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
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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
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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
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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
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III
IV
V
VI
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Annual Report & Accounts 2009
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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
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Annual Report & Accounts 2009
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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%.
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Annual Report & Accounts 2009
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• 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%.
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• 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.
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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 $20,380 million in 2008. Steel
segment sales accounted for the majority of the decrease in revenues due to the lower average prices and sales volumes of steel products.
Evraz’s sales volumes of steel products to third parties decreased from 17.0 million tonnes in 2008 to 14.3 million tonnes in 2009.
The decrease in steel sales volumes primarily refl ects a decline in demand for construction products in Russia with overall sales on
the Russian market down by –2.4 million tonnes. Sales volumes in Ukraine declined by –0.1 million tonnes. These decreases on
the domestic markets were partially offset by the growth in export sales volumes from the Russian and Ukrainian operations, which
showed a total increase of 0.8 million tonnes. Sales volumes of the European and South African operations declined by –0.3 million
tonnes and –0.1 million tonnes respectively. The Canadian operations, which were acquired in June 2008, achieved approximately
the same steel sales volumes in 2009 as in 2008 post acquisition, while sales at the US operations decreased by –0.6 million tonnes.
These decreases were a direct result of the general slowdown experienced by steel markets in 2009 and related cuts in production
volumes.
99
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VII
Annual Report & Accounts 2009
Management Report
The following table shows the average price trends of Evraz’s principal products in 2009 and 2008 (encompassing semi-annual breakdowns of
both the Russian and non-CIS export markets), which illustrates an uneven distribution of revenues during the periods under consideration:
US$ 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 $3,634 million in 2008. This primarily refl ected the lower
average prices of iron ore and coal in 2009 compared with 2008.
Sales volumes of iron ore products decreased by –15.7% in 2009 compared to 2008. Excluding the effect of the resale of iron ore products from
UGOK (a related party) in 2008, sales volumes of iron ore in 2009 decreased by only –1.1% compared with the previous year. Sales volumes of
steam coal products decreased by –8.2% in 2009 compared with 2008, while sales volumes of coking coal increased by 3.7%.
103
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Annual Report & Accounts 2009
Management Report
The following table shows a breakdown of Evraz’s mining segment sales in 2009 and 2008:
2009
2008
2009 vs 2008
Year ended December 31,
Mining
segment sales
Percentage
of total
Mining
segment sales
Percentage
of total
US$ 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
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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
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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
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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
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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.