revenues due to the lower average prices and sales volumes of steel products. Evraz’s sales volumes of steel products to third parties decreased from 17.0 million tonnes in 2008 to 14.3 million tonnes in 2009. The decrease in steel sales volumes primarily reﬂ ects a decline in demand for construction products in Russia with overall sales on the Russian market down by –2.4 million tonnes. Sales volumes in Ukraine declined by –0.1 million tonnes. These decreases on the domestic markets were partially offset by the growth in export sales volumes from the Russian and Ukrainian operations, which showed a total increase of 0.8 million tonnes. Sales volumes of the European and South African operations declined by –0.3 million tonnes and –0.1 million tonnes respectively. The Canadian operations, which were acquired in June 2008, achieved approximately the same steel sales volumes in 2009 as in 2008 post acquisition, while sales at the US operations decreased by –0.6 million tonnes. These decreases were a direct result of the general slowdown experienced by steel markets in 2009 and related cuts in production volumes. 99 99 VII Annual Report & Accounts 2009 Management Report The following table shows the average price trends of Evraz’s principal products in 2009 and 2008 (encompassing semi-annual breakdowns of both the Russian and non-CIS export markets), which illustrates an uneven distribution of revenues during the periods under consideration: US$ million 2009 2008 2nd half 1st half 2nd half 1st half 2nd half 2009 vs 1st half 2009 2nd half 2009 vs 2nd half 2008 Average Russian and CIS prices for Evraz’s Russian and Ukrainian products(1) Year ended December 31, % 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 Construction products H-beams Rebars Wire rods Semi-ﬁ nished products Billets Slabs Pig Iron Flat-rolled products Plates Construction products SA operations - H-beams Flat-rolled products European operations – plates NA operations – commodity plates NA operations – speciality plates SA operations – commodity plates Tubular products 442 750 545 503 432 533 371 700 502 450 362 440 554 1,164 519 1,099 511 394 271 451 598 438 445 301 245 409 559 384 869 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 19.1% 7.1% 8.6% 11.8% 19.3% 21.1% 6.7% 5.9% (49.1)% (43.5)% (46.6)% (49.7)% (55.1)% (45.1)% (30.9)% (25.9)% 14.8% (51.3)% 30.9% 10.6% 10.3% 7.0% 14.1% (59.5)% (63.3)% (59.3)% (50.6)% (53.9)% Average non-CIS export prices for Evraz’s Russian and Ukrainian products(2) 490 481 475 414 399 334 683 423 432 393 344 382 275 680 516 851 367 486 893 341 769 735 606 686 701 660 492 725 15.8% 11.3% 20.9% 20.3% 4.5% 21.5% (5.0)% (43.5)% 29.4% (14.8)% (55.3)% (2.1)% 0.4% (11.2)% Average prices for Evraz’s non-CIS operations products(3) 723 576 657 915 799 673 1,113 961 7.4% (35.0)% 680 638 1,059 797 1,315 1,426 1,848 1,154 1,121 1,010 1,782 863 (15.3)% 3.0% (13.6)% 0.3% (56,2)% (53,9)% (50.5)% (30.8)% NA operations – large diameter pipes 1,248 1,589 1,799 1,450 (21.5)% (30,6)% Notes: (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 East Metals S.A. (3) Prices for sales denominated in Euros, Czech Korunas, South African Rands and Canadian dollars 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. 100100 Annual Report & Accounts 2009 Management Report The following table presents Evraz’s consolidated revenues by segment for 2009 and 2008: 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 December 31, 2009 2008 2009 vs 2008 Change % Change 8,855 83 – 40 8,978 354 9 363 435 1,017 4 1,456 128 508 129 765 (1,790) 9,772 90.6% 3.6% 4.5% 1.3% 17,623 178 28 96 17,925 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% (8,768) (95) (28) (56) (8,947) (847) 4 (843) (855) (1,323) – (2,178) (138) (80) (39) (257) 1,617 (10,608) (49.8)% (53.4)% (100)% (58.3)% (49.9)% (70.5)% 80.0% (69.9)% (66.3)% (56.5)% 0.0% (59.9)% (51.9)% (13.6)% (23.2)% (25.1)% (47.5)% (52.1)% The following table presents the geographic breakdown of Evraz’s consolidated revenues in 2009 and 2008 (based on location of customer) in monetary terms and as a percentage of total revenues. US$ million Revenues by segment Russia Americas Asia Europe CIS Africa Rest of the World Total 2009 2,950 2,428 2,423 1,028 543 381 19 9,772 Percentage of total revenues 30.2% 24.8% 24.8% 10.5% 5.6% 3.9% 0.2% 100% Year ended December 31, 2008 7,575 4,538 3,217 2,862 1,429 720 39 Percentage of total revenues 37.2% 22.3% 15.8% 14.0% 7.0% 3.5% 0.2% 2009 vs 2008 Change (4,625) (2,110) (794) (1,834) (886) (339) (20) % Change (61.1)% (46.5)% (24.7)% (64.1)% (62.0)% (47.1)% (51.3)% 20,380 100% (10,608) (52.1)% Revenues from sales in Russia decreased as a proportion of total revenues. The principal driver of the higher proportion of revenues outside Russia in 2009 compared with 2008 was the re-orientation of sales of the Russian operations to export markets in view of weak demand on the domestic market. Steel Segment Steel segment revenues decreased by 49.9% to $8,978 million in 2009 compared with $17,925 million in 2008. Steel segment revenues were affected by the negative price dynamic for steel products and lower sales volumes as described above. VII 101 101 Annual Report & Accounts 2009 Management Report The following table provides a breakdown of Evraz’s steel segment sales by major product groups in 2009 and 2008. Year ended December 31, US$ million 2009 2008 2009 vs 2008 Steel segment sales Percentage of total Steel segment sales Percentage of total Change % Change Construction products(1) Railway products(3) Flat-rolled products(2) Tubular products(4) Semi-ﬁ nished products(5) Other steel products(6) Other products(7) TOTAL 2,189 1,117 1,450 1,008 2,018 255 941 8,978 24.4% 12.4% 16.2% 11.2% 22.5% 2.8% 10.5% 100% 4,958 2,226 3,239 1,753 3,512 607 1,630 27.7% 12.4% 18.1% 9.8% (2,769) (55.8)% (1,109) (49.8)% (1,789) (55.2)% (745) (42.5)% 19.6% (1,494) (42.5)% 3.4% 9.1% (352) (689) (58.0)% (42.3)% 17,925 100% (8,947) (49.9)% Notes: (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, ferroalloys and resale of coking coal. The proportion of revenue attributable to sales of construction products decreased as the result of a signiﬁ cant decline in the sales volumes of construction products in the Russian Federation. The proportion of revenue attributable to sales of railway products was unchanged despite a decrease in the proportion of volumes. This is explained by the fact that prices of railway products decreased to a lesser extent than other steel products. The proportion of revenues attributable to sales of ﬂ at-rolled products (primarily plates) decreased due to an above average decline in sales volumes compared to other steel products, particularly in Europe. The proportion of revenues attributable to sales of tubular products increased due to the fact that prices for tubular products in North America were relatively stable at the end of 2008 and the onset of 2009 and the average price decline was therefore less in comparison with other steel products. The proportion of revenues attributable to sales of semi-ﬁ nished products increased due to higher sales volumes of semis sold by the Russian and Ukrainian operations to export markets. Revenues from sales of other steel products (mainly rounds, grinding balls and mine uprights sold in Russia) decreased slightly as a proportion of steel segment revenues due to a decline in sales volumes. Revenues attributable to non-steel sales increased as a proportion of steel segment sales due to the relative stability of prices and volumes in comparison with steel products. Steel segment sales to the mining segment totalled $83 million in 2009 compared with $178 million in 2008. The decrease is attributable to lower sales prices as well as volumes. 102102 Annual Report & Accounts 2009 Management Report Revenues from sales in Russia amounted to approximately 30% of steel segment revenues in 2009, compared with 39% in 2008. The decreased share of revenues from sales in Russia is primarily attributable to the reallocation of steel volumes from the Russian market to Asian export markets in 2009. Vanadium Segment Vanadium segment revenues fell by 69.9% to $363 million in 2009 compared with $1,206 million in 2008. This reﬂ ected signiﬁ cantly lower prices and sales volumes in respect of vanadium products in 2009 compared with the previous year. Sales volumes of the vanadium segment decreased from 26.4 thousand tonnes of pure Vanadium in 2008 to 18.4 thousand tonnes of pure Vanadium in 2009. The following table shows a breakdown of Evraz’s vanadium segment sales in 2009 and 2008. Year ended December 31, US$ million 2009 2008 2009 vs 2008 Vanadium segment sales Percentage of total Vanadium segment sales Percentage of total Change % Change Vanadium in slag Vanadium in alloys & chemicals Other revenues TOTAL 60 298 5% 363 16.5% 82.1% 1.4% 100% 290 913 3% 1,206 24.1% 75.7% 0.2% 100% (230) (615) (79.3)% (67.4)% 2 66.7% (843) (69.9)% The following table shows the average price trends of Evraz’s vanadium products from 2008 through 2009 (encompassing semi-annual breakdowns): US$ per tonne of pure vanadium in the products NTMK – Vanadium in slag Highveld – Vanadium in alloys Stratcor – Vanadium in alloys Year ended December 31, % change 2009 2008 2nd half 1st half 2nd half 1st half % change 2nd half 2009 vs 1st half 2009 % change 2nd half 2009 vs 2nd half 2008 Average prices for Evraz’s vanadium products(1) 10,919 26,282 28,072 6,836 22,501 28,979 25,152 57,167 53,359 31,771 55,026 54,550 59.7% 16.8% (3.1)% (56.6)% (54.0)% (47.4)% Notes: (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. Mining Segment Mining segment revenues fell by 59.9% to $1,456 million in 2009 compared to $3,634 million in 2008. This primarily reﬂ ected the lower average prices of iron ore and coal in 2009 compared with 2008. Sales volumes of iron ore products decreased by –15.7% in 2009 compared to 2008. Excluding the effect of the resale of iron ore products from UGOK (a related party) in 2008, sales volumes of iron ore in 2009 decreased by only –1.1% compared with the previous year. Sales volumes of steam coal products decreased by –8.2% in 2009 compared with 2008, while sales volumes of coking coal increased by 3.7%. 103 103 VII Annual Report & Accounts 2009 Management Report The following table shows a breakdown of Evraz’s mining segment sales in 2009 and 2008: 2009 2008 2009 vs 2008 Year ended December 31, Mining segment sales Percentage of total Mining segment sales Percentage of total US$ million Iron ore products Iron ore concentrate of which resale of related party products Sinter of which resale of related party products Pellets Other Coal products Coking coal Coal concentrate Steam coal Steam coal concentrate Other revenues TOTAL 840 311 n/a 158 n/a 238 133 562 137 268 124 33 54 1,456 57.7% 21.4% n/a 10.9% n/a 16.3% 9.1% 38.6% 9.4% 18.4% 8.5% 2.3% 3.7% 100% 2,213 625 316 885 57 566 137 1,251 259 719 265 8 170 3,634 60.9% 17.2% 8.7% 24.4% 1.6% 15.6% 3.8% 34.4% 7.1% 19.8% 7.3% 0.2% 4.7% Change % Change (1,373) (62.0)% (314) (316) (727) (57) (328) (4) (50.2)% (100)% (82.1)% (100)% (58.0)% (2.9)% (689) (55.1)% (122) (451) (141) 25 (47.1)% (62.7)% (53.2)% 312.5% (116) (68.2)% 100% (2,178) (59.9)% The following table shows the average price trends of the mining segment’s iron ore products in 2009 and 2008 with half-yearly breakdowns: US$ per tonne Iron ore products Concentrate Sinter Pellets Coal products Coking coal Coal concentrate Steam coal Steam concentrate Year ended December 31, % change 2009 2008 2nd half 1st half 2nd half 1st half Average prices for Evraz’s mining segment products(1) 2nd half 2009 vs 1st half 2009 2nd half 2009 vs 2nd half 2008 61 50 46 41 81 36 75 47 48 41 29 59 37 68 86 108 103 87 168 32 89 95 116 111 79 157 38 79 29.8% 4.2% 12.2% 41.4% 37.3% (2.7)% 10.3% (29.1)% (53.7)% (55.3)% (52.9)% (51.8)% 12.5% (15.7)% Note: (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 the National Bank of Ukraine respectively. Evraz also holds a 40.0% equity method accounted interest in Raspadskaya coking coal mine. Revenue attributable to Raspadskaya is therefore not consolidated 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 $1,017 million (69.8% of mining segment sales) in 2009 compared with $2,340 million (64.4% of mining segment sales) in 2008. Approximately 77% of Evraz’s iron ore requirements were met by the mining segment in 2009 compared with 73% in 2008. Around 58% of Evraz’s coking coal requirements were satisﬁ ed by supplies from Raspadskaya and YuKU in 2009, as against 55% in 2008. Approximately 51% of third party sales by the mining segment in 2009 were to customers in Russia compared with 29% in 2008. The higher share of third party sales outside Russia in 2008 was primarily attributable to the resale of iron ore from UGOK, a related party, to export markets. There were no such resales in 2009. 104104 Annual Report & Accounts 2009 Management Report Other operations Evraz’s revenues in respect of the other operations segment decreased by 25.1% to $765 million in 2009 compared to $1,022 million in 2008. Revenues were largely derived from the following operations (sales ﬁ gures shown below include sales within the same segment): • Nakhodka Sea Port. Sales at Nakhodka Sea Port, which provides various seaport services, amounted to $82 million in 2009 against $81 million in 2008. Intra-group sales accounted for 56% and 26% of such revenues in 2009 and 2008 respectively. • Evraztrans acts as a railway forwarder for Evraz’s steel segment. Sales at Evraztrans amounted to $83 million in 2009 compared with $98 million in 2008. Evraztrans derives the majority of its revenues from intra-group sales which accounted for 92% and 77% of revenues in 2009 and 2008 respectively. • Metallenergoﬁ nance (“MEF”) supplies electricity to Evraz’s steel and mining segments and to third parties. MEF’s sales amounted to $299 million in 2009 compared with $457 million in 2008. Intra-group sales accounted for 80.2% and 83.1% of MEF’s revenues in 2009 and 2008 respectively. • Sinano Shipmanagement (“Sinano”) provides sea freight services to Evraz’s steel segment. Sinano’s sales totalled $92 million in 2009 compared with $144 million in 2008. Sinano derives the majority of its revenues from inter-segment sales. • Evro-Aziatskaya Energy Company (“EvrazEK”) is an energy generating company which supplies natural gas, steam and electricity to the steel and mining segments. In 2009, EvrazEK generated revenues of $133 million compared to $169 million in 2008. Intra-group sales accounted for 94% and 81% of its revenues in 2009 and 2008 respectively. • West Siberian Heat and Power Plant (“Zapsib Power Plant”) is an energy generating branch of Zapsib which supplies electricity and heat to Zapsib and external customers. The revenues of Zapsib Power Plant amounted to $70 million in 2009 compared with $90 million in 2008. Intra-group sales accounted for 82% and 35% of revenues in 2009 and 2008 respectively. External sales in respect of the other operations segment, primarily comprising sales of energy by MEF, EvrazEK and Zapsib Power Plant and the provision of port services by Nakhodka Sea Port, decreased from $266 million in 2008 to $128 million in 2009. Cost of revenues and gross profit Evraz’s consolidated cost of revenues amounted to $8,756 million, representing 89.6% of consolidated revenues, in 2009 compared with $13,463 million, representing 66.1% of consolidated revenues, in 2008. This steep reduction in gross proﬁ t margin primarily resulted from the fall in steel and vanadium prices and production cuts in response to weaker demand on the principal steel markets in 2009. An additional factor related to a 65% increase in the steel segment’s 2009 depreciation charge compared with 2008 due to a revaluation of Russian steel assets. The effect of the weakening of local currencies against the US dollar contributed to the decrease in costs in 2009 compared with 2008. The table below shows the declines in the average exchange rates of currencies relevant to Evraz’s subsidiaries against the US dollar in 2009 against 2008: Currency Russian Rouble Czech Koruna Euro South African Rand Ukrainian Hryvnia Canadian Dollar 105 105 Effect (22)% (10)% (5)% (2)% (32)% (2)% Operations Russian operations Evraz Vitkovice Steel Evraz Palini e Bertoli Highveld Steel and Vanadium Ukrainian operations Evraz Inc. N.A. Canada VII Annual Report & Accounts 2009 Management Report The table below sets forth cost of revenues and gross proﬁ t by segment for 2009 and 2008, including percentage of segment revenues. Year ended December 31, 2009 2008 2009 vs 2008 Amount Percentage of segment revenues Amount Percentage of segment revenues Change % Change US$ million 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 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 (8,122) (4,077) (551) (736) (970) (704) (1,084) 856 (362) (163) - (24) (48) (53) (74) 1 (90.5)% (45.4)% (6.1)% (8.2)% (10.8)% (7.8)% (12.1)% 9.5% (99.7)% (44.9)% 0.0% (6.6)% (13.2)% (14.6)% (20.4)% 0.3% (12,662) (8,499) (567) (1,012) (589) (904) (1,091) 5,263 (922) (486) (1) (65) (37) (58) (275) 284 (1,368) (94.0)% (2,387) (119) (126) (358) (351) (193) (221) 88 (552) 213 4 4 1,644 (146) (8,756) 1,016 (8.2)% (8.7)% (24.6)% (24.1)% (13.3)% (15.2)% 6.0% (72.2)% 27.8% (705) (239) (501) (354) (245) (343) 1,247 (749) 273 (7) (7) 3 264 (143) (70.6)% (47.4)% (3.2)% (5.6)% (3.3)% (5.0)% (6.1)% 29.4% (76.5)% (40.3)% (0.1)% (5.4)% (3.1)% (4.8)% (22.8)% 23.5% (65.7)% (19.4)% (6.6)% (13.8)% (9.7)% (6.7)% (9.4)% 34.3% (73.3)% 26.7% 4,540 4,422 16 276 (381) 200 7 (35.9)% (52.0)% (2.8)% (27.3)% 64.7% (22.1)% (0.6)% (4,407) (83.7)% 560 323 1 41 (11) 5 201 (283) 1,019 586 113 143 3 52 122 (1,159) 197 (60) 11 11 (60.7)% (66.5)% (100)% (63.1)% 29.7% (8.6)% (73.1)% (99.6)% (42.7)% (83.1)% (47.3)% (28.5)% (0.8)% (21.2)% (35.6)% (92.9)% (26.3)% (22.0)% (157.1)% (157.1)% (1,620) (49.6)% (3) 2.1% (89.6)% (13,463) (66.1)% 4,707 (35.0)% 10.4% 6,917 33.9% (5,901) (85.3)% Notes: (1) Includes repairs and maintenance, auxiliary materials such as refractory products and effect of changes in work-in-progress and ﬁ nished goods inventories. (2) Includes electricity, heat, natural gas and fuel used in production processes, such as fuel oil. (3) Includes auxiliary materials, repairs and maintenance and effect of changes in work-in-progress and ﬁ nished goods inventories. 106106 Annual Report & Accounts 2009 Management Report Steel segment Steel segment cost of revenues decreased by 35.9% from $12,662 million in 2008 to $8,122 million in 2009. Cost of revenues amounted to 90.5% and 70.6% of steel segment revenues for 2009 and 2008 respectively. The principal factors affecting the change in steel segment cost of revenues in monetary terms in 2009 compared with 2008 were as follows: • Raw material costs decreased by 52.0% due to the decline in sales volumes and the lower prices of iron ore, coking coal, scrap, ferroalloys, pig iron and steel semis purchased by the steel operations. • Transportation costs decreased by 2.8%. Railway tariffs in relation to the transportation of Evraz’s steel products to the relevant ports, which represent a major aspect of these costs, increased as a result of the higher export sales volumes of steel products from Russia and growth in the average railway tariff in Rouble terms. These increases were more than offset by the decline in transport costs related to the deliveries of raw materials to Russian plants and the depreciation of local currencies against the US dollar. • Staff costs decreased by 27.3%. Factors affecting the decrease were staff optimisation measures and the depreciation of local currencies against the US dollar. • Depreciation costs increased by 64.7%. This increase is largely attributable to the revaluation of assets at Zapsib (growth of $216 million) and NTMK (growth of $124 million). • Energy costs decreased by 22.1% due to the reduction in production volumes and the depreciation of local currencies against the US dollar. • Other costs decreased by 0.6%. These costs consisted primarily of contractor services and materials for maintenance and repairs and also included the effects of changes in work-in-progress and ﬁ nished goods inventories on the cost of revenues. There was a $75 million increase in other costs reﬂ ecting the contribution of the new Canadian operations and a $321 million increase due to release of work- in-progress and ﬁ nished goods inventories in 2009. These increases were more than offset by the effect of cost cutting measures and the depreciation of local currencies against the US dollar. Steel segment gross proﬁ t decreased by 83.7% from $5,263 million in 2008 to $856 million in 2009, while gross proﬁ t margin amounted to 9.5% of steel segment revenues in 2009 compared with 29.4% in 2008. The decrease in gross proﬁ t margin primarily reﬂ ected the decline in prices and volumes of steel products and higher depreciation expense in respect of the Russian operations. Vanadium segment Vanadium segment cost of revenues decreased by 60.7% from $922 million in 2008 to $362 million in 2009. The decrease was primarily attributable to lower sales volumes and the lower prices of raw materials. Cost of revenues amounted to 99.7% of vanadium segment revenues in 2009 compared with 76.5% in 2008. Gross proﬁ t of the vanadium segment decreased by 99.6% from $284 million in 2008 to $1 million in 2009, the result being a gross proﬁ t margin of 0.3% of vanadium segment revenues in 2009 compared with 23.5% in 2008. 107 107 VII Annual Report & Accounts 2009 Management Report Mining segment The mining segment cost of revenues decreased by 42.7% from $2,387 million in 2008 to $1,368 million in 2009, representing 94.0% and 65.7% of mining segment revenues in 2009 and 2008 respectively. The principal factors affecting the change in mining segment cost of revenues between the periods were: • Raw material costs decreased by 83.1%. Excluding the effect of the resale of iron ore products from UGOK in 2008, raw material costs decreased by 36%. This decrease resulted from the lower prices and volumes of external iron ore purchased by the mining segment for processing and the weakening of the average rates of the Russian Rouble and Ukrainian Hryvnia against the US dollar. • Transportation costs decreased by 47.3% primarily due to lower export sales volumes of mining products and the weakening of the average rates of the Russian Rouble and Ukrainian Hryvnia against the US dollar. • Staff costs decreased by 28.5%. Factors that affected the decrease were staff optimisation and the weakening of the average rates of the Russian Rouble and Ukrainian Hryvnia against the US dollar. • Depreciation costs decreased by 0.8%. • Energy costs decreased by 21.2%. The decrease is primarily attributable to the weakening of the average rates of the Russian Rouble and Ukrainian Hryvnia against the US dollar. • Other costs decreased by 35.6%. These costs consisted primarily of contractor services and materials for maintenance and repairs and certain taxes. The decrease is attributable to cost reduction measures and the weakening of the average rates of the Russian Rouble and Ukrainian Hryvnia against the US dollar. Mining segment gross proﬁ t decreased by 92.9% to $88 million in 2009 compared with $1,247 million in 2008, representing a gross proﬁ t margin of 6.0% of mining segment revenues in 2009 compared with 34.3% in 2008. The decrease in the gross proﬁ t margin largely reﬂ ected declines in the average prices of iron ore and coal in 2009 compared with the previous year. Other operations The other operations segment’s cost of revenues decreased by 26.3% to $552 million, representing 72.2% of other operations segment’s revenues, in 2009 compared with $749 million, representing 73.3% of other operations’ revenues, in 2008. The major components of cost of revenues at Nakhodka Sea Port are staff and inventory costs; 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 Zapsib Power Plant’s 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 decreased by 22.0% from $273 million in 2008 to $213 million in 2009. This decrease was largely attributable to a decline in Sinano’s revenues associated with freight services provided by third party ship owners. The corresponding decrease in the costs of these services was reﬂ ected in selling and distribution costs discussed below, thus largely affecting the gross proﬁ t margin with minimal impact on Sinano’s operating proﬁ t. Gross proﬁ t margin amounted to 27.8% of the other operations’ revenues in 2009 compared with 26.7% in 2008. 108108 Annual Report & Accounts 2009 Management Report Selling and distribution costs Selling and distribution costs decreased by 27.2% to $623 million, amounting to 6.4% of consolidated revenues, in 2009 compared with $856 million, amounting to 4.2% of consolidated revenues, in 2008. Selling and distribution costs largely consist of transportation expenses related to Evraz’s selling activities. The following table presents selling and distribution costs by segment in 2009 and 2008, including as a percentage of segment revenues. US$ million Year ended December 31, 2009 2008 2009 vs 2008 Selling and distribution costs by segment Amount Percentage of segment revenues Amount Percentage of segment revenues Change % Change 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 (617) (347) (48) (26) (113) (83) (20) (6) (2) (1) (4) (7) (59) (39) (1) (10) (9) (80) 153 (6.9)% (3.9)% (0.5)% (0.3)% (1.3)% (0.9)% (5.5)% (1.7)% (0.6)% (0.3)% (1.1)% (1.9)% (4.1)% (2.7)% (0.1)% (0.7)% (0.6)% (10.5)% (623) (6.4)% (777) (448) (69) (13) (106) (141) (82) (36) (6) – (4) (36) (40) (22) (2) (3) (13) (119) 162 (856) (4.3)% (2.5)% (0,4)% (0.1)% (0.6)% (0.8)% (6.8)% (3.0)% (0.5)% 0.0% (0.3)% (3.0)% (1.1)% (0.6)% (0.1)% (0.1)% (0.4)% (11.6)% 160 101 21 (13) (7) 58 62 30 4 (1) – 29 (19) (17) 1 (7) 4 39 (9) (20.6)% (22.5)% (30.4)% 100.0% 6.6% (41.1)% (75.6)% (83.3)% (66.7)% 0.0% 0.0% (80.6)% 47.5% 77.3% (50.0)% 233.3% (30.8)% (32.8)% (5.6)% (4.2)% 233 (27.2)% Note: (1) Includes auxiliary materials such as packaging, port services and customs duties. Steel segment Selling and distribution costs amounted to 6.9% and 4.3% of steel segment revenues in 2009 and 2008 respectively. The primary factors affecting the changes in the steel segment selling and distribution costs between the periods were: • Transportation costs decreased by 22.5% primarily due to the depreciation of local currencies against the US dollar. • Staff costs decreased by 30.4%. This decrease is largely attributable to staff optimisation measures and depreciation of the average rates of local currencies against the US dollar. • Bad debt expense increased by 100.0% from $13 million in 2008 to $26 million in 2009, largely attributable to provision made against receivables from Russian customers. • Depreciation costs increased by 6.6% mainly reﬂ ecting the contribution of the new Canadian operations. • Other selling costs decreased by 41.1%, primarily due to cost cutting measures and depreciation of the average rates of local currencies against the US dollar. VII 109 109 Annual Report & Accounts 2009 Management Report Vanadium segment Selling and distribution costs decreased by 75.6% to $20 million in 2009 compared with $82 million in 2008, representing 5.5% and 6.8% of vanadium segment revenues in 2009 and 2008 respectively. The decrease was primarily due to reductions in freight services, customs duties and sales commissions. Mining segment Selling and distribution costs amounted to 4.1% of the mining segment’s revenues in 2009 compared with 1.1% in 2008. The principal factors affecting the changes in the mining segment’s selling and distribution costs between the periods were: • Transportation costs increased by 77.3% largely due to changes in cost allocation between the steel and mining segments in the 2009 Financial Statement compared with 2008. • Staff costs decreased by approximately 50% in 2009 primarily due to changes in the classiﬁ cation of staff costs at YuKU in the 2009 Financial Statement compared with 2008. • Bad debt expense increased from $3 million in 2008 to $10 million in 2009 largely due to the write-off of unrecoverable accounts receivable. • Other selling costs decreased by 30.8% largely due to lower sales commissions and depreciation of the average rates of local currencies against the US dollar. Other operations Selling and distribution costs amounted to 10.5% of other operations’ revenues in 2009 compared with 11.6% in 2008. The decrease in selling and distribution costs was largely attributable to lower external freight and port services of Sinano (See ampliﬁ cation of the gross proﬁ t margin of other operations segment above). General and administrative expenses General and administrative expenses decreased by 27.9% to $645 million, representing 6.6% of consolidated revenues, in 2009 compared with $895 million, representing 4.4% of consolidated revenues, in 2008. 110110 Annual Report & Accounts 2009 Management Report The following table presents general and administrative expenses by segment for 2009 and 2008, including as a percentage of segment revenues. US$ million 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 Amount (372) (126) (82) (164) (25) (13) (1) (11) (90) (43) (14) (33) (27) (138) 7 (645) Year ended December 31, 2008 2009 vs 2008 2009 Percentage of segment revenues (4.1)% (1.4)% (0.9)% (1.8)% (6.9)% (3.6)% (0.3)% (3.0)% Amount (472) (193) (90) (189) (33) (18) (2) (13) (6.2)% (138) (3.0)% (1.0)% (2.3)% (3.5)% (66) (17) (55) (44) (211) 3 Percentage of segment revenues (2.6)% (1.1)% (0.5)% (1.1)% (2.7)% (1.5)% (0.2)% (1.1)% (3.8)% (1.8)% (0.5)% (1.5)% (4.3)% Change % Change 100 (21.2)% 67 8 25 8 5 1 2 48 23 3 22 17 73 4 (34.7)% (8.9)% (13.2)% (24.2)% (27.8)% (50.0)% (15.4)% (34.8)% (34.8)% (17.6)% (40.0)% (38.6)% (34.6)% (133.3)% (6.6)% (895) (4.4)% 250 (27.9)% Notes: (1) Includes depreciation, insurance and bank and other service costs. (2) Includes rent, insurance, bank and other service costs. (3) Relates principally to staff costs. Steel segment General and administrative expenses amounted to 4.1% of the steel segment’s revenues in 2009 compared with 2.6% in 2008. The principal factors affecting the changes in the steel segment’s general and administrative expenses between the periods were: • Staff costs decreased by 34.7%. This decrease is mainly attributable to staff optimisation measures and appreciation of the average exchange rates of local currencies against the US dollar. • Taxes, other than on income, including property, land and local taxes, decreased by 8.9%. The decrease primarily reﬂ ected depreciation of the average exchange rates of local currencies against the US dollar. • Other general and administrative expenses decreased by 13.2%. The decrease is largely attributable to depreciation of the average exchange rates of local currencies against the US dollar. 111 111 VII Annual Report & Accounts 2009 Management Report Vanadium segment General and administrative expenses decreased by 24.2% to $25 million, representing 6.9% of vanadium segment revenues, in 2009 compared with $33 million, representing 2.7% of vanadium segment revenues, in 2008. The decrease in the general and administrative expenses is primarily attributable to staff optimisation measures and depreciation of the average exchange rates of local currencies against the US dollar. Mining segment General and administrative expenses decreased by 34.8% to $90 million, representing 6.2% of mining segment revenues, in 2009 compared with $138 million, representing 3.8% of mining segment revenues, in 2008. The principal factors affecting the changes in the mining segment’s general and administrative expenses between the periods were: • Staff costs decreased by 34.8%. The decrease was primarily attributable to staff optimisation measures and depreciation of the average exchange rates of local currencies against the US dollar. • Taxes, other than on income, decreased by 17.6% mainly due to depreciation of the average exchange rates of local currencies against the US dollar. • Other expenses decreased by 40.0% largely due to cost cutting measures and depreciation of the average exchange rates of local currencies against the US dollar. Other operations General and administrative expenses decreased by 40.0% to $27 million, representing 3.5% of other operations segment’s revenues, in 2009 compared with $44 million, representing 4.3% of other operations segment’s revenues, in 2008. The decrease in general and administrative expenses is primarily attributable to staff optimisation measures and depreciation of the average exchange rates of local currencies against the US dollar. Unallocated Unallocated general and administrative expenses are mainly attributable to costs associated with EvrazHolding and OUS (a subsidiary which provides accounting services to Evraz’s operations in Russia and Ukraine). 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 decreased by 34.6% to $138 million in 2009 compared with $211 million in 2008. This decrease is attributable to cost cutting, staff optimisation measures and depreciation of the average exchange rates of local currencies against the US dollar. Other operating income and expenses Other operating expenses, net of other operating income, decreased to $795 million, representing 8.1% of consolidated revenues, in 2009 compared with $1,534 million, representing 7.5% of consolidated revenues, in 2008. Other operating income and expenses consist primarily of social and social infrastructure expenses, gain (loss) on the disposal of property, plant and equipment, impairment of assets, gain (loss) in respect of foreign exchange rates and a revaluation deﬁ cit on property, plant and equipment. Social and social infrastructure expenses include such items as maintenance of medical centres, recreational centres, employee holiday allowances, sponsorship of sports teams and charitable events. 112112 Annual Report & Accounts 2009 Management Report The following table presents other operating income and expenses by segment for 2009 and 2008, including as a percentage of segment revenues. US$ million 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) Revaluation deﬁ cit on property, plant and equipment Other income (expense), net Total Vanadium segment Foreign exchange gain (loss) Revaluation deﬁ cit on property, plant and equipment Total Mining segment Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Revaluation deﬁ cit on property, plant and equipment Other income (expense), net Total Other operations Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Revaluation deﬁ cit on property, plant and equipment Other income (expense), net Total Unallocated Eliminations Year ended December 31, 2009 2008 2009 vs 2008 Percentage of segment revenues Amount Percentage of segment revenues Amount Change % Change (43) (56) (168) 54 (422) (72) (707) – (4) (4) (6) (19) 5 1 (112) (22) (153) (1) (6) – – (26) 4 (29) 98 – (0.5)% (0.6)% (1.9)% (0.6)% (4.7)% (0.8)% (91) (11) (821) (342) – (3) (0.5)% (0.1)% (4.6)% (1.9)% 0.0% 0.0% (7.9)% (1,268) (7.1)% 0.0% (1.1)% (1.1)% (0.4)% (1.3)% 0.3% 0.1% (7.7)% (1.5)% (10.5)% (0.1)% (0.8)% 0.0% 0.0% (3.4)% 0.5% (3.8)% 1 – 1 (18) (15) (56) 10 – (19) (98) (2) (11) (3) (4) – (7) (27) (141) (1) 0.1% 0.0% 0.1% (0.5)% (0.4)% (1.5)% 0.3% 0.0% (0.5)% (2.7)% (0.2)% (1.1)% (0.3)% (0.4)% 0.0% (0.7)% (2.6)% 48 (45) 653 396 (422) (69) 561 (1) (4) (5) 12 (4) 61 (9) (112) (3) (55) 1 5 3 4 (26) 11 (2) (52.7)% 409.1% (79.5)% (115.8)% 0.0% n/a (44.2)% (100.0)% 0.0% n/a (66.7)% 26.7% (108.9)% (90.0)% 0.0% 15.8% 56.1% (50.0)% (45.5)% (100)% (100)% 0.0% (157.1)% 7.4% 239 (169.5)% 1 (100)% Total other operating income and expenses, net (795) (8.1)% (1,534) (7.5)% 739 (48.2)% VII 113 113 Annual Report & Accounts 2009 Management Report Total social and social infrastructure expenses decreased by 53.5% from $114 million in 2008 to $53 million in 2009. The decrease was largely attributable to social and social infrastructure expenses in relation to the Russian steel and mining operations. The total revaluation deﬁ cit on property, plant and equipment amounted to $564 million in 2009 and related to application of the revaluation model to the valuation of certain items of property, plant and equipment, which resulted in additional charges recognised in the statement of operations. (See Note 2 to the 2009 Financial Statements). Total loss on the disposal of property, plant and equipment amounted to $81 million in 2009 compared with $37 million in 2008. The increase in 2009 was primarily related to the revaluation of property, plant and equipment. Total impairment of assets amounted to $163 million in 2009 compared with $880 million in 2008. Impairment was largely attributable to impairment of goodwill in the amount of $135 million in 2009 and $756 million in 2008 in relation to the acquisition of new operations in North America and Ukraine. Evraz also recognised impairment of assets, other than goodwill, in the amounts of $28 million in 2009 and $124 million in 2008, including impairment due to the closure of certain obsolete and inefﬁ cient Russian production facilities. The total foreign exchange gain (loss) amounted to $156 million in 2009 compared with $(471) million in 2008. The foreign exchange loss in 2008 was due to the depreciation of the local currencies of Evraz’s Russian, European, Canadian and South African subsidiaries against the US dollar between December 31, 2007 and December 31, 2008. The majority of Evraz’s credit portfolio is maintained in US dollars. Consequently, the depreciation of the local currencies against the US dollar resulted in foreign exchange losses being sustained by Evraz’s subsidiaries in relation to bank loans denominated in US dollars. The total foreign exchange loss also included Evraz’s losses in respect of inter-company loans issued to subsidiaries, in particular to Evraz Inc NA Canada, in local currencies. The foreign exchange gain in 2009 largely related to the effect of the appreciation of the Canadian dollar against the US dollar, between December 31, 2008 and December 31, 2009, on the inter-company loans issued by Evraz Group to Evraz Inc NA Canada in Canadian dollars (gain at Evraz Group) and in US dollars (gain at Evraz Inc NA Canada). Losses on US dollar denominated borrowings at the Russian operations, due to the depreciation of the Russian Rouble against the US dollar between December 31, 2008 and December 31, 2009, were largely offset by gains in respect of inter-company loans issued by Russian subsidiaries to Mastercroft Finance Ltd (a Cyprus-based subsidiary of Evraz Group) in Russian Roubles. Profit from Operations Proﬁ t (loss) from operations recorded a loss of $(1,047) million, amounting to –10.7% of consolidated revenues, in 2009 compared to a proﬁ t of $3,632 million, amounting to 17.8% of consolidated revenues, in 2008. The change in proﬁ t (loss) from operations is attributable to the decline in consolidated gross proﬁ t margin in 2009. The following table presents proﬁ t (loss) from operations by segment for 2009 and 2008, including as a percentage of segment revenues. US$ million Year ended December 31, 2009 2008 2009 vs 2008 Proﬁ t (loss) from operations by segment Amount Percentage segment of revenues (9.4)% (13.2)% (14.7)% 10.1% (840) (48) (214) 77 (36) 14 Percentage segment of revenues 15.3% 14.1% 26.7% 8.1% Amount 2,746 170 971 83 (358) 20 Change % Change (3,586) (130.6)% (218) (128.2)% (1,185) (122.0)% (6) 322 (6) (7.2)% (89.9)% (30.0)% (1,047) (10.7)% 3,632 17.8% (4,679) (128.8)% Steel segment Vanadium segment Mining segment Other operations Unallocated Eliminations Total 114114 Annual Report & Accounts 2009 Management Report Steel Segment Steel segment proﬁ t (loss) from operations recorded a loss of $(840) million, representing –9.4% of steel segment revenues, in 2009 compared with a proﬁ t of $2,746 million, representing 15.3% of steel segment revenues, in 2008. The change in the operating proﬁ t margin of the steel segment is attributable to the decline in gross proﬁ t margin in 2009. Vanadium Segment Vanadium segment proﬁ t (loss) from operations decreased to a loss of $(48) million in 2009 compared with a proﬁ t of $170 million in 2008. The change in the operating proﬁ t of the vanadium segment is attributable to the decline in gross proﬁ t. Mining Segment Mining segment proﬁ t (loss) from operations decreased to a loss of $(214) million in 2009 compared with a proﬁ t of $971 million in 2008. The decrease in the operating proﬁ t of the mining segment is attributable to the decline in gross proﬁ t and the revaluation deﬁ cit on property, plant and equipment in 2009. Other Operations The other operations segment’s proﬁ t from operations decreased by 7.2% to $77 million in 2009 compared with $83 million in 2008. Proﬁ t from operations as a percentage of other operations segment’s revenues increased from 8.1% in 2008 to 10.1% in 2009. Non-Operating Income and Expense Non-operating income and expense includes interest income, interest expense, share of proﬁ ts (losses) of associates and joint ventures, gains (losses) on ﬁ nancial assets and liabilities and other non-operating gains (losses). The table below presents these items for 2009 and 2008, including as a percentage of consolidated revenues. US$ million Year ended December 31, 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 Gain/(loss) on extinguishment of debts Other non-operating gain (loss), net Total 2009 2008 2009 vs 2008 Amount Percentage of revenues Amount Percentage of revenues 40 (677) (8) (6) (19) 10 103 4 0.4% (6.9)% (0.1)% (0.1)% (0.2)% 0.1% 1.1% 0.0% 57 (655) 194 (209) (43) 0 80 (5) 0.3% (3.2)% 1.0% (1.0)% (0.2)% 0.0% 0.4% 0.0% (553) (5.7)% (581) (2.9)% Change % Change (17) (22) (29.8)% 3.4% (202) (104.1)% 203 24 (97.1)% (55.8)% 10 23 9 28 0.0% 28.8% (180.0)% (4.8)% Interest income decreased by 29.8% from $57 million in 2008 to $40 million in 2009. This primarily comprised interest on bank accounts and deposits. Interest expense showed a slight increase of 3.4% to $677 million in 2009 compared with $655 million in 2008. The increase primarily reﬂ ected higher interest on liabilities relating to employee beneﬁ ts. Share of proﬁ ts (losses) of associates and joint ventures in 2009 and 2008 largely related to income (loss) attributable to Evraz’s interest in Raspadskaya and Kazankovskaya mine (associate of YuKU). VII Net loss on ﬁ nancial assets and liabilities amounted to $6 million in 2009 compared with $209 million in 2008. In 2008, this loss largely related to revaluation of the investment in Delong ($144 million) and Cape Lambert ($21 million). It also included loss on trading in Raspadskaya shares ($27 million). 115 115 Annual Report & Accounts 2009 Management Report Income Tax Expense (Benefit) Income tax beneﬁ t amounted to $339 million in 2009 compared with an income tax expense of $1,192 million in 2008. Evraz’s effective tax rate, deﬁ ned as income tax expense (beneﬁ t) as a percentage of proﬁ t (loss) before tax, decreased from 39.1% in 2008 to 21.2% in 2009. Net Profit (Loss) Attributable to Equity Holders of the Parent Entity As a result of the factors set forth above, Evraz’s net proﬁ t (loss) attributable to equity holders of the parent entity decreased from a proﬁ t of $1,797 million in 2008 to a loss of $1,251 million in 2009. Net Profit (Loss) Attributable to Minority Interests Net loss attributable to minority interests amounted to $10 million, representing 0.8% of total net loss, in 2009 compared with $62 million, representing 3.3% of total net proﬁ t, in 2008. The decrease in the relative share of net proﬁ t (loss) attributable to minority interests largely reﬂ ected the offset of losses against proﬁ ts attributable to different minority shareholders in 2009. Evraz’s strategy is to reduce the level of minority interests in its subsidiaries. The following table presents the Company’s effective ownership interests in its major subsidiaries as of December 31, 2009 and 2008: Subsidiary Effective ownership interest as of December 31, % 2009 100.00 100.00 100.00 96.03 100.00 100.00 100.00 100.00 85.12 72.84 100.00 100.00 100.00 100.00 99.42 100.00 98.65 94.37 93.86 100.00 76.00 100.00 100.00 100.00 2008 100.00 100.00 100.00 96.03 100.00 100.00 100.00 100.00 85.12 72.84 – 100.00 100.00 100.00 99.42 100.00 98.65 94.37 93.86 100.00 76.00 100.00 100.00 100.00 Business activity Steel production Steel production Steel production Steel production Steel production Location Russia Russia Russia Ukraine Italy Steel production Czech Republic Steel production Steel production Steel and vanadium production USA Canada S.Africa Vanadium production USA, S.Africa Vanadium production Iron ore mining and processing Iron ore mining and processing Iron ore mining and processing Iron ore mining and processing Coal mining Coke production Coke production Coke production Seaport services Freight-forwarding Freight Utilities supply Utilities supply Russia Russia Russia Russia Ukraine Russia Ukraine Ukraine Ukraine Russia Russia Cyprus Russia Russia NTMK Zapsib NKMK DMZ Palini Vitkovice Evraz Inc. NA Evraz Inc. NA Canada Highveld Stratcor Vanady-Tula KGOK Evrazruda VGOK Sukhaya Balka Yuzhkuzbassugol Dneprokoks Bagleykoks DKHZ Nakhodka Sea Port Evraztrans Sinano EvrazEK Metallenergoﬁ nance 116116 Annual Report & Accounts 2009 Management Report Liquidity and Capital Resources Capital Requirements In addition to meeting its working capital requirements, Evraz expects that repayments of outstanding debt, capital expenditure and acquisitions 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 are 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 its product range. Evraz also plans to utilise capital expenditure to increase its production, sales and market shares of higher margin products. In 2009, Evraz’s total capital expenditure amounted to approximately $441 million, including $264 million in respect of the steel segment, $148 million in respect of the mining segment and $2 million in respect of the 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. Evraz’s acquisitions of new subsidiaries (net of cash acquired) totalled $16 million in 2009, while purchases of minority interests amounted to $8 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 requirements. 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 $1,700 million in 2009 compared with $4,563 million in 2008. The decrease in net cash provided by operating activities in 2009 was primarily caused by decreased proﬁ t margins consequent to the global ﬁ nancial crisis. Cash provided by operating activities before working capital adjustments decreased from $4,726 million in 2008 to $1,046 million in 2009. Working capital movement in 2009 was largely driven by the decrease in inventories. Net cash from investing activities totalled $183 million in 2009 compared with $3,736 million of net cash used in investing activities in 2008. 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 used in ﬁ nancing activities amounted to $2,149 million in 2009 compared with $127million in 2008. In 2009 and 2008, 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: (cid:129) Evraz Inc. N.A. On December 18, 2009, Evraz Inc. NA signed an agreement with GE Capital for a revolving credit line of $225 million with a maturity date of December 18, 2013. The loan is secured with pledge of Evraz Inc. N.A. revenue and bears an annual interest rate of 6.25%. (cid:129) Gazprombank On October 23, 2009, NTMK, Zapsib and NKMK signed agreements with Gazprombank for revolving credit lines of US$300 million, US$500 million and US$150 million respectively, with maturity dates of July 23, 2013. The loans are secured with pledge of 50% less one share of KGOK and bear an annual interest rate of 9.5%. (cid:129) Rouble-denominated bonds On October 23, 2009, NTMK, Zapsib and NKMK signed agreements with Gazprombank for revolving credit lines of $300 million, $500 million and $150 million respectively, with maturity dates of July 23, 2013. The loans are secured with pledge of 50% less one share of KGOK and bear an annual interest rate of 9.5%. VII 117 117 Annual Report & Accounts 2009 Management Report (cid:129) Evraz convertible bonds On July 13, 2009, Evraz Group S.A. issued convertible bonds for the total amount of $650 million, due in 2014. The bonds bear a quarterly coupon at an annual rate of 7.25% and are convertible into Evraz GDRs at an initial conversion price of $21.20 (adjustable in respect of dividends and stock splits). Unless previously converted or repurchased, the convertible Bonds will be redeemed at their principal amount on July 13, 2014. The proceeds from the issue of the convertible bonds were used to reﬁ nance Evraz’s short-term debt. Evraz’s bonds 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. (cid:129) VEB Facilities On November 21, 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 5 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 borrowed in November 2007. The loan is secured with pledge of 100% of Zapsib 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 scheduled for December 2010. In November 2009, the maturity of the VEB loan facility was extended for another twelve months. Subsequent to the reporting date, in January 2010, Evraz Group S.A. signed an amendment to the loan agreement with VEB. Under the revised agreement, the extension of the four tranches was cancelled. At the maturity dates, the Company is going to conclude separate agreements with VEB for the extension of each tranch. The interest rate will be ﬁ xed at one year LIBOR deﬁ ned on two business days preceding the date of the extension agreement plus 5%. (cid:129) Evraz Eurobonds 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 redeemed 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. 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. 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 $1,997 million as of December 31, 2009 and approximately $2,634 million as of December 31, 2008. As of December 31, 2009, Evraz had unutilised borrowing facilities in the amount of $1,345 million, including $864 million of committed facilities and $481 million of uncommitted facilities. Committed facilities consisted of credit facilities available for Russian, North American and European operations in the amounts of $778 million, $79 million and $7 million respectively. Uncommitted facilities consisted of revolving credit lines of $296 million with western banks for export trade ﬁ nancing at East Metals S.A. and credit facilities available for European, South African, and North American operations in the amounts of $139 million, $42 million and $4 million respectively. 118118 Annual Report & Accounts 2009 Management Report Evraz’s current ratio, deﬁ ned as current assets divided by current liabilities, increased from 0.96 as of December 31, 2008 to 1.13 as of December 31, 2009. Evraz’s corporate treasury monitors the ﬁ nancial requirements of Evraz’s various subsidiaries and has various instruments at its disposal to ensure that each subsidiary has sufﬁ cient liquidity to meet its obligations and capital requirements. US$ million As of December 31, 2009 As of December 31, 2008 Estimated Liquidity Cash and cash equivalents(1) Amount available under credit facilities Short-term bank deposits Total estimated liquidity 675 1,300 22 1,997 930 1,679 25 2,634 Note: (1) Since December 31, 2009, Evraz has used or agreed to use cash in several ways other than in the ordinary course of business. In March 2010, the Group won the tender to develop the Mezhegey coal deposit located in East Siberia, Russia. The Group offered RUB950 million (approximately $32 million) in the tender held by the Russian State Mineral Resources Agency. Contractual Obligations and Commercial Commitments The following table sets forth the amount of Evraz’s obligations in respect of loans and borrowings as of December 31, 2009 and December 31, 2008 by period: US$ million As of December 31, 2009 As of December 31, 2008 Obligations in respect of borrowings Total Less than 1 year Short-term loans and borrowings (including current portion of long-term borrowings) Long-term loans and borrowings Unamortised debt issue costs(1) Difference between the nominal amount and liability component of convertible bonds (Note 20) Interest payable Total 1,909 1,909 6,249 (196) (126) 87 – (4) – 87 1–2 years – 2–5 years – More than 5 years Less than 1 year Total – 3,841 3,841 1–2 years – 2–5 years – More than 5 years – 3,283 1,132 6,152 1,834 (192) – – – – (94) – 87 - (2) – 83 1,565 3,240 1,347 (92) – 4 – – – – – – – – (126) – 7,923 1,992 1,642 3,157 1,132 9,986 3,922 1,477 3,240 1,347 Note: (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 December 31, 2009, Evrazholding-Finance (a subsidiary of Evraz Group) issued and placed on Moscow Interbank Currency Exchange (MICEX) Rouble-denominated bonds for an amount of RUB15 billion (approximately $509 million at the exchange rate as of March 24, 2010). Proceeds from this placement will be fully utilised to reﬁ nance existing debt obligations. As of December 31, 2009 and December 31, 2008, Evraz possessed equipment with a carrying value of $11 million and $1,131 million respectively, pledged as collateral under loans to the Company. In addition, Evraz had pledged ﬁ nished goods with a carrying value of $81 million as of December 31, 2009 and $648 million as of December 31, 2008. In addition, as of December 31, 2009, 100% of the shares of Zapsib were pledged as collateral under bank loans. This subsidiary represents 15% of the consolidated assets and 9% of the consolidated revenues of the Group. At December 31, 2009, the net assets (including intra-group balances) of Zapsib were $3,162 million. In addition, at the end of the reporting period, 50% less one share of KGOK was pledged as collateral under an unutilised bank loan. VII 119 119 Annual Report & Accounts 2009 Management Report As of December 31, 2009 and December 31, 2008, 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 and deﬁ ned beneﬁ t plans of $307 million and $292 million respectively. 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 gains (losses) 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 payments. 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 December 31, 2009, Evraz had contractual commitments for the purchase of production equipment and construction works for approximately $324 million. Future minimum lease payments as of December 31, 2009 were as follows: US$ million 2009 2008 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 Minimum lease payments Present value of minimum lease payments Minimum lease payments Present value of minimum lease payments $24 65 7 96 (21) $ 75 $17 51 7 75 – $ 75 $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 2010, Evraz plans to spend approximately $94 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 2010 to 2014, Evraz is obligated to spend approximately $167 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 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 consolidated ﬁ nancial statements as of December 31, 2009, could total up to approximately $38 million. 120120 Annual Report & Accounts 2009 Management Report 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 its lowest levels of 8.8% in 2009 compared with 13.3% in 2008. 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. However, stabilisation of the economic situation due to government stimulus programmes post the ﬁ rst quarter of 2009 was followed by a year-long gradual recovery in the prices of metallurgical goods driven by a revival of demand and increased business activity. The table below presents changes in consumer price indices from 2005 to 2009 in countries where Evraz has production facilities. 2005 2006 2007 2008 2009 2005 to 2009 Source Russian Consumer Price Index, change in RUB(1) 10.9% 9.0% 11.9% 13.3% 8.8% 66.7% Fedstat Ukrainian Consumer Price Index, change in UAH(1) 13.5% 9.1% 12.8% 25.2% 15.9% 102.7% State Statistics Committee of Ukraine US Consumer Price Index, change in USD(1) 3.4% 2.5% 4.1% 0.1% 2.7% 13.4% Bureau of Labor Statistics Canadian Consumer Price Index, change in CAD(1) 2.2% 2.0% 2.2% 2.3% 0.3% 9.3% Statistics Canada Italian Consumer Price Index, change in EUR(1) 2.0% 2.1% 1.8% 3.3% 0.8% 10.4% Eurostat, Istat, OECD.Stat Czech Consumer Price Index, change in CZK(1) 1.9% 2.5% 2.8% 6.3% 1.0% 15.3% Czech Statistical Ofﬁ ce South African Consumer Price Index, change in ZAR(1) 3.6% 5.8% 9% 9.6% 6.3% 39.2% Statistics South Africa Note: (1) Represents the change from December 31 of the prior year to December 31 of the indicated year. The table below presents changes in the nominal exchange rates of national currencies against the US dollar from 2005 to 2009 in countries where Evraz has production facilities. Nominal RUB/$ exchange rate, change(1) 6.1% (3.6%) 9.3% 7.3% (16.4)% (2.8)% (8.2)% CBR 2004 2005 2006 2007 2008 2009 2005 to 2009 Source Nominal UAH/$ exchange rate, change(1) 0.5% 5.1% 0% 0% (34.4)% (3.6)% (33.6)% National Bank of Ukraine Nominal CAD/$ exchange rate, change(1) 7.4% 3.2% 0.1% 17.9% (18.9)% 15.9% 14.5% Bank of Canada Nominal EUR/$ exchange rate, change(1) 7.8% (13.4)% 11.6% 11.8% (5.5)% 3.5% 5.8% The European Central Bank Nominal CZK/$ exchange rate, change(1) 14.7% (9.0)% 17.8% 15.5% (6.6)% 5.3% 21.76% Czech National Bank Nominal ZAR/$ exchange rate, change(1) 18.1% (10.8)% (9.4)% 2.8% (27.1)% 26.2% (23.6)% The South African Reserve Bank Note: (1) Represents the change from December 31 of the prior year to December 31 of the indicated year. Seasonality Seasonal effects have a relatively limited impact on Evraz. Nonetheless, a slowing of demand and a consequent reduction in sales volumes, 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 slow down during the ﬁ rst and second quarters of the year. 121 121 VII Annual Report & Accounts 2009 Management Report 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 usually enter into hedging or forward contracts in respect of any of these risks. However, after the RUB20 billion issue of Rouble-denominated bonds in 2009 which bear interest of 13.50% per annum, Evraz concluded swap contracts to manage some of the transaction exposures. Under these arrangements the Company agreed to deliver $325 million at an interest rate of 7.50% per annum in exchange for RUB9,441 million of the principal amount plus the accrued interest, and $50 million at an interest rate of 7.90% per annum in exchange for RUB1,450 million of the principal amount plus the accrued interest. The exchange will be made on the same dates as the payments under the bonds. These swap contracts were not designated as cash ﬂ ow or fair value hedge. 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 Hryvnia in respect of the Ukrainian subsidiaries, the Canadian dollar in respect of Evraz Inc. N.A. 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 exchange 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 15% in 2007 and depreciated by (1.1)% in 2008 and by (0.4)% in 2009 according to the CBR. 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 subsidiaries 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 6.3% and 3.1% in 2007 and 2008 respectively, but experienced a signiﬁ cant depreciation of 21.7% in nominal terms during 2009, according to the CBR. 122122 Annual Report & Accounts 2009 Management Report The following table summarises Evraz’s outstanding interest bearing debt, including loans and other borrowings, by currency and interest rate method as of December 31, 2009 and December 31, 2008 (as opposed to the obligations in respect of borrowings in “Contractual obligations and commercial commitments”, this table excludes interest payable, difference between the nominal amount and liability component of convertible bonds and unamortised debt issue costs): As of December 31, 2009 As of December 31, 2008 US dollar- denominated Rouble- denominated Euro- denominated Denomi nated in other currencies US dollar- denominated Rouble- denominated Euro- denominated Total Denomi nated in other currencies Total 7,173 4,080 3,093 684 677 8 287 55 232 14 8,159 9,267 - 4,812 4,112 14 3,347 5,155 360 342 18 343 134 209 23 9,993 - 4,589 23 5,405 US$ million Total debt, of which Fixed-rate debt Variable-rate debt A hypothetical, instantaneous and simultaneous 10% appreciation of the Rouble, Euro and Czech Koruna against the US dollar as of December 31, 2009 would have resulted in an increase of approximately $110 million in borrowings denominated in Roubles, Euros and Czech Korunas held as of December 31, 2009. For sensitivity analysis to reasonably possible changes in the respective currencies please refer to page 228. The Group incurs interest rate risk on liabilities with variable interest rates. In case of changes in the current market ﬁ xed or variable interest rates, management may consider the reﬁ nancing of a particular debt on more favourable terms. Due to the ongoing world liquidity crisis the Group has a limited ability to negotiate interest rates. For cash ﬂ ow sensitivity analysis for variable rate instruments please refer to page 226. Commodity Price Risk 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. Adverse 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, scrap and other raw material inputs. Evraz’s exposure to ﬂ uctuations in the price of iron ore and 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 associated 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. 123 123 VII Annual Report & Accounts 2009 Management Report Tariff Risk 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 market prices in Western Europe and are regulated by government authorities in both countries, 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 authorised 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 2008 and in 2009, Evraz’s Russian operations purchased approximately 8,620 million kWh and 5,903 million kWh of electricity, representing approximately 80% and 75% 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, electricity 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 4.62 US cents per kWh in 2008 and 4.63 US cents per kWh in 2009. Assuming a price of 6.7 US cents per kWh, Evraz’s Russian operations would have incurred additional costs of approximately $190 million and $124 million in the years ended December 31, 2008 and 2009 respectively. Assuming a price of 6.7 US cents per kWh, Evraz’s Russian operations would have incurred additional costs of approximately $190 million and $124 million in the years ended December 31, 2008 and 2009 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 RUB1,943 per thousand cubic metres and RUB2,067 per thousand cubic metres in 2008 and 2009 respectively. Despite these recent price increases, natural gas prices in Russia remain signiﬁ cantly below western 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 $60 million and $93 million in 2008 and 2009 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 Russian natural gas price level for Ukraine in 2010 is between $300-330 which, on the one hand, represents a 15-25% increase in Ukrainian prices compared with 2009 but, on the other hand, is compatible with current price levels in Eastern European Countries (e.g. Czech Republic). In 2009 Evraz’s Ukrainian operations purchased approximately 115 million cubic metres of natural gas at an average price of UAH2,050 or $263 per thousand cubic metres. Assuming a price of $330 per thousand cubic metres, Evraz’s Ukrainian operations would have incurred additional costs of approximately $8 million in 2009. 124124 Annual Report & Accounts 2009 Management Report 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 Countries (e.g. Czech Republic). Evraz’s Ukrainian operations purchased approximately 465 million kWh of electricity at an average price of 6.1 US cents per kWh in 2009. Assuming a price of 12 US cents per kWh, Evraz’s Ukrainian operations would have incurred additional costs of approximately $27 million in 2009. Transportation Evraz is also exposed to ﬂ uctuations in transportation costs. Transportation costs inﬂ uence Evraz’s ﬁ nancial results directly as a component 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. Operational Outlook The year 2009 was challenging for Evraz and for the global steel industry in general. The Company was particularly affected by the contraction in the Russian construction sector and the slowdown in infrastructure spending in the markets where Evraz’s production facilities are located: North America, Europe and South Africa. However, Evraz’s business model proved its viability. As the global economic crisis struck, management developed and executed an action plan designed to reduce the Company’s cost base and strengthen its balance sheet. Evraz’s Russian steelmaking operations have been running at full capacity since July 1, 2009 in response to improved demand for steel products from South-East Asia, the Middle East and North Africa. This, together with higher prices, has helped to raise the Company’s EBITDA margin from 10% in the ﬁ rst half of 2009 to 15% in the second half. Since the beginning of 2010, Evraz has continued to experience improved demand in all its markets. Prices globally have risen further, in line with raw material prices, a factor that will translate into improved results for the Company due to its vertical integration. The Russian domestic market has displayed an encouraging trend during the early months of 2010, with sales volumes of construction steel registering steady growth to levels in excess of the highest monthly ﬁ gures achieved in 2009. Export demand remains strong thereby allowing Evraz to continue running its Russian steelmaking capacity at full utilisation. The North American market has also demonstrated marked improvements since the beginning of the year and this has allowed the Company to increase utilisation rates in its US and Canadian plants. In the medium-term, Evraz believes that global demand for long steel product and structural ﬂ at products will continue to strengthen in response to infrastructure investments. The Company’s focus on raw material supply, which ensures that Evraz’s steel plants are supplied with low extraction cost iron ore and coking coal, will remain integral to the fundamental strength of the business. Evraz has made good progress in deleveraging and strengthening its balance sheet with total debt reduced by more than $2 billion during 2009. The issues of equity and ﬁ ve-year convertible bonds in July 2009, together with ﬁ ve-year Rouble bonds in October 2009 and three-year Rouble bonds in March 2010, signiﬁ cantly improved the current liquidity and maturity proﬁ le of the Company. In November 2009, Evraz reset certain ﬁ nancial covenants in relation to bank debt and bonds, to provide sufﬁ cient headroom even assuming pessimistic scenarios. At December 31, 2009, the Company was in compliance with all of its ﬁ nancial covenants. Taking into consideration the current market situation, Evraz’s management anticipates that the Company will comply with all debt covenants during 2010. 125 125 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Evraz Group S.A. Consolidated Financial Statements Year Ended December 31, 2009 126 126 Contents Index to the Notes to the Consolidated Financial Statements Independent Auditors’ Report 128 129 Consolidated Financial Statements Consolidated Statement of Operations 130 Consolidated Statement of Comprehensive Income 131 Consolidated Statement of Financial Position 132 Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements 138 135 133 127 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Index to the Notes to the Consolidated Financial Statements 1. Corporate Information 2. Signiﬁ cant Accounting Policies 138 139 147 146 146 148 139 149 148 149 Basis of Preparation Changes in Accounting Policies 139 Signiﬁ cant Accounting Judgements and Estimates 143 Foreign Currency Transactions Basis of Consolidation Investments in Associates Interest in a Joint Venture Property, Plant and Equipment Leases Goodwill Intangible Assets Other Than Goodwill Financial Assets Inventories Accounts Receivable Value Added Tax Cash and Cash Equivalents Borrowings Financial Guarantee Liabilities Equity Provisions Employee Beneﬁ ts Share-based Payments Revenue Current Income Tax Deferred Income Tax 154 150 155 152 152 153 151 153 151 152 152 151 152 155 149 3. Segment Information 4. Business Combinations Oregon Steel Mills Highveld Steel and Vanadium Corporation West-Siberian Heat and Power Plant Yuzhkuzbassugol Steel and Mining Businesses in Ukraine Claymont Steel IPSCO Inc. Vanady-Tula Steel Dealers Other Acquisitions Disclosure of Other Information in Respect of Business Combinations 5. Goodwill 128128 155 163 163 164 166 167 168 170 171 173 174 174 175 175 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 178 179 181 184 187 11. Investments in Joint Ventures and Associates 189 Corber Enterprises Limited Yuzhkuzbassugol Kazankovskaya Highveld Steel and Vanadium Corporation Streamcore 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. Other Current Assets 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 Fair Value of Financial Instruments Capital Management 30. Non-Cash Transactions 31. Commitments and Contingencies 32. Subsequent Events 190 191 191 192 194 195 197 199 199 200 202 202 203 203 203 205 206 206 206 207 210 211 217 219 220 220 221 221 221 222 226 228 229 230 230 233 Ernst & Young Socie´te´ Anonyme 7, Parc d’Activite´ Syrdall L-5365 Munsbach B.P. 780 L-2017 Luxembourg Tel: +352 42 124 1 Fax: +352 42 124 5555 www.ey.com/luxembourg R.C.Luxembourg B 47 771 TVA LU 16063074 Independent Auditor’s report To the Shareholders of Evraz Group S.A. 1, Allée Scheffer L-2520 LUXEMBOURG Report on the consolidated ﬁ nancial statements Following our appointment by the General Meeting of the Shareholders dated 15 May 2009, we have audited the accompanying consolidated ﬁ nancial statements of Evraz Group S.A., which comprise the consolidated statement of ﬁ nancial position as at 31 December 2009, the consolidated statement of operations, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, and the consolidated statement of cash ﬂ ows for the year then ended, and a summary of signiﬁ cant accounting policies and other explanatory notes. Board of Directors’ responsibility for the consolidated ﬁ nancial statements The Board of Directors is responsible for the preparation and fair presentation of these consolidated ﬁ nancial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated ﬁ nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Responsibility of the “réviseur d’entreprises” Our responsibility is to express an opinion on these consolidated ﬁ nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the “Institut des Réviseurs d’Entreprises”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁ nancial statements. The procedures selected depend on the judgement of the “réviseur d’entreprises”, including the assessment of the risks of material misstatement of the consolidated ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, the “réviseur d’entreprises” considers internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated ﬁ nancial statements. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁ nancial statements give a true and fair view of the ﬁ nancial position of Evraz Group S.A. as of 31 December 2009, and of its ﬁ nancial performance and its cash ﬂ ows for the year then ended in accordance with International Financial Reporting Standards. Report on other legal and regulatory requirements The management report, which is the responsibility of the Board of Directors, is consistent with the consolidated ﬁ nancial statements. ERNST & YOUNG Société Anonyme Réviseur d’entreprises VII Luxembourg, 29 March 2010 Thierry BERTRAND 129 129 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Operations (In millions of US dollars, except for per share information) Year ended December 31, Notes 2009 2008* 2007 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 3 3 7 7 7 Impairment of assets 5, 9, 10 Revaluation deﬁ cit on property, plant and equipment Foreign exchange gains/(losses), net Other operating income Other operating expenses Proﬁ t/(loss) from operations Interest income Interest expense 9 7 7 7 Share of proﬁ ts/(losses) of joint ventures and associates 11, 13 Gain/(loss) on ﬁ nancial assets and liabilities, net Gain/(loss) on disposal groups classiﬁ ed as held for sale, net 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/(loss) before tax Income tax beneﬁ t/(expense) Net proﬁ t/(loss) Attributable to: Equity holders of the parent entity Minority interests Earnings/(losses) per share: basic, for proﬁ t/(loss) attributable to equity holders of the parent entity, US dollars diluted, for proﬁ t/(loss) attributable to equity holders of the parent entity, US dollars $ 9,505 $ 19,990 $ 12,627 267 9,772 (8,756) 1,016 (623) (645) (53) (81) (163) (564) 156 38 (128) (1,047) 40 (677) (8) 97 (19) 10 4 (1,600) 339 390 20,380 (13,463) 6,917 (856) (895) (114) (37) (880) – (471) 28 (60) 3,632 57 (655) 194 (129) (43) – (5) 3,051 (1,192) 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) 7 12 4 8 $ (1,261) $ 1,859 $ 2,179 $ (1,251) $ 1,797 $ 2,103 (10) 62 76 $ (1,261) $ 1,859 $ 2,179 20 $ (9.30) $ 14.55 $ 17.62 20 $ (9.30) $ 14.50 $ 17.49 * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 130130 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Comprehensive Income (In millions of US dollars) Net proﬁ t/(loss) Other comprehensive income Effect of translation to presentation currency Net gains/(losses) on available-for-sale ﬁ nancial assets (Note 13) Net (gains)/losses on available-for-sale ﬁ nancial assets reclassiﬁ ed to proﬁ t or loss (Notes 7 an 13) Income tax effect Deferred income tax beneﬁ t resulting from reduction in tax rate recognised in equity Surplus on revaluation of property, plant and equipment of the Group’s subsidiaries Deﬁ cit on revaluation of property, plant and equipment recognised in other comprehensive income Decrease in revaluation surplus in connection with the impairment of property, plant and equipment Impairment losses reversed through other comprehensive income Income tax effect Surplus on revaluation of property, plant and equipment of the Group’s joint ventures and associates Effect of translation to presentation currency Share of other comprehensive income of joint ventures and associates accounted for using the equity method Revaluation surplus on acquisition of a controlling interest in associates (Note 4) Income tax effect Total other comprehensive income/(loss) Total comprehensive income/(loss), net of tax Attributable to: Equity holders of the parent entity Minority interests Year ended December 31, Notes 2009 $ (1,261) 2008* $ 1,859 2007 $ 2,179 3,9 3,9 3,9 3,9 8 11 11 6 12 (8) – 4 – 7,901 (38) (98) 55 (1,653) 6,167 66 (13) 53 – – – 6,230 $ 4,969 $ 4,889 80 $ 4,969 (2,288) 510 (150) 150 – – 7 – – – – – – – (116) (116) – – – (2,397) (538) (522) (16) (538) – – – – – – – – – – – – 56 56 280 (69) 211 777 $ 2,956 $ 2,871 85 $ 2,956 * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. VII 131 131 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Financial Position (In millions of US dollars) 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 ﬁ nancial 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 Other current assets 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 Unrealised gains and losses 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 Liabilities directly associated with disposal groups classiﬁ ed as held for sale Total equity and liabilities December 31, Notes 2009 2008* 2007 9 10 5 11 8 13 13 14 15 16 17 18 19 12 $ 14,941 1,098 2,211 687 40 66 128 19,171 1,886 1,001 134 1 107 58 258 120 675 4,240 13 4,253 $ 23,424 $ 9,012 1,108 2,167 551 44 118 160 13,160 2,416 1,369 76 108 137 262 397 589 930 6,284 7 6,291 $ 19,451 $ 10,107 806 2,145 592 22 93 147 13,912 1,619 1,802 196 48 60 86 351 25 327 4,514 211 4,725 $ 18,637 $ 20 20 20 4,9 20 375 – 1,739 6,338 36 4 3,164 (1,372) 10,284 324 10,608 5,931 2,537 58 307 176 68 9,077 $ 332 (9) 1,054 218 30 – 4,377 (1,330) 4,672 245 4,917 6,064 1,389 40 292 153 58 7,996 $ 320 – 286 211 29 – 4,108 996 5,950 406 6,356 4,653 1,690 54 347 132 55 6,931 1,069 112 1,992 235 108 140 17 35 17 – 13 3,738 1 3,739 $ 23,424 1,479 107 3,922 322 156 154 15 63 – 309 11 6,538 – 6,538 $ 19,451 1,242 305 2,103 1,204 76 209 15 55 6 80 16 5,311 39 5,350 $ 18,637 21 8 22 23 25 26 27 21 16 28 22 25 4 12 * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 132132 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Cash Flows (In millions of US dollars) Cash ﬂ ows from operating activities Net proﬁ t/(loss) Adjustments to reconcile net proﬁ t/(loss) to net cash ﬂ ows from operating activities: Deferred income tax (beneﬁ t)/expense (Note 8) Depreciation, depletion and amortisation (Note 7) Loss on disposal of property, plant and equipment Impairment of assets Revaluation deﬁ cit on property, plant and equipment Foreign exchange (gains)/losses, net Interest income Interest expense Share of (proﬁ ts)/losses of associates and joint ventures (Gain)/loss on ﬁ nancial assets and liabilities, net (Gain)/loss on disposal groups classiﬁ ed as held for sale, net 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 Expense arising from the share option plans (Note 24) Share-based payments under cash-settled award (Note 24) Other 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 Proceeds from the transaction with a 49% ownership interest in NS Group (Note 18) Purchases of subsidiaries, net of cash acquired (Notes 4 and 11) Purchases of minority interests 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 (Note 12) Dividends received Other investing activities, net Net cash ﬂ ows from/(used in) investing activities Year ended December 31, 2009 2008* 2007 $ (1,261) $ 1,859 $ 2,179 (524) 1,632 81 163 564 (156) (40) 677 8 (97) 19 (10) (4) 41 (16) 6 (35) (2) 1,046 682 438 (52) (162) 238 (56) (353) 1 (73) (9) 1,700 (28) 40 (3) 114 506 (16) (8) (67) 48 (16) 20 (441) 6 28 1 (1) 183 (402) 1,195 37 880 – 471 (57) 655 (194) 129 43 – 5 33 25 35 – 12 4,726 (499) 345 100 165 (355) (3) 238 (203) 51 (2) 4,563 (1) 32 (147) 33 – (1,914) (120) (896) 99 3 29 (1,103) 27 161 70 (9) (3,736) (87) 749 26 7 – 55 (41) 409 (88) 71 6 (10) (4) 9 (8) 5 – 2 3,280 (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 – (5,650) * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). Continued on the next page VII 133 133 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Cash Flows (continued) (In millions of US dollars) Cash ﬂ ows from ﬁ nancing activities Issue of shares, net of transaction costs of $5 million, $1 million and $nil, respectively (Notes 4, 20 and 24) Repurchase of vested share options (Notes 20 and 24) Purchase of treasury shares (Note 20) Sale of treasury shares (Note 20) Contribution from/(distribution to) a shareholder (Note 4) Dividends paid by the parent entity to its shareholders Dividends paid by the Group’s subsidiaries to minority shareholders Proceeds from bank loans and notes Repayment of bank loans and notes, including interest Net proceeds from/(repayment of) bank overdrafts and credit lines, including interest Payments under covenants reset (Note 21) Restricted deposits at banks in respect of ﬁ nancing activities Proceeds from loans provided by related parties Repayment of loans provided by related parties, including interest Payments under ﬁ nance leases, including interest Payments of restructured liabilities, including interest Proceeds from sale-leaseback 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 by the Group Year ended December 31, 2009 2008* 2007 $ 310 (3) (5) 7 65 (90) (2) 3,427 (4,987) (794) (85) 1 – – (31) – 38 (2,149) 11 (255) 930 $ 675 $ (1) (77) (197) 81 (68) (1,276) (81) 5,657 (3,949) (54) – – – (21) (20) (121) – (127) (97) 603 327 $ 930 $ 35 (21) (8) 2 – (916) (48) 4,638 (1,771) 212 – 9 3 (1) (22) – – 2,112 29 (515) 842 $ 327 $ (586) 29 (141) $ (565) 44 (1,680) $ (392) 42 (1,084) * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 134134 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Changes in Equity (In millions of US dollars) Attributable to equity holders of the parent entity Issued capital Treasury shares Additional paid-in capital Revaluation surplus Legal reserve Unrealised gains and losses Accumulated proﬁ ts Translation difference Total Minority interests Total Equity $ 332 $ (9) $ 1,054 $ 218 $ 30 $ – $ 4,448 $ (1,344) $ 4,729 $ 245 $ 4,974 – – – – – – (71) 14 (57) – (57) 332 (9) 1,054 218 30 – – – – 43 – – – – – – – – – – – – – – – – – – (5) 12 2 – – – – – – 492 (5) 133 – 65 – – – – – – 6,178 (58) 6,120 – – – – – – – – – – – – – – – – – – – – – – 6 – – – 4 – 4 – – – – – – – – – – 4,377 (1,330) 4,672 245 4,917 (1,251) – (1,251) (10) (1,261) – (42) 6,140 90 6,230 58 – – – – (1,193) (42) 4,889 80 4,969 – – – (5) – – (6) (3) (6) – – – – – – – – – – – 535 (5) 133 (5) 65 (5) 6 (1) – – – – – – – – – – – 535 (5) 133 (5) 65 (5) 6 (1) – (1) (1) VII $ 375 $ – $ 1,739 $ 6,338 $ 36 $ 4 $ 3,164 $ (1,372) $ 10,284 $ 324 $ 10,608 At December 31, 2008 (as previously reported) Adjustments to provisional values (Note 4) At December 31, 2008 (as restated) Net loss Other comprehensive income/(loss) Reclassiﬁ cation of revaluation surplus to accumulated proﬁ ts in respect of the disposed items of property, plant and equipment Total comprehensive income/(loss) for the period Issue of share capital (Note 20) Transaction costs in respect of the issue of shares (Note 20) Equity component of convertible bonds (Note 20) Derecognition of minority interests arising on acquisition of subsidiaries (Note 4) Contribution from a shareholder (Note 4) Purchase of treasury shares (Note 20) Sale of treasury shares (Note 20) Exercise of share options (Note 20) Appropriation of net proﬁ t to legal reserve (Note 20) Dividends declared by the Group’s subsidiaries to minority shareholders (Note 20) At December 31, 2009 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 135 135 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Changes in Equity (continued) (In millions of US dollars) Attributable to equity holders of the parent entity Issued capital Treasury shares Additional paid-in capital Revaluation surplus Legal reserve Unrealised gains and losses Accumulated proﬁ ts Translation difference Total Minority interests Total Equity $ 320 $ – $ 286 $ 211 $ 29 $ – $ 4,108 $ 996 $ 5,950 $ 406 $ 6,356 – – – 12 – – – – – – – – – – – – – – – – – – – – – – (197) 108 80 – – – – – – 746 (1) 21 – – – 2 – – – – – – – 7 7 – – – – – – – – – – – – – – – – – – – – – – – – – – 1 – – – – – – – – – – – – – – – – – – 1,797 – 1,797 62 1,859 – (2,326) (2,319) (78) (2,397) 1,797 (2,326) (522) (16) (538) – – (37) 3 (18) 215 – – (39) (145) (1) (1,506) – – – – – – – – – – – – – – 758 (1) – – 758 (1) (16) (62) (78) 3 (3) – (18) 215 2 (197) 69 (65) – (1,506) – – – – – – – – (18) 215 2 (197) 69 (65) – (1,506) – (80) (80) $ 332 $ (9) $ 1,054 $ 218 $ 30 $ – $ 4,377 $ (1,330) $ 4,672 $ 245 $ 4,917 At December 31, 2007 Net proﬁ t* Other comprehensive income/(loss)* Total comprehensive income/(loss) for the period* Issue of share capital (Notes 4 and 20) Transaction costs in respect of the issue of shares (Note 20) Acquisition of minority interests in existing subsidiaries (Notes 4 and 6) Decrease in minority interests arising due to change in ownership within the Group Distribution to a shareholder (Note 4) Change in the fair value of liability to a shareholder (Note 4) Equity-settled share- based payments (Note 24) Purchase of treasury shares (Note 20) Sale of treasury shares (Note 20) Exercise of share options (Note 20) Appropriation of net proﬁ t to legal reserve (Note 20) Dividends declared by the parent entity to its shareholders (Note 20) Dividends declared by the Group’s subsidiaries to minority shareholders (Note 20) At December 31, 2008* * The amounts shown here do not correspond to the 2008 ﬁ nancial statements and reﬂ ect adjustments made in connection with the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 136136 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Consolidated Statement of Changes in Equity (continued) (In millions of US dollars) Attributable to equity holders of the parent entity Issued capital Treasury shares Additional paid-in capital Revaluation surplus Legal reserve Unrealised gains and losses Accumulated proﬁ ts Translation difference Total Minority interests Total Equity $ 318 $ – $ 531 $ – $ 28 $ – $ 2,750 $ 439 $ 4,066 $ 169 $ 4,235 – – – – – – – – – – – – – 2 – – – – – – – – – – – – – – – (8) 8 – – – – – – – – – – – – – – 5 – 33 – (283) – – 211 211 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 – – – – – – – – – – – – – – – – – – – 2,103 – 2,103 76 2,179 – 557 768 9 777 2,103 557 2,871 85 2,956 – – – 5 (151) 78 (50) 76 – – (27) (1) (675) – – – – – – – – – – – – – – – – – – 5 (10) (10) 298 298 44 44 (5) – (151) (305) (456) 78 170 248 (50) 76 5 (8) 16 – (958) – – – – – – – (50) 76 5 (8) 16 – (958) – (40) (40) VII $ 320 $ – $ 286 $ 211 $ 29 $ – $ 4,108 $ 996 $ 5,950 $ 406 $ 6,356 At December 31, 2006 Net proﬁ t Other comprehensive income/(loss) Total comprehensive income/(loss) for the period Acquisition of minority interests in existing subsidiaries (Note 6) Minority interests arising on acquisition of subsidiaries (Note 4) Minority interests arising on acquisition of a single asset entity (Note 10) Decrease in minority interests arising due to change in ownership within the Group Derecognition of minority interests in subsidiaries (Notes 4 and 6) Recognition of minority interests in respect of the expired put options (Note 4) Distribution to a shareholder (Note 4) Change in the fair value of liability to a shareholder (Note 4) Equity-settled share- based payments (Note 24) Purchase of treasury shares (Note 20) Exercise of share options (Notes 20 and 24) Appropriation of net proﬁ t to legal reserve (Note 20) Dividends declared by the parent entity to its shareholders (Note 20) Dividends declared by the Group’s subsidiaries to minority shareholders (Note 20) At December 31, 2007 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 137 137 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements Year ended December 31, 2009 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 March 29, 2010. Evraz Group S.A. (“Evraz Group” or “the Company”) is a joint stock 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 addition, the Group produces vanadium products and owns and operates certain mining assets. The Group is one of the largest steel producers globally. Lanebrook Limited (Cyprus) is the ultimate controlling party of Evraz Group. The major subsidiaries included in the consolidated ﬁ nancial statements of Evraz Group were as follows at December 31: Subsidiary 2009 2008 2007 Business activity Location Effective ownership interest, % 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. N.A. Evraz Inc. N.A. Canada ZAO Yuzhkuzbassugol* OAO Kachkanarsky Mining-and-Processing Integrated Works OAO Evrazruda Sukha Balka 100.00 100.00 100.00 100.00 85.12 96.03 100.00 100.00 100.00 100.00 100.00 99.42 100.00 100.00 100.00 100.00 85.12 96.03 100.00 100.00 100.00 100.00 100.00 99.42 100.00 100.00 100.00 100.00 80.92 95.57 100.00 - 100.00 100.00 100.00 99.25 Steel production Steel production Steel production Russia Russia Russia Steel production Czech Republic Steel production South Africa Steel production Steel mill Steel mill Coal mining Ore mining and processing Ore mining Ore mining Ukraine USA Canada Russia Russia Russia Ukraine * Before the purchase of controlling interests in ZAO Yuzhkuzbassugol and Highveld Steel and Vanadium Corporation in 2007 (Note 4), these entities were accounted for under the equity method (Note 11). At December 31, 2009, the Group employed approximately 110,000 eployees, 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. The Group reported net loss of $1,261 million for the year ended December 31, 2009. As of December 31, 2009, the Group had unutilised bank loans in the amount of $1,345 million, including $864 million of committed facilities and $481 million of uncommitted facilities. In the period from January 1, 2010 to the date of authorisation of issue of these consolidated ﬁ nancial statements, the Group received $596 million of new borrowings (including $506 million under the rouble-denominated bonds issue – Note 32) and repaid $239 million of current loans and borrowings. The remaining current maturities are expected to be covered by free cash ﬂ ows and reﬁ nancing of current debts. 138 138 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 1. Corporate Information (continued) Going Concern (continued) In November 2009, the Group reset certain ﬁ nancial covenants and obtained waivers from its lenders (Note 21). At December 31, 2009, the Group was in compliance with all of its ﬁ nancial covenants (Note 21). Taking into consideration the current market situation, the Board and the management anticipate that the Group will comply with all debt covenants during 2010. 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, certain categories of property, plant and equipment carried under revaluation model of IAS 16 “Property, Plant and Equipment” at fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses, 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. Completion of Initial Accounting In 2009, the Group ﬁ nalised its purchase price allocation for the acquisition of IPSCO Inc. As a result, the Group recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities of the entity at the date of acquisition and restated consolidated ﬁ nancial statements as of December 31, 2008 and for the year then ended (Note 4). Changes in Accounting Policies In the preparation of these consolidated ﬁ nancial statements, the Group followed the same accounting policies and methods of computation as compared with those applied in the previous year, except for: • the change in accounting policy in respect of the subsequent measurement of property, plant and equipment, i.e. the adoption of a revaluation model under IAS 16 “Property, Plant and Equipment” as of January 1, 2009; • the adoption of new standards and interpretations and revision of the existing standards as of January 1, 2009. Property, Plant and Equipment Prior to January 1, 2009, the Group applied the cost model for the measurement of property, plant and equipment. The Group’s property, plant and equipment were stated at purchase or construction cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any impairment in value. Property, plant and equipment acquired in business combinations were measured at fair value at the dates of business combinations. The ongoing global ﬁ nancial crisis has resulted in a devaluation and signiﬁ cant ﬂ uctuations of the Russian rouble and Ukrainian hryvnia, the functional currencies of subsidiaries, which constitute a signiﬁ cant part of the Group’s business. As the assets and liabilities of these subsidiaries are translated into the US dollar, the presentation currency of the Group’s consolidated ﬁ nancial statements, at the rate of exchange ruling at the end of the reporting periods, this resulted in a signiﬁ cant deviation of the US dollar denominated carrying value of property, plant and equipment from its replacement cost. Under these circumstances, the revaluation model for the measurement of property, plant and equipment became a tool, which provides reliable and more relevant information about the Group’s assets. The Group made a voluntarily change in the accounting policies to account for the selected classes of property, plant and equipment – land, buildings and constructions, machinery and equipment – under the revaluation model instead of the cost model. The Group continued to apply the cost model for other classes of property, plant and equipment. 139 139 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Changes in Accounting Policies (continued) Property, Plant and Equipment (continued) As of January 1, 2009, the Group revalued the selected classes of assets based on valuation performed by an independent professionally qualiﬁ ed valuer. Since most of the assets subject to revaluation represent specialised items of property, plant and equipment that are rarely sold, except as part of a continuing business, the Group used the depreciated replacement cost approach as the main approach to valuation of buildings and constructions and machinery and equipment with the income approach used to support the results of the main approach. The Group used market based value approach as the main approach to valuation of land. The signiﬁ cant assumptions applied in estimating the items’ fair values were as follows: The replacement cost was determined as follows: • land – based on indicative market transactions; • buildings and constructions – based on the relevant price books adjusted for the subsequent price changes; • machinery and equipment – based on the related item’s weight, where the cost per mass unit was determined in terms of the cost of materials components, labour, engineering and other costs for each speciﬁ c type of equipment. The remaining useful lives were determined based on the linear-age life method using the independent valuer’s experience and data provided by technical specialists of the Group. The maximum physical depreciation level for main equipment was limited at the level of 65-90% depending on a speciﬁ c type of equipment. Functional obsolescence of assets with the excess capital costs was determined by the independent valuer based on cost-to-capacity analysis. The cost-to-capacity factor applied was 0.7. The assumptions used for the income approach were as follows: Period of forecast, years After-tax discount rate, % Commodity Average price of the commodity per ton in 2009 Russia Steel Iron ore Coal Other Ukraine Steel Coke Iron ore Europe Steel South Africa Steel Vanadium North America Steel Vanadium 5 12-19 27 4 5 5 26 5 6 6 8 6 12.86 14.75 14.39 11.97 13.12 13.92 15.20 steel products $465-$544 iron ore coal services $59-$74 $60-$82 – steel products $522 coke iron ore $149-$174 $43 9.93-10.27 steel products $510-$810 11.94 11.94 steel products $593 vanadium products $23,000-$28,000 9.3-10.7 steel products $727-$2,266 9.69 vanadium products $37,000 For the periods not covered by the forecasts cash ﬂ ow projections have been estimated by extrapolating the respective business plans results using a zero real growth rate. 140 140 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Changes in Accounting Policies (continued) Property, Plant and Equipment (continued) The following accounting policy was adopted for the revalued classes of property, plant and equipment: After recognition as an asset, an item of property, plant and equipment is carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are made with sufﬁ cient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs is revalued. If an asset’s carrying amount is increased as a result of a revaluation, the increase is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase is recognised in proﬁ t or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in proﬁ t or loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease is recognised in proﬁ t or loss. However, the decrease is recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. The revaluation surplus included in equity in respect of an item of property, plant and equipment is transferred directly to retained earnings when the asset is retired or disposed of. Deferred income taxes are charged or credited to other comprehensive income if they relate to revaluation of property, plant and equipment credited or charged to other comprehensive income. Deferred income taxes are charged or credited to proﬁ t or loss if they relate to revaluation of property, plant and equipment credited or charged to proﬁ t or loss. The application of the revaluation model under IAS 16 has been accounted for prospectively. The adoption of the revaluation model resulted in additional charges recognised in the consolidated statement of operations for the year ended December 31, 2009: • revaluation deﬁ cit in the amount of $420 million (net of income tax effect of $144 million), • additional depreciation expense of $558 million (net of income tax effect of $148 million), • impairment loss recognised as of the date of revaluation in respect of goodwill in the amount of $76 million, • impairment loss recognised as of the date of revaluation in respect of classes of property, plant and equipment that were not subject to revaluation in the amount of $60 million (net of income tax effect of $16 million), and • impairment losses recognised as of the date of revaluation in respect of intangible assets in the amount of $11 million (net of income tax effect of $4 million). The revaluation surplus arising on revaluation of property, plant and equipment of $6,231 million, net of income tax effect of $1,670 million, cannot be distributed to shareholders. New/Revised Standards and Interpretations Adopted in 2009 • IFRS 8 “Operating Segments” This Standard requires disclosure of information about the Group’s operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. The adoption of this Standard did not have any effect on the ﬁ nancial position or performance of the Group. The Group determined operating segments based on information that is regularly reviewed by the Group’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. As the comparative segment information is not available and the cost to develop it would be excessive, the segment information for the current period was presented on both the old basis and the new basis of segmentation. Segment disclosures are shown in Note 3. VII 141 141 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Changes in Accounting Policies (continued) New/Revised Standards and Interpretations Adopted in 2009 (continued) • IAS 1 (revised) “Presentation of Financial Statements” The revised Standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements. • Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards” and IAS 27 “Consolidated Financial Statements” – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate The amendments to IFRS 1 allows an entity to determine the cost of investments in subsidiaries, jointly controlled entities or associates in its opening IFRS ﬁ nancial statements in accordance with IAS 27 or using a deemed cost. The amendment to IAS 27 requires all dividends from a subsidiary, jointly controlled entity or associate to be recognised in the statement of operations in the separate ﬁ nancial statements. The new requirements affect only separate ﬁ nancial statements and do not have any impact on the consolidated ﬁ nancial statements. • Amendments to IFRS 2 “Share-based Payments” – Vesting Conditions and Cancellations The Standard has been amended to clarify the deﬁ nition of vesting conditions and to prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisﬁ ed. The adoption of this amendment did not have any impact on the ﬁ nancial position or performance of the Group. • Amendments to IFRS 7 “Financial Instruments: Disclosures” – Improving Disclosures about Financial Instruments The amended Standard requires additional disclosure about fair value measurement and liquidity risk. Fair value measurements are to be disclosed by source of inputs using a three level hierarchy for each class of ﬁ nancial instrument. In addition, a reconciliation between the beginning and ending balance for Level 3 fair value measurements is now required, as well signiﬁ cant transfers between Level 1 and Level 2 fair value measurements. The amendments also clarify the requirements for liquidity risk disclosures. These additional disclosures are presented in Note 29. • Amendments to IAS 32 “Financial Instruments: Presentation” and IAS 1 (revised) “Presentation of Financial Statements” – Puttable instruments and obligations arising on liquidation The Standards have been amended to allow a limited scope exception for puttable ﬁ nancial instruments to be classiﬁ ed as equity if they fulﬁ ll a number of speciﬁ ed criteria. The adoption of these amendments did not have any effect on the ﬁ nancial position or performance of the Group. • IFRIC 13 “Customer Loyalty Programmes” This interpretation requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred. This is then recognised as revenue over the period that the award credits are redeemed. The adoption of this interpretation did not have any effect on the ﬁ nancial position or performance of the Group. • IFRIC 16 “Hedges of a Net Investment in a Foreign Operation” This interpretation provides guidance on the accounting for a hedge of a net investment. As such, it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group of the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. The adoption of this interpretation did not have any effect on the ﬁ nancial position or performance of the Group. 142 142 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Changes in Accounting Policies (continued) New/Revised Standards and Interpretations Adopted in 2009 (continued) • IFRIC 18 “Transfer of Assets from Customers” This interpretation provides guidance on how to account for items of property, plant and equipment received from customers, or cash that is received and used to acquire or construct speciﬁ c assets. It is only applicable to such assets that are used to connect the customer to a network or to provide ongoing access to a supply of goods or services or both. The adoption of this interpretation did not have any effect on the ﬁ nancial position or performance of the Group. • Certain amendments to standards following the May 2008 “improvement to IFRSs” project These amendments clarify wording and remove inconsistencies in the standards. There are separate transitional provisions for each standard. 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 2 (revised) “Share-based Payment” – Group Cash-settled Share-based Payment Transactions (effective from January 1, 2010); • IFRS 3 (revised) “Business Combinations” (effective for annual periods beginning on or after July 1, 2009); • IAS 27 (revised) “Consolidated Financial Statements” (effective for annual periods beginning on or after July 1, 2009); • IAS 24 (revised) “Related Party Disclosures” (effective for annual periods beginning on or after January 1, 2011); • IFRS 9 “Financial Instruments” (effective for annual periods beginning on or after January 1, 2013); • IFRIC 17 “Distributions of Non-Cash Assets to Owners” (effective for annual periods beginning on or after July 1, 2009); • IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” (effective for annual periods beginning on or after July 1, 2010); • Amendments to IAS 39 “Financial Instruments: Recognition and Measurement ”– Eligible Hedged Items (effective for annual periods beginning on or after July 1, 2009); • Amendment to IAS 32 “Financial Instruments: Presentation” (effective for annual periods beginning on or after February 1, 2010); • Amendments to IFRIC 14/IAS 19 “Prepayments of a Minimum Funding Requirement” (effective for annual periods beginning on or after January 1, 2011); • Amendments to standards following April 2009 “improvements to IFRS” project (separate transitional provisions for each standard). The Group expects that the adoption of the pronouncements listed above will not have a signiﬁ cant impact on the Group’s results of operations 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 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). • For available-for-sale ﬁ nancial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classiﬁ ed as available-for-sale, objective evidence would include a signiﬁ cant or prolonged decline in the fair value of the investment below its cost. The determination of what is ‘signiﬁ cant’ or ‘prolonged’ requires judgment. In making this judgment, the Group evaluates, among other factors, historical share price movements and the duration or extent to which the fair value of an investment is less than its cost. Based on these criteria, in 2008, the Group identiﬁ ed an impairment of $150 million on available-for-sale investments – quoted shares, which is recognised within gain/(loss) on ﬁ nancial assets and liabilities in the consolidated statement of operations for the year ended December 31, 2008 (Notes 7 and 13). Estimation Uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. VII 143 143 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Signiﬁ cant Accounting Judgements and Estimates (continued) Estimation Uncertainty (continued) 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 cash- generating 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 2009, 2008 and 2007, the Group recognised an impairment loss of $66 million, $117 million and $7 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 expectations 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 2009, following the independent valuation, the Group changed its estimation of useful lives of property, plant and equipment, which resulted in a decrease in depreciation expense by $671 million as compared to the amount that would have been charged had no change in estimate occurred. In 2008, the change in estimates of useful lives of property, plant and equipment resulted in an additional depreciation expense of approximately $22 million. No such changes took place in 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, 2009, 2008 and 2007 was $2,211 million, $2,167 million and $2,145 million, respectively. More details are provided in Note 5. In 2009 and 2008, the Group recognised an impairment loss in respect of goodwill in the amount of $135 million and $756 million, respectively (Note 5). Mineral Reserves Mineral reserves are a material factor in the Group’s computation of depreciation, depletion and amortisation charge. The Group estimates its mineral reserves in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (“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. 144 144 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Signiﬁ cant Accounting Judgements and Estimates (continued) Estimation Uncertainty (continued) Site Restoration Provisions The Group reviews site restoration provisions at each reporting date and adjusts them to reﬂ ect the current best estimate in accordance 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 end of the reporting period 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 Benefits The Group uses actuarial valuation method for measurement of the present value of post-employment beneﬁ t obligations and related current 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 discontinued to pay lump-sum amounts at retirement date during 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 current 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 allowance for doubtful accounts recorded in the consolidated ﬁ nancial statements. As of December 31, 2009, 2008 and 2007, allowances for doubtful accounts in respect of trade and other receivables have been made in the amount of $92 million, $89 million and $79 million, respectively (Notes 15 and 16). The Group makes an allowance for obsolete and slow-moving raw materials and spare parts (Note 14). In addition, certain ﬁ nished goods of the Group are carried at net realisable value (Note 14). 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 end of the reporting period 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 litigations 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. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group’s entities may not coincide 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. VII 145 145 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Signiﬁ cant Accounting Judgements and Estimates (continued) Estimation Uncertainty (continued) Deferred Income Tax Assets Deferred tax assets are reviewed at each reporting 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 these 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 statement of operations. 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 end of the reporting period, and their statements of operations are translated at the exchange rates that approximate the exchange rates at the dates of the transactions. The exchange differences 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 statement of operations. 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 functional currency rate of exchange ruling at the end of the reporting period. All resulting differences are taken to the statement of operations. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities 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 identiﬁ 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, directly or indirectly through subsidiaries, by the parent. 146 146 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Basis of Consolidation (continued) Acquisition of Subsidiaries (continued) Minority interests at the end of the reporting period represent the minority shareholders’ portion of the fair values 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 statement of ﬁ nancial position within equity, separately from the parent’s shareholders’ equity. Losses allocated to minority interests 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 consideration 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. 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 statement of ﬁ nancial position over the carrying value of the derecognised minority interests is charged to accumulated proﬁ ts. 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 statement of operations 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. VII 147 147 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Investments in Associates (continued) Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Interest in Joint Ventures The Group’s interest in its joint ventures 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 joint ventures. The statement of operations reﬂ ects the Group’s share of the results of operations of joint ventures. Property, Plant and Equipment Before January 1, 2009, the Group’s property, plant and equipment were stated at purchase or construction cost, excluding the costs of day-to-day 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. As discussed in Changes in Accounting Policies above, starting from January 1, 2009, the Group applies the revaluation model under IAS 16 “Property, Plant and Equipment” for certain classes of property, plant and equipment. These classes are stated at fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. 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 development 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 end of the reporting period 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 impairment loss in the statement of operations or other comprehensive income. 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. Buildings and constructions Machinery and equipment Transport and motor vehicles Other assets Useful lives (years) Weighted average remaining useful life (years) 15-60 4-45 7-20 3-15 17 12 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. 148 148 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) 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 capitalised 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. The depreciation policy for depreciable leased assets is consistent with that for depreciable assets, which are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term or its useful life. Leases where the lessor retains substantially all the risks and beneﬁ ts of ownership of the asset are classiﬁ ed as operating leases. Operating lease payments are recognised as an expense in the statement of operations 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 subsidiary 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 statement of operations. 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 accumulated 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. VII 149 149 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Intangible Assets Other Than Goodwill (continued) The table below presents the useful lives of intangible assets. Customer relationships Trade names and trademarks Water rights and environmental permits with deﬁ nite lives Patented and unpatented technology Contract terms Other Useful lives (years) Weighted average remaining useful life (years) 1-15 5 5 5 1-49 5-10 13 3 3 3 47 5 Certain water rights and environmental permits are considered to have indeﬁ nite lives as 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 (allowances) for each compliance period (one year) are issued at the beginning of the year, actual emissions are veriﬁ ed after the end of the 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 statement of ﬁ nancial position 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 liability 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 end of the reporting period being the present market price of the number of allowances required to cover emissions made up to the end of the reporting period. 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 receivables; 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 short-term 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 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. 150 150 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Financial Assets (continued) 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 holding the investment for less than 12 months from the end of the reporting period 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 statement of operations. Reversals of impairment losses in respect of equity instruments are not recognised in the statement of operations. 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 statement of operations. 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 end of the reporting period. For investments where there is no active market, fair value is determined 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 components 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 allowance 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 end of the reporting period, 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. VII 151 151 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) 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. Borrowings Borrowings are initially recognised at the fair value of consideration received, net of directly attributable transaction costs. After initial recognition 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 capitalised (Note 9). 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 end of the reporting period 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 statement of operations on the purchase, sale, issue or cancellation of the treasury shares. Dividends Dividends are recognised as a liability and deducted from equity at the end of the reporting period only if they are declared before or on the end of the reporting period. Dividends are disclosed when they are proposed before the end of the reporting period or proposed or declared after the end of the reporting period 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 reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash 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 within property, plant and equipment. 152 152 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) 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 unemployment funds at the statutory rates in force (approximately 23%), based on gross salary payments. The Group has no legal or constructive 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 Benefits 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 non-monetary 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 statement of ﬁ nancial position in respect of post-employment beneﬁ ts is the present value of the deﬁ ned beneﬁ t obligation at the end of the reporting period 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 statement of operations. 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. Share-based Payments In 2005 and 2006, the Group adopted share option plans, under which certain directors, senior executives and employees of the Group received remuneration in the form of share-based payment transactions, whereby they render services as consideration for equity instruments (“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 charge or credit in the statement of operations for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. VII 153 153 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) Share-based Payments (continued) 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 liability 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) could 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 reporting date up to and including the settlement date with changes in fair value recognised in the statement of operations. 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 revenue 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. 154 154 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 2. Signiﬁ cant Accounting Policies (continued) 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 end of the reporting period. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of operations. 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 temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the end of the reporting period. 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 adopted IFRS 8 “Operating segments” starting from January 1, 2009. The Group did not restate the segment information for prior periods reported as comparative information in these consolidated ﬁ nancial statements, because the necessary information is not available and the cost to develop it would be excessive. Consequently, the Group disclosed segment information for the current period on both the new basis of segmentation in accordance with IFRS 8 “Operating Segments” and the basis used in previous periods in accordance with IAS 14 “Segment Reporting”. The adoption of IFRS 8 did not result in a change in reportable segments previously disclosed by the Group. For management purposes, the Group is organised into business units based on their products and services, and has four reportable operating segments: • Steel production segment includes production of steel and related products at eleven steel mills. • Mining segment includes iron ore and coal mining and enrichment. • Vanadium products segment includes extraction of vanadium ore and production of vanadium products. Vanadium slag arising in steel- making process is also allocated to vanadium segment. • Other operations include energy generating companies, seaports, shipping and railway transportation companies. Management and investment companies were not allocated to any of the segments. No operating segments have been aggregated to form the above reportable segments. Transfer prices between operating segments are on an arm’s-length basis in a manner similar to transactions with third parties. VII 155 155 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) Management monitors the operating results of the business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on EBITDA. This performance indicator is calculated based on management accounts that differ from the IFRS consolidated financial statements for the following reasons: 1) for the last month of the reporting period, the statement of operations for each operating segment is prepared using a forecast for that month; 2) the statement of operations is based on local GAAP ﬁ gures with the exception of depreciation expense which approximates the amount under IFRS. Segment revenue is revenue reported in the Group’s statement of operations that is directly attributable to a segment and the relevant portion of the Group’s revenue that can be allocated on a reasonable basis to a segment, whether from sales to external customers or from transactions with other segments. Segment expense is expense resulting from the operating activities of a segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to the segment, including expenses relating to external counterparties and expenses relating to transactions with other segments. Segment result is segment revenue less segment expense that is equal to earnings before interest, tax and depreciation and amortisation (“EBITDA”). Segment EBITDA is determined as segment’s proﬁ t/(loss) from operations adjusted for impairment of assets, proﬁ t/(loss) on disposal of property, plant and equipment and intangible assets, foreign exchange gains/(losses), depreciation, depletion and amortisation expense and revaluation deﬁ cit on property, plant and equipment. Segment assets and liabilities are not reviewed by the Group’s chief operating decision maker and presented in these consolidated ﬁ nancial statements in accordance with the previous accounting policies in respect of segment information. Segment assets are those operating assets that are employed by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment assets do not include income tax assets. As segment’s segment result does not include interest or dividend income, its segment assets do not include the related receivables, loans, investments, or other income-producing assets. Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment liabilities do not include income tax liabilities. As segment result does not include interest expense, segment liabilities do not include the related interest-bearing liabilities. The following table presents measures of segment proﬁ t or loss based on management accounts in accordance with the new accounting policies in respect of segment information. Year ended December 31, 2009 US$ million Revenue Steel production Mining Vanadium products Other operations Eliminations Total Sales to external customers $ 9,292 $ 188 $ 226 $ 117 $ – $ 9,823 Inter-segment sales Total revenue 129 9,421 1,160 1,348 36 262 439 556 (1,764) (1,764) – 9,823 Segment result – EBITDA $ 950 $ 179 $ 12 $ 110 $ – $ 1,251 156 156 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) The following table shows a reconciliation of revenue and EBITDA used by management for decision making and revenue and proﬁ t or loss before tax per the consolidated ﬁ nancial statements prepared under IFRS. Year ended December 31, 2009 US$ million Revenue Steel production Mining Vanadium products Other operations Eliminations Total $ 9,421 $ 1,348 $ 262 $ 556 $ (1,764) $ 9,823 Forecasted vs. actual revenue Reclassiﬁ cations and other adjustments (54) (389) (2) 110 Revenue per IFRS ﬁ nancial statements $ 8,978 $ 1,456 EBITDA $ 950 $ 179 3 98 $ 363 $ 12 – – – (2) (2) – 209 – (26) (53) 2 $ 765 $ (1,790) $ 9,772 $ 110 $ – 4 – 53 57 – – – 14 – 14 $ 1,251 (27) 87 39 23 122 (27) 53 25 (98) (47) – 30 – 70 100 Forecasted vs. actual EBITDA Exclusion of management services from segment result Unrealised proﬁ ts adjustment Reclassiﬁ cations and other adjustments EBITDA based on IFRS ﬁ nancial statements Unallocated subsidiaries Depreciation, depletion and amortisation expense Impairment of goodwill Impairment of property, plant and equipment and intangible assets Gain/(loss) on disposal of property, plant and equipment and intangible assets Revaluation deﬁ cit on property, plant and equipment Foreign exchange gains/(losses), net Unallocated income/(expenses), net Proﬁ t/(loss) from operations Interest income/(expense), net Share of proﬁ ts/(losses) of joint ventures and associates Gain/(loss) on ﬁ nancial assets and liabilities 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/(loss) before tax 157 157 $ 903 $ 279 $ 10 $ 167 $ 14 $ 1,373 (1,151) (135) (33) (56) (422) 54 (368) (54) (58) – 5 (19) (112) 1 – – – (4) – – – (6) (26) – (136) $ 1,237 $ (1,631) (135) (28) (81) (564) 55 $ (840) $ (214) $ (48) $ 77 $ 14 $ (1,147) 100 (1,047) $ (637) (8) 97 (19) 10 4 $ (1,600) VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) Under the previous basis of segmentation in accordance with IAS 14 “Segment Reporting”, the Group’s primary reporting format was business segments and its secondary format was geographical segments. The following tables present revenue and proﬁ t information regarding business segments for the years ended December 31, 2009, 2008 and 2007 in accordance with the previous accounting policies in respect of segment information. Year ended December 31, 2009 US$ million Revenue Steel production Mining Vanadium products Other operations Eliminations Total Sales to external customers $ 8,855 $ 435 $ 354 $ 128 $ – $ 9,772 123 8,978 1,021 1,456 9 363 637 765 (1,790) (1,790) – 9,772 $ (840) $ (214) $ (48) $ 77 $ 14 $ (1,011) Investments in joint ventures and associates 65 622 – – (1) (7) – – $ 16,985 $ 3,933 $ 618 $ 855 $ 1,373 $ 484 $ 155 $ 43 (36) $ (1,047) (8) (545) 339 $ (1,261) 22,391 687 346 $ 23,424 $ 2,055 10,761 $ 12,816 $ 208 $ 150 $ 2 $ 33 $ $ 393 7 (1,155) 6,668 – (378) 801 (422) (112) – (217) 49 (38) (74) 79 (86) (12) 55 – 54 (54) 25 (4) – – – – – – (58) 407 (26) – – – – – 61 (1,645) 7,901 (564) (38) (291) 128 (98) 55 Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t/(loss) from operations Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t/(loss) Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 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 Revaluation surplus Revaluation deﬁ cit recognised in statement of operations Revaluation deﬁ cit recognised in other comprehensive income Impairment losses recognised in statement of operations Impairment losses reversed through statement of operations Impairment losses recognised in other comprehensive income Impairment losses reversed through other comprehensive income 158 158 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) Year ended December 31, 2008 US$ million Revenue Steel production Mining Vanadium products Other operations Eliminations Total Sales to external customers $ 17,623 $ 1,290 $ 1,201 302 17,925 2,344 3,634 5 1,206 $ 266 756 1,022 $ – $ 20,380 (3,407) (3,407) – 20,380 $ 2,746 $ 971 $ 170 $ 83 $ 20 $ 3,990 Investments in joint ventures and associates 10 541 – – – 194 – – – $ 12,794 $ 3,684 $ 478 $ 547 $ 1,881 $ 460 $ 101 $ 70 (358) $ 3,632 194 (775) (1,192) $ 1,859 $ 17,503 551 1,397 $ 19,451 $ 2,512 12,022 $ 14,534 Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t/(loss) from operations Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t/(loss) Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 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 losses recognised in statement of operations 159 159 $ 740 $ 415 $ 1,534 (756) – (380) (821) (56) 9 – (43) – $ 30 $ 1,194 – (47) (3) 1,534 (1,226) (880) VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) Year ended December 31, 2007 US$ million Revenue Steel production Mining Vanadium products Other operations Eliminations Total Sales to external customers $ 11,743 $ 371 $ 583 $ 162 $ – $ 12,859 Inter-segment sales Total revenue Result Segment result Unallocated expenses Proﬁ t/(loss) from operations Share of proﬁ ts/(losses) of joint ventures and associates Other income/(expenses), net Income tax expense Net proﬁ t/(loss) Assets and liabilities Segment assets 165 11,908 1,532 1,903 – 583 621 783 (2,318) (2,318) – 12,859 $ 3,036 $ 444 $ 45 $ 87 $ 2 $ 3,614 20 68 – – (146) $ 3,468 88 (431) (946) $ 2,179 $ 11,957 $ 4,473 $ 469 $ 692 $ 17,591 Investments in joint ventures and associates 4 588 – 592 454 $ 18,637 $ 2,424 9,857 $ 12,281 $ 1,846 $ 421 $ 116 $ 41 $ 460 $ 192 $ 3,339 3,175 (478) (4) (213) (2) 7 – (30) – $ 131 $ 790 306 (36) (1) 6,820 (757) (7) Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 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 losses recognised in statement of operations 160 160 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) The revenues from external customers for each group of similar products and services are presented in the following table: US$ million Steel Production Construction products Flat-rolled products Railway products Tubular products Semi-ﬁ nished products Other steel products Other products Rendering of services Mining Iron ore Coal Other products Rendering of services Vanadium Products Vanadium in slag Vanadium in alloys and chemicals Other products Rendering of services Other Operations Rendering of services 161 161 2009 2008 2007 $ 2,184 $ 4,949 $ 3,709 1,448 1,113 1,008 2,018 236 729 119 8,855 175 219 22 19 435 60 290 3 1 354 128 128 3,236 2,221 1,753 3,512 562 1,305 85 1,966 1,694 703 2,496 435 694 46 17,623 11,743 708 461 84 37 1,290 290 909 – 2 1,201 266 266 145 165 37 24 371 167 416 – – 583 162 162 $ 9,772 $ 20,380 $ 12,859 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) 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 China United Arab Emirates South Africa Thailand Philippines Ukraine Taiwan Vietnam Kazakhstan Korea Austria Italy Turkey Czech Republic Germany Jordan Poland Indonesia Syria Slovakia Great Britain Other countries 2009 $ 2,950 1,543 861 528 415 298 285 250 233 228 226 210 174 148 140 130 120 116 101 93 74 62 51 25 511 2008 $ 7,575 3,232 1,283 172 289 649 479 149 913 504 234 327 760 415 343 192 295 417 74 166 143 104 119 173 1,373 2007 $ 5,954 1,964 91 72 27 319 175 144 186 373 82 380 400 173 361 87 277 263 58 179 75 2 33 119 1,065 None of the Group’s customers amounts to 10% or more of the consolidated revenues. $ 9,772 $ 20,380 $ 12,859 162 162 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 3. Segment Information (continued) Carrying amounts of the Group’s assets by geographical area in which the assets are located at December 31 were as follows: US$ million Russia USA Canada South Africa Ukraine Czech Republic Switzerland Italy Cyprus Luxembourg Other countries 2009 $ 13,061 2008 $ 8,252 2007 $ 8,813 2,905 2,671 1,443 1,354 807 512 377 148 113 33 3,604 2,415 1,052 1,533 613 646 415 159 723 39 3,125 – 1,515 3,399 577 475 414 212 39 68 $ 23,424 $ 19,451 $ 18,637 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: US$ million Russia USA South Africa Canada Czech Republic Ukraine Other countries 2009 $ 293 2008 $ 971 2007 $ 586 30 26 15 14 13 3 50 53 15 19 84 8 39 62 5 13 81 6 $ 394 $ 1,200 $ 792 4. Business Combinations 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. N.A. Total cash consideration for the acquisition of a 100% ownership interest in OSM amounted to $2,276 million, including transaction costs of $10 million. VII 163 163 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Oregon Steel Mills (continued) As a result, the ﬁ nancial position and the results of operations of OSM were included in the Group’s consolidated ﬁ nancial statements beginning January 12, 2007. The table below sets forth the fair values of OSM’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: US$ 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 outstanding 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. 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 Vanady-Tula, Chussovskoy Metallurgical Plant, both located in Russia, and Treibacher (Austria) – the major consumers of the feedstock sold by the Group and Highveld. 164 164 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Highveld Steel and Vanadium Corporation (continued) 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). The table below sets forth the fair values of Highveld’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of business combination: 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 (Note 12) Total assets Deferred income tax liabilities Non-current liabilities Current liabilities Liabilities directly associated with disposal groups classiﬁ ed as held for sale (Note 12) Total liabilities Net assets Carrying amounts immediately before the business combination $ 207 April 26, 2007 $ 431 − 2 70 161 75 170 685 36 42 316 24 418 $ 267 419 2 81 168 75 295 1,471 181 54 329 44 608 $ 863 On April 26, 2007, the Group recognised revaluation surplus amounting to $27 million in respect of the change in fair values of identiﬁ able assets, liabilities and contingent liabilities of Highveld allocated to the previously acquired stakes. In 2007, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiary Cash paid Net cash outﬂ ow For the period from April 26, 2007 to December 31, 2007, Highveld reported net proﬁ t amounting to $101 million. $ 75 (254) $ (179) VII 165 165 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Highveld Steel and Vanadium Corporation (continued) The acquisition of Highveld was achieved in stages. Cost of the business combination at each stage, the fair values of Highveld’s identiﬁ able consolidated assets, liabilities and contingent liabilities and goodwill are summarised in the table below: US$ million Ownership interest acquired Cost of business combination Fair values of Highveld’s identiﬁ able consolidated assets, liabilities and contingent liabilities Goodwill July 13, 2006 (Note 11) February 26, 2007 (Note 11) April 26, 2007 24.9% 54.1% 216 731 34 442 802 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. 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 accumulated 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 statement of operations 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 recognised 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 liability 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 statement of operations 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 (“ZapSib Power Plant”), 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 $1 million. As a result, the ﬁ nancial position and the results of operations of ZapSib Power Plant were included in the Group’s consolidated ﬁ nancial statements beginning May 3, 2007. 166166 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) West-Siberian Heat and Power Plant (continued) The fair values of the identiﬁ able assets, liabilities and contingent liabilities as at the date of acquisition were as follows: US$ 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 Goodwill 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, ZapSib Power Plant 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 ZapSib Power Plant 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 ZapSib Power Plant amounting to $17 million and accrued a liability to the minority shareholders in the amount of $17 million. During the offer the Group acquired 4.44% shares of ZapSib Power Plant 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 associate, 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 $9 million. VII 167 167 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Yuzhkuzbassugol (continued) As a result, the ﬁ nancial position and results of operations of Yuzhkuzbassugol were included in the Group’s consolidated ﬁ nancial statements beginning June 8, 2007 as the Group effectively exercised control over Yuzhkuzbassugol’s operations since that date. In the period from January 1, 2007 to June 8, 2007, the Group accounted for its investment in Yuzhkuzbassugol under the equity method (Note 11). The table below sets forth the fair values of Yuzhkuzbassugol’s consolidated identiﬁ able assets, liabilities and contingent liabilities at date of acquisition of a controlling interest in the entity: US$ million Mineral reserves Other property, plant and equipment Investments in associates (Note 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 $ 1,373 June 8, 2007 $ 1,661 856 18 45 38 105 17 2,740 196 462 326 984 14 $ 1,742 $ $ 871 871 On June 8, 2007, the Group recognised revaluation surplus amounting to $184 million in respect of the change in fair values of identiﬁ able assets, liabilities and contingent liabilities of Yuzhkuzbassugol allocated to the previously acquired stake. In 2007, cash ﬂ ow on acquisition was as follows: US$ 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 production assets in Ukraine which included 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). 168168 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Steel and Mining Businesses in Ukraine (continued) 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 existed 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 $18 million. The Group obtained control over Palmrose on April 14, 2008. The acquisition of 51.4% and 48.6% ownership interests in Palmrose were considered as linked transactions and were accounted for as a single transaction in these ﬁ nancial statements. As a result, on April 14, 2008, the Group effectively acquired 100% ownership interest in Palmrose with a deferred consideration in respect of 48.6% ownership interest. In accordance with the accounting policy (Note 2), the Group accounted for this acquisition by applying the pooling of interests method and presented its consolidated ﬁ nancial statements as if the transfer of controlling interest in the subsidiary had occurred from the date of acquisition of the subsidiary by Lanebrook, which was December 11, 2007. As a result, the ﬁ nancial position and the results of operations of Palmrose were included in the Group’s consolidated ﬁ nancial statements beginning December 11, 2007. The table below sets forth the fair values of Palmrose’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of its acquisition by the predecessor: US$ 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 subsidiaries Cash paid Net cash outﬂ ow 169 169 December 11, 2007 $ 429 1,307 822 2,558 57 377 839 1,273 40 $ 1,245 $ 2,108 $ 863 $ – (1,060) $ (1,060) VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Steel and Mining Businesses in Ukraine (continued) $68 million paid by the Group to Lanebrook in 2008 was recorded as a distribution to a shareholder in the consolidated statement of cash ﬂ ows. The excess of the consideration paid by the Group to its shareholder over the historical cost of net assets transferred to the Group, including 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 issued 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. In 2009, the Group and Lanebrook Limited signed an amendment agreement under which the purchase price for the acquired businesses has been reduced by $65 million. This reduction in the purchase price was accounted for as a contribution from a shareholder in the consolidated statement of changes in equity. 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 $7 million. As a result, the ﬁ nancial position and the results of operations of Claymont Steel were included in the Group’s consolidated ﬁ nancial statements beginning January 16, 2008. 170170 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Claymont Steel (continued) The table below sets forth the fair values of identiﬁ able assets, liabilities and contingent liabilities of Claymont Steel at the date of acquisition: US$ 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 subsidiaries Cash paid Net cash outﬂ ow January 16, 2008 $ 161 40 – 52 44 5 302 136 58 59 253 49 420 371 $ $ $ $ 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, 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 approximately $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 $65 million. VII 171 171 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) IPSCO Inc. (continued) The ﬁ nancial position and the results of operations of IPSCO Inc. were included in the Group’s consolidated ﬁ nancial statements beginning June 12, 2008. At December 31, 2008, the acquisition of IPSCO Inc. was accounted for based on provisional values as the Group, at the date of authorisation of issue of the ﬁ nancial statements for the year ended December 31, 2008, did not complete purchase price allocation in accordance with IFRS 3 “Business Combinations”. In 2009, the Group ﬁ nalised its purchase price allocation on the acquisition of IPSCO Inc. As a result, the Group recognised adjustments to the provisional values of identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition. The table below sets forth the fair values of IPSCO Inc.’s consolidated identiﬁ able assets, liabilities and contingent liabilities at June 12, 2008: US$ 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 Net assets Purchase consideration Goodwill In 2008, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiaries Cash paid Net cash outﬂ ow Provisional fair values Final estimation of fair values $ 726 362 18 432 184 2 1,724 4 221 167 392 $ 1,332 $ 2,450 $ 1,118 $ 726 607 18 551 186 2 2,090 4 319 169 492 $ 1,598 $ 2,450 $ 852 $ 2 (1,501) $ (1,499) $938 million of purchase consideration was paid by a bank on behalf of the Group directly to the seller. Transaction costs amounting to $10 million were paid in 2009. At December 31, 2009, accounts payable include $1 million of unpaid transaction costs. For the period from June 12 to December 31, 2008, IPSCO Inc. reported net loss amounting to $87 million. The investment in a 49% ownership interest in NS Group was included in short-term investments caption of the consolidated statement of ﬁ nancial position as of December 31, 2008. In 2009, TMK exercised its call option for a 49% ownership interest in NS Group (Note 18). 172172 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Vanady-Tula On December 20, 2007, the Group signed an option agreement with OOO SGMK-Engineering (the “Seller”) in respect of shares of OAO Vanady-Tula (“Vanady-Tula”), a vanadium reﬁ nery located in Russia. Under the agreement, the Group had the right to acquire (the call option) and OOO SGMK-Engineering had the right to sell to the Group (the put option) 90.84% of shares of Vanady-Tula for 3,140 million roubles ($108 million at the exchange rate at November 2, 2009, the date of business combination). The options were extended to December 31, 2009. The exercise of the options was conditional upon the approval of the regulatory authorities. 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 – Note 13). The deposit would have been repayable to the Group if neither the call option nor the put option was exercised before their expiration. During 2008 and 2009, the Group purchased minority shares of Vanady-Tula and immediately before the business combination had a 1.88% ownership interest in the entity. The consideration paid for these shares was $2 million. On November 2, 2009, the Group obtained the regulatory approvals. The share options became exercisable and economic beneﬁ ts have been effectively transferred to the Group since that date. As a result, the ﬁ nancial position and results of operations of Vanady-Tula were included in the Group’s consolidated ﬁ nancial statements beginning November 2, 2009 as the Group effectively exercised control over the entity’s operations since that date. In December 2009, the option agreement was dissolved and the companies entered into a new agreement for the purchase of an 82.96% ownership interest in Vanady-Tula. The purchase consideration amounted to 2,854 million roubles ($95 million at the exchange rate as of the date of the transaction, which was completed on December 15, 2009). The acquisition of the subsidiary was accounted for based on provisional values as the Group, at the date of authorisation of issue of these ﬁ nancial statements, has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”. The table below sets forth the provisional fair values of Vanady-Tula’s consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of business combination: US$ million Property, plant and equipment Inventories Accounts and notes receivable Total assets Deferred income tax liabilities Current liabilities Total liabilities Net assets Fair value of net assets attributable to 92.72% ownership interest Purchase consideration Goodwill In 2009, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiaries Cash paid Net cash outﬂ ow At December 31, 2009, the Group’s accounts receivable include $12 million due from the seller. 173 173 November 2, 2009 $ 54 14 16 84 9 31 40 $ 44 41 $ 110 $ 69 $ – (5) $ (5) VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) Vanady-Tula (continued) For the period from November 2, 2009 to December 31, 2009, Vanady-Tula reported net proﬁ t amounting to $2 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”). On December 15, 2009, the date when the Group became the legal owner of the shares under the new purchase agreement, the Group derecognised all minority interests in the entity and accrued a liability to the minority shareholders in the amount of $17 million. This transaction resulted in a $5 million charge to accumulated proﬁ ts. On February 18, 2010, the Group made an offer to minority shareholders of Vanady-Tula to sell their stakes to the Group at a price of 3,861.91 roubles per share ($127.69 at the exchange rate as of December 31, 2009). The total purchase consideration for the ownership interests, that could be acquired, amounts to 521 million Russian roubles ($17 million at the exchange rate as of December 31, 2009). Steel Dealers On October 15, 2009, the Group acquired 100% in a holding company owning steel dealers throughout Russia (previously known as Carbofer). Purchase consideration amounted to $11 million. The ﬁ nancial position and the results of operations of this holding were included in the Group’s consolidated ﬁ nancial statements beginning October 15, 2009. The acquisition was accounted for based on provisional values as the Group, as of the date of authorisation of issue of these ﬁ nancial statements, has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”. The table below sets forth the provisional fair values of consolidated identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: US$ million Property, plant and equipment Other non-current assets Inventories Accounts and notes receivable Cash Total assets Current liabilities Total liabilities Net assets 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 2009, cash ﬂ ow on acquisition was as follows: US$ million Net cash acquired with the subsidiaries Cash paid Net cash outﬂ ow October 15, 2009 $ 7 7 73 45 8 140 119 119 $ 21 $ 11 $ (10) $ 8 (9) $ (1) At December 31, 2009, unpaid purchase consideration was $2 million. For the period from October 15, 2009 to December 31, 2009, steel dealers reported net loss amounting to $5 million. Other Acquisitions 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 statement of ﬁ nancial position as of December 31, 2007. 174174 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 4. Business Combinations (continued) 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 combination, because the acquirees did not prepare ﬁ nancial statements in accordance with IFRS before acquisitions. 5. Goodwill The table below presents movement in the carrying amount of goodwill. Gross amount Impairment losses Carrying amount $ 112 1,122 $ US$ million At December 31, 2006 Goodwill recognised on acquisitions of subsidiaries (Note 4) Goodwill previously recognised in investments under the equity method (Note 11) Goodwill allocated to disposal groups classiﬁ ed as held for sale (Note 11) Goodwill in respect of subsidiaries acquired from entities under common control (Note 4) Adjustment to contingent consideration Translation difference At December 31, 2007 Goodwill recognised on acquisitions of subsidiaries (Note 4) Adjustment to contingent consideration Impairment Palmrose Claymont Steel OSM Tubular – Portland Mill Translation difference At December 31, 2008 Goodwill recognised on acquisitions of subsidiaries (Note 4) Adjustment to contingent consideration Impairment Palmrose Claymont Steel OSM Tubular – Camrose General Scrap Evraz Inc. N.A. Canada (Surrey) Translation difference At December 31, 2009 175 175 – – – – – – – – – – (756) (466) (187) (103) – (756) – – (135) (100) (15) (9) (4) (7) 21 $ 112 1,122 42 (16) 863 11 11 2,145 1,223 (2) (756) (466) (187) (103) (443) 2,167 69 (5) (135) (100) (15) (9) (4) (7) 115 VII $ (870) $ 2,211 42 (16) 863 11 11 2,145 1,223 (2) – – – – (443) 2,923 69 (5) – – – – – – 94 $ 3,081 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 5. Goodwill (continued) 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. N.A. (formerly Oregon Steel Mills) 2009 $ 1,155 2008 $ 1,183 2007 $ 1,082 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. N.A. Canada (formerly IPSCO) Calgary Red Deer Regina Steel Regina Tubular Others Palmrose Dnepropetrovsk Iron and Steel Works Dneprodzerzhinsk Coke Chemical Plant Bagleykoks Dneprokoks Palini e Bertoli Vanady-Tula Strategic Minerals Corporation Nikom, a.s. Highveld Steel and Vanadium Corporation Evro-Aziatskaya Energy Company 412 – 410 148 169 16 801 220 54 376 130 21 – – – – – 82 66 39 40 27 1 412 – 410 157 184 20 700 190 46 327 112 25 99 24 27 32 16 80 – 45 38 21 1 412 103 410 157 – – – – – – – – 863 512 114 151 86 84 – 47 40 28 1 $ 2,211 $ 2,167 $ 2,145 The cash generating units within Evraz Inc. N.A. and Evraz Inc. N.A. Canada 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, 2009. Events and circumstances that led to recognition of impairment are disclosed in Note 31, Operating Environment of the Group. For the purpose of the goodwill impairment testing the Group assessed the recoverable amount of each cash generating unit to which the goodwill relates. The recoverable amount has been determined based on value in use calculation using cash ﬂ ows projections based on the actual operating results and business plans approved by management and appropriate discount rates reﬂ ecting time value of money and risks associated with respective cash generating units. For mining operations management business plans cover the full life of mines. 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. 176176 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 5. Goodwill (continued) The key assumptions used by management in value-in-use calculation are presented in the table below. US$ million Evraz Inc. N.A Evraz Inc. N.A. Canada Palini e Bertoli Vanady-Tula Strategic Minerals Corporation Nikom, a.s. Highveld Steel and Vanadium Corporation Period of forecast, years Pre-tax discount rate, % 5 5 5 5 5 5 5 13.05–14.89 12.96–13.37 13.64 15.38 Commodity steel products steel products steel plates vanadium products 15.92-16.10 ferrovanadium products 14.60 ferrovanadium products 15.92 ferrovanadium products steel products Average price of the commodity per ton in 2010 $ $ € 770 898 461 $ 28,191 $ 32,944 $ 30,206 $ 24,481 $ 618 In respect of cash generating units, for which an impairment loss was recognised in 2009, the discount rates used in the previous estimates of value in use were as follows: US$ million Palmrose Dnepropetrovsk Iron and Steel Works Coking plants Evraz Inc. N.A. Claymont Steel OSM Tubular – Camrose General Scrap Evraz Inc. N.A. Canada Surrey Pre-tax discount rate, % 16.59 16.76-17.19 13.83 14.95 14.95 13.57 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 Evraz Inc. N.A. and Evraz Inc. N.A. Canada cash generating units. A 10% increase in the discount rates would lead to an additional impairment of $202 million. Sales Prices The prices of the products sold by the Group were estimated using industry research. Average 2010 prices for steel products were assumed to be 6% higher than average 2009 prices. The Group expects that in 2011-2014 the nominal prices will grow on average by 9% and in 2014 and thereafter – by 3%. Reasonable changes in the assumptions for products prices could lead to an additional impairment at Evraz Inc. N.A. cash generating units. If the prices assumed for 2010 and 2011 in the impairment test were 10% lower, this would lead to an additional impairment of $21 million. Sales Volumes Management assumed that the sales volumes of steel products would increase on average by 18% during 2010 and would grow evenly during the following ﬁ ve years to reach normal asset capacity thereafter. Reasonable changes in sales volumes could lead to an additional impairment at Evraz Inc. N.A. cash generating units. If the sales volumes were 10% lower than those assumed for 2010 and 2011 in the impairment test, this would lead to an additional impairment of $11 million. VII 177 177 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 5. Goodwill (continued) Cost Control Measures The recoverable amounts of cash generating units are based on the business plans approved by management. The reasonable deviation of cost from these plans could lead to an additional impairment at Evraz Inc. N.A. and Evraz Inc. N.A. Canada cash generating units. If the actual costs were 10% higher than those assumed for 2010 and 2011 in the impairment test, this would lead to an additional impairment of $43 million. 6. Acquisitions of Minority Interests in Subsidiaries Buy Outs 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 Kachkanarsky Mining-and-Processing Integrated Works (“KGOK”). Under the Russian legislation, a shareholder owning 95% of the share capital is obliged to acquire the company’s shares in case when the minority shareholders are willing to sell their stakes. On the other hand, such shareholder can initiate a forced disposal of the shares held by minority shareholders. Consequently, the Group obtained a call option and minority shareholders obtained a put option for the minority shares in the subsidiaries. At this date, the Group derecognised minority interests 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. 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. In March 2007, the Group made voluntary offers to minority shareholders of Nizhny Tagil Iron and Steel Plant (“NTMK”), Vysokogorsky Mining-and-Processing Integrated Works (“VGOK”) and Nakhodka Trade Sea Port (”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. 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. Consequently, 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, the Group received the right to require the minority shareholders to sell their stakes. In August 2007, 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 were successfully completed in October 2007. 178178 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 6. Acquisitions of Minority Interests in Subsidiaries 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 accumulated proﬁ ts. Exercise of Potential Voting Rights In 2008, the Group exercised options in respect of the interests in Caplink Limited and Velcast Limited, which owned a slab casting workshop and equipment. Total cash consideration amounted to $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 2009 $ (3,255) (1,499) (1,632) 2008 $ (6,408) (2,154) (1,195) 2007 $ (4,892) (1,532) (749) In 2009, the Group made a reversal of the allowance for net realisable value in the amount of $148 million. 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 $314 million. In 2007, these write-downs and allowances were not signiﬁ cant. The major components of other operating expenses were as follows: US$ million Idling, reduction and stoppage of production, including termination beneﬁ ts Restoration works and casualty compensations in connection with accidents Write-off of Mezhegey licence Other 2009 $ (70) (1) – (57) 2008 $ (19) (4) (12) (25) $ (128) $ (60) 2007 $ (4) (20) – (15) $ (39) In July 2008, the Group won the tender to develop the Mezhegey coal deposit located in Russia. The Group offered $725 million in the tender held by the Russian State Mineral Resources Agency. Due to signiﬁ cant deterioration of economic conditions in the second half of 2008, the Group made a decision not to proceed with the purchase of the licence. In 2008, a prepayment amounting to $12 million, which was used to secure the licence, was written off to other operating expenses. In 2010, a new tender was held by the Russian State Mineral Resources Agency and the Group won the licence to develop the Mezhegey coal deposit for $32 million (Note 32). VII 179 179 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 7. Income and Expenses (continued) Interest expense consisted of the following for the years ended December 31: US$ million Bank interest Interest on bonds and 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 2009 $ (346) (268) (7) (28) (12) (2) (14) 2008 $ (392) (221) (7) (17) (9) (2) (7) 2007 $ (285) (97) (8) (10) (4) (1) (4) $ (677) $ (655) $ (409) 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 loans receivable from related parties Interest on accounts receivable Other 2009 $ 17 10 6 7 – $ 40 2008 $ 37 15 – 1 4 $ 57 Gain/(loss) on ﬁ nancial assets and liabilities included the following for the years ended December 31: US$ million Gain/(loss) on available-for-sale ﬁ nancial assets (Note 13) Gain/(loss) on extinguishment of debts (Note 21) Loss on trading with Raspadskaya shares Change in the fair value of derivatives (Notes 18 and 26) Impairment of ﬁ nancial instrument relating to the transaction with 49% ownership interest in NS Group (Note 18) Remeasurement of liabilities to minority shareholders at fair value Other 2009 $ – 103 (1) 1 (2) – (4) 2008 $ (150) 80 (27) (10) (3) – (19) $ 97 $ (129) 2007 $ 24 7 – 9 1 $ 41 2007 – – – – – $ (72) 1 $ (71) 180180 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 7. Income and Expenses (continued) Remeasurement of Liabilities to Minority Shareholders at Fair Value In October 2007, the Group exercised its call option in respect of 25% less one share ownership interest in Palini for €76 million ($107 million at the exchange rate as of the date of the transaction). The change in the fair value of the liability to minority shareholders amounting to $21 million was recorded as a loss within gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated income statement for the year ended December 31, 2007. In 2007, in connection with the acquisition of Highveld the Group recognised $51 million on the remeasurement of liabilities to minority shareholders (Note 4). 8. Income Taxes The Group’s income was subject to tax at the following tax rates: Russia Canada Cyprus Czech Republic Italy South Africa Switzerland Ukraine USA 2009 20.00% 29.00% 10.00% 20.00% 31.40% 28.00% 12.10% 25.00% 35.00% 2008 24.00% 29.00% 10.00% 21.00% 31.40% 28.00% 10.04% 25.00% 35.00% 2007 24.00% – 10.00% 24.00% 37.25% 29.00% 12.60% 25.00% 35.00% Ferrotrade Limited (Gibraltar) has a Taxation Exemption Certiﬁ cate under which it is currently liable to tax at the ﬁ xed annual amount of £225. This certiﬁ cate is valid through 2010. In November 2008, a reduction of income tax rate from 24% to 20% was announced by the Russian government. The new rate became effective from January 1, 2009. As such, the respective deferred tax assets and liabilities at December 31, 2008 were measured using the announced tax rate. Major components of income tax expense for the years ended December 31 were as follows: US$ million Current income tax expense Adjustment in respect of income tax of previous years Deferred income tax beneﬁ t/(expense) relating to origination and reversal of temporary differences Deferred income tax beneﬁ t relating to changes in tax rates Less: deferred income tax recognised directly in other comprehensive income Income tax beneﬁ t/(expense) reported in the consolidated statement of operations 181 181 2009 $ (179) (6) (1,145) 16 1,653 2008 $ (1,622) 2007 $ (1,064) 28 302 107 (7) 31 82 5 – $ 339 $ (1,192) $ (946) VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 8. Income Taxes (continued) 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 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 20% (2008 and 2007: 24%) Deferred income tax beneﬁ t resulting from reduction in tax rate, net of amount recognised directly in other comprehensive income 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 Utilisation of previously unrecognised tax losses Beneﬁ t arising from early payment of income tax Tax paid on dividends to minorities 2009 $ (1,600) 2008 $ 3,051 320 16 (6) (123) – (1) 119 11 (2) 5 – – (732) 100 28 (430) 23 (153) (100) 43 25 5 6 (7) 2007 $ 3,125 (750) 5 31 (93) 31 (78) (37) (43) (12) – – – Income tax expense reported in the consoli- dated statement of operations $ 339 $ (1,192) $ (946) In 2008, the effect of non-deductible expenses included $(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. 182182 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 8. Income Taxes (continued) Deferred income tax assets and liabilities and their movements for the years ended December 31 were as follows: Change recog- nised in state- ment of op- erations Change recog- nised in other compre- hensive income Change due to busi- ness combi- nations 2009 Transla- tion dif- ference 2008 Change recog- nised in state- ment of op- erations Change recog- nised in other compre- hensive income Change due to busi- ness combi- nations Transla- tion dif- ference 2007 $ 2,577 (349) 1,652 297 (47) – 96 (11) 36 – – – 2,970 (371) 1,652 203 124 22 124 473 154 (29) (3) 31 153 40 (5) – – – (1) (1) (3) 9 – – – 9 4 – 2 1 7 8 (9) $ 1,274 (221) (7) 170 (268) $ 1,600 34 310 (39) 11 58 (43) (85) 2 – – – 177 (54) 226 – 47 – (10) 54 106 27 1,653 (388) (7) 394 (332) 1,986 2 6 (1) (1) 6 (4) 43 147 24 94 308 14 (3) 2 1 14 44 27 – – – – – – 10 7 – – 17 – (4) (15) (7) (15) (41) 23 158 29 108 318 (5) 22 $ 2,537 (529) 1,650 10 17 $ 1,389 (375) (7) 377 (296) $ 1,690 US$ million Deferred income tax liabilities: Valuation and depreciation 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 Net deferred income tax asset Net deferred income tax liability As of December 31, 2009, 2008 and 2007, deferred income taxes have been provided for in respect of undistributed earnings of the Group’s subsidiaries amounting to $nil, $199 million and $1,046 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, 2009, the Group has not recognised a deferred tax liability and deferred tax asset in respect of temporary differences of $8,870 million and $2,284 million, respectively (2008: $4,118 million and $2,826 million, respectively, 2007: $3,685 million and $857 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%. 183 183 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 8. Income Taxes (continued) 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 current 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, 2009, the unused tax losses carry forward approximated $2,757 million (2008: $803 million, 2007: $369 million). The Group recognised deferred tax asset of $203 million (2008: $43 million, 2007: $23 million) in respect of unused tax losses. Deferred tax asset in the amount of $463 million (2008: $78 million, 2007: $45 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 $1,873 million (2008: $463 million, 2007: $283 million) for which deferred tax asset was not recognised arose in companies registered in Luxembourg, Cyprus, Russia, Ukraine and Canada. Losses in the amount of $1,870 million (2008: $459 million, 2007: $270 million) are available indeﬁ nitely for offset against future taxable proﬁ ts of the companies in which the losses arose and $3 million (2008: $4 million, 2007: $13 million) will expire during 2016–2018. 9. Property, Plant and Equipment Property, plant and equipment consisted of the following as of December 31: US$ million Revalued amount or cost: Land Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Assets under construction Accumulated depreciation, depletion and impairment losses: Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Government grants: Machinery and equipment, net 2009 2008 2007 $ 292 $ 157 $ 147 13,596 21,600 446 2,619 77 538 39,168 (9,675) (13,835) (174) (488) (50) (24,222) 2,383 4,971 430 2,603 98 691 11,333 (570) (1,218) (133) (359) (35) (2,315) 2,200 5,153 461 3,170 115 728 11,974 (324) (1,161) (98) (237) (39) (1,859) (5) $ 14,941 (6) $ 9,012 (8) $ 10,107 Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $121 million, $145 million and $114 million as of December 31, 2009, 2008 and 2007, respectively. 184184 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 9. Property, Plant and Equipment (continued) The movement in property, plant and equipment for the year ended December 31, 2009 was as follows: US$ million At December 31, 2008, cost, net of accumulated depreciation and government grants (as previously reported) Buildings and con- structions Machinery and equipment Transport and motor vehicles Land Mining assets Other assets Assets under construction Total $ 159 $ 1,808 $ 3,747 $ 296 $ 2,244 $ 67 $ 691 $ 9,012 Adjustments to provisional values (2) 5 – 1 – 157 1,813 3,747 297 2,244 135 2,804 4,962 (21) (315) (266) 34 – 31 56 (20) (362) (13) 10 26 346 (59) – – (1) – 2 24 (4) – – 6 11 – 73 (1) (943) (42) (147) (4) 63 – – (34) – – 15 (1) (17) – – 691 9,012 – – 2 372 2 (517) 7,901 (602) – 393 61 – (6) (92) – (1,511) (22) (35) (11) (53) (1) (19) (141) 9 21 10 66 (11) (1) (21) 5 (79) (28) – (1) 6 (13) – – – – – (10) – 3 (3) (61) 1 – – (2) – 3 11 118 – – – – 2 (43) (11) (25) 14 (133) 6 – – 3 (1) – – – (4) – (1) – 18 At December 31, 2008 (as adjusted) Change in accounting policies: revaluation surplus (Note 2) Change in accounting policies: revaluation deﬁ cit (Note 2) Reclassiﬁ cations between categories Additions Assets acquired in business combination Assets put into operation Disposals Depreciation and depletion charge Impairment losses recognised in statement of operations Impairment losses reversed through statement of operations Impairment losses recognised or reversed through other comprehensive income Disposal of assets due to sale of a subsidiary Transfer to/from assets held for sale Change in site restoration and de- commissioning provision Translation difference At December 31, 2009, reval- ued amount or cost, net of ac- cumulated depreciation and government grants At December 31, 2009, the carrying amount that would have been rec- ognised had the assets been carried under the cost model 185 185 $ 292 $ 3,921 $ 7,760 $ 272 $ 2,131 $ 27 $ 538 $ 14,941 $ 164 $ 1,745 $ 3,707 $ 272 $ 2,131 $ 27 $ 538 $ 8,584 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 9. Property, Plant and Equipment (continued) 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 losses recognised in statement of operations Transfer to assets held for sale Change in site restoration provision Buildings and con- structions Machinery and equip- ment Transport and motor vehicles Land Mining assets Other assets Assets under construction Total $ 147 $ 1,876 $ 3,984 $ 363 $ 2,933 $ 76 $ 728 $ 10,107 – – 29 – (2) – – 2 – 160 1 174 166 (10) (177) (16) 1 5 (130) 27 630 671 (26) (631) (45) 6 15 (754) (18) 3 2 67 (4) (52) (1) – – (63) (3) 32 – 122 (5) (220) (53) – 21 (583) (13) – 15 11 (1) (22) – 1 – (4) 4 – 1,135 1,198 37 (1,037) (21) – (2) – – 887 – (69) (1,102) (117) 10 41 (153) (1,943) Translation difference (19) (367) At December 31, 2008, cost, net of accumulated deprecia- tion and government grants $ 157 $ 1,813 $ 3,747 $ 297 $ 2,244 $ 63 $ 691 $ 9,012 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 losses recognised in statement of operations 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 deprecia- tion and government grants Buildings and con- structions Machinery and equip- ment Transport and motor vehicles Land Mining assets Other assets Assets under construction Total $ 62 $ 1,075 $ 1,497 $ 202 $ 314 $ 31 $ 474 $ 3,655 (2) – 88 – (6) – – – (1) 6 (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 $ 147 $ 1,876 $ 3,984 $ 363 $ 2,933 $ 76 $ 728 $ 10,107 Impairment losses were identiﬁ ed in respect of certain items of property, plant and equipment that were recognised as functionally obsolete or as a result of the testing at the level of cash generating units. The amount of borrowing costs capitalised during the year ended December 31, 2009 was $7 million (2008: $18 million, 2007: $nil). The rate used to determine the amount of borrowing costs eligible for capitalisation was 7%, which is the effective interest rate of the speciﬁ c borrowings. 186186 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 10. Intangible Assets Other Than Goodwill Intangible assets consisted of the following as of December 31: US$ 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 2009 2008 $ 1,276 $ 1,117 31 64 9 42 46 1,468 (307) (19) (5) (6) (2) (31) (370) $ 1,098 28 63 9 66 56 1,339 (171) (12) (3) (4) (8) (33) (231) $ 1,108 2007 $ 714 31 63 10 66 46 930 (87) (6) (2) (3) – (26) (124) $ 806 As of December 31, 2009, 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, 2009 was as follows: Customer relation- ships Trade names and trademarks Water rights and environ- mental per- mits Patented and unpatented technology Contract terms $ 722 224 946 – (104) – – (15) 8 134 $ 19 (3) 16 – (5) – – – 2 (1) $ 60 – 60 – (1) – – – – – $ 5 – 5 – (2) – – – – – $ 59 (1) 58 – (18) – – – – – Other Total $ 20 $ 885 3 23 1 (4) 5 (11) – – 1 223 1,108 1 (134) 5 (11) (15) 10 134 $ 969 $ 12 $ 59 $ 3 $ 40 $ 15 $ 1,098 US$ million At December 31, 2008, cost, net of ac- cumulated amortisation (as previously reported) Adjustments to provisional values At December 31, 2008, cost, net of ac- cumulated amortisation (as adjusted) Additions Amortisation charge Emission allowances granted Emission allowances used/sold for the period Impairment loss recognised in statement of operations Impairment losses reversed through statement of operations Translation difference At December 31, 2009, cost, net of accumulated amortisation 187 187 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 10. Intangible Assets Other Than Goodwill (continued) 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 recognised in statement of operations Translation difference At December 31, 2008, cost, net of accumulated amortisation Customer relationships Trade names and trade- marks Water rights and environ- mental permits Patented and unpatented technology Contract terms Other Total $ 627 $ 25 $ 61 $ 7 $ 66 $ 20 $ 806 – 613 (98) – – – (196) – – (6) – – (3) – – – (1) – – – – – – (2) – – – – – 27 (9) – – – (26) 2 7 (8) 12 (1) (4) (5) 2 647 (124) 12 (1) (7) (227) $ 946 $ 16 $ 60 $ 5 $ 58 $ 23 $ 1,108 The movement in intangible assets for the year ended December 31, 2007 was as follows: US$ million At December 31, 2006, cost, net of ac- cumulated amortisation Additions Assets acquired in business combination Amortisation charge Emission allowances granted Emission allowances used for the period Impairment loss recognised in statement of operations Translation difference At December 31, 2007, cost, net of accumulated amortisation Customer relationships Trade names and trade- marks Water rights and environ- mental per- mits Patented and unpatented technology $ 6 – 697 (87) – – – 11 $ 3 $ 6 – 28 (6) – – – – – 57 (1) – – – (1) $ 9 – – (2) – – – – Contract terms $ 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 combination 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 $65 million (at the exchange rate as of the date of the purchase) and included in contract terms category of the intangible assets. 188188 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates The Group accounted for investments in joint ventures and associates under the equity method. The movement in investments in joint ventures and associates was as follows: US$ million Corber Yuzhkuzbassugol Highveld Streamcore Kazankovskaya Other associates Total Investment at December 31, 2006 $ 577 $ 679 $ 231 $ – Additional investments Share of proﬁ t/(loss) Dividends paid Assets acquired in business combination (Note 4) Acquisition of controlling interests (Note 4) 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 (Note 4) Translation difference Investment at December 31, 2008 Additional investments Share of proﬁ t/(loss) Surplus on revaluation of property, plant and equipment Disposal of investments Translation difference – 82 (120) – – 34 573 212 (95) (35) – (114) 541 – 30 66 – (15) – (10) – – 442 20 (15) – (682) (686) 13 – – – – – – – – – – – – 8 – – – – – – – – – – – – – – – – – – – – – – – – – 42 – – – 2 $ – – (5) – 19 – 1 15 (14) – – – (1) – – – – – – $ 7 $ 1,494 – 1 (1) 2 (5) – 4 – – – 7 (1) 10 13 (1) – (1) – 442 88 (136) 21 (1,373) 56 592 198 (95) (35) 7 (116) 551 55 29 66 (1) (13) Investment at December 31, 2009 $ 622 $ – $ – $ 44 $ – $ 21 $ 687 Share of proﬁ t/(loss) of joint ventures and associates comprised the following: US$ million Share of proﬁ t/(loss), net Losses recognised in excess of the Group’s investment in the associate (Note 13) Share of proﬁ ts/(losses) of joint ventures and associates recognised in the consolidated statement of operations 2009 $ 29 (37) $ (8) 2008 $ 198 (4) $ 194 2007 $ 88 – $ 88 189 189 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates (continued) Corber Enterprises Limited Corber Enterprises Limited (“Corber”) is a joint venture established in 2004 for the purpose of exercising joint control over economic activities of Raspadskaya Mining Group. The Group has 50% share in the joint venture, i.e. effectively owns 40% in OAO Raspadskaya. 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 2009 $ 864 904 38 44 335 24 2008 $ 935 643 5 56 268 73 2007 $ 1,163 587 10 51 245 84 2,209 1,980 2,140 325 218 111 654 316 333 188 102 623 277 328 297 107 732 260 $ 1,239 $ 1,080 $ 1,148 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 2009 $ 497 (286) (140) $ 71 $ 57 14 $ 71 1 $ 30 2008 $ 1,200 (362) (311) $ 527 $ 420 107 $ 527 2 $ 212 2007 $ 784 (374) (194) $ 216 $ 170 46 $ 216 (3) $ 82 190190 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates (continued) Yuzhkuzbassugol On December 30, 2005, the Group acquired a 50% ownership interest in ZAO Coal Company Yuzhkuzbassugol (“Yuzhkuzbassugol”) for cash consideration of $675 million payable to Crondale Overseas Limited (“Crondale”), an entity under common control with the Group. The Group determined that its ownership interest in Yuzhkuzbassugol represents the purchase of an associate and accounted for the investment under the equity method. The table below sets forth Yuzhkuzbassugol’s income and expenses till the date when the entity became a subsidiary of the Group (Note 4): US$ 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. The table below sets forth the fair values of Kazankovskaya’s identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition of Yuzhkuzbassugol: 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 191 191 June 8, 2007 $ 69 59 1 13 2 144 83 13 11 107 $ 37 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates (continued) Kazankovskaya (continued) 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 2009 $ – 21 2 1 1 25 48 8 15 71 2008 $ 38 46 2 1 1 88 83 – 13 96 Net assets/(liabilities) $ (46) $ (8) 2007 $ 72 59 1 8 3 143 92 10 11 113 $ 30 The table below sets forth Kazankovskaya’s income and expenses for the periods from acquisition of the controlling interest in Yuzhkuzbassugol: 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 (Note 13) Highveld Steel and Vanadium Corporation 2009 $ 15 (26) (55) $ (66) $ (33) (33) 2008 $ 15 (24) (27) $ (36) $ (18) (4) Period from June 8 to December 31, 2007 $ 7 (11) (5) $ (9) $ (5) – 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. On February 26, 2007, when the Board of directors of the Company approved the acquisition transaction, the completion of the acquisition 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 $442 million. As a result, taking into account the eventual exercise of potential voting rights under the option agreements concluded by the Group with Anglo and Credit Suisse in 2006 in respect of an additional 54.1% ownership interest in Highveld, under which the exercise price for put and call options was ﬁ xed and adjusted for dividends to be distributed by Highveld to Anglo and Credit Suisse, the Group, in substance, obtained access to the economic beneﬁ ts associated with that additional ownership interest. Consequently, the Group accounted for a 79% ownership interest in the associate under the equity method beginning February 26, 2007. 192192 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates (continued) Highveld Steel and Vanadium Corporation (continued) The fair values of identiﬁ able assets, liabilities and contingent liabilities as of the date of the increase in the beneﬁ cial interest in Highveld were as follows: US$ 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 February 26, 2007 $ 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 $ 17 193 193 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 11. Investments in Joint Ventures and Associates (continued) Streamcore In 2009, the Group acquired a 50% interest in Streamcore, a joint venture established for the purpose of exercising joint control over facilities for scrap procurement and processing in Siberia, Russia. Cash consideration amounted to $42 million. The table below sets forth the fair values of Streamcore’s identiﬁ able assets, liabilities and contingent liabilities at the date of acquisition: US$ million Property, plant and equipment Inventories Accounts receivable Total assets Deferred income tax liabilities Current liabilities Total liabilities Net assets The table below sets forth Streamcore’s assets and liabilities as of December 31: US$ million Property, plant and equipment Inventories Accounts receivable Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities Net assets September 4, 2009 $ 59 1 11 71 5 5 10 $ 61 2009 $ 59 – 15 74 2 5 3 10 $ 64 The table below sets forth Streamcore’s income and expenses from the date of acquisition of interest in the joint venture: US$ million Revenue Cost of revenue Other expenses, including income taxes Net proﬁ t Group’s share of proﬁ t of the joint venture Period from September 4 to December 31, 2009 $ 5 (4) (1) $ – $ – 194194 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 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 Net assets classiﬁ ed as held for sale 2009 $ 1 12 – – – 13 1 $ 12 2008 $ – 7 – – – 7 – $ 7 2007 $ 1 139 15 – 56 211 39 $ 172 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 during 2007-2009. 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 2009 $ 30 – – 3 7 – 40 – 14 14 2008 $ 91 13 – 35 33 36 208 10 12 22 2007 $ 74 – 8 – 20 137 239 – 7 7 $ 26 $ 186 $ 232 Cash ﬂ ows on disposal of subsidiaries and other business units were as follows: US$ million Net cash disposed of with subsidiaries Transaction costs Cash received Net cash inﬂ ow 2009 $ – – 28 $ 28 2008 $ – (7) 168 $ 161 2007 $ – (3) 226 $ 223 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, 2009, the Group owed $5 million in respect of the disposed business units. The disposal groups sold during 2007-2009 are described below. VII 195 195 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 12. Disposal Groups Held for Sale (continued) OAO Nerungriugol At December 31, 2006, assets held for sale were mostly represented by OAO Nerungriugol, a subsidiary sold in April 2007. In 2007, the Group received a disposal consideration amounting to $84 million. Highveld’s Business Units The assets held for sale at the date of acquisition of ownership interests in Highveld (Notes 4 and 11) included two divisions of Highveld (Transalloys, producing manganese alloys, and Rand Carbide, producing ferrosilicon and various carbonaceous products). Both divisions 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 approximated 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 disposal was effected on 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. Mine 12 On June 1, 2009, the Group entered into a contractual agreement to sell a 100% ownership interest in Mine 12, the coal mine located in Russia, for cash consideration of $2 million. Under the terms of the agreement, control over Mine 12 was transferred to the purchaser at the date of the agreement and the Group ceased to consolidate Mine 12 from that date. In July 2009, the regulatory approval for the acquisition of Mine 12 was received and the transaction was completed. Loss from the sale of Mine 12 in the amount of $9 million was included in the consolidated statement of operations for the year ended December 31, 2009. Other Disposal Groups Held for Sale Other disposal groups held for sale included a few small subsidiaries involved in non-core activities (construction business, trading activity and recreational services) and other non-current assets. 196196 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 13. Other Non-Current Assets Non-Current Financial Assets US$ million Investments in Delong Holdings Limited Investments in Cape Lambert Iron Ore Restricted deposits at banks Loans issued to related parties (Note 29) Loans receivable (Note 29) Trade and other receivables (Note 29) Other Other Non-Current Assets US$ million Deposit to secure put option for the shares of OAO Vanady-Tula (Note 4) Prepayment for a contribution to a newly established joint venture Prepaids for purchases of minority interests Long-term input VAT Deﬁ ned beneﬁ t plan asset (Note 23) Fees for future purchases under a long-term contract Other Investments in Delong Holdings Limited 2009 $ 43 – 18 – 4 1 – 2008 $ 23 10 2 38 5 40 – 2007 $ – – 5 46 12 27 3 $ 66 $ 118 $ 93 2009 $ 12 – 8 59 15 12 22 $ 128 2008 $ 105 28 – 2 4 – 21 $ 160 2007 $ 126 – – 2 – – 19 $ 147 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 was 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 “Offer 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 also granted the Group a call option to acquire an additional 32.08% of the issued share capital of Delong. The Group 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 were 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 was 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, subsequently they were extended to August 18, 2009. VII 197 197 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 13. Other Non-Current Assets (continued) Investments in Delong Holdings Limited (continued) In addition, the beneﬁ cial shareholders of Best Decade have agreed to sell in the future approximately 8.96% of the issued share capital 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 was estimated at S$3.9459 per share or S$189 million ($131 million at the exchange rate as of December 31, 2008). 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 statement of operations for the year ended December 31, 2008, within gain/(loss) on available-for-sale ﬁ nancial assets (Note 7). The foreign exchange gain amounted to $2 million. 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 was assessed as remote. On August 18, 2009, the call and the put options under the agreement to acquire shares of Delong lapsed and ceased to have any further effect. In 2009, the Group exercised the swap contract for the shares of Delong and used the proceeds to acquire approximately 5.47% of Delong shares for cash consideration of S$31 million ($22 million at the exchange rate as of the date of the transaction). The loss of $7 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 statement of operations, within gain/(loss) on available-for-sale ﬁ nancial assets (Note 7). 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 statement of operations, within change in the fair value of derivatives (Note 7). In July 2008, the Group additionally paid $15 million and, thereby, converted all of the options into shares. As of December 31, 2008, investments in Cape Lambert Iron Ore represented a 13.65% ownership interest in the entity. 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 statement of operations for the year ended December 31, 2008, within gain/(loss) on available-for-sale ﬁ nancial assets (Note 7). The foreign exchange loss amounted to $8 million. In 2009, the shares of Cape Lambert Iron Ore were sold for cash consideration of $17 million. The gain in the amount of $7 million was recognised in gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated statement of operations, within gain/(loss) on available-for-sale ﬁ nancial assets (Note 7). 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 bore interest of 10% per annum and mature in 2013. In 2009, the interest rate was reduced to 0.1%. In 2009 and 2008, the Group wrote off $37 million and $4 million in respect of this loan. These amounts were included in share of proﬁ ts/(losses) of joint ventures and associates caption of the consolidated statement of operations. 198198 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 14. Inventories Inventories consisted of the following as of December 31: US$ million Raw materials and spare parts: – at cost – at net realisable value Work-in-progress: – at cost – at net realisable value Finished goods: – at cost – at net realisable value 2009 2008 2007 $ 659 77 736 264 112 376 544 230 774 $ 974 145 1,119 376 156 532 496 269 765 $ 429 332 761 210 – 210 648 – 648 $ 1,886 $ 2,416 $ 1,619 As of December 31, 2009, 2008 and 2007, the net realisable value allowance was $161 million, $318 million and $12 million, respectively. As of December 31, 2009, 2008 and 2007, certain items of inventory with an approximate carrying amount of $81 million, $648 million and $415 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 21). 15. Trade and Other Receivables Trade and other receivables consisted of the following as of December 31: US$ million Trade accounts receivable Other receivables Allowance for doubtful accounts 2009 $ 931 160 1,091 (90) $ 1,001 2008 $ 1,365 90 1,455 (86) 2007 $ 1,156 723 1,879 (77) $ 1,369 $ 1,802 Ageing analysis and movement in allowance for doubtful accounts are provided in Note 29. 199 199 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 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 effected on the same terms, conditions and amounts as transactions between unrelated parties. Amounts owed by/to related parties at December 31 were as follows: US$ million Corber Kazankovskaya Lanebrook Limited Marens Raspadsky Ugol SEAR-MF Yuzhny GOK Other entities Less: allowance for doubtful accounts Amounts due from related parties Amounts due to related parties 2009 $ – 2008 $ – 2007 $ – 14 53 2 1 – 22 17 109 (2) 10 81 2 1 – 37 9 140 (3) 7 – 31 – –– – 24 62 (2) 2009 2008 2007 $ – 1 – – 73 154 7 235 – $ – 1 – – 56 – 231 34 322 – $ 70 7 1,022 – 24 19 – 62 1,204 – $ 107 $ 137 $ 60 $ 235 $ 322 $ 1,204 Transactions with related parties were as follows for the years ended December 31: US$ million Evrazmetall-Centre Evrazmetall-Chernozemie Evrazmetall-Povolzhie Evrazmetall-Severo-Zapad Evrazmetall-Sibir Evrazmetall-Ural Interlock Security Services Kazankovskaya Raspadsky Ugol Yuzhkuzbassugol Yuzhny GOK Other entities 2009 $ – – – – – – 1 5 11 – 6 8 Sales to related parties Purchases from related parties 2008 2007 2009 2008 2007 $ – $ 144 $ – – – – – 1 – – – 57 19 65 65 46 137 157 – – – 1 – 17 – – – – – – 27 15 107 – 34 18 $ – – – – – – 32 – 354 – 631 46 $ – – – – – – 5 – 192 121 – 51 In addition to the disclosures presented in this note, the balances and transactions with related parties are disclosed in Notes 4, 11 and 13. $ 31 $ 77 $ 632 $ 201 $ 1,063 $ 369 200200 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 16. Related Party Disclosures (continued) Corber is the Group’s joint venture (Note 11). At December 31, 2007, amounts due to Corber represented advances received from the entity in respect of dividends to be declared for 2007. 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, the Group sold approximately 5% 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. In October 2009, the Group acquired these entities (Note 4 – Steel Dealers). Interlock Security Services is a group of entities controlled by a member of the key management personnel. The entities provide security services to the Russian subsidiaries of the Group. Kazankovskaya is an associate of the Group (Note 11). In 2009, the Group purchased coal from the entity and sold mining equipment and inventory to Kazankovskaya. 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 (Note 18). 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, 2010. 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. In 2008, the loan was repaid to the Group, the outstanding balances represent the unpaid interest. OOO Raspadsky Ugol (“Raspadsky Ugol”), a subsidiary of the Group’s joint venture, sells coal to the Group. Raspadsky Ugol represents approximately 18% of volume of the Group’s coal purchases. The coal was sold at prevailing market prices at the dates of transactions. In 2009, the Group sold steel products and renderred services to Raspadsky Ugol. ZAO SEAR-MF (“SEAR-MF”) is an entity under control of an ultimate principal shareholder of the Group. The accounts payable to SEAR- MF represented zero-interest loans to Yuzhkuzbassugol, the Group’s subsidiary, which were settled in 2008. 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 associate of Lanebrook Limited. The Group sold steel products to Yuzhny GOK and purchased iron ore from the entity. The transactions are based on market prices. Compensation to Key Management Personnel Key management personnel include the following positions within the Group: • directors of Evraz Group S.A., • top managers of major subsidiaries. 201 201 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 16. Related Party Disclosures (continued) Compensation to Key Management Personnel (continued) In 2009, 2008 and 2007, key management personnel totalled 58, 60 and 48 persons, respectively. Total compensation to key management personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following: US$ million Salary Performance bonuses Social security taxes Share-based payments (Note 24) Termination beneﬁ ts Other beneﬁ ts 2009 $ 18 10 1 3 – 1 2008 $ 22 29 1 18 – 1 2007 $ 25 20 1 3 10 – $ 33 $ 71 $ 59 17. Other Taxes Recoverable Taxes recoverable consisted of the following as of December 31: US$ million Input VAT Other taxes 2009 $ 173 85 $ 258 2008 $ 257 140 $ 397 2007 $ 209 142 $ 351 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. Other Current Assets Other current assets included the following as of December 31: US$ million Financial instrument relating to the transaction with a 49% ownership interest in NS Group (Note 4) Investments in Yuzhny GOK (Note 16) Bank deposits Restricted deposits at banks Financial assets at fair value through proﬁ t or loss (Note 13) Other short-term investments 202202 2009 $ – 38 22 59 – 1 2008 $ 508 38 25 – 18 – 2007 $ – – 25 – – – $ 120 $ 589 $ 25 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 18. Other Current Assets Financial Instrument Relating to the Transaction with a 49% Ownership Interest in NS Group This ﬁ nancial instrument represented 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 statement of operations for the year ended December 31, 2008 (Note 7). Transaction costs paid in 2009 amounted to $2 million (Note 7). Financial Assets at Fair Value through Profit or Loss In 2009, the Group recognised $7 million gain on swaps for the shares of Delong and Cape Lambert Iron Ore, which was included in gain/ (loss) on ﬁ nancial assets and liabilities caption of the consolidated statement of operations, within change in the fair value of derivatives. 19. Cash and Cash Equivalents Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of December 31: US$ million US dollar Russian rouble South African rand 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 2009 $ 304 170 110 75 14 1 1 – 2008 $ 536 124 177 45 27 12 7 2 2007 $ 72 55 105 83 – – 10 2 $ 675 $ 930 $ 327 2009 2008 2007 257,204,326 157,204,326 157,204,326 145,957,121 122,504,803 118,309,653 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. VII 203 203 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 20. Equity (continued) Share Capital (continued) Scrip Dividends On January 30, 2009, the Extraordinary General Meeting approved the modiﬁ cation of the method of payment of the 2008 interim dividends: 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. Share-based Payment Transactions In 2007, the participants exercised share options granted under the Company’s Incentive Plan 2005 (Note 24). 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 acquired its own shares (in the form of global depositary receipts) on the open market for the grantees or repurchased the share options after vesting. In 2009, 2008 and 2007, 234,813, 275,994 and 243,872 share options, respectively, were repurchased after vesting. The cash spent on repurchase of vested options, amounting to $3 million, $77 million and $21 million in 2009, 2008 and 2007, respectively, was charged to accumulated proﬁ ts. Treasury Shares During 2009, 2008 and 2007, the Group purchased 67,569, 1,037,498 and 55,656 treasury shares, respectively, for $5 million, $197 million and $8 million, respectively, and sold 135,000, 970,604 and 55,119 treasury shares, respectively, including 27,902, 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 $6 million, $107 million and $6 million in 2009, 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. Convertible Bonds and Equity Offerings On July 13, 2009, Evraz Group S.A. completed the offering of $600 million unsecured convertible bonds (the “Convertible Bonds Offering”) and $300 million equity in the form of global depository receipts (“GDRs”) listed on the London Stock Exchange, representing ordinary shares of Evraz Group S.A. (the “Equity Offering”). The bonds were issued at 100% of their principal amount. They bear interest of 7.25% per annum payable on a quarterly basis and mature on July 13, 2014. The conversion can be exercised at the option of bondholders on any date during the period from September 11, 2009 till July 6, 2014. The bonds will be convertible into GDRs at an initial conversion price of $21.20 per GDR. The conversion price represents a 28% premium to the equity offering placement price of $16.50 per GDR, which is the reference price for the convertible bonds. Lanebrook, the Company’s parent, and its afﬁ liate, subscribed for $200 million of the bonds. The Group can early redeem the bonds at their principal amount plus accrued interest if 15% or less of the bonds remain outstanding. In the equity offering, on July 13, 2009, 6,060,608 new shares were issued as GDRs at an issue price of $16.50 per GDR. The newly issued shares represented approximately 4.4% of the Company’s issued share capital after the issue. The Company granted to Goldman Sachs and Morgan Stanley (the “Joint Bookrunners”) in the convertible bonds offering an over- allotment option to subscribe to additional bonds for up to $50 million, which was exercised in full on July 27, 2009 and resulted in an increase in the aggregate principal amount of the bonds to $650 million. 204204 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 20. Equity (continued) Share Capital (continued) Convertible Bonds and Equity Offerings (continued) The Company granted to the Joint Bookrunners in the equity offering an over-allotment option to subscribe to up to 909,090 additional GDRs, represented by 303,030 additional new shares, corresponding to additional gross proceeds of $15 million. This option was exercised in full on July 27, 2009. Transaction costs relating to the bonds and equity offerings amounted to $10 million and $5 million, respectively. The Group considered that the convertible bonds represent a ﬁ nancial instrument that creates a ﬁ nancial liability and grants an option to the holders of the instrument to convert it into an equity instrument of the Company. The Group recognised the liability and equity components separately in its statement of ﬁ nancial position. The Group determined the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an associated equity component. The fair value of this liability was calculated based on cash ﬂ ows discounted at the Group’s market rate of interest (without a conversion option) at the date of the convertible bonds offering (13.26%). The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares was then determined by deducting the fair value of the ﬁ nancial liability from the fair value of the compound ﬁ nancial instrument as a whole. Transaction costs relating to the convertible bonds offering were allocated between liability and equity components on a pro rata basis. As a result, the equity component of the convertible bonds amounting to $133 million was included in equity. Increase of Authorised Share Capital On July 31, 2009, Evraz Group S.A. increased its authorised share capital by 100,000,000 shares with par value of €2 each. In addition, in connection with the issue of convertible bonds, the shareholders resolved to extend the authority of the Board of Directors to issue new shares for another ﬁ ve years as well as the right of the Company to acquire up to 10% of its own shares. Shares Lending Transactions In order to facilitate the issuance of the convertible bonds, Morgan Stanley offered to certain institutional investors an opportunity to borrow ordinary shares of Evraz Group S.A., represented by GDRs, during the term of the bonds by means of a loan of GDRs beneﬁ cially owned by Lanebrook (the “Borrowed GDRs”). On August 4, 2009, the Board of Directors approved the issue of the new ordinary shares to Lanebrook in the amount equal to the number of shares underlying the borrowed GDRs. The Group effected a novation of the shares lending arrangements, whereby the Company was substituted for Lanebrook as a lender of the borrowed GDRs. As a result, on August 12, 2009, 7,333,333 new shares were issued to Lanebrook in exchange for the right to receive 7,333,333 shares lended under the shares lending transactions. These transactions had no impact on equity, as the Group’s net assets did not change as a result of these transactions. Earnings per Share Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. 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. 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 134,457,386 123,495,726 119,363,489 Effect of dilution: share options – 435,504 903,146 2009 2008 2007 Weighted average number of ordinary shares adjusted for the effect of dilution Proﬁ t/(loss) for the year attributable to equity holders of the parent, US$ million Basic earnings/(losses) per share Diluted earnings/(losses) per share 205 205 134,457,386 123,931,230 120,266,635 $ (1,251) $ (9.30) $ (9.30) $ 1,797 $ 14.55 $ 14.50 $ 2,103 $ 17.62 $ 17.49 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 20. Equity (continued) Earnings per Share (continued) 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 statement of operations. 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. In 2007 and 2008, share options granted to participants of the Group’s Incentive Plans (Note 24) had a dilutive effect. In 2009, the Group reported net loss. Consequently, the options were antidilutive. In 2009, the convertible bonds were antidilutive as the interest (net of tax) per ordinary share obtainable on conversion exceeded basic earnings per share. 10,220,126 contingently issuable shares on conversion of the bonds could potentially dilute basic earnings per share in the future. There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these consolidated ﬁ nancial statements. Dividends Dividends declared by Evraz Group S.A. were as follows: 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 20/06/2007 04/10/2007 15/05/2008 29/08/2008 20/06/2007 19/10/2007 14/05/2008 18/09/2008 390 568 497 1,011 3.30 4.80 4.20 8.25 The shareholders meeting held May 15, 2009 resolved not to declare ﬁ nal dividends for 2008. No interim dividends were declared during 2009. Interim dividends for 2008 include $2 million in respect of treasury shares. The ﬁ nal dividends for 2006 were distributed from accumulated proﬁ ts to the extent that distributable amounts were available as of December 31, 2006. 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 representing the excess of declared dividends over the Company’s distributable accumulated proﬁ ts as of December 31, 2006 reduced additional paid-in capital in 2007. In addition, certain subsidiaries of the Group declared dividends. The share of minority shareholders in those dividends in 2009, 2008 and 2007 was $1 million, $80 million and $40 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 statutory 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. Other Movements in Equity Acquisitions of Minority Interests in Subsidiaries In 2008, the Group acquired minority interests in certain subsidiaries (Note 6). The excess of acquired minority interests over the consideration amounting to $21 million was recorded as additional paid-in capital and the excess of consideration over the carrying value of minority interests amounting to $37 million 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. Derecognition of Minority Interests in Subsidiaries In 2009, the Group derecognised minority interests in Vanady-Tula resulting in a $5 million charge to accumulated proﬁ ts (Note 4). 206206 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 21. Loans and Borrowings Short-term and long-term loans and borrowings were as follows as of December 31: US$ million Bank loans 8.875 per cent notes due 2013 7.25 per cent convertible bonds due 2014 (Note 20) 8.25 per cent notes due 2015 9.5 per cent notes due 2018 10.875 per cent notes due 2009 13.5 per cent bonds due 2014 Unamortised debt issue costs Difference between the nominal amount and liability component of convertible bonds (Note 20) Interest payable 2009 $ 4,605 1,156 650 577 509 – 661 (196) (126) 87 $ 7,923 2008 $ 7,163 1,245 – 725 560 300 – (94) – 87 2007 $ 5,748 – – 750 – 300 – (82) – 40 $ 9,986 $ 6,756 As of December 31, 2009, 2008 and 2007, total interest bearing loans and borrowings consisted of short-term loans and borrowings in the amount of $411 million, $2,495 million and $1,260 million, respectively, and long-term loans and borrowings in the amount of $7,747 million, $7,498 million and $5,538 million, respectively, including the current portion of long-term liabilities of $1,498 million, $1,346 million and $804 million, respectively. The average effective annual interest rates were as follows at December 31: Long-term borrowings Short-term borrowings 2009 7.30% 13.49% 5.11% – – – – 2008 6.56% – 5.54% – – – – 2007 7.9% 9.1% 5.9% – –– 7.3% –– 2009 4.18% 13.25% 1.46% 3.38% – 2008 6.40% 16.50% 6.06% 3.49% – – – 2007 6.2% 8.0% 5.5% – 13.4% – 12.5% VII US dollar Russian rouble Euro Czech koruna Ukrainian hryvnia Canadian dollar South African rand 207 207 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 21. Loans and Borrowings (continued) The liabilities are denominated in the following currencies: US$ million US dollar Russian rouble Euro Czech koruna Ukrainian hryvnia Canadian dollar Unamortised debt issue costs Difference between the nominal amount and liability component of convertible bonds (Note 20) Covenants Reset 2009 $ 7,233 701 297 14 – – (196) (126) 2008 $ 9,345 364 348 23 – – (94) – 2007 $ 6,200 182 311 – 140 5 (82) – $ 7,923 $ 9,986 $ 6,756 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. In November 2009, the lenders under certain bank facilities approved the requested amendments to the agreements, which included a reset of the ﬁ nancial covenants. The total principal amount of these borrowings at December 31, 2009 was $2,895 million. As a result, the ﬁ nancial covenant ratios tested on the Group’s consolidated numbers were loosened, with no testing for the year 2009; all ﬁ nancial covenant ratios that were tested on the consolidated numbers of Mastercroft Limited were replaced with the new ratios tested on the Group’s consolidated numbers; new restrictions on capital expenditure, acquisitions and loans to third parties were established; a number of exemptions were introduced to the debt incurrence covenants, where applicable, allowing the Group to reﬁ nance its current debt maturities in the ordinary course. In December 2009, the Group received the consent of the holders of its notes due in 2013, 2015 and 2018 totalling $2,242 million to amend the terms of certain covenants in the notes. The ﬁ nancial covenant ratios of the notes were subsequently amended in a manner similar to the amendments to the bank facilities. In connection with the covenants reset, the Group incurred transaction costs comprising consent fees and legal fees amounting to $114 million, which will be amortised during the period of the borrowings. At December 31, 2009, the unpaid transaction costs were $29 million. Covenants Compliance During 2009 A ﬁ nancial ratio maintenance covenant for the testing period ending June 30, 2009, applying under a syndicated loan agreement of one of the Group’s subsidiaries, could have been breached when tested, in accordance with that loan agreement, following the issuance of the subsidiary’s interim ﬁ nancial statements in November 2009. However, no event of default has occurred under the loan agreement, because that subsidiary obtained the syndicate’s consent to reset the covenant levels commencing with the testing period ended June 30, 2009. In August 2009, the loan agreement was amended to implement that consent. The amendments include an additional pledge of the borrower’s receivables and a guarantee of Evraz Group S.A. in respect of the loan. 208208 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 21. Loans and Borrowings (continued) Pledged Assets The Group pledged its rights under some export contracts as collateral under the loan agreements. All proceeds from sales of steel pursuant to these contracts can be used to satisfy the obligations under the loan agreements in the event of a default. At December 31, 2009, 2008 and 2007, the Group had equipment with a carrying value of $11 million, $1,131 million and $121 million, respectively, pledged as collateral under the loan agreements. In addition, the Group pledged inventory with a carrying value of $81 million, $648 million and $415 million as of December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, 100% less one share of West- Siberian Iron & Steel Plant were pledged as collateral under bank loans. This subsidiary represents 15% of the consolidated assets and 9% of the consolidated revenues of the Group. At December 31, 2009, the net assets (including intra-group balances) of West-Siberian Iron & Steel Plant were $3,162 million. In addition, at the end of the reporting period, 50% less 1 share of Kachkanarsky Mining-and-Processing Integrated Works were pledged as collateral under an unutilised bank loan. Issue of Notes and Bonds In August and September 2004, EvrazSecurities issued guaranteed notes amounting to $300 million. The notes bore interest of 10.875% per annum payable semi-annually and matured on August 3, 2009. In August 2009, the Group repaid all its liabilities under these notes. 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. 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 redeemed 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 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 statement of operations for the year ended December 31, 2008. In 2009, the Group issued convertible bonds in the amount of $650 million, which bear interest of 7.25% per annum and mature on July 13, 2014 (Note 20). In 2009, the Group issued rouble-denominated bonds in the total amount of 20,000 million Russian roubles, which bear interest of 13.50% per annum and mature on October 16, 2014. The currency and interest rate risk exposures of this transaction were partially economically hedged (Note 26). Repurchase of Notes and Bonds In 2008, the Group re-purchased notes due 2013, 2015 and 2018 with the nominal amount of $220 million for cash consideration of $121 million. As a result, the Group recognised a gain on extinguishment of debts in the amount of $99 million within gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated statement of operations for the year ended December 31, 2008. In 2009, the Group re-purchased notes due 2009, 2013, 2015 and 2018 with the nominal amount of $417 million for cash consideration of $302 million. As a result, the Group recognised a gain on extinguishment of debts in the amount of $115 million within gain/(loss) on ﬁ nancial assets and liabilities caption of the consolidated statement of operations for the year ended December 31, 2009. Loans from the Russian State Banks In 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 matured in one year from the dates of disbursement. The interest rates were set at one year LIBOR plus 5% per annum (VEB) and 16.50% per annum (VTB). In 2008, the Group utilised $1,342 million under these loan agreements and $805 million were disbursed in 2009. These facilities were used for reﬁ nancing of short-term loans. VII 209 209 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 21. Loans and Borrowings (continued) Loans from the Russian State Banks (continued) In December 2009, the Group fully repaid its liabilities under $800 million loan from VEB and 10,000 million roubles loan from VTB. In November 2009, the maturity of the VEB loan facility in the total amount of $1,007 million was extended for another twelve months. Consequently, the VEB tranches totalling $805 million have been classiﬁ ed as non-current liabilities in the consolidated statement of ﬁ nancial position as of December 31, 2009. Subsequent to the reporting date, the agreement with VEB has been further amended (Note 32). Unamortised Debt Issue Costs Unamortised debt issue costs represent agent commission and transaction costs paid by the Group in relation to the arrangement and reset of loans and notes. Unutilised Borrowing Facilities The Group had the following unutilised borrowing facilities as of December 31: US$ million Unutilised borrowing facilities 2009 $ 1,345 2008 $ 1,679 2007 $ 1,015 22. Finance Lease Liabilities 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 2 to 13 years. The estimated remaining useful life of leased assets varies from 1 to 36 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 Buildings and constructions Machinery and equipment Transport and motor vehicles Assets under construction 2009 $ 6 31 101 10 $ 148 2008 $ – 16 73 – $ 89 2007 $ – 17 93 – $ 110 The leased assets are included in property, plant and equipment in the consolidated statement of ﬁ nancial position (Note 9). Future minimum lease payments were as follows at December 31: 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 2009 2008 2007 Minimum lease payments Present value of minimum lease payments Minimum lease payments Present value of minimum lease payments Minimum lease payments Present value of minimum lease payments $ 24 $ 17 $ 20 $ 15 $ 22 $ 15 65 7 96 (21) 51 7 75 – 41 8 69 (14) 34 6 55 – 57 9 88 (19) 46 8 69 – $ 75 $ 75 $ 55 $ 55 $ 69 $ 69 In the years ended December 31, 2009, 2008 and 2007, the average interest rates under the ﬁ nance lease liabilities were 10.0%, 10.0% and 9.6%. 210210 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts Russian Plans In 2007-2009, the Russian subsidiaries of the Group provided 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 various 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. At certain subsidiaries, the lifetime pension payments have been cancelled for employees retiring after January 1, 2009 and lump-sum amounts payable at the retirement date were stopped during 2009. These beneﬁ ts have been replaced by new deﬁ ned beneﬁ t plans under which the contributions have to be made to a separately administered 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. In 2009, the Group realised a staff optimisation programme. The Group paid $22 million as termination beneﬁ ts to approximately 10,000 employees discharged as a result of the staff optimisation measures. The termination payments were recognised as expense and included in other operating expense caption of the consolidated statement of operations for the year ended December 31, 2009. Deﬁ ned contribution plans represent payments made by the Group to the Russian 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 contribution 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. 211 211 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts (continued) Deﬁ ned Contribution Plans The Group’s expenses under deﬁ ned contribution plans were as follows: US$ million Expense under deﬁ ned contribution plans 2009 $ 187 2008 $ 283 2007 $ 220 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 statement of operations for the years ended December 31, 2009, 2008 and 2007 and amounts recognised in the consolidated statement of ﬁ nancial position as of December 31, 2009, 2008 and 2007 for the deﬁ ned beneﬁ t plans were as follows: Net benefit expense (recognised in cost of sales and general and administrative expenses) Russian plans Ukrainian plans USA & Canadian plans Other plans Total $ (5) (11) – – 1 – 1 $ (6) (7) – (1) (2) – – $ (13) (33) 25 (2) (1) 7 (1) $ (1) (2) – (1) – – – $ (25) (53) 25 (4) (2) 7 – $ (14) $ (16) $ (18) $ (4) $ (52) Russian plans Ukrainian plans USA & Canadian plans $ (8) (11) – (2) 1 – 13 $ (4) (4) – – (11) – – $ (11) (24) 25 (5) – (8) – Other plans $ (1) (3) – 1 – – – Total $ (24) (42) 25 (6) (10) (8) 13 $ (7) $ (19) $ (23) $ (3) $ (52) Year ended December 31, 2009 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 Minimum funding requirements Curtailment gain/(loss) Net beneﬁ t expense 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 Minimum funding requirements Curtailment gain Net beneﬁ t expense 212212 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts (continued) Deﬁ ned Beneﬁ t Plans (continued) Net benefit expense (recognised in cost of sales and general and administrative expenses) (continued) 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 Net beneﬁ t expense 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, 2009 US$ million Beneﬁ t obligation Plan assets Unrecognised net actuarial gains/(losses) Unrecognised past service cost Beneﬁ t asset Beneﬁ t 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 213 213 Russian plans Ukrainian plans $ (5) $ – (9) – (1) 1 – – – – USA & Canadian plans Other plans Total $ (8) (15) 15 – – $ (1) (1) – – – $ (14) (25) 15 (1) 1 $ (14) $ – $ (8) $ (2) $ (24) 2009 $ 66 65 1 2008 $ (101) (101) – 2007 $ 19 18 1 Russian plans Ukrainian plans $ 173 $ 72 (1) 172 (55) 14 – $ 131 – 72 (4) (12) – $ 56 USA & Canadian plans $ 562 (403) 159 (74) – 15 Other plans Total $ 20 $ 827 – 20 – – – (404) 423 (133) 2 15 $ 100 $ 20 $ 307 Russian plans Ukrainian plans USA & Canadian plans Other plans Total $ 150 (1) 149 (31) 18 – $ 136 $ 72 – 72 (12) (15) – $ 45 $ 475 (316) 159 (67) – 4 $ 20 – 20 (5) – – $ 717 (317) 400 (115) 3 4 $ 96 $ 15 $ 292 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts (continued) Deﬁ ned Beneﬁ t Plans (continued) Benefit liability (continued) December 31, 2007 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, 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 At December 31, 2008 Interest cost on beneﬁ t obligation Current service cost Beneﬁ ts paid Actuarial (gains)/losses on beneﬁ t obligation Curtailment gain Disposal of subsidiaries Translation difference Russian plans Ukrainian plans $ 183 $ 56 (2) 181 (24) 22 – 56 – – USA & Canadian plans Other plans Total $ 275 (199) 76 18 – $ 21 – 21 (3) – $ 535 (201) 334 (9) 22 $ 179 $ 56 $ 94 $ 18 $ 347 Russian plans Ukrainian plans USA & Canadian plans Other plans Total $ 89 $ 9 5 70 (12) 11 1 9 182 11 8 (1) – (21) 13 (14) (28) 150 11 5 (12) 29 (5) (2) (3) – – – 56 – – – – 56 4 4 33 – (5) 17 – (37) 72 7 6 (5) (6) – – (2) $ 36 $ 6 $ 131 15 8 235 (13) (13) – 7 275 24 11 – 229 (21) (35) – (8) 475 33 13 (43) 46 – – 38 1 1 14 (1) 3 – (2) 22 3 1 – – (2) 2 – (6) 20 2 1 (2) (5) – – 4 25 14 375 (26) 1 1 14 535 42 24 32 229 (49) (3) (14) (79) 717 53 25 (62) 64 (5) (2) 37 At December 31, 2009 $ 173 $ 72 $ 562 $ 20 $ 827 The amount of contributions expected to be paid to the deﬁ ned beneﬁ t plans during 2010 approximates $52 million. 214214 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts (continued) Deﬁ ned Beneﬁ t Plans (continued) Russian plans Ukrainian plans USA & Canadian plans Other plans Total Changes in the fair value of plan assets US$ million At December 31, 2006 Change in plan assets due to business combinations Expected return on plan assets Contributions of 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 of employer Beneﬁ ts paid Actuarial gains/(losses) on plan assets Minimum funding requirements Curtailment gain Translation difference At December 31, 2008 Expected return on plan assets Contributions of employer Beneﬁ ts paid Actuarial gains/(losses) on plan assets Minimum funding requirements Translation difference At December 31, 2009 $ 1 – – 13 (12) – – 2 – – 21 (21) – – (1) – 1 – 11 (12) 1 – – $ 1 $ – – – – – – – – – – 5 (5) – – – – – – 5 (5) – – – $ – $ 23 153 15 13 (13) 4 4 199 235 25 17 (21) (125) (8) – (6) 316 25 24 (43) 40 7 34 $ 403 $ – – – 1 (1) – – – – – 2 (2) – – – – – – 2 (2) – – – $ – The major categories of plan assets as a percentage of total plan assets were as follows at December 31: US$ million USA & Canadian plans: Equity funds and investment trusts Corporate bonds and notes Shares Property Cash 2009 86% 9% 0% 3% 2% 2008 76% 11% 4% 4% 5% 215 215 $ 24 153 15 27 (26) 4 4 201 235 25 45 (49) (125) (8) (1) (6) 317 25 42 (62) 41 7 34 $ 404 2007 58% 22% 8% 9% 3% VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 23. Employee Beneﬁ ts (continued) Deﬁ ned Beneﬁ t Plans (continued) Changes in the fair value of plan assets (continued) 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 2009 $ 827 404 (423) 54 24 2008 $ 717 325 (392) (38) 16 2007 $ 535 201 (334) (18) 5 2006 $ 131 24 (107) 11 – 2005 $ 81 – (81) – – The principal assumptions used in determining pension obligations for the Group’s plans are shown below: 2009 2008 2007 US$ million Rus- sian plans Ukrai- nian plans USA & Canadian plans Other plans Rus- sian plans Ukrai- nian plans USA & Canadian plans Other plans Rus- sian plans Ukrai- nian plans USA & Canadian plans Other plans Discount rate 10% 12.4% 5.5-9.3% 4.2-9.5% 8.5% 10.85% 5.75-7.5% 4.3% 6.8% 8% 5.0-6.4% 4.7-8.3% Expected rate of return on assets Future beneﬁ ts increases Future salary increase Healthcare costs increase rate 12% – 1.3-8.5% – 12% – 6.75-8.5% – 12% – 7.8-8.5% 8% 8% – – 3% 3-10% 6% 7-10% 0-7.75% 3.9% 9% 3-7.5% 6.3-7.5% 6% 10% 3-4% 3.2% – 8-10% – – – 8-10% – 5% 5% – – 5% 0% 3-4% – 0-3% 3-5% – 7-10% – The expected long-term rate of return on deﬁ ned beneﬁ t pension plan assets represents the weighted-average asset return for each forecasted 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. 216216 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 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 Directors, senior executives and employees (“participants”) could 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 could be exercised for $65.37 per share. The vesting dates under Plan 2005 were determined by the reference to the grant date (June 15, 2005) and became vested on the ﬁ rst, second and third anniversary of the grant date. Under Plan 2006, the vesting date for each tranche was the date falling 15 days after the date when the Board of directors decides to announce annual results. The actual vesting dates were as follows: Incentive Plan 2006 Incentive Plan 2005 December 15, 2005 June 15, 2006 May 11, 2007 June 15, 2007 April 15, 2008 June 15, 2008 May 15, 2009 – – 99,282 – 148,904 – 248,183 496,369 63,685 555,170 – 750,000 – 1,250,000 – 2,618,855 The plans were administrated by the Board of Directors of the Company. The Board of Directors had 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, expired on termination date. Under Plan 2005, unless otherwise determined by the Board of directors, all options which were not vested on the grantee’s termination date became vested and remained exercisable within the period of one year. The options which were vested on the grantee’s termination date remained exercisable and expired automatically as of the date of expiration. In 2007, the Board of Directors made a decision to cease the issuance of new shares under the share options plans. Starting from May 23, 2007, the Group acquired its own shares in the form of global depositary receipts (“GDR”) on the open market for the grantees or repurchases the share options after vesting. On April 21, 2008, the Board of Directors resolved to delay the exercise of 17.5% of the options under Incentive Plan 2005. The participants received the right to claim indemniﬁ cation from the Company of the difference between the market price at the date of exercise and the price of $100 per GDR. In addition, the participants had 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. In 2008 and 2006, the vesting date of the share options held by certain participants resigned from the Group was accelerated. There have been no other modiﬁ cations or cancellations to the plans during 2007-2009. 217 217 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 24. Share-based Payments (continued) The Group accounted for its share options at fair value pursuant to the requirements of IFRS 2 “Share-based Payment”. The weighted average 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 4-6 45.37 5.42-5.47 0.7-2.7 $ 66.06 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 6-8 55.00 4.36-4.59 0.5-3 $ 42.90 December 31, 2008 n/a 84.10 2.59 0.3 $ 25.32 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. 2009 2009 2008 2008 2007 2007 No. WAEP No. WAEP No. WAEP Outstanding at January 1 370,340 $ 50.71 933,284 $ 48.72 2,266,580 $ 48.29 Forfeited during the year Exercised during the year: by issue of shares by purchase of shares on the open market by repurchase of vested share options Outstanding at December 31 Vested at December 31 Exercisable at December 31 (107,625) 48.30 (33,846) 45.13 (224,258) (262,715) 51.70 (529,098) 47.55 (1,109,038) 65.37 44.48 – (27,902) (234,813) – (253,104) (275,994) (810,047) (55,119) (243,872) – $ – $ – – – – 370,340 $ 50.71 933,284 $ 48.72 92,751 $ 45.96 176,842 $ 45.00 5,029 43.50 42,619 44.02 The weighted average share price at the dates of exercise was $67.29, $310.22 and $111.33 in 2009, 2008 and 2007, respectively. The weighted average remaining contractual life of the share options outstanding as at December 31, 2008 and 2007 was 0.30 and 0.54 years, respectively. 218218 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 24. Share-based Payments (continued) In the years ended December 31, 2009, 2008 and 2007, compensation expense, arising from the share option plans, was as follows: US$ million Expense arising from equity-settled share-based payment transactions Expense arising from cash-settled share-based payment transactions 2009 $ – 6 $ 6 2008 $ 2 33 $ 35 2007 $ 5 – $ 5 In 2009, the Group paid $35 million in respect of the cash-settled share-based compensations, $4 million were unpaid at December 31, 2009. 25. Provisions In the years ended December 31, 2009, 2008 and 2007, the movement in provisions was as follows: US$ million 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 Additional provisions Increase from passage of time Effect of changes in estimated costs and timing Utilised in the year Unused amounts reversed Translation difference At December 31, 2009 Site Restoration Costs Site restoration and decommissioning costs Legal claims Other provisions $ 38 $ 3 7 4 82 (2) – 5 134 47 9 (10) 11 (5) – (26) 160 15 12 (1) (6) – 10 10 – 13 (2) (9) – 15 6 – – – (3) (13) (1) 4 7 – – (3) (2) – $ 190 $ 6 $ 6 14 – 50 (25) (7) – 38 30 – – (1) (9) (3) (3) 52 28 – – (59) (6) – $ 15 Total $ 47 31 4 145 (29) (16) 5 187 83 9 (10) 10 (17) (16) (30) 216 50 12 (1) (68) (8) 10 $ 211 Under the legislation, mining companies and steel mills have obligations to restore mining sites and contaminated land. The respective 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 8.00% to 13.00% (2008: from 6.85% to 11.90%, 2007: from 6.85% to 8.50%). VII 219 219 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 26. Other Long-Term Liabilities Other long-term liabilities consisted of the following as of December 31: US$ million Contingent consideration payable 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 Derivatives not designated as hedging instruments (Note 21) Other liabilities Less: current portion (Note 27) Derivatives Not Designated As Hedging Instruments 2009 $ 31 14 7 18 – 6 18 94 (26) $ 68 2008 $ 34 14 16 18 – – 7 89 (31) $ 58 2007 $ 34 14 15 13 127 – 7 210 (155) $ 55 In 2009, the Group issued rouble-denominated bonds in the total amount of 20,000 million Russian roubles, which bear interest of 13.50% per annum (Note 21). To manage some of the transaction exposures, the Group concluded swap contracts under which it agreed to deliver $325 million at an interest rate of 7.50% per annum in exchange for 9,441 million roubles of the principal amount plus the accrued interest, and $50 million at an interest rate of 7.90% per annum in exchange for 1,450 million roubles of the principal amount plus the accrued interest. The exchange will be made on the same dates as the payments under the bonds. These swap contracts were not designated as cash ﬂ ow or fair value hedge. The Group accounted for these derivatives at fair value which was determined using valuation techniques. The change in fair value of the derivatives amounting to $(6) million was recognised within gain/(loss) on ﬁ nancial assets and liabilities in the consolidated statement of operations for the year ended December 31, 2009 (Note 7). Contingent Consideration Payable Contingent consideration represents additional payments for the acquisition of Stratcor in 2006. The payments 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. In 2010, the Group paid $16 million in respect of this liability. 27. Trade and Other Payables Trade and other payables consisted of the following as of December 31: US$ million Trade accounts payable Promissory notes with current maturities Accrued payroll Termination beneﬁ ts Other long-term obligations with current maturities (Note 26) Other payables Maturity proﬁ le of the accounts payable is shown in Note 29. 220220 2009 $ 780 – 176 1 26 86 2008 $ 1,094 5 208 2 31 139 2007 $ 729 4 201 – 155 153 $ 1,069 $ 1,479 $ 1,242 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 28. Other Taxes Payable Taxes payable were mainly denominated in roubles and consisted of the following as of December 31: US$ million VAT Social insurance taxes Property tax Land tax Personal income tax Other taxes, ﬁ nes and penalties 2009 $ 67 29 16 5 10 13 2008 $ 72 31 15 9 10 17 2007 $ 113 39 15 10 13 19 $ 140 $ 154 $ 209 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 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 customer is Russian Railways (4.5% of total sales). 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 creditworthiness of the customers. Certain of the Group’s long-standing Russian customers for auxiliary products, such as heat and electricity, represent municipal enterprises and governmental organisations that experience ﬁ nancial difﬁ culties. The signiﬁ cant part of doubtful debts allowance consists of receivables 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. 221 221 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Credit Risk (continued) The maximum exposure to credit risk is equal to the carrying amount of ﬁ nancial assets, which is disclosed below. 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 2009 $ 77 – 104 1,002 5 107 675 $ 2008 2 – 622 1,409 113 156 930 $ 2007 5 3 25 1,829 60 88 327 $ 1,970 $ 3,232 $ 2,337 Receivables from related parties in the table above do not include prepayments in the amount of $nil, $19 million and $18 million as of December 31, 2009, 2008 and 2007, respectively. The ageing analysis of trade and other receivables, loans receivable and receivables from related parties is presented in the table below. US$ million Not past due Past due Less than six months between six months and one year over one year 2009 2008 2007 Gross amount Impairment Gross amount Impairment Gross amount Impairment $ 842 364 187 28 149 $ (1) (91) (5) (8) (78) $ 1,035 $ (8) $ 1,834 $ (3) 736 500 166 70 (85) (13) (7) (65) 222 133 16 73 (76) (4) (4) (68) $ 1,206 $ (92) $ 1,771 $ (93) $ 2,056 $ (79) In the years ended December 31, 2009, 2008 and 2007, 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 Liquidity Risk 2009 $ 93 40 (40) (1) $ 92 2008 $ 79 35 (7) (14) $ 93 2007 $ 59 15 – 5 $ 79 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 the rolling 12-month ﬁ nancial plan 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. The Group’s objective is to reﬁ nance its short-term debt by long-term borrowings. 222222 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Liquidity Risk (continued) The Group developed standard payment periods in respect of trade accounts payable and monitors the timeliness of payments to its suppliers and contractors. The following tables summarise the maturity proﬁ le of the Group’s ﬁ nancial liabilities based on contractual undiscounted payments, including interest payments. On demand Less than 3 months 3 to 12 months 1 to 2 years 2 to 5 years After 5 years Total $ $ 5 – – 17 22 25 32 1 – 58 $ 273 $ 930 $ 2,488 $ 1,091 $ 4,812 384 374 2 1 3 7 841 7 28 217 1,848 5 25 18 78 660 1,314 3,364 1,338 6,756 Year ended December 31, 2009 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 242 229 1,135 – – 30 5 103 16 242 264 1,254 904 69 22 995 – – – – – – 795 42 32 869 – – – – – – 41 5 3 49 – – – – – – 3,346 249 78 3,673 5 866 188 17 13 1,089 Financial instruments included in other liabilities Trade and other payables Payables to related parties Amounts payable under put options for shares of subsidiaries Dividends payable 5 196 112 17 13 – 647 62 – – Total non-interest bearing debt 343 709 – 23 14 – – 37 $ 607 $ 1,031 $ 1,951 $ 2,309 $ 4,233 $ 1,387 $ 11,518 223 223 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. 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 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 $ 61 54 2 – $ 1,727 $ 120 $ 1,333 $ 1,338 $ 4,587 357 3 16 239 3 4 633 7 13 366 8 29 1,649 23 63 117 2,103 366 1,986 1,741 6,322 627 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 – – – – – – – – – – 9 – – 9 – – – – – 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 224224 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Liquidity Risk (continued) 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 $ – – – – – – – – – 6 145 76 6 96 329 $ 42 23 1 – 66 398 84 4 486 127 695 68 – – 890 $ 268 $ 412 $ 176 $ 792 $ 1,690 108 4 15 395 1,356 235 13 110 4 1 527 947 190 15 202 8 13 399 2,393 234 30 1,604 1,152 2,657 – 46 2 – – 48 1 – – – – 1 – – – – – – 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 Payables to related parties in the tables above do not include advances received in the amount of $47 million, $138 million and $86 million as of December 31, 2009, 2008 and 2007, 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). 225 225 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) 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 other obligations. The Group incurs interest rate risk on liabilities with variable interest rate. The Group’s treasury function performs analysis of current interest rates. In case of changes in market ﬁ xed or variable rates management may consider reﬁ nancing of a particular 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. In estimating reasonably possible changes for 2007 the Group assessed the volatility of interest rates during the three years preceding the end of the reporting periods. In 2008 and 2009, the Group assessed reasonably possible changes based on the volatility of interest rates during the reporting periods. 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 2009 2008 2007 Basis points Effect on PBT Basis points Effect on PBT Basis points Effect on PBT US$ millions US$ millions US$ millions (25) 100 – – – – (25) 100 $ 8 (30) – – – – 1 $ (2) (53) 53 (106) 106 (33) 33 (30) 30 $ 24 (24) 4 (4) 1 (1) 1 $ (1) (125) 75 – – – – (150) 75 $ 24 (14) – – – – 3 $ (1) 226226 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Market Risk (continued) 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 denominated borrowings. The Group’s exposure to currency risk determined as the net monetary position in respective currencies was as follows: US$ million USD/RUB EUR/RUB EUR/USD CAD/USD EUR/CZK USD/CZK USD/ZAR EUR/ZAR USD/UAH RUB/UAH 227 227 2009 $ 1,732 (297) 108 1,281 22 (154) 41 43 (88) (15) 2008 $ 967 (390) 180 1,611 48 (216) (7) – (203) 12 2007 $ 430 (313) 193 – 71 (102) 36 – – – VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Market Risk (continued) Currency Risk (continued) 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 the Group assessed the volatility of foreign exchange rates during the three years preceding the end of the reporting periods. In 2008 and 2009, the Group assessed reasonably possible changes based on the volatility of foreign exchange rates during the reporting periods. 2009 2008 2007 Change in exchange rate Effect on PBT Change in exchange rate Effect on PBT Change in exchange rate Effect on PBT % US$ millions % US$ millions % US$ millions (15.65) 15.65 (12.18) 12.18 (12.96) 12.96 (14.02) 14.02 (10.28) 10.28 (18.52) 18.52 (21.41) 21.41 (17.74) 17.74 (31.30) 31.30 (13.53) 13.53 (271) 271 36 (36) (14) 14 (180) 180 (2) 2 29 (29) (9) 9 (8) 8 28 (28) 2 (2) (8.98) 8.98 (8.63) 8.63 (14.32) 14.32 (15.44) 15.44 (10.61) 10.61 (18.52) 18.52 (28.52) 28.52 – – (11.77) 11.77 (14.73) 14.73 (87) 87 34 (34) (26) 26 (249) 249 (5) 5 40 (40) 2 (2) – – 24 (24) (2) 2 (5.80) 4.20 (5.45) 3.25 (7.35) 7.35 – – (4.10) 4.10 (9.40) 9.40 (17.70) 13.00 – – – – – – (25) 18 17 (10) (14) 14 – – (3) 3 10 (10) (6) 5 – – – – – – USD/RUB EUR/RUB EUR/USD CAD/USD EUR/CZK USD/CZK USD/ZAR EUR/ZAR USD/UAH RUB/UAH Fair Value of Financial Instruments The Group uses the following hierarchy for determining and disclosing the fair value of ﬁ nancial instruments by valuation technique: • Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities; • Level 2: other techniques for which all inputs which have a signiﬁ cant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a signiﬁ cant effect on the recorded fair value that are not based on observable market data (unobservable inputs). 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 and promissory notes, approximate their fair value. As at 31 December 2009, the Group held the following ﬁ nancial instruments measured at fair value: US$ million Assets measured at fair value Available for sale ﬁ nancial assets Liabilities measured at fair value Derivatives not designated as hedging instruments 2009 43 6 Level 1 Level 2 43 – – 6 228228 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 29. Financial Risk Management Objectives and Policies (continued) Fair Value of Financial Instruments (continued) During the reporting period, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. The following table shows ﬁ nancial instruments which carrying amounts differ from fair values. US$ million 2009 2008 2007 Carrying amount Fair Value Carrying amount Fair value Carrying amount Fair value Long-term ﬁ xed-rate bank loans $ 1,234 $ 1,197 $ 369 $ 354 $ 436 $ 423 Long-term variable-rate bank loans 8.875 per cent notes due 2013 7.25 per cent convertible bonds due 2014 8.25 per cent notes due 2015 9.5 per cent notes due 2018 10.875 per cent notes due 2009 13.5 per cent bonds due 2014 2,894 1,132 528 551 497 – 674 2,847 1,155 624 554 508 – 667 4,253 1,260 – 718 567 314 – 3,819 3,998 3,910 668 – 374 284 302 – – – 742 – 314 – – – 747 – 316 – $ 7,510 $ 7,552 $ 7,481 $ 5,801 $ 5,490 $ 5,396 The fair value of the non-convertible bonds and notes was determined based on market quotations. The fair value of convertible bonds and long-term 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 instruments are denominated USD EUR RUB Capital Management 2009 8.6-9.5% 7.0% 16.0% 2008 10.0-16.8% 6.6% 23.0% 2007 7.7% 6.5% 9.1% 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 2009. 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 (Notes 4 and 9). The Group manages its capital structure and makes adjustments to it by issue of new shares, dividend payments to shareholders, purchase 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 $2,000 million. 229 229 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 30. Non-Cash Transactions Investing and ﬁ nancing transactions that did not require the use of cash or cash equivalents were as follows in the years ended December 31: US$ 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 (Note 4) Loans provided in the form of payments by banks for the subsidiaries acquired by the Group (Note 4) 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 (Note 4) Offset of loan receivable with amounts payable for the purchase of non-current assets 2009 $ 49 1 – – – – – 2008 $ 124 15 757 938 – – – Offset of income tax receivable/(payable) against other taxes 18 (52) 2007 $ 50 38 – – 1,535 207 13 – 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 economies are characterised by relatively high inﬂ ation and the existence of currency controls, which cause the national currency to be illiquid outside of the countries. Russia and Ukraine 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 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 reported substantially lower customer demand due to the ﬁ nancial crisis and the slowing global economy. 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. 230230 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 31. Commitments and Contingencies (continued) Operating Environment of the Group (continued) 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 described 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 liabilities 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 end of the reporting period as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in these ﬁ nancial statements could be up to approximately $38 million. Contractual Commitments At December 31, 2009, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $324 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 2010, the Group plans to spend approximately $94 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 environmental 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 pollutions and contaminations in the future in accordance with environmental protection programmes. In the period from 2010 to 2014, the Group is committed to spend approximately $167 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. 231 231 VII Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 31. Commitments and Contingencies (continued) Legal Proceedings (continued) 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 motion 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 denying 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 District 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. On May 13, 2009, the District Court rendered its decision, granting the defendants’ motion and issuing a permanent injunction barring the plaintiffs from pursuing their claims in any other courts of the United States, including the pending action in the Chancery Court. The plaintiffs have appealed the May 13, 2009 decision of the District Court to the United States Court of Appeals for the Third Circuit. The appeal was briefed, and oral argument took place on January 25, 2010. The court reserved its decision. In March 2010, the Court of Appeals for the Third Circuit issued a judgment, afﬁ rming the order of the Delaware District Court that enjoined the plaintiffs from further litigation of their KGOK-related claims in the United States. As a result, the plaintiffs are unable to proceed with their action in the Delaware Court of Chancery or any new action in the United States based on the same allegations. 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. Stratcor, the Group’s subsidiary, together with IBM Corporation, Anglo American Plc., Gold Fields Ltd., UBS AG and some other companies, was named as a defendant in an action ﬁ led in 2004. Plaintiffs alleged that the defendants engaged in a conspiracy with the Apartheid- era government 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. On March 9, 2009, the court dismissed that action based upon the plaintiffs’ failure to prosecute the case. There have been no further proceedings since that time, and the plaintiffs have not sought to have the action reinstated or sought relief from the court’s order. 232232 Annual Report & Accounts 2009 Consolidated Financial Statements for the Year Ended December 31, 2009 Notes to the Consolidated Financial Statements (continued) 32. Subsequent Events Borrowings Subsequent to December 31, 2009, the Group signed short-term bank loan agreements for $90 million. Issue of Rouble-Denominated Bonds In March 2010, the Group issued rouble-denominated bonds in the total amount of 15,000 million Russian roubles ($506 million at the exchange rate as of March 26, 2010), which bear interest of 9.25% per annum and mature in March 2013. VEB Loan Amendment In January 2010, Evraz Group S.A. signed an amendment to the loan agreement with VEB for $1,007 million (Note 21). Under the revised agreement, the extension of the four tranches was cancelled, thus resulting in a reclassiﬁ cation of $805 million into current liabilities. At the maturity dates, the Company is going to conclude with VEB separate agreements for the extension of each tranch. The interest rate will be ﬁ xed at one year LIBOR deﬁ ned on two business days preceding the date of the extension agreement plus 5%. Licence for Mezhegey Coal Deposit In March 2010, the Group won the tender to develop the Mezhegey coal deposit located in East Siberia, Russia. The Group offered 950 million roubles (approximately $32 million) in the tender held by the Russian State Mineral Resources Agency. The Mezhegey coal deposit is a world class coking coal deposit with estimated category A+B+C1 reserves of 213.5 million tonnes of hard coking coal (grade Zh under Russian classiﬁ cation). Detailed plans for the development of the Mezhegey deposit will be prepared in due course. 233 233 VII Evraz Group S.A. Parent Company Financial Statements for the Year Ended 31 December 2009 EVRAZ GROUP S.A. Société Anonyme 1 allée Scheffer L-2520 Luxembourg R.C.S. Luxembourg B 105615 Annual Accounts as at December 31, 2009 and Independent Auditor’s Report 234234 Contents Responsibility Statement of the Directors in Respect of the Annual Accounts of Evraz Group S.A. 236 Independent Auditors’ Report 237 Financial Statements Balance Sheet Proﬁ t and Loss Account Notes to the Annual Accounts 238 239 240 235 VII Annual Report & Accounts 2009 Parent Company Financial Statements Responsibility Statement of the Directors in Respect of the Annual Accounts of Evraz Group S.A. We conﬁ rm that to the best of our knowledge the annual accounts of Evraz Group S.A., prepared in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts, give a true and fair view of the ﬁ nancial position of Evraz Group S.A. as of 31 December 2009, and of the results of its operations for 2009. By order of the Board Alexander Frolov Chief Executive Ofﬁ cer Evraz Group S.A. 21 April 2010 236236 Independent Auditors’ report To the Shareholders of Evraz Group S.A. 1, Allée Scheffer L-2520 LUXEMBOURG Ernst & Young Socie´te´ Anonyme 7, Parc d’Activite´ Syrdall L-5365 Munsbach B.P. 780 L-2017 Luxembourg Tel: +352 42 124 1 Fax: +352 42 124 5555 www.ey.com/luxembourg R.C.Luxembourg B 47 771 TVA LU 16063074 Following our appointment by the General Meeting of the Shareholders dated 15 May 2009, we have audited the accompanying annual accounts of Evraz Group S.A., which comprise the balance sheet as at 31 December 2009 and the proﬁ t and loss account for the year then ended, and a summary of signiﬁ cant accounting policies and other explanatory notes. Board of Directors’ responsibility for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of annual accounts that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Responsibility of the “réviseur d’entreprises” Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the “Institut des Réviseurs d’Entreprises”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the judgment of the “réviseur d’entreprises”, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the “réviseur d’entreprises” considers internal control relevant to the entity’s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the annual accounts give a true and fair view of the ﬁ nancial position of Evraz Group S.A. as of 31 December 2009, and of the results of its operations for the year then ended in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the annual accounts. ERNST & YOUNG Société Anonyme Réviseur d’entreprises VII Luxembourg, 29 March 2010 Thierry BERTRAND 237 237 Annual Report & Accounts 2009 Parent Company Financial Statements Balance Sheet (in thousands of EUR) ASSETS Fixed assets Intangible assets Financial assets Shares in afﬁ liated undertakings Loans to afﬁ liated undertakings Other loans Current assets Debtors Amounts owed by afﬁ liated undertakings becoming due and payable within one year Other debtors Cash at banks Prepayments TOTAL ASSETS EQUITY AND LIABILITIES Capital and reserves Subscribed capital Share premium Legal reserve Non-distributable reserve for own shares Proﬁ t brought forward (Loss)/Proﬁ t for the year Interim dividend Creditors Convertible bonds becoming due and payable within one year becoming due and payable after more than one year Non-convertible bonds becoming due and payable within one year becoming due and payable after more than one year Amounts owed to credit institutions becoming due and payable within one year becoming due and payable after more than one year Amounts owed to afﬁ liated undertakings becoming due and payable within one year becoming due and payable after more than one year Other creditors becoming due and payable within one year becoming due and payable after more than one year Deferred income TOTAL EQUITY AND LIABILITIES The accompanying notes form an integral part of the annual accounts. 238238 Notes 2009 2008 3 4 5 6 5 6 8 8 7 7 9 9 10 11 11 2 118.402 46.016 5.302.187 907.968 329.146 3.646.724 1.750.804 – 6.539.301 5.397.528 53.785 89 53.874 16.727 5.766 1.028.291 30 1.028.321 78.860 – 6.734.070 6.550.725 291.914 1.079.487 24.501 329.146 288 (163.838) – 1.561.498 7.147 451.201 24.453 1.556.157 751.821 1.467.843 447.561 – 35.397 10.352 4.751.932 420.640 6.734.070 245.010 725.792 23.662 4.152 240.054 445.294 (684.222) 999.742 – – 28.223 1.817.921 1.356.626 1.565.610 306.428 – 114.290 13.623 5.202.721 348.262 6.550.725 Annual Report & Accounts 2009 Parent Company Financial Statements Proﬁ t and Loss Account (in thousands of EUR) Charges Value adjustment in respect of intangible ﬁ xed assets Value adjustment in respect of current assets Other operating charges Value adjustment in respect of ﬁ nancial assets and of transferable securities held as current assets Interest payable and similar charges – concerning afﬁ liated undertakings – exchange loss – interest expense in respect of notes and bank loans – other Loss on disposal of investments Other taxes Proﬁ t for the ﬁ nancial year Income Income from participating interests – concerning afﬁ liated undertakings – other Other interest receivable and similar income – concerning afﬁ liated undertakings – exchange gain – gain on extinguishment of debts – other Gain on disposal of investments Value adjustment in respect of ﬁ nancial assets and of transferable securities held as current assets Loss for the ﬁ nancial year The accompanying notes form an integral part of these consolidated ﬁ nancial statements. Notes 2009 2008 3 4,5 6 4 10 4 12 5 7 4 4 11.729 21.462 38.840 9.935 – 22.192 2.021 844.719 8.006 – 289.453 1.522 58.199 9.431 – 8.475 452.882 254.724 1.360 – 4.563 445.294 440.663 2.044.144 – – 141.638 21.074 90.215 1.130 366 22.402 163.838 1.803.229 – 165.149 – 70.655 5.111 – – – 440.663 2.044.144 239 239 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts December 31, 2009 (All monetary amounts are expressed in thousands) Note 1 – Corporate Information Evraz Group S.A. (“Evraz Group” or the “Company”) is a joint stock company registered under the laws of Luxembourg on December 31, 2004. The registered address of Evraz Group is 1, Allée Scheffer L-2520, Luxembourg. Prior to August 3, 2006, Evraz Group’s parent was Crosland Global Limited (“CGL”), 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. In 2005, Crosland Limited, the parent of CGL, contributed in kind to the Company all its assets and liabilities, including a participation of 95,83% in the shares in Mastercroft Limited (“Mastercroft”), a limited liability company registered in Cyprus. Subsequently, the Company purchased the residual 4,17% ownership interest, which was owned by Mastercroft itself. Mastercroft is a holding company that controls certain steel production, mining and trading entities located mainly in the Russian Federation. In 2005, Evraz Group became listed on the London Stock Exchange. Going Concern These 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 activities of the Company and its subsidiaries (the “Group”) have been adversely affected by uncertainty and instability in international ﬁ nancial, currency and commodity markets resulting from the global economic crisis. The Company reported net loss of EUR 163.838 for the year ended December 31, 2009. The current liabilities were EUR 1.266.379 (including loans and borrowings of EUR 1.230.982 with maturities in 2010) and exceeded current assets by EUR 1.190.012. The current maturities are expected to be covered by free cash ﬂ ows and reﬁ nancing of current debts. As of December 31, 2009, the Company and its subsidiaries had unutilised borrowings in the amount of USD 1.345.000, including USD 864.000 of committed facilities. In November 2009, the Company reset certain ﬁ nancial covenants and obtained waivers from its lenders (Notes 3, 7, 9). At December 31, 2009, the Company was in compliance with all of its ﬁ nancial covenants. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Operating Environment of the Group The Company’s subsidiaries sell their 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. 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. 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 and the Company itself. 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 Company’s ﬁ nancial position, results of operations and business prospects. The unexpected further deterioration in the areas described above could negatively affect the Company’s results and ﬁ nancial position in a manner not currently determinable. 240240 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 2 – Signiﬁ cant Accounting Policies Basis of Preparation The Company maintains its books and records in EURO (“EUR”) and the annual accounts have been prepared in thousands of EURO in accordance with applicable legal requirements in Luxembourg and in conformity with the commercial law of August 10, 1915, as amended, including the following signiﬁ cant accounting policies: Foreign Currency Transactions The presentation and measurement currency of the Company is euro. Transactions in foreign currencies are initially recorded in Euro at the rate ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Realised exchange gains and losses and unrealised exchange losses are recorded in the income statements. Unrealised exchange gains are deferred. As of December 31, 2009, the deferred unrealised exchange gains amounted to EUR 418.523 (2008: EUR 342.670). Investments Financial assets, including participation and loans granted to group-related companies and shareholders, are stated at acquisition cost. Write-downs are recorded if, in the opinion of the management, there is any permanent impairment in value. Dividend income is recognised as revenue when the shareholders’ right to receive the payment is established. All purchases and sales of investments are recognised on the settlement date, which is the date when the investment is delivered to or by the Company. All investments are initially recognised at cost. Accounts Receivable Accounts receivable are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful receivables is made when collection of the full amount is no longer probable. 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. Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, and when 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 Company expects a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Revenue Revenue is recognised to the extent that it is probable that the economic beneﬁ ts will ﬂ ow to the Company and the revenue can be reliably measured. 241 241 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 3 – Intangible Assets On November 10, 2005, Evraz Group S.A. issued guaranteed notes for the value of USD 750.000 at an issue price of 98,338 %, bearing interest at 8,25% (Note 7). The amount of USD 12.465 (EUR 10.587) resulting from the difference between the issue price and the nominal value was capitalised and amortised on a straight-line basis over the life of the notes. Transaction costs in respect of the notes amounting to USD 5.046 (EUR 4.771) were also capitalised and amortised over the life of the notes. In 2007 and 2006, the Company incurred loan arrangement costs of USD 63.315 (EUR 43.922) and USD 6.879 (EUR 5.402), respectively. These costs were capitalised and amortised over the period of the borrowings. On April 24, 2008, the Company issued notes due 2013 amounting to USD 1.300.000 and notes due 2018 amounting to USD 700.000 (Note 7). Transaction costs in respect of these notes amounting to USD 17.479 (EUR 11.084) were capitalised and amortised on a straight-line basis over the life of the notes. In July 2009, the Company issued unsecured convertible bonds due 2014 amounting to USD 650.000. Transaction costs in respect of these bonds amounting to USD 9.865 (EUR 6.879) were capitalised and amortised over the life of the bonds. In November and December 2009, the Company received the consent of its lenders and note-holders to amend the terms of certain ﬁ nancial covenants (Note 7). In connection with the covenant reset, the Company incurred consent fees and legal costs of USD 112.375 (EUR 76.320). These costs were capitalised and amortised over the period of the borrowings. Note 4 – Shares in Afﬁ liated Undertakings Mastercroft Limited Highveld Steel and Vanadium Corporation Strategic Minerals Corporation Vanston Limited Evraz Overseas S.A. Emmy N.A. Evraz Vitkovice Steel Evraz Inc. N.A. Palmrose Limited Evraz Inc. N.A. Canada Delong Holdings Limited ECS Holdings Europe B.V. 242242 2009 3.831.982 – 94.291 42.500 – – 11 – 732.108 582.038 19.228 29 2008 1.336.875 555.443 97.791 42.500 2.002 19 11 473.560 757.082 365.272 16.169 – 5.302.187 3.646.724 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 4 – Shares in Afﬁ liated Undertakings (continued) Mastercroft Limited At December 31, 2009 and 2008, the Company held 100% of the shares in Mastercroft. On December 18, 2007, Mastercroft issued 12.000 ordinary shares for USD 1.200.000 to the Company. In 2007, the Company paid USD 859.200 in respect of the newly issued shares. At December 31, 2007, amounts owed to afﬁ liated undertakings included USD 340.800 (EUR 231.506) in respect of the unpaid shares of Mastercroft. On January 30, 2008, the Company paid USD 16.300 (EUR 11.006) of the outstanding amount. In April 2008, the remaining balance in the amount of USD 324.500 (EUR 207.216) was offset against the loans payable by Mastercroft to the Company under the loan agreements signed in May 2007. On June 23, 2009, Mastercroft issued 1.000 ordinary shares for USD 670.000 (EUR 479.324) to the Company. The amount payable for the newly issued shares was fully offset by the transfer of the Highveld shares from the Company to Mastercroft in accordance with to the Share Contribution Agreement signed on June 23, 2009. On June 26, 2009, Mastercroft issued 1.000 ordinary shares for USD 2.465.000 to the Company. The amount of USD 781.149 (EUR 554.164) was offset against the shares of Evraz Inc. N.A. transferred by the Company to Mastercroft according to the Share contribution and settlement agreement signed on June 26, 2009. The amount of USD 1.683.851 (EUR 1.194.559) was offset against the loans receivable from Evraz Inc. N.A., which were transferred by the Company to Mastercroft Finance Limited (subsidiary of Mastercroft) in accordance with the Contribution and assignment agreement signed on June 26, 2009 (Note 5). On July 28, 2009, Mastercroft issued 1.000 ordinary shares for USD 380.000 (EUR 267.060) to the Company. In 2009, the Company paid for these shares in cash. As at December 31, 2009 and 2008, the underlying equity of Mastercroft amounted to EUR 3.706.755 and EUR 1.270.712, respectively. Highveld Steel and Vanadium Corporation At December 31, 2007, the Company owned 80.223.738 shares of Highveld, which represented 80,91% of the Highveld’s share capital. In 2008, the Company acquired 4.162.606 shares of Highveld (4,2% of share capital) for a cash consideration of ZAR 535.031 (EUR 46.885). Transaction costs amounting to USD 320 (EUR 202) were included in the cost of investments in Highveld. The summary of the movements in investments in Highveld during 2008 is presented below: Investments in Highveld at December 31, 2007 Acquisition of shares Transaction costs capitalised Investments in Highveld at December 31, 2008 EUR EUR EUR EUR 508.356 46.885 202 555.443 On June 23, 2009, the Company contributed its ownership interest in Highveld to Mastercroft. The fair value of the contributed shares, determined based on market quotations, amounted to USD 670.000 (EUR 479.324). The difference between the cost of investment in Highveld and its fair value amounting to USD 81.350 (EUR 58.199) was recorded as a loss on disposal of investments. As at December 31, 2008, the underlying equity of Highveld amounted to EUR 419.075. 243 243 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 4 – Shares in Afﬁ liated Undertakings (continued) Evraz Inc. N.A. At December 31, 2008, the investments in Evraz Inc. N.A. amounted to USD 610.634 (EUR 473.560). In June 2009, the Company made a cash contribution to Evraz Inc. N.A. in the amount of USD 170.000 (EUR 121.459). On June 26, 2009, the Company entered into a number of agreements with Mastercroft and its subsidiary, under which the shares of Evraz Inc. N.A. have been contributed to the share capital of Mastercroft and the loans receivable from Evraz Inc. N.A. have been transferred to Mastercroft Finance Limited. Gain on disposal of investments in Evraz Inc. N.A. amounting to USD 515 (EUR 366) was recognised in the proﬁ t and loss account for the year ended December 31, 2009. As at December 31, 2008, the underlying equity of Evraz Inc. N.A. amounted to USD 547.441 (EUR 393.361). Strategic Minerals Corporation The Company owns 72,84% of ordinary shares of Strategic Minerals Corporation (“Stratcor”), including 69,00% of voting shares. At December 31, 2009, the cost of investments amounted to USD 120.471 (EUR 94.055), including transaction costs of USD 1.383 and fair value of contingent consideration amounting to USD 21.161. Under the share purchase agreement signed in 2006, the Company is obliged to pay to the seller the earn-out and synergy payments during the period from 2007 to 2019. The payments 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 for the earn-out and synergy payments were recognised at fair value, which was determined based on the expected amounts to be paid, the timing of payments and applicable discount rate. In 2009, the Company re-assessed its future earn-out and synergy payments, which led to a decrease in the investments in Stratcor by EUR 3.500 (2008: decrease by EUR 1.437). In 2009, the Company paid USD 7.956 (EUR 5.523) to acquire a 5,92% ownership interest in Stratcor, which is shown as a prepayment in the balance sheet at December 31, 2009. The ownership rights have been transferred to the Company in 2010. At December 31, 2009 and 2008, the underlying equity of Stratcor amounted to USD 103.697 (EUR 71.982) and USD 84.956 (EUR 61.045), respectively. Vanston Limited On September 13, 2006, the Company acquired 100% ownership interest in Vanston Limited from Mastercroft for EUR 42.500. Vanston Limited owns Evraz Palini e Bertoli. As at December 31, 2009 and 2008, the underlying equity of Vanston amounted to EUR 51.893 and EUR 38.220, respectively. Evraz Vitkovice Steel In January 2006, the Company purchased 100% of the share capital of ABA Assets s.r.o. (the Czech Republic) for EUR 11. In January 2006, ABA Assets acquired a controlling interest in Vitkovice Steel, a steel rolling mill, located in the Czech Republic, from Mastercroft. In 2007, ABA Assets was merged with its subsidiary – Evraz Vitkovice Steel. At December 31, 2009 and 2008, the underlying equity of Evraz Vitkovice Steel amounted to EUR 333.884 and EUR 180.180, respectively. Emmy N.A. Emmy N.A. S.à.r.l. (Luxembourg) was established in 2007 for the purpose of acquisition of the steel businesses in Canada. On July 6, 2009, Emmy N.A. S.à.r.l. was liquidated. 244244 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 4 – Shares in Afﬁ liated Undertakings (continued) Evraz Overseas On April 20, 2007, the Company incorporated Evraz Overseas S.A., a wholly owned subsidiary located in Switzerland. Transactions costs amounted to CHF 500 (EUR 304). On April 1, 2008 Evraz Overseas S.A. increased its share capital to 3.200.000 shares. The shares were fully subscribed by the Company for CHF 2.700 (EUR 1.699). At December 31, 2009, the investments in Evraz Overseas S.A. were considered as fully impaired and this loss was included in the value adjustment in respect of ﬁ nancial assets. As at December 31, 2009 and 2008, the underlying equity of Evraz Overseas amounted to EUR (6.866) and EUR (3.578), respectively. Palmrose Limited Palmrose Limited (“Palmrose”) is a Cyprus-based holding company, which owns controlling interests in certain steel and mining businesses located in Ukraine: • Sukha Balka iron ore mining and processing complex; • Dnepropetrovsk Iron and Steel Works; • three coking plants (Bagleykoks, Dneprkoks, Dneprodzerzhinsk Coke Chemical Plant). Lanebrook, the Company’s parent, acquired these production assets in 2007. On December 5, 2007, the Company signed an agreement with Lanebrook for the acquisition of Palmrose. In 2007, the Company made prepayments amounting to USD 1.060.000 (EUR 720.060) for the acquisition of Palmrose. On April 14, 2008, the Company acquired a 51.4% share in Palmrose for a cash consideration of USD 1.110.000 (EUR 764.845). On September 9, 2008, the Company issued 4.195.150 shares in exchange for 972 shares of Palmrose. The fair value of the issued shares determined by an independent appraiser amounted to EUR 714.080, which was allocated to share capital (EUR 8.390) and share premium (EUR 705.690). The amount of EUR 2 representing the unpaid share capital of Palmrose was included in the amounts owed to afﬁ liated undertakings. In 2009, this amount was fully paid by the Company. In 2008, the Company recognised an impairment loss in the amount of EUR 721.846 in respect of investments in Palmrose. In 2009, an impairment loss in the amount EUR 19.227 was reversed. In 2009, the purchase price for the acquisition of Palmrose was reduced by USD 65.000 (EUR 44.201). The amount was received from Lanebrook Limited in cash. This change in the purchase price reduced the amount of investments in Palmrose. At December 31, 2009 and 2008, the underlying equity of Palmrose amounted to EUR 1.462.198 and EUR 1.514.809, respectively. Evraz Inc. N.A. Canada On March 14, 2008, the Company entered into a Stock-Purchase Agreement to acquire IPSCO’s Canadian plate and pipe business (“IPSCO Canada”). IPSCO Canada is a leading North American producer of steel plate, as well as pipe for the oil and gas industry. According to the agreement, the Company acquired 526.944.510 ordinary shares of 6938621 Canada Inc., a company registered in Canada, for a total purchase consideration of USD 526.945 (EUR 341.794). Transaction costs amounting to USD 17.676 (EUR 12.833) were included in the cost of investments in IPSCO. Total cash consideration paid by the Company for investments in IPSCO amounted to USD 533.933 (EUR 346.203). On July 31, 2008, the Company subscribed to 17.000.000 ordinary shares issued by 6938621 Canada Inc. at an aggregate subscription price of CAD 17.000 (EUR 10.645). The payment of subscription price was offset against Promissory note 2 dated June 12, 2008 received by the Company from 6938621 Canada Inc. (Note 5). VII 245 245 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 4 – Shares in Afﬁ liated Undertakings (continued) On September 11, 2008, 6938621 Canada Inc. was renamed into Evraz Inc. N.A. Canada. As of December 31, 2008, total investments in Evraz Inc. N.A. Canada amounted to USD 560.617 (EUR 365.272). On February 27, 2009, Evraz Inc. N.A. Canada increased its share capital by 346.500.000 shares with par value of CAD 0,001 each. The Company subscribed to these shares at an aggregate subscription price of CAD 346.500 (EUR 216.766). The payment of the subscription price was offset against Amended and Restated Note #1 dated November 28, 2008 received by the Company from Evraz Inc. N.A. Canada (Note 5). At December 31, 2009 and 2008, the underlying equity of Evraz Inc. N.A. Canada amounted to EUR 542.651 and EUR 304.766, respectively. Delong Holdings Limited On February 18, 2008, the Company entered into a Share Purchase Agreement to acquire up to approximately 51,05% of the issued share capital of Delong Holdings Limited (“Delong”), a hot-rolled coil manufacturer, headquartered in Beijing (China), over an agreed period of time. This transaction was subject to anti-trust clearance by the regulatory authorities of China. The Share Purchase Agreement entered into between the Company, Best Decade and the shareholders of Best Decade included an initial sale to the Company of 10,01% of the issued share capital of Delong for SGD 211.000 (USD 150.000 at the exchange rate as of the date of the agreement). On February 22, 2008, the Company paid USD 150.415 (EUR 100.572) for 53.557.498 ordinary shares of Delong Holdings Limited and became the owner of 10.01% of its share capital. Transaction costs amounted to USD 2.569 (EUR 1.654). In 2008, the Company recognised an impairment loss in the amount of EUR 86.058 in respect of the investments in Delong Holdings Limited. In 2009, the Company reversed part of the previously recognised impairment loss in the amount of EUR 3.175 due to the increase in market prices for the shares of Delong. Cape Lambert Iron Ore From March to June 2008, the Company purchased 4.033.021 ordinary shares and 56.050.143 options of Cape Lambert Iron Ore for USD 19.499 (EUR 12.506). On July 11, 2008, all options were converted into ordinary shares. The cash consideration, which was paid by the Company, amounted to USD 14.970 (EUR 9.454). On October 13, 2008, all shares were sold to Evraz Inc. N.A. for a sale price of EUR 13.306, resulting in an impairment loss of EUR 8.654. On September 12, 2008, the Company entered into a joint venture agreement with China Metallurgical Group Corporation (MCC) and Blessing City Investments Limited (BCI). The joint venture was created for cooperative development of ore deposit. In accordance with the agreement, on September 24, 2008, the Company paid AUD 10.000 (EUR 5.695) as a deposit. As of December 31, 2008, the Company decided not to participate in the joint venture and recognised an impairment loss for the whole amount of the deposit (EUR 4.932 at the exchange rate as of December 31, 2008). 246246 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 4 – Shares in Afﬁ liated Undertakings (continued) ECS Holdings Europe B.V. On August 4, 2009, the Company incorporated a wholly-owned subsidiary in the Netherlands – ECS Holdings Europe B.V. Transaction costs amounted to EUR 18. On October 16, 2009, the Group contributed EUR 11 to the capital of ECS Holdinds Europe B.V. At December 31, 2009, the underlying equity of ECS Holdings Europe B.V. amounted to EUR (1). Note 5 – Loans to Afﬁ liated Undertakings and Other Amounts Owed by Afﬁ liated Undertakings Becoming due and payable within one year Mastercroft Limited Vanston Limited EMMY N.A. Evraz Inc. N.A. Canada Highveld Steel and Vanadium Corporation Lanebrook Limited Becoming due and payable after more than one year Evraz Inc. N.A. EvrazHolding Evraz Inc. N.A. Canada Type of receivables 2009 2008 dividends loan loan loan other receivables other receivables loan loan loan – 16.886 – – 16 36.883 53.785 – – 907.968 907.968 252 30.552 364.692 574.837 71 57.887 1.028.291 1.153.647 86 597.071 1.750.804 961.753 2.779.095 247 247 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 5 – Loans to Afﬁ liated Undertakings and Other Amounts Owed by Afﬁ liated Undertakings (continued) In the year ended December 31, 2009, the movement of loans issued to related parties was as follows: Loans denominated in USD Interest rate Maturity date 6,00% 14.07.2009 Balance at December 31, 2008 120 Unamor- tised debt issue costs – Loans issued to related parties – Interest income 3 Settlement of the loans (123) Debt issue costs am- ortised – Effect of exchange rate changes – Balance at December 31, 2009 – EvrazHolding LLC Emmy N.A. 10,00% 30.01.2009 507.542 East Metals S.A. 5,50% 15.12.2009 – Evraz Inc. N.A. Canada 7,6225%/ 6,03531% 10.12.2014 800.000 – – – Evraz Inc. N.A. loan A 9,17% 26.06.2009 320.000 (1.937) Evraz Inc. N.A. loan B 9,41% 26.06.2009 295.000 (1.852) Evraz Inc. N.A. loan C 9,67% 26.06.2009 360.000 (945) Evraz Inc. N.A. loan D 9,78% 26.06.2009 370.000 Evraz Inc. N.A. loan E 9,91% 26.06.2009 260.530 – – – – (507.542) 222.500 838 (223.338) – – – – – – 61.192 (61.192) 14.924 (334.924) 14.122 (309.122) 17.715 (377.715) 18.417 (388.417) 13.143 (273.673) – – – 1.937 1.852 945 – – – – – – – – – – – – 800.000 – – – – – 2.913.192 (4.734) 222.500 140.354 (2.476.046) 4.734 – 800.000 Translation into EUR 2.093.261 (3.000) 148.621 100.627 (1.784.657) 3.000 (2.528) 555.324 Loans denominated in EURO Vanston Limited Interest rate 7.20% Maturity date 08.07.2009 Balance at December 31, 2008 65 Loans issued to related parties – Interest income 2 Vanston Limited 7.20% 08.07.2009 Vanston Limited 7,20% 16.07.2009 784 2.008 Vanston Limited 7,20% 31.12.2010 27.695 Emmy 8,75% 03.06.2009 – 30.552 – – – 19 19 Loans denominated in Canadian dollars Settlement of the loans (67) (784) (2.008) – – 1.466 (12.265) – (19) 1.468 (15.143) Effect of exchange rate changes Balance at December 31, 2009 – – – (10) – (10) – – – 16.886 – 16.886 Interest rate Maturity date Balance at December 31, 2008 Loans issued to related parties Interest income Settlement of the loans Effect of ex- change rate changes Balance at December 31, 2009 Evraz Inc. N.A. Canada 8,08% 12.06.2018 1.014.902 Translation into EUR 1.014.902 597.071 – – – 52.241 (533.662) 533.481 52.241 (533.662) – 533.481 32.959 (332.929) 55.543 352.644 In the opinion of Directors, the above loans do not present any permanent impairment as of December 31, 2009. 248248 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 6 – Capital and Reserves Subscribed Capital Number of shares Authorised Ordinary shares of EUR 0,002 each Issued and fully paid Ordinary shares of EUR 0,002 each 2009 2008 257.204.326 157.204.326 145.957.121 122.504.803 Shareholders of the Company 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 Palmrose On September 9, 2008, the Company issued 4.195.150 shares in exchange for 972 shares of Palmrose Limited. The fair value of the issued shares determined by an independent appraiser amounted to EUR 714.080 and was allocated to share capital (EUR 8.390) and share premium (EUR 705.690). Scrip Dividends On January 30, 2009, the Extraordinary General Meeting approved the modiﬁ cation of the method of payment of the 2008 interim dividends: euro equivalent of the outstanding dividends of USD 0,00225 per share could be either exchanged for new shares of the Company 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 USD 0.0225 per share. The new shares are ranked pari passu with the existing ordinary shares of the Company. The Company’s major shareholder, Lanebrook Limited, subscribed to 9.193.477 shares. The value of the issued shares amounted to EUR 171.267 (at the exchange rate as of January 30, 2009), which was allocated to share capital (EUR 19.511) and share premium (EUR 151.756). Increase of Authorised Share Capital On July 31, 2009, the Company increased its authorised share capital by 100.000.000 shares with par value of EUR 0,002 each. In addition, in connection with the issue of convertible bonds, the shareholders resolved to extend the authority of the Board of Directors to issue new shares for another ﬁ ve years as well as the right of the Company to acquire up to 10% of its own shares. Equity Offering In 2009, the Company completed the offering of global depository receipts (the “Equity Offering”). On July 13, 2009, the Company issued the Global Depository Receipts (“GDRs”) listed on the London Stock Exchange, representing ordinary shares of the Company for the total amount of USD 300.000. 6.060.608 new shares were issued at an issue price of USD 0,01650 per GDR (USD 0,0495 per share). The value of the issued shares amounted to EUR 214.669 (at the exchange rate as at July 13, 2009) and was allocated to share capital (EUR 12.121) and share premium (EUR 202.548). The Company has granted to the Goldman Sachs and Morgan Stanley (“Joint Book runners”) an over-allotment option to subscribe to up to 909.090 additional GDRs, represented by 303.030 additional new shares, corresponding to additional gross proceeds of USD 15.000. This option was exercised in full on July 27, 2009. The value of the issued shares amounted to EUR 10.512 (at the exchange rate as of July 27, 2009), which was allocated to share capital (EUR 606) and share premium (EUR 9.906). 249 249 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 6 – Capital and Reserves (continued) Shares Lending In order to facilitate the issuance of the convertible bonds, Morgan Stanley offered to certain institutional investors an opportunity to borrow ordinary shares of the Company, represented by GDRs, during the term of the bonds by means of a loan of GDRs beneﬁ cially owned by Lanebrook (the “Borrowed GDRs”). On August 4, 2009, the Board of Directors approved the issue of the new ordinary shares to Lanebrook in the amount equal to the number of shares underlying the borrowed GDRs. The Group effected a novation of the stock lending arrangements, whereby the Company was substituted for Lanebrook as a lender of the borrowed GDRs. As a result, on August 12, 2009, 7.333.333 new shares were issued to Lanebrook at the price of USD 0,0212 per GDR or USD 0,0636 per share in exchange for the right to receive 7.333.333 shares lended under the shares lending agreement. These shares were recognised as other ﬁ nancial assets in the balance sheet as at December 31, 2009. The value of the issued shares amounted to EUR 329.146 (at the exchange rate as of August 12, 2009), which was allocated to share capital (EUR 14.667) and share premium (EUR 314.479). Transaction costs in respect of the capital increase in the amount of EUR 3.568 were recorded in other operating charges. Non-Distributable Reserves As of December 31, 2008, Mastercroft Limited, a wholly owned subsidiary of Evraz Group S.A., and Mastercroft Finance Limited, a wholly owned subsidiary of Mastercroft Limited, held together 202.296 global depositary receipts (“GDR”), including 163.000 GDRs, which were held by the Company’s direct subsidiary. In accordance with the Luxembourg laws, the Company recognised a non-distributable reserve for the global depositary receipts held by its direct subsidiary thereby reducing the share premium in the amount of USD 5.778 (EUR 4.152). In 2009, Mastercroft Limited sold all GDRs and non-distributable reserve was transferred to the share premium. In addition, in 2009, the Company recognised a non-distributable reserve for the contributed rights under the stock lending agreement amounting to EUR 329.146. Legal reserve According to the Luxembourg Law, the Company is required to create a legal reserve of 10% of share capital per the Luxembourg statutory 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. In 2009 and 2008, EUR 839 and EUR 162, respectively, were allocated to legal reserve. Dividends Dividends declared by the Company were as follows: Final for 2007 Interim for 2008 Date of declaration 15/05/2008 28/08/2008 To holders registered at 14/05/2008 18/09/2008 Dividends declared, USD 496.901 1.010.665 USD per share Equivalent in EUR 4.20 8.25 321.120 684.222 The shareholders meeting held May 15, 2009 resolved not to declare ﬁ nal dividends for 2008. No interim dividends were declared during 2009. 250250 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 7 – Non-Convertible Bonds Notes due 2015 On November 10, 2005, the Company issued guaranteed notes in the amount of USD 750.000 at an issue price of 98,338%, bearing interest of 8,25% per annum and maturing on November 10, 2015. These notes are unconditionally and irrevocably guaranteed without limitation for an amount by Mastercroft. The notes were subscribed for an amount of USD 737.535 (EUR 623.497), but they will be redeemed at their principal amount of USD 750.000. The difference between the issue price and the nominal value of USD 12.465 (EUR 10.587) was capitalised and is amortised over the maturity period of the notes. Interest on the notes is payable semi-annually in arrears on May 10 and November 10 of each year commencing May 10, 2006. As at December 31, 2009 and 2008, the accrued interest amounted to USD 6.793 (EUR 4.715) and USD 8.521 (EUR 6.123), respectively. In 2009 and 2008, the Company repurchased the notes due 2015 with the nominal amount of USD 148.100 and USD 25.200, respectively, for cash consideration of USD 90.028 and USD 13.863, respectively. As a result, the Company recognised gain on extinguishment of debts in the amount of USD 58.072 (EUR 45.378) and USD 11.337 (EUR 8.095), respectively. Notes due 2013 and 2018 On April 24, 2008, the Company issued notes in the amount of USD 1.050.000 maturing on April 24, 2013 and bearing interest of 8,875%, and notes in the amount of USD 550.000 maturing on April 24, 2018 and bearing interest of 9,5%. The notes were issued at a price of 100%. On May 27, 2008, the Company issued additional tranches of the notes due 2013 and notes due 2018 amounting to USD 250.000 and USD 150.000, respectively, at an issue price of 101,15% plus interest accrued from and including April 24, 2008 to May 26, 2008. The premium was recognised in deferred income and is amortised over the maturity period of the notes. Interest on the notes is payable semi-annually in arrears on April 24 and October 24 of each year commencing October 24, 2008. As at December 31, 2009 and 2008, the accrued interest amounted to USD 28.434 (EUR 19.738) and USD 30.757 (EUR 22.101), respectively. On December 24, 2008, the Company repurchased notes due 2013 with the nominal amount of USD 55.000 for a cash consideration of USD 30.255 and notes due 2018 with the nominal amount of USD 139.800 for a cash consideration of USD 76.929. As a result, the Company recognised a gain on extinguishment of debts in the amount of USD 87.616 (EUR 62.560). In 2009, the Company repurchased notes due 2013 with the nominal amount of USD 89.100 (EUR 68.133) for a cash consideration of USD 52.160 (EUR 39.681) and notes due 2018 with the nominal amount of USD 51.000 (EUR 38.702) for a cash consideration of USD 29.284 (EUR 22.136). As a result, the Company recognised a gain on extinguishment of debts in the amount of USD 58.656 (EUR 44.837). Covenants Reset Some of the loan agreements and terms and conditions of the notes provide for certain covenants in respect of the Company and its subsidiaries (the Group). The covenants impose restrictions in respect of certain transactions and ﬁ nancial ratios, including restrictions in respect of indebtedness and proﬁ tability. In November 2009, the lenders under certain bank facilities approved the requested amendments to the agreements, which included a reset of the ﬁ nancial covenants. The total principal amount of these borrowings at December 31, 2009 was USD 2.178.860. In addition, the covenants have been reset in respect of certain loans of the entities under control of the Company. 251 251 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 7 – Non-convertible Bonds (continued) As a result, the ﬁ nancial covenant ratios tested on the Group’s consolidated numbers were loosened, with no testing for the year 2009; all ﬁ nancial covenant ratios that were tested on the consolidated numbers of Mastercroft Limited were replaced with the new ratios tested on the Group’s consolidated numbers; new restrictions on capital expenditure, acquisitions and loans to third parties were established; a number of exemptions were introduced to the debt incurrence covenants, where applicable, allowing the Group to reﬁ nance its current debt maturities in the ordinary course. In December 2009, the Group received the consent of the holders of its notes due in 2013, 2015 and 2018 totaling USD 2.241.800 to amend the terms of certain covenants in the notes. The ﬁ nancial covenant ratios of the notes were subsequently amended in a manner similar to the amendments to the bank facilities. In connection with the covenants reset the Company incurred transaction costs comprising consent fees and legal fees amounting to USD 112.375, which will be amortised during the period of the borrowings. At December 31, 2009, the unpaid transaction costs were USD 29.256. Note 8 – Convertible Bonds In July 2009, the Company issued unsecured convertible bonds for the total amount of USD 650.000 at a price of 100%. They bear interest of 7,25% per annum payable on a quarterly basis and mature on July 13, 2014. The conversion can be exercised at the option of the bondholders on any date during the period from September 11, 2009 till July 6, 2014. The bonds will be convertible into GDRs at an initial conversion price of USD 0,0212 per GDR. The conversion price represents a 28% premium to the equity offering placement price of USD 0,0165 per GDR, which is the reference price for the convertible bonds. The Company can early redeem the bonds at their principal amount plus accrued interest if 15% or less of the bonds remain outstanding. As at December 31, 2009, the accrued interest amounted to USD 10.296 (EUR 7.147). Note 9 – Amounts Owed to Credit Institutions Long-Term Loans Natixis In June 2006, the Company borrowed a syndicated loan of USD 225.000 arranged by Natixis (formerly Natexis Banques Populaires). The loan bears a ﬁ xed interest of 6,681% per annum payable on a monthly basis and is repayable in 42 monthly installments starting from January 9, 2007 to May 6, 2011. In 2009, the Company repaid USD 64.286 of principal amount of loan and USD 13.351 of accrued interest. As at December 31, 2009 and 2008, the outstanding principal amounted to USD 96.428 (EUR 66.936) and USD 160.714 (EUR 115.481), respectively, and the outstanding accrued interest was USD 477 (EUR 331) and USD 686 (EUR 493), respectively. In December 2009, the Company entered into amendment agreement with Natixis regarding the covenants reset. Interest rate from this date was increased by the margin of 2,55%. Deutsche Bank In November and December 2007, the Company borrowed a syndicated loan of USD 3.214.000 under which Deutsche Bank Amsterdam Branch acts as an agent for all lenders. The loan bears interest of LIBOR plus 1,8% per annum. The loan consists of a 3-year unsecured tranche of USD 500.000 and a 5-year secured tranche of USD 2.174.000. The secured tranches are repayable in quarterly unsettlements from February 25, 2008 to November 23, 2010. 252252 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 9 – Amounts Owed to Credit Institutions (continued) The 5-year tranche secured by the proceeds of the sales contracts of East Metals S.A., an indirect subsidiary of the Company, is guaranteed without limitation for an amount by Mastercroft. In 2009 and 2008, the Company repaid USD 166.667 and USD 166.667, respectively, relating to the 3-year unsecured tranche and USD 638.588 and USD 159.647, respectively, of the principal amount of loan and USD 77.822 and USD 143.041, respectively, of the accrued interest in respect of the 5-year secured tranche. As at December 31, 2009 and 2008, the outstanding principal amounted to USD 2.082.431 (EUR 1.445.531) and USD 2.887.686 (EUR 2.074.934), respectively, and the outstanding accrued interest was USD 4.774 (EUR 3.314) and USD 11.733 (EUR 8.430), respectively. In December 2009, the Company entered into an amendment agreement with Deutsche Bank, under which the interest rate was increased by the margin of 2% starting from December 29, 2009. Vnesheconombank On November 21, 2008, the Company entered into the loan agreement with Vnesheconombank (VEB). In accordance with this loan agreement, the Company borrowed USD 1.006.569 for partial reﬁ nancing of the loan from Deutsche Bank. The loan bears interest of LIBOR plus 5% per annum payable on a quarterly basis and matures one year later than a tranche is provided. The borrowing was executed by ﬁ ve tranches. On November 24, 2008, the ﬁ rst tranche amounting to USD 201.314 (EUR 144.653 at the exchange rate as of December 31, 2008) was borrowed by the Company. In 2009, the remaining four tranches were borrowed by the Company in the amount of USD 201.314 each. In November 2009, the Company signed an amendment, according to which the loan matures twenty four months after disbursement of each tranche. At December 31, 2009, the outstanding principal amounted to USD 1.006.569 (EUR 698.715) and the outstanding accrued interest was USD 6.960 (EUR 4.832). Short-Term Loans In June 2006, the Company borrowed USD 207.000 from Credit Suisse. The loan bore interest of LIBOR plus 2% per annum payable on a quarterly basis. The principal amount was payable in bullet repayment with a ﬁ nal payment on July 18, 2008. The principal amount and accrued interest were fully repaid by the Company in 2008. In September 2006, the Company borrowed USD 207.000 arranged by ABN Amro Bank N.V. London Branch. The loan bore interest of LIBOR plus 0,8% per annum payable on a quarterly basis and matured on September 10, 2007. On this date ABN Amro agreed to extend the maturity date to September 9, 2008. The principal amount and accrued interest were fully repaid by the Company in 2008. In December 2008, the Company entered into the loan agreement with Vnesheconombank (VEB). In accordance with this loan agreement, the Company borrowed USD 800.000. The loan bore interest of LIBOR plus 5% per annum payable on a quarterly basis and matured on December 12, 2009. The principal amount and accrued interest were fully repaid by the Company in 2009. Interest payable At December 31, 2009 and 2008, the interest payable in respect of long-term and short-term loans amounted to USD 12.211 (EUR 8.476) and USD 17.152 (EUR 12.325), respectively, and was included in current liabilities. 253 253 VII Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 10 – Amounts Owed to Afﬁ liated Undertakings Becoming due and payable within one year Type of payables 2009 2008 Palmrose Limited Evraz Vitkovice Steel East Metals S.A. Mastercroft Finance Limited KGOK NTMK ZSMK Lanebrook Limited Mastercroft Finance Limited Other related parties unpaid share capital loan loan loan loan loan loan dividends payable other payables other payables – – 305.801 28.082 3.151 56.992 44.708 – 10 8.817 447.561 2 35.118 89.671 42.972 – – – 137.586 – 1.079 306.428 In the year ended December 31, 2009, the movement in loans received from related parties, all of which were denominated in USD, was as follows: Interest rate Maturity date Balance at December 31, 2008 Loans received from related parties Interest expense Repayment of loans Effect of exchange rate changes Balance at December 31, 2009 Mastercroft Finance Limited 7,00% 19.10.2009 59.804 124.595 3.268 (187.667) Mastercroft Finance Limited 7,35% 31.12.2010 - East Metals S.A. East Metals S.A. East Metals S.A. KGOK NTMK ZSMK 6,00% 19.10.2009 124.795 6,00% 20.10.2009 6,00% 31.12.2010 6,00% 15.12.2010 6,00% 15.12.2010 6,00% 31.12.2010 - - - - - Evraz Vitkovice Steel 7,00% 03.02.2009 48.874 43.300 124.850 296.820 439.000 4.522 81.800 64.170 – 156 (3.000) 2.529 (252.174) 2.807 (299.627) 1.537 17 302 236 315 – – – – (49.189) – 40.456 – – 440.537 4.539 82.102 64.406 – Translation into EUR 167.761 820.623 8.006 (565.939) 8.283 438.734 233.473 1.179.057 11.167 (791.657) – 632.040 254254 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 11 – Other Creditors Other creditors comprise of the following: Becoming due and payable within one year Dividends payable Accrued payroll and related taxes Taxes payable Earn out and synergy payments (Note 4) Other payables Becoming due and payable after more than one year Earn out and synergy payments (Note 4) 2009 – 121 79 11.408 23.789 35.397 10.352 10.352 45.749 2008 60.471 1.784 26.415 10.950 14.670 114.290 13.623 13.623 127.913 Note 12 – Income from Participating Interests In 2008, Mastercroft declared and partly paid interim dividends for 2007 in the amount of USD 400.000 (EUR 268.654). As at December 31, 2008, the outstanding amount of unpaid dividends was USD 350 (EUR 252). This amount was received in 2009. In addition, in 2008, Mastercroft declared and paid second interim dividends for 2007 in the amount of USD 200.000 (EUR 128.816). In 2008, Mastercroft declared and paid interim dividends for 2008 in the amount of USD 1.650.000 (EUR 1.088.233). In 2008, Highveld declared and paid special dividends in respect of 2007 for the total amount of ZAR 1.448.292 (EUR 120.033). In addition, in 2008, Highveld declared and paid interim dividends in the amount of ZAR 1.177.912 (EUR 101.721). In 2008, Stratcor declared and paid interim dividends in the amount of USD 16.390 (EUR 10.447). In 2008, Evraz Vitkovice Steel declared and paid dividends in respect of 2007 for a total amount of CZK 2.106.390 (EUR 84.299). In 2008, Delong Holdings Limited declared and paid ﬁ nal dividends in respect of 2007 for a total amount of SGD 2.223 (EUR 1.026). In 2009, subsidiaries of the Company did not declare and pay any dividends. Note 13 – Taxation The Company is subject to all taxes applicable to Luxembourg commercial companies. VII 255 255 Annual Report & Accounts 2009 Parent Company Financial Statements Notes to the Annual Accounts (continued) December 31, 2009 (All monetary amounts are expressed in thousands) Note 14 – Guarantees At December 31, 2009, the Group had the following contingent liabilities with respect to the guarantees issued: Name of afﬁ liated entity which debt was guaranteed by the Company Subject of the guarantee Principal and accrued interest at December 31, 2009 (thousands of EUR) EvrazResource-Ukraine Evraz Vitkovice Steel Evraz Vitkovice Steel Sibmetinvest bank loan bank loan credit line bonds Maturity June 30, 2011 June 11, 2012 not deﬁ ned 62.474 81.868 9.200 470.918 October 16, 2019 Note 15 – Subsequent Events VEB Loan Amendment In January 2010, the Company signed an amendment to the loan agreement with VEB for USD 1.007.000. Under the revised agreement, the extension of the four tranches was cancelled, thus resulting in a reclassiﬁ cation of USD 805.000 into current liabilities. At the maturity dates, the Company is going to conclude separate agreements with VEB for the extension of each tranche. The interest rate will be ﬁ xed at one year LIBOR deﬁ ned on two business days preceding the date of the extension agreement plus 5%. Issue of Rouble-Denominated Bonds In March 2010, the entity under control of the Company issued rouble-denominated bonds in the total amount of 15,000 million Russian roubles ($505.779 at the exchange rate as of March 26, 2010), which bear interest of 9.25% per annum and mature in March 2013. Evraz Group S.A. guaranteed the repayment of these bonds. 256256 Annual Report & Accounts 2009 Abbreviations and Acronyms AGM – Annual General Meeting OCTG pipe – Oil Country Tubular Goods BRIC – Brazil, Russia, India and China Oxycutter – Oxygen cutter BOF – Basic oxygen furnace p.a. – Per annum, annually CAD – The Canadian Dollar RoW – Rest of the world CEO – Chief Executive Ofﬁ cer RZD – Joint Stock Company “Russian Railways” CIS – The Commonwealth of Independent States RUB – The Russian Rouble CO2 – Carbon dioxide CZK – The Czech Koruna t – Tonne. In this document, unless stated otherwise, all references to “tonnes” are to metric tonnes. One metric tonne is equal to one thousand kilograms, or 2,204.6 pounds EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortisation UK – United Kingdom of Great Britain and Northern Ireland EGM – Extraordinary General Meeting ERM – Enterprise Risk Management ERW – Electric Resistance Welded EU – European Union EUR or €€ – The Euro GDP – Gross Domestic Product USA – The United States of America UAH – The Ukrainian Hryvnia USD, US$ or $ – The US Dollar V – Vanadium VAT – Value added tax VEB – Russia’s State Corporation Bank for Development and Foreign Economic Affairs “Vnesheconombank” GDR – Global Depositary Receipts ZAR – The South African Rand HRC – Hot rolled coil IAS – International Accounting Standard IFRS – International Financial Reporting Standards kt – Thousand tonnes kWh – Kilowatt-hour LIBOR – The London Interbank Offered Rate LD – Large diameter pipe LSE – London Stock Exchange M or mln – Million mt – Million tonnes 257257 Annual Report & Accounts 2009 Glossary of Selected Terms Angle Angle-shaped steel section for construction API-grade slab American Petroleum Institute certiﬁ ed (API quality) slab Beam Construction steel product, structural element that is capable of withstanding load primarily by resisting bending Concentrate A product resulting from ore and coal enrichment, with a high grade of extracted mineral Construction products Include beams, channels, angles, rebars, wire rods, wire and other goods used in construction Consumption The physical use of steel by end users Billet A usually square, semi-ﬁ nished steel product obtained by continuous casting or rolling of blooms. Sections, rails, wire rod and other long products are made from billets Convertor Shop A type of furnace that uses pure oxygen in the process of producing steel from cast iron or dry mix Blast furnace The blast furnace is the classic production unit to reduce 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 reduces the iron ore to liquid iron. To increase efﬁ ciency and productivity, hot air (often enriched with oxygen) is blown into the bottom of the blast furnace. In order to save coke, coal or other carbon containing materials are sometimes injected with this hot air 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 Ferroalloy A metal product commonly used as a raw material feed in steelmaking, usually containing iron and other metals, to aid various stages of the steelmaking process such as deoxidation and desulphurisation, and add strength Bloom A usually square, semi-ﬁ nished steel product obtained by continuous casting or rolling of ingots. Blooms are used to make billets and in the manufacture of structural steel products Flat products or Flat-rolled steel products Include commodity plate, specialty plate and other products in ﬂ at shape such as sheet, strip and tin plate Brownﬁ eld project A development or exploration project in the vicinity of an existing operation Cast iron Please refer to “Pig iron” Channel U-shaped section for construction GZh coal Coal graded as gas fat coal, Russian equivalent of semi hard coking coal in international classiﬁ cation Greenﬁ eld project The development or exploration of a new project not previously examined H-Beam An H-shaped beam Coke A product made by baking coal without oxygen at high temperatures. 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 Coke (oven) battery A group of coke ovens operating as a unit and connected by common walls 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 melting is usually required 258258 Annual Report & Accounts 2009 Long products Include bars, rods and structural products that are “long” rather than “ﬂ at” and are produced from blooms or billets Skip coke Coke already sorted by size (usually less than 25 millimetres) in blast-furnace workshop Open-hearth furnace A vessel used to produce steel, which has been largely superseded by the substantially more efﬁ cient basic oxygen furnace (BOF) Sheet pile A long structural section with interlocking connections Other steel products Include rounds, grinding balls, mine uprights, strips etc. OCTG pipe Oil Country Tubular Goods – pipes used in the oil industry Pellets An enriched form of iron ore shaped into small balls or pellets. 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 Sinter An iron rich clinker like aggregate formed by heating iron ore ﬁ nes and coke in a sinter line and used as a burden material in blast furnaces. Slab A very 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 substances 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 Plate A long thin square shaped construction element made from slabs Tubular products Include large diameter 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. Upon heating, it reversibly loses oxygen Zh coal Coal graded as fat coal, Russian equivalent of hard coking coal in international classiﬁ cation Railway products Include rails, rail fasteners, wheels, tyres and other goods for the railway sector Rebar Reinforcing bar, a commodity grade steel used to strengthen concrete in highway and building construction Scrap Iron containing recyclable materials (mainly industrial or household waste) that is generally remelted and processed 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. Shale Shale is a ﬁ ne-grained, clastic sedimentary rock composed of a mixture of clay minerals and tiny fragments of other minerals, principally quartz and calcite Shale gas Shale gas is natural gas produced from shale 259259 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. The registered address of Evraz Group S.A. is 1 Allee Scheffer 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’. EvrazHolding LLC is a centralised management company overseeing the management of Evraz’s assets. EvrazHolding in Russia: Address: 15 Dolgorukovskaya str., bld. 4-5, 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 Further Information GDR Programme The Bank of New York Mellon Depositary Receipts Division 101 Barclay Street 22nd ﬂ oor New York, NY 10286 USA www.adrbny.com The Bank of New York Mellon Shareowner Services PO Box 11258 Church Street Station New York, NY 10286-1258 USA www.stockbny.com External Auditor Ernst & Young Société Anonyme 7, Parc d’Activité Syrdall L-5365 Munsbach B.P. 780 L-2017 Luxembourg Tel: +352 42 124 1 Fax: +352 42 124 5555 www.ey.com/luxembourg R.C.Luxembourg B 47 771 TVA LU 16063074a Availability of Annual Report Evraz Group’s Annual Report for 2009 and those for previous 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 Cautionary Statements The Evraz Group S.A. Annual Report and Accounts for 2009 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, objectives, goals, strategies, future operations and performance together with the assumptions underlying such matters. The Company generally uses words such as “estimates”, “expects”, “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 management’s best judgement but involve uncertainties and are subject to certain known and unknown risks together with other important 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 regarding 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.

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