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SynalloyGuide to the world of eVrAZ Annual Report and Accounts 2010 Nizhny TagilKuzbassCalgaryCamroseSheregeshRed DeerHot SpringsPortlandNovokuznetskKachkanarOstravaeMalahleniSan Giorgio di NogaroClaymontPuebloReginaNakhodka 2 AnnuAl RepoRt And Accounts 2010 +37% revenue growth in 2010 for more info see page 35 +90% eBItdA growth in 2010 for more info see page 35 –64% short-term debt decrease in 2010 for more info see page 12 +9% steel sales increase in 2010 for more info see page 12 #1 long steel producer in Russia for more info see page 35 #1 Rail producer in Russia and the usA for more info see page 35 LEADING world vanadium producer for more info see page 35 LARGEST crude steel producer in Russia for more info see page 87 BB-/Stable by Fitch Ratings for more info see page 79 B1/Positive by Moody’s for more info see page 79 B+/Stable By standard & poor’s for more info see page 79 165° 180° 165° 150° 135° 120° 105° 90° 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 75° 90° 105° 120° 135° 150° 165° 180° 165° 150° 135° 120° 90° EVRAZ OpERAtiOns mAp (As of 30 April 2011) 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° EVRAZ Red Deer EVRAZ Calgary EVRAZ Camrose EVRAZ Regina EVRAZ Surrey Moscow Vanady(cid:31)Tula EVRAZ NTMK ZSMK NKMK Evrazruda Nikom EVRAZ Vitkovice Steel EVRAZ Bagliykoks EVRAZ VGOK EVRAZ KGOK Raspadskaya Yuzhkuzbassugol EVRAZ DMZ Petrovskogo1 EVRAZ NMTP EVRAZ Portland EVRAZ Claymont EVRAZ Pueblo Stratcor East Metals EVRAZ Palini e Bertoli EVRAZ DKHZ EVRAZ Sukha Balka Type of business: Steel Production Iron Ore Mining and Enrichment Coal Mining Equity Investment (coal) Coke Production Vanadium Production Logistics Vametco EVRAZ Highveld Steel and Vanadium Mapochs Mine 165° 180° 165° 150° 135° 120° 105° 90° 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 75° 90° 105° 120° 135° 150° 165° 180° 165° 150° 135° 1 : 100 000 000 0 800 1 600 2 400 4 800 1 From 1 April 2011 EVRAZ DMZ Petrovskogo includes production facilities of Dneprokoks coking plant 90° 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° EVRAZ’S WORLD MAP 1 AnnuAl RepoRt And Accounts 2010 CoNteNtS 4 Company overview 4 6 8 9 10 11 Who We Are Key Events Corporate Structure Major Assets Production by Region 2010 Key Performance Indicators 2006-2010 14 messages 15 17 Chairman’s Statement Chief Executive’s Report 61 Corporate governanCe 61 62 63 65 66 71 73 76 76 78 Introduction The Board of Directors and Senior Management The Board Role of the Board Senior Management Board and Senior Management Remuneration Board Committee Reports Risk Management Internal Control Shareholder Information 22 eConomiC and industry overview Overview of the Global Macroeconomic Environment Overview of the Steel Industry Overview of the Coking Coal Market Overview of the Iron Ore Market Overview of the Vanadium Market 22 25 26 28 30 82 management report 82 Responsibility Statement of the Directors in Respect of the Annual Report and the Financial Statements Independent Auditor's Report on Legal and Regulatory Requirements Related to Consolidated Annual Management Report Selected Consolidated Financial Information 84 87 Management’s Discussion and Analysis of 83 33 Business overview Our Vision and Strategy 33 Our Business 35 Steel 36 36 Steel: Russia 38 Steel: Ukraine 39 Steel: Western Europe 39 Steel: South Africa 40 Steel: North America 41 Mining 41 Mining: Coal 42 Mining: Iron Ore Vanadium Outlook for 2011 Key Investment Projects 45 47 48 50 Corporate responsiBility 50 51 54 Introduction Economic Prosperity HSE Information and Developments 54 Health and Safety 56 Environment Our People 58 Financial Condition and Results of Operations 110 Consolidated FinanCial statements Independent Auditor's Report 110 Contents 112 113 Consolidated Financial Statements for the Years Ended 31 December 2010, 2009 and 2008 121 Notes to the Consolidated Financial Statements for the Years Ended 31 December 2010, 2009 and 2008 194 evraz group s.a. parent Company FinanCial statements 194 Contents 195 Responsibility Statement of the Directors in Respect of the Annual Accounts of Evraz Group S.A. Independent Auditor's Report 196 197 Parent Company Financial Statements 199 Notes to the Annual Accounts for the Year Ended 31 December 2010 211 Abbreviations and Acronyms 212 Glossary of Selected Terms 214 Interesting Facts about EVRAZ Symbols Address Phone Fax Weblink E-mail Information Geographic latitude and longitude Greenwich Mean Time Founded Population Area Diagram Table Data source Flora Fauna Sights Food and drinks Active leisure The photograph on Pages 52-53 is one of the winners of EVRAZ’s Photo & Picture competition which attracted entries from employees on a global basis and was organised by the EVRAZ Talent Committee. The authors of the photo are Ludmila Chirkina and Anna Chirkina of EVRAZ NTMK page 41 page 7 page 5 About Kachkanar Russia Kachkanar is a town in Sverdlovsk Oblast, situated between the Isa and Vyya Rivers, 205 kilometres (127 miles) north of Yekaterinburg in the Tura River basin. Originally founded as an ore mining settlement in 1957, Kachkanar received urban-type settlement status in 1959 and town status in 1968. The original meaning of Kachkanar, the Kachkanar Mountain that gave birth to the Kachkanarsky Ore Mining and Processing Plant (now EVRAZ KGOK), is unclear. The Tatar translation is ‘Hidden’ or ‘Disappearing’ mountain while the Turco equivalent is 'kesh-kener’ or ‘double-humped camel'. Curiously, the Ukrainian version is 'kachka' which translates into ‘Duck Mountain’. The exploration of Kachkanar’s titanomagnetite ores commenced in 1957, and KGOK subsequently pioneered the enrichment of low-iron content ores. KAchKAnAR Russian fedeRation General information 58°42’18”N 59°28’59”E GMT+05:00 1957 42,563 people 318,39 km2 4 AnnuAl RepoRt And Accounts 2010 Company overview i y n A p m o C W e i v r e v o Who We Are EVRAZ Group S.A. is a global, vertically-integrated, steel, mining and vanadium business with operations in the Russian Federation, Ukraine, the Czech Republic, Italy, the USA, Canada and South Africa. We are ranked by Steel Business Briefing the 20th largest steel company in the world, based on 2010 crude steel production volumes. Following an Initial Public Offering in June 2005, EVRAZ Group’s shares are listed and traded on the London Stock Exchange in the form of Global Depositary Receipts. Each GDR is equivalent to one third of one Ordinary share in EVRAZ Group S.A. our Business Our principal activities, which span four continents, are: The manufacture and sale of steel and steel products Iron ore mining and enrichment Coal mining and processing The manufacture and sale of vanadium products Trading operations and logistics EVRAZ is a premier producer of infrastructure products, one of the world’s leading manufacturers of construction steel and the world’s No 1 producer of rails. In 2010: Group revenues achieved US$13.4 billion Employees worldwide totalled 110,000 The steel division produced 16.3 million tonnes of crude steel and sold 15.5 million tonnes of rolled steel products The mining division produced 19.8 million tonnes of iron ore, 7.5 million tonnes of raw coking coal and 3.8 million tonnes of steam coal The vanadium division produced 20,969 tonnes of vanadium1 and sold 19,776 tonnes of vanadium products. The majority of EVRAZ’s iron ore and coking coal requirements for steel making is supplied by its mining operations. our Story The Company’s history dates back to 1992 when Evrazmetall, a small Russian metal trading firm, was founded. In the space of almost 20 years this company, the forerunner of the EVRAZ Group, has been transformed, via a programme of domestic and cross border acquisitions, into a multinational steelmaking and mining corporation with a US$17.6 billion asset base. 1 Primary vanadium (slag) production 5 AnnuAl RepoRt And Accounts 2010 Company overview our mission We are a global steel and mining Company delivering value to our infrastructure customers. We make the world Stronger, Safer and Cleaner. The acquisitive growth of EVRAZ, focused on the creation of a geographically diversified steelmaking capability alongside a complementary resource of raw material provides us with a stable platform for further growth. our Values EVRAZ is a distinctive company with distinctive values. We believe that our responsibilities encompass all our stakeholders including shareholders, customers, employees and communities in the areas where we operate. We endeavour to deliver ongoing growth and value while, at the same time, pursuing environmentally responsible policies within a framework of sustainability. KAChKANAr dePoSit Although Mount Kachkanar’s iron ore deposits would have been visibly apparent to the Mansi, the indigenous people of the region, they used the mountain primarily as a sanctuary. After the Middle Urals and Trans-Urals were integrated within the principality of Moscow during the 16th century, Russian mining industrialists focused their attention on Kachkanar. Akinfiy Demidov, a member of the prominent family dynasty of industrialists, wanted to buy the entire mountain from the Mansi but the deal never materialised. Platinum fever subsequently broke out and led to the construction of the historic Kachkanar mine, owned by Count Shuvalov. In the event, the rich platinum placers were quickly depleted and Kachkanar became the focus of scientific research. The systematic study of ore deposits at Kachkanar began in the early 1930s as did research into ways in which to enrich the Kachkanar ores and sinter the iron-vanadium concentrate. Various pilot projects were introduced which proved the technical feasibility of mining and processing ores that possessed a low iron content. During 1946-1953, company Uralchermetrazvedka, carried out a detailed exploration of the Kachkanar deposits. The development of titanium magnetite ores at Mount Kachkanar was first undertaken in 1957 under the initiative of a group of mining industry executives and professional representatives of the Urals Institute for Mining Projects. The town of Kachkanar was founded to the southeast of the mountain the same year. Today, mining at the Kachkanar Mountain is conducted by EVRAZ KGOK. 6 AnnuAl RepoRt And Accounts 2010 Company overview Key eVeNtS 2010 Ò marCh EVRAZ won the licence to develop the Mezhegey coking coal deposit (estimated reserves of 213.5 million tonnes of category A+B+C1 hard coking coal) in the Republic of Tyva, Russia. EVRAZ’s subsidiary, OOO EvrazHolding Finance, announced the issue of a 15 billion Rouble-denominated bond (approx. US$506 million) with an annual coupon of 9.25% due in 2013. EVRAZ Inc. NA announced a restructuring of its manufacturing and commercial operations focused on three key product groups: ‘Flat Rolled’, ‘Tubular’ and ‘Long.’ Ò april EVRAZ sold the Koksovaya coal mine, an offshoot of the Company’s Yuzhkuzbassugol subsidiary, to the Raspadskaya coal company in order to derive maximum synergies from the future development of the coal field. EVRAZ Highveld launched Project Zero Tolerance, a ‘three-card’ health and safety programme designed to monitor and control potential dangers in the workplace. Ò 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. EVRAZ fully repaid a US$1,007 million loan to VEB utilising a US$950 million loan from Gazprombank which will mature in 2015. Ò June EVRAZ created a Health, Safety and Environmental Committee of the Board of Directors and appointed a Vice President of Health, Safety and Environment. Ò oCtoBer EVRAZ won the tender to develop the Eastern field of the Western part of the Ulug-Khemsky coal deposit (inferred hard coking coal – grade Zh under Russian classification – reserves of more than 550 million tonnes and out-of-balance reserves of more than 100 million tonnes) in the central part of the Republic of Tyva, East Siberia. EVRAZ completed the first stage of the rail mill modernisation at NKMK, initiated in June 2010. EVRAZ’s subsidiary, OOO EvrazHolding Finance, issued a 15 billion 5-year Rouble-denominated bond (approx. US$490 million) with an annual coupon of 9.95% for the purpose of refinancing EVRAZ’s existing debt. Ò novemBer EVRAZ Vitkovice Steel resumed steelmaking after reaching an agreement with ArcelorMittal Ostrava regarding supplies of liquid pig iron. EVRAZ appointed Scott Baus, a specialist in corporate efficiency with 25-years experience, Director of Lean. EVRAZ signed a US$950 million structured credit facility scheduled to mature in 2015. EVRAZ completed a two-stage modernisation programme at NTMK’s steel manufacturing facilities, initiated in June 2010. Ò deCemBer EVRAZ’s Board of Directors approved investment in the construction of the Yuzhny Rolling Mill in the Rostov Region of Southern Russia and the Kostanay Rolling Mill in Kazakhstan with a combined annual production capacity of approximately 900,000 tonnes of light sections and rebars. EVRAZ Highveld formed the EVRAZ eMalahleni Community Forum – a vehicle through which all Socio- Economic Development investments are approved and managed. EVRAZ acquired INPROM and amalgamated the latter’s distribution network with that of EvrazMetall under a new company which will become one of the largest steel distribution enterprises in the CIS. Moody’s adjusted EVRAZ’s rating outlook from positive to stable. Ò July EVRAZ temporarily closed the steel shop at EVRAZ Vitkovice Steel due to the failure to negotiate prices for hot iron supplied by ArcelorMittal Ostrava. EVRAZ initiated Pulverised Coal Injection (PCI) technology at Zapsib and NTMK, a development that will reduce coke consumption by more than 20% with benefit to the environment. Ò septemBer EVRAZ Inc. NA Canada secured a CAD300 million (approx. US$285 million) four-year committed revolving credit facility to finance working capital requirements and other corporate disbursements. 7 AnnuAl RepoRt And Accounts 2010 Company overview 2011 Ò January EVRAZ signed a long-term contract with Praxair Rus for the supply of industrial gases to NTMK and the construction by Praxair of air separation plants on NTMK’s site. EVRAZ announced plans to relocate the headquarters of the North American operations, EVRAZ Inc. NA, from Portland, Oregon, to Chicago, Illinois, in June 2011. Old order mining rights were converted into new order mining rights in respect of Mapochs Mine (a subsidiary of EVRAZ Highveld) in South Africa. EVRAZ Vitkovice Steel signed an agreement, in common with other Industrial companies, designed to further air protection in the Moravian Silesian region. Ò FeBruary EVRAZ appointed two new Vice Presidents: Vice President of Sales and Vice President of Procurement. EVRAZ announced plans to consolidate two of its Russian steel mills, OAO ‘ZSMK’ and OAO ‘NKMK’ under the name EVRAZ – Consolidated West Siberian Metallurgical Plant. Ò marCh EVRAZ announced the launch of «EVRAZ New Leaders 2011», a multi-module integrated programme designed to further the development of the Company’s personnel. Standard and Poor’s Rating Service upgraded EVRAZ’s long-term corporate credit rating to ‘B+’ (Stable). Ò april EVRAZ commenced the rebranding of a number of Russian and Ukranian enterprises with ‘EVRAZ’ added as a prefix to the existing names. EVRAZ received awards for Best Financial Disclosure Procedure 2011 and Best Progress in Europe 2011 from IR Global Rankings. Fitch upgraded EVRAZ’s long-term foreign currency Issuer Default Rating (IDR) from ‘B+’ (Stable) to ‘BB-’ (Stable). Fitch also upgraded EVRAZ’s senior unsecured rating to ‘BB-‘ from ‘B+’ and assigned its prospective Eurobond issue an expected ‘BB-(exp)’ rating. EVRAZ launched an US$850 million issue of Eurobonds, due 2018, with a 6.75% coupon. Ò may Shareholders at EVRAZ’s AGM approved the Directors' Report and the consolidated and stand-alone financial statements for the year ending 31 December 2010, the new composition of the Board of Directors, determined the level of the directors’ and CEO’s remuneration and re-appointed Ernst & Young as the Company’s external auditor. EVRAZ NTMK became the first Russian company to master the production technology of extrahard railway wheels. ZapSib became the first enterprise in the Kemerovo region to receive audited confirmation that the company’s integrated system of management (covering the three key elements of quality, ecology and health and safety) conforms to international standards. EVRAZ Pueblo was recognised with a Community Involvement Award from the Steel Manufacturers Association. Ò June EVRAZ priced a 20 billion 5-year rouble bond (approx. US$710 million) at a coupon rate of 8.40% per annum. mouNtAiN KAChKANAr Kachkanar is one of the tallest peaks in the Middle Urals close to the natural dividing line between Europe and Asia. Mount Kachkanar is part of the mountain group in the northern part of the Middle Urals bearing the same name. It is located on the east bank of the Is River in the Sverdlovsk Oblast. Kachkanar, geologically, is the youngest of all the mountains in the Urals range. The word ‘Kachkanar’ can be traced back to Turkic origins, where ‘kachka’ means ‘bald’ and ‘nar’ means ‘camel’, i.e. a bald mountain resembling a camel. Mount Kachkanar’s peak is covered in bizarrely shaped rocks, many of which have names of their own, ‘camel’ being the most popular. An alpine ski piste is located on the south-eastern slope of the mountain. 8 AnnuAl RepoRt And Accounts 2010 Company overview CorPorAte StruCture (As of 30 April 2011) eVrAZ GrouP S.A. STEEL IRON ORE COAL VANADIUM SALES, SERVICES AND LOGISTICS EVRAZ Bagliykoks 94.37% EVRAZ DKHZ 93.86% EVRAZ KGOK 100% Raspadskaya 6 40% Nikom 100% East Metals AG 100% Evrazruda 100% Yuzhkuzbassugol 100% Stratcor 7 78.76% EvrazEK 100% EVRAZ DMZ Petrovskogo 1 96.03% EVRAZ Sukha Balka 99.42% Vanady-Tula 100% EVRAZ Metall Inprom 8 100% EVRAZ VGOK 100% EVRAZ NMTP 100% Evraztrans 100% MEF 100% Sinano 100% TC EvrazHolding 100% EVRAZ Highveld 2 85.12% EVRAZ Inc. NA 3 100% EVRAZ Inc. NA Canada 4 100% EVRAZ NTMK 100% EVRAZ Palini e Bertoli 100% EVRAZ Vitkovice Steel 100% NKMK 5 100% ZSMK 5 100% 1 From 1 April 2011 EVRAZ DMZ Petrovskogo includes production facilities of Dneprokoks coking plant 2 EVRAZ Highveld Steel and Vanadium produces both steel and vanadium products. Highveld’s shares have a primary listing on the Johannesburg Stock Exchange. 5 During 2011 ZSMK and NKMK are in the process of merger. The combined enterprise will be named EVRAZ – Consolidated West Siberian Metallurgical Plant 6 40% interest in Raspadskaya is held by its management, while 20% is free float. 3 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). 4 EVRAZ Inc. NA Canada 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 office in Calgary. 7 Strategic Minerals Corporation comprises two divisions: Stratcor (Hot Springs, Arkansas, USA) and Vametco Alloys (Brits, South Africa). 8 During 2010 EVRAZ merged its distribution network EvrazMetall with metal service company INPROM under name EVRAZ Metall Inprom. 9 AnnuAl RepoRt And Accounts 2010 Company overview Major assets (As of 30 April 2011) EVRAZ DMZ Petrovskogo1 (‘EVRAZ DMZ Petrovskogo’), Ukraine, an integrated steel mill specialising in the manufacture of pig iron, steel and rolled products. EVRAZ Inc. NA together with EVRAZ Inc. NA Canada represents one of the most diversified 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. EVRAZ Highveld Steel and Vanadium (‘EVRAZ 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. EVRAZ Palini e Bertoli in northern Italy produces customised, high-quality steel plate products. EVRAZ Vitkovice Steel, the largest producer of steel plates in the Czech Republic. Evrazruda Iron Ore Mining and Processing Complex (‘Evrazruda’) produces iron ore concentrate with operating mines in Kemerovo region, the Republic of Khakassia and south Krasnoyarsk Krai. EVRAZ Metall Inprom2 (‘EVRAZ Metall Inprom’), one of the largest steel distribution companies in the CIS with 43 metal centres in industrially developed regions of Russia and the CIS.. EVRAZ Kachkanarsky Ore Mining and Processing Plant (‘EVRAZ KGOK’) produces sinter and pellets from vanadium-rich iron ore. EVRAZ Nakhodka Trade Sea Port (‘EVRAZ NMTP’), one of the largest ports in the Far East of Russia, from where EVRAZ ships the majority of its exports. Nikom, a ferrovanadium producer located in the Czech Republic. EVRAZ Nizhny Tagil Metallurgical Plant (‘EVRAZ NTMK’), an integrated steel plant that primarily produces railway and construction long products, pipe blanks and semi- finished products. Novokuznetsk Iron and Steel Plant3 (‘NKMK’) specialises in the production of rolled long metal products for the railway sector and semi-finished products. Strategic Minerals Corporation (‘Stratcor’), one of the world’s leading producers of vanadium alloys and chemicals for the steel and chemical industries. EVRAZ Sukha Balka (‘EVRAZ Sukha Balka’) operates two underground mines in Ukraine for the production of lumping iron ore. Vanady-Tula (‘Vanady-Tula’), the largest Russian producer and one of the leading world producers of vanadium products. EVRAZ Vysokogorsky Ore Mining and Processing Plant (‘EVRAZ VGOK’) produces sinter from its iron ore resources, as well as iron ore concentrate, limestone, crushed stone and other products. West Siberian Iron and Steel Plant3 (‘ZSMK’), an integrated steel plant that primarily produces construction long products and semi-finished products. Yuzhkuzbassugol Coal Company (‘Yuzhkusbassugol’), one of the largest coal companies in Russia that produces both coking and steam coal. Ukrainian coking plants – EVRAZ Bagliykoks (‘EVRAZ Bagliykoks’), Dnepropetrovsk Coke Chemical Plant1 (‘Dneprokoks’) and EVRAZ Dniprodzerzhynsky Coke and Chemical Plant (‘EVRAZ DKHZ’) – supply their coke production to EVRAZ DMZ Petrovskogo and various local steelmakers in Eastern Europe. 1 With effect from 1 April 2011 Dneprokoks was merged with EVRAZ DMZ Petrovskogo. 2 During 2010 EVRAZ merged its distribution network EvrazMetall with metal service company INPROM under name EVRAZ Metall Inprom. 3 Merge of ZSMK and NKMK will be effected during 2011. The combined enterprise will be named EVRAZ – Consolidated West Siberian Metallurgical Plant. 150° 165° 180° 165° 150° 135° 120° 105° 90° 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 75° 90° 105° 120° 135° 150° 165° 180° 165° 150° 10 annual RepoRt and accounts 2010 Company overview Guide to EVRAZ’s WORld 10 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 75° pROductiOn by REGiOn 2010 pROductiOn, mininG sEGmEnt (thousand tonnes) russia Mining segment: Iron ore concentrate 5,822 Sinter 3,999 Pellets 5,616 Coking coal mined 7,509 Steam coal mined 3,830 ukraine Mining segment: Lumping ore 2,044 south afriCa Mining segment: Iron ore fines 6011 1 Total production by the Mapochs mine (structurally a division of EVRAZ Highveld) includes both production of lumpy ore for the Company’s internal consumption at the EVRAZ Highveld steelmaking operations and fines ore sold to third parties. 35.2% Tubular 34.5% Flat(cid:31)rolled 15.5% Railway 14.8% Construction North America 85.6% Flat(cid:31)rolled 12.5% Construction Europe 1.9% Other 58.3% Flat(cid:31)rolled 30.6% Construction 6.0% Semi(cid:31)finished South Africa 5.1% Other 52.2% Construction 42.3% Semi(cid:31)finished Ukraine 5.5% Other 42.9% Semi(cid:31)finished 35.2% Construction 13.8% Railway 5.2% Other 2.9% Flat(cid:31)rolled Russia pROductiOn, VAnAdium sEGmEnt (tonnes, calculated in pure vanadium equivalent) Ferrovanadium 13,507 Nitrovan® 2,408 Oxides, vanadium aluminium and chemicals 1,317 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 150° 165° 180° 165° 150° 135° 120° 105° 90° 75° 60° 45° 30° 15° 0° 15° 30° 45° 60° 75° 90° 105° 120° 135° 150° 165° 180° 165° 150° 1 : 100 000 000 0 800 1 600 2 400 4 800 75° 11 AnnuAl RepoRt And Accounts 2010 Key Performance IndIcators 2006-2010 Revenues US$ million Adjusted eBItdA US$ million 25,000 20,000 15,000 10,000 5,000 0 CAPeX 1,200 1,000 800 600 400 200 0 20,380 12,859 13,394 8,292 9,772 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 6,215 4,305 2,594 2,350 1,237 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 US$ million OPeRAtIng CAsh FlOw US$ million 1,103 744 651 5,000 4,000 3,000 832 4,563 2,994 441 2,000 2,084 1,698 1,662 1,000 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 12 AnnuAl RepoRt And Accounts 2010 STEEl SAlES VOluMES million tonnes ASSETS US$ million 20 15 10 5 0 16.0 16.4 17.0 15.5 15,000 14.3 16,952 17,601 20,000 19,451 18,637 10,000 8,510 5,000 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 TOTAl DEBT US$ million REVENuES BY REGION 2010 9,986 3,922 6,756 2,103 7,923 1,992 7,811 714 35.0% Russia 23.6% Americas 20.0% Asia 10.6% Europe 7.2% CIS (excl. Russia) 3.6% Africa 10,000 8,000 6,000 4,000 2,000 0 2,596 741 2006 2007 2008 2009 2010 Short(cid:31)term debt page 41 page 19 page 20 page 19 About Portland Russia Big city excitement combined with small town charm make Portland, Oregon, a popular destination in the West. Portland is situated approximately 70 miles from the Pacific in an awesome setting between the sparkling waters of the Columbia and Willamette Rivers. Portland is often acknowledged as the ‘Greenest City in America’, and ranks among the world's Top Ten environmentally friendly cities. Tourist attractions include Portland's historic old town, numerous galleries and museums, the Saturday Market (complete with live music and exotic food) and a host of theatre opportunities. Likewise, the city’s lush green parks are synonymous with picnics and relaxation. For the more adventurous, Portland is only a short distance from the Willamette valley wineries, skiing at Timberline Lodge and the magnetic pull of Oregon's spectacular ocean beaches. Portland is home to no less than 28 breweries, more than any other city in the United States. Portland’s climate, with mild, damp winters and relatively dry, warm summers, is ideal for growing roses and, in 2003, Portland was officially nicknamed ‘The City of Roses’ as testament to a profusion of rose gardens -- most notably the International Rose Test Garden. The steel industry's history in Portland predates World War II and, by the 1950s, the industry had become the city's principal employer. Although EVRAZ Inc. NA will move its headquarters to Chicago in 2011, EVRAZ will remain an important part of the Oregon manufacturing community through its ongoing operations at the Portland steel mill. The Portland steel facility, which enjoys ready access to Canada’s Western Provinces, is the only plate mill in the Western United States. Products include plate and coil, large diameter line pipe and structural tubing. PortlAnd United StateS Of america General Information 45°31’24”N 122°40’34”W GMT –08:00 1845 583,776 people 376.5 km2 15 AnnuAl RepoRt And Accounts 2010 15 AnnuAl RepoRt And Accounts 2010 ChAirmAN’S StAtemeNt Dear Stakeholders, In my letter to you a year ago I highlighted the unprecedented challenges faced by the global steel industry as a result of the 2008 economic downturn. Major challenges can, however, also provide valuable opportunities and I am pleased to report that, due to the swift and decisive actions taken by EVRAZ’s management, we have improved efficiency, reduced costs and reorganised important areas of our business. Since mid-2009 we have seen a measured recovery in the global economy accompanied by an increase in steel demand, a trend that continued through 2010 and into the beginning of 2011. I am also pleased to report that our key strategic priorities, namely cost leadership, vertical integration into raw materials, geographic diversification, a manufacturing focus on infrastructure and the development of downstream operations in regions where value added products enjoy high consumption, have stood the test of time and remain unchanged. Our strategic and managerial decisions are synonymous with our mission statement: to be a global steel and mining company delivering value to our infrastructure customers. Equally, such decisions walk hand in hand with certain specific principles that we endeavour to bring to bear throughout our operations. Each of these common values is represented by one of the letters in the Company’s name: Enrichment through collaboration. We appreciate that working together as a team will enable us to achieve the best results. Value created for our customer. Through continually improving our products and services, we strengthen our long-term partnerships with our customers. Respect for people. The utmost regard for safety, the development of our people and support for local communities represent integral aspects of EVRAZ’s corporate culture. Accountability for actions and results. We aspire to achieve our goals and are responsible for the results. Zeal for continuous improvement. The development and implementation of new ideas can further our undertaking to make the world Stronger, Safer and Cleaner. 16 AnnuAl RepoRt And Accounts 2010 messages GuIde to eVrAZ’S world 16 I should emphasise that these are not merely a collection of dictums, they are central to what we refer to as ‘the EVRAZ way of doing business.’ We continue to focus our efforts on achieving further growth of the business and we do so in the knowledge that we can support such growth through what, in this instance, we refer to as key strategic pillars namely: health, safety and environmental protection; human capital; customer focus and the EVRAZ Business System. In December 2010, Russia won the bid to host the 2018 FIFA World Cup and the Russian Government has committed to invest US$50 billion in preparation for this event, including US$3.8 billion in respect of stadiums and US$11 billion on infrastructure projects. EVRAZ estimates that 2018 World Cup steel requirements for the construction of stadiums (13 stadiums to be built and three to be renovated), hotels and local infrastructure (highways, bridges, etc.) may amount to 2-2.5 million tonnes. EVRAZ remains committed to the highest standards of transparency and corporate governance and we were delighted to receive awards for the Best Financial Disclosure and Best Progress in Financial Disclosure in Europe in the 2011 IR Global Rankings survey. This is the first time that this prestigious award has been presented to a company headquartered in Russia. We are proud that our financial disclosure and investor relations practices have received such notable commendations. I am confident that EVRAZ is well positioned, as a quality driven, geographically diversified and socially responsible business, to capitalise on the prospective investment in global infrastructure and gainfully progress the Company’s growth targets. Ongoing improvements in health and safety standards in relation to the well-being of our employees remain at the forefront of our priorities. We increased our emphasis in this regard during 2010 by setting up a Health, Safety and Environmental Committee of the Board of Directors and hiring Vice President of Health, Safety and Environment. We are intent on meeting the objectives of our stakeholders and, to this end, we will endeavour to grow shareholder value while continuing to address the occupational and social needs of employees, including our support for community projects which is of unquestionable benefit to those who reside in the regions where we operate. EVRAZ has always taken the view that employees represent our most important asset and are integral to the Company’s success. Our achievements would not have been possible without the hard work and commitment of our people around the world and I would like to take this opportunity to thank each of them for their outstanding contributions. It is encouraging to note that EVRAZ is well positioned to benefit from an abundance of infrastructure investments – both private and public – and I would like to draw your attention to the fact that our products feature in a number of recent and ongoing landmark infrastructure projects. These include 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-Pacific Economic Cooperation summit in the Russian Far East in 2012. Alexander Abramov Chairman of the Board 17 AnnuAl RepoRt And Accounts 2010 17 AnnuAl RepoRt And Accounts 2010 Chief exeCutiVe’S rePort Dear Stakeholders, The year 2010 saw a continuation of the recovery in steel demand across all of EVRAZ’s key markets. Our steelmaking capacity in Russia was fully utilised and we significantly increased the utilisation rates at our international plants. By way of illustration, the proportion of steel sales from our Russian and Ukrainian mills to Russia and other CIS countries increased from 44% to 58%. This allowed us to fully utilise our rolling capacities in Russia, thereby shifting our product mix from semi- finished steel to higher margin products. Our North American operations registered notable volume increases driven by strong demand for pipes, to facilitate shale gas exploration projects, and construction plate in respect of infrastructure investment on behalf of local governments. As a result, we improved our financial performance in 2010, generating US$2.35 billion of EBITDA and US$282 million of free cash flow. The focus of our financial management was on the refinancing of short-term debt through longer-term instruments. Capital markets were available to us, notably with regard to Rouble bond issuance, but we were also able to access bank lending both on a bilateral basis and with a group of international lenders in respect of a pre-export finance facility. In 2010 we had two Rouble bond issues totalling to RUB30 million and entered into US$950 million 5-year structured credit facility. In April 2011, EVRAZ launched an issue of US$850 million Eurobonds, due 2018, carrying an interest rate of 6.75%, the lowest ever coupon in respect of an EVRAZ Eurobond issue. Part of the proceeds from the issue was used to purchase approximately US$622 million in aggregate of the principal amount of the outstanding bonds due 2013. We have also issued RUB20 billion of bonds in early June 2011 in order to replace more expensive and short-term bank loans. Our refinancing activities, focused on a realignment of our short- and long-term debt, have significantly improved our debt maturity profile. Subject to the results for 1H 2011 meeting the Board’s expectations, consideration will be given to the dividend payment. 18 AnnuAl RepoRt And Accounts 2010 messages GuIde to eVrAZ’S world 18 As part of the ongoing development of our raw material base we acquired the licence to develop the Mezhegey coal deposit in Russia, a project that will significantly enhance our coking coal mining volumes over a period of several years. The mineable reserves associated with these deposits amount to in excess of 700 million tonnes of coking coal. We also commenced construction of a new mine in Kemerovo region which will provide EVRAZ with 2 mtpa of high quality coking coal with effect from 2013. In order to further capitalise on our iron ore asset base, we plan to commence exploration of the Sobstvenno- Kachkanarskoye iron ore deposit, a development which will ultimately enable KGOK to produce 11 mtpa of saleable iron ore products for several decades. We are also seeking prime greenfield projects in Russia and on a global basis. In order to strengthen EVRAZ’s position in current markets we commenced the construction of new rolling facilities in regions where we have identified growing demand, namely Southern Russia and Kazakhstan. We also created one of the largest steel distribution companies in the CIS by acquiring INPROM, a metal service enterprise, and combining its operations with our own trading network. Ongoing modernisation of our rail mills, the expansion of our product mix and the upgrade of the wheels shop will all serve to underwrite our production focus on value-added products. We have strengthened our focus on health and safety issues and the appointment of a Vice President of Health, Safety and Environment is designed to ensure that developments in this area receive the due attention of management and employees and the necessary level of investment. We believe that this course of action will have a positive impact on our safety performance. We continued to drive efficiency gains through operational improvements. The introduction of a pulverised coal injection project, scheduled for completion in 2012, will increase our energy efficiency, eliminate the need for natural gas in blast furnaces and reduce our coking coal consumption by almost 20%. Existing cost saving programmes are currently yielding annual efficiency gains of US$20-30 million at each Russian steel plant. In 2010, we appointed Scott Baus as Director of Lean. We have every confidence that Mr Baus’s 25-plus years of experience in business system optimisation will help us progress our ambitious targets in relation to cost- saving and production efficiencies. To this end we have introduced Lean principles at EVRAZ’s plants. Management teams have been strengthened within our international subsidiaries, a new pricing formula has been agreed in respect of hot metal supply to EVRAZ Vitkovice Steel, our Czech subsidiary, and a number of organisational and environmental improvements have been introduced at our North American operations. Accordingly, our shaping of a powerful, integrated and diverse steel manufacturing enterprise in North America advanced during 2010 and will progress further through 2011. The establishment of critical integrated functions such as supply chain planning, manufacturing excellence and business development across all three divisions (Flat, Tubular and Long) is integral to the maintenance of EVRAZ’s competitive strength in North America. In January 2011 we successfully converted old order mining rights into new order mining rights in respect of the Mapochs iron ore mine in South Africa. Global steel markets, while remaining distinctly sensitive, have made a promising start to 2011 which points to an ongoing broad-based recovery. The prices and availability of steelmaking raw materials – iron ore, coking coal and scrap – will remain the key drivers of steel prices. Based on our sales at the beginning of 2011, we expect Russian demand for construction steel to increase by upwards of 10% in 2011 compared with 2010. We are also experiencing improved demand from our international markets. We are confident that EVRAZ’s credentials as one of the lowest cost steel producers in the world will enable us to maximise the benefits from any significant upturn in global infrastructure markets. Alexander Frolov Chief Executive Officer 19 AnnuAl RepoRt And Accounts 2010 iNterNAtioNAl roSe teSt GArdeN roSe GArdeN Portland enjoys a marine west coast climate which is characterised by warm, dry summers and rainy but mild winters. This climate is ideal for growing roses and, for more than a century, Portland has been known as ‘The City of Roses’. The city is home to numerous rose gardens – most notably the International Rose Test Garden. The International Rose Test Garden, located in Portland’s Washington Park, contains more than 7,000 rose plants encompassing approximately 550 varieties. The roses bloom from April through October and, depending on the weather, peak in June. New rose cultivars are constantly received from many parts of the world and are tested for colour, fragrance, disease resistance and various other attributes. One of the most popular areas (particularly for weddings) is the Shakespeare Garden which harbours a plaque of the playwright and his quote: ‘Of all flowers methinks a rose is best’. The garden is the oldest ongoing public rose test garden in the United States. The Rose Garden, commonly known as the Rose Garden Arena, is Portland’s principal indoor sports arena. Major indoor events staged at the arena include basketball, ice hockey, rodeos, circuses, conventions, ice shows, concerts, and drama productions. The arena can accommodate close on 20,000 basketball spectators, with a smaller capacity utilised for other events. State -of-the-art acoustics are accompanied by various amenities for the benefit of visitors. The arena is located in Portland’s sports and entertainment district known as the Rose Quarter, an area in inner northeast Portland that also houses the Memorial Coliseum arena and various facilities including restaurants and parking complexes. The reason why the ‘Rose Garden’ is more commonly known as the ‘Rose Garden Arena’ is to differentiate it from the International Rose Test Garden, also located in Portland. The name was chosen to reflect Portland's reputation as ‘The City of Roses’ and as an acknowledgement of the importance of the Boston Garden and Madison Square Garden arenas to basketball’s heritage. 20 AnnuAl RepoRt And Accounts 2010 eAStBANK eSPlANAde SmAlleSt PArK iN the world The Eastbank Esplanade (officially the Vera Katz Eastbank Esplanade) is a pedestrian and bicycle path that follows the east shore of the Willamette River in Portland. The path, which runs through the Kerns, Buckman, and Hosford-Abernethy neighbourhoods, was designed to replace the Interstate 5 bicycle bypass which was washed away by the Willamette Valley Flood of 1996. The esplanade was renamed after Vera Katz, Portland’s former mayor, in 2004 and features a statue of her near the Hawthorne Bridge. The esplanade, which extends 2.4 kilometres from the Steel Bridge to the Hawthorne Bridge, includes a 370 metre floating walkway (the longest of its kind in the United States) which is connected to a 37 metre public dock. The 13 markers alongside the esplanade correspond to the eastside street grid. Portland is also home to Mill Ends Park, the world's smallest park. According to the Guinness Book of Records, which officially granted such recognition in 1971, the circular park has a two-foot-diameter and a total area of 452 square inches or approximately 0.3 square metres. The park was established on St. Patrick's Day, 1948 as, in the words of Dick Fagan, its creator: ‘the only leprechaun colony west of Ireland’. The story of the park's origin goes like this. Fagan looked out of a window and spotted a leprechaun digging a hole. He ran outside and grabbed the leprechaun, thereby earning himself a single wish. He wished for a park of his own but, because he had not specified the size of the park, the leprechaun only gave him the small hole. Fagan, who worked at the Oregon Journal, often featured the park and Patrick O’Toole, its head leprechaun, in his whimsical column. The park, which Fagan perceived as an ideal location for snail races, has proved the receptacle of several unusual items over the years including a swimming pool for butterflies – complete with a diving board -- a horseshoe, a fragment of the Journal building, and a miniature Ferris wheel delivered with due care by a full size crane. page 41 page 31 page 27 page 29 About Nizhny Tagil Russia Nizhny Tagil is a city in the Sverdlovsk Region of Russia. It is situated approximately 25 kilometres east of the virtual border between Europe and Asia. Nizhny Tagil spans 22 kilometres from north to south and 21 kilometres from east to west; rivers and ponds cover one third of the city's territory. The city is built around the extinct volcano, Mount Lisya (‘fox’s hill’). This mountain, which has a watch-tower at its summit, is the symbol of Nizhny Tagil. The city was officially founded in October 1722 by way of an amalgamation of various settlements connected with the construction of the Vyysky copper smelting plant, an enterprise owned by Nikolay Demidov, the founder of the mining and metallurgical industries in the Urals. Over the following decades, the city developed into one of the early centres of Russian industrialisation and became a major producer of cast iron and steel. Nizhny Tagil’s geological structure is complex and, with an altitude that ranges from 170 to 380 metres, the area is one of the Earth’s rare natural store-rooms. Numerous mineral deposits, containing 63 different elements of the periodic table, are to be found here. The seeds of the city’s history were sown in 1696 with the opening of the Vysokogorsky iron ore quarry. The deposits discovered were particularly rich and included lodes of pure magnetic iron. Today, Nizhny Tagil remains a major industrial centre in the Middle Urals. More than 600 manufacturing companies are based in the city, including EVRAZ NTMK (one of Russia’s largest integrated steel mills) and EVRAZ VGOK (one of the largest iron ore mining and processing enterprises in the Urals). NizhNy TAgil Russian fedeRation general information 57°55’0”N 59°58’0”E GMT+05:00 1722 361,900 people 4,601 km2 22 AnnuAl RepoRt And Accounts 2010 Economic and industry ovErviEw iii Overview Of the GlObal MacrOecOnOMic envirOnMent The dual effects of a slow recovery in developed markets and robust growth in emerging markets were the principal drivers of the global economy during 2010. A broad advance following the 2009 downturn translated into 4.4% global GDP growth and positive prospects for 2011. China and India continued to effectively underwrite key commodity sectors, courtesy of the ongoing growth in Asia, and the prices of most commodities either returned to pre-crisis levels or are expected to do so in 2011. The EU and the Euro remained under pressure throughout 2010 as events in Europe fuelled concern over member-states’ debt issues. Such anxieties persist although signs that the broader based economic scenario may have stabilised have encouraged recovery hopes. Both the US and the EU are looking to reduce their respective budget deficits against inflation. Capital markets have largely recovered in relation to equity and debt transactions, as reflected in a significant increase in corporate fund raising activity, a trend that is expected to continue in 2011. In China, rising raw material prices and high industrial production growth rates has led to higher interest rates in an effort to cool the Chinese economy. In the wake of 2010’s progress, the consensus outlook for the key sectors of the global economy in 2011 is positive. y r t s u d n i d n a i c M O n O c e w e i v r e v O 23 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview REAl GDP GROWTH 15 10 5 0 (5) (10) (15) 6.5 (3.5) (3.8) (5.1) (9.3) 8.1 (3.1) (4.1) (5.1) (11.0) 9.5 (2.0) (2.7) (4.3) (8.6) 11.3 11.9 3.9 3.1 2.4 0.7 0.9 0.2 (2.2) (2.9) 10.3 5.2 4.3 3.0 2.0 9.6 4.2 3.2 2.7 2.2 percents 9.0 4.9 3.8 2.9 2.4 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 China Russia World EU(cid:31)27 USA Global Insight percents 15.9 10.9 9.9 7.4 7.3 13.5 7.8 6.8 6.4 6.0 13.0 6.2 6.2 5.7 5.4 INDuSTRIAl PRODuCTION GROWTH 20 15 10 5 0 (5) (10) (15) (20) 5.7 (11.6) (13.4) (15.5) (16.7) 12.4 (8.3) (8.6) (9.6) (13.0) 9.0 (12.3) (12.7) (13.6) (16.5) 19.6 9.5 8.3 3.4 2.7 17.9 1.9 (0.9) (3.8) (6.3) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 China Russia World EU(cid:31)27 USA SElECTED FX RATES RUB/US$, RUB/€ 50 45 40 35 30 25 Global Insight ZAR/US$ 12 10 8 6 4 2 Jan’09 Aug’09 Apr’10 RUB/USD RUB/EUR ZAR/USD Dec’10 Factset 24 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview lIBOR AND EuRIBOR RATES percents 2.5 2.0 1.5 1.0 0.5 0 Jan’09 Aug’09 Apr’10 LIBOR EURIBOR Dec’10 Factset wAtCh tower AtoP the liSyA mouNtAiN Lisya Mountain is the jewel in Nizhny Tagil’s crown. It rises majestically on the western side of the city and provides a classic observation point overlooking the entire cityscape. The tower, built on Lisya Mountain, the symbol of Nizhny Tagil, in 1818, has remained largely unchanged for the best part of two centuries. The edifice has been used as an observation tower by guards and a fire tower. The building is a three-tiered brick structure with a rotunda and high semicircular arches decorated with pilasters. The slender, graceful tower is topped with a spired dome and its location, at the highest point, adds to the aesthetics. Occasionally used for astronomical observations, the Lisya Mountain tower has also served as a ‘public observatory’. The tower’s urban fire watch function utilised a special signalling system which involved a red lantern and a bell. 25 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview oVerView of the Steel iNduStry iN 2010 The steel industry recovered in 2010 as capacity utilisation reached 80% on an annualised basis: a significant improvement compared with 2009. Second half demand, however, failed to match first half levels and led to reduced capacity utilisation and, in turn, price corrections. Global crude steel production expanded by 15% to 1,412 mt in 2010 driven by growth in China and India and the respective recoveries in North America and Europe. China continued to expand its share of global steel consumption and would appear to be on track to account for 50% of worldwide steel consumption by 2014-2015. The global steel industry’s scale of exposure to the performance of China’s economy remains a point of concern. In addition to the growth fuelled demand from China and India, 2010 also witnessed improved sentiment and strong market fundamentals in other parts of Asia, Latin America and the CIS. In 2010 Russia was selected to host the 2018 FIFA World Cup and the Russian Government’s commitment to invest US$50 billion in preparation for the event will inevitably lead to a significant increase in domestic demand for steel. Requirements in relation to the construction of stadiums, hotels and local infrastructure projects are currently estimated at approximately 2–2.5 mt. Cost pressure in the shape of rising raw material prices added 10-15% to total costs in 2010 compared with 2009, much of which translated into global end product price increases. Global steel production is expected to further expand in 2011 and while analysts do not expect prices to revisit 2007/2008 levels, the outlook for corporate margins is encouraging. CRuDE STEEl PRODuCTION mt 500 400 300 200 100 0 SHARE OF CRuDE STEEl PRODuCTION & FINISHED STEEl DEMAND IN 2010 percents 44.4% China 12.2% EU 7.8% Japan 5.7% USA 4.7% Russia 4.7% India 2.4% Ukraine 18.1% ROW 46.6% China 12.6% EU 8.4% NA 5.1% Japan 4.8% Africa / ME 4.6% India 4.1% South Korea 4.0% CIS / Russia 9.8% ROW Total Production: 1,412 mt Total Demand: 1,299 mt Morgan Stanley Research, Worldsteel Utilisation Rate, % 85 80 75 70 65 60 55 50 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Total Production Capacity Utilisation Worldsteel 26 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview oVerView of the CoKiNG CoAl mArKet iN 2010 The global coking coal industry experienced a strong year due to growth in demand and constraints on the supply side. High quality coking coal is a scarce resource and represents the key restriction in terms of the expansion of integrated steel production on a global basis. The global coking coal seaborne market rose by 19% to 243 mt in 2010. The principal coking coal exporting countries are Australia, which exported 148 mt (+13% versus 2009), USA 45 mt (+30%) and Russia 13 mt (+58%). These three countries together accounted for 85% of total worldwide exports. Coal prices and asset prices rose significantly over the year. In 2010 Japan, China and India imported 128 mt of coking coal or 52% of total imports. Steel producers displayed a marked enthusiasm for obtaining access to coal supplies and continued to compete with mining houses for the relatively few assets available: a scenario that points to further such transactions during 2011. A number of Greenfield projects are scheduled to begin extraction in 2012-2014, although the net deficit is expected to persist over the mid-term. Despite the strength of the market, there was less price volatility than in 2009 however overall price level has increased significantly. In a market driven by spot sales, the contract - spot spread narrowed in the second half of the year with Australian coal FOB prices stabilising at slightly above $200/t. SHARE OF COKING COAl SEABORNE EXPORTS AND IMPORTS IN 2010 61.0% Australia 18.5% USA 8.8% Canada 5.2% Russia 3.1% Mongolia 3.4% ROW 26.6% Japan 23.6% Europe 13.2% India 12.7% China 8.9% South Korea 8.2% Americas 6.8% Brazil Total Exports Production: 243 mt Total Imports Production: 244 mt Morgan Stanley Research SPOT VS. CONTRACT HARD COKING COAl PRICES uS$/t FOB Australia 400 300 200 100 0 Jan’09 Aug’09 Apr’10 Dec’10 Australian Contract Australian Spot CRU Steelmaking Raw Material Monitor 27 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview mt 555 COKING COAl PRODuCTION 400 432 478 478 512 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 China Australia USA Russia ROW CRU Coking Coal Outlook ComPlex of SPriNGBoArdS oN dolGAyA mouNtAiN In 2009, the renovation of ski jumps at Dolgaya Mountain commenced as part of the special federal programme: ‘Development of Physical Fitness and Sports in Russia in 2006-2015’. Following the completion of this project, the ski jump complex will have been transformed into one of Russia’s most advanced training centres for teams participating in the biathlon and springboard ski jumping. The Dolgaya development will include four ski jumps, a ski stadium and a sports and hotel complex. A roller ski track, which will allow athletes to train during the summer, represents a key facility. Jump specifications will be fully compliant with the International Ski Federation’s requirements which were adopted in 2008. NIzhny Tagil is thus set to host top-level competitions and will become a major training centre for athletes during the run up to the 2014 Sochi Olympics. 28 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview oVerView of the iroN ore mArKet iN 2010 The iron ore industry experienced renewed growth during 2010 as improved economic perceptions found reflection in increased production levels and a favourable pricing environment. Global iron ore production rose by 12% to 1,778 mt in 2010. The ‘Big Four’ iron ore producer countries added capacity in response to the positive global trend with Australia producing 443 mt (+13% versus 2009), Brazil 359 mt (+20%), China 292 mt (+24%) and India 225 mt (+3%). These countries accounted for 74% of total production worldwide. Russia’s iron ore output increased by 2% to 107 mt. Ongoing global projects designed to further expand capacity are largely on track. China continued to dominate the seaborne market importing 613 mt of iron ore, or 62% of total seaborne traded iron ore. Further positive sentiment for the sector was reflected in iron ore fines CIF China prices which rose by an average of 82% in 2010. Sales structure for the industry has moved towards a larger share of spot contracts. Expectations that spot contracts will play an increasingly important role in the sector’s sales structure encouraged global steel players to continue to pursue vertical integration with a view to reducing volatility at the bottom line, a trend that signals further M&A activity during 2011. SHARE OF IRON ORE SEABORNE SuPPlY AND DEMAND IN 2010 43.4% Australia 30.3% Brasil 9.9% India 5.0% South Africa 3.1% Canada 8.3% ROW 61.8% China 13.1% Japan 11.1% Europe 4.8% South Korea 9.2% ROW Total Seaborne Supply: 1,022 mt Total Seaborne Demand: 922 mt Morgan Stanley Research SPOT VS. CONTRACT IRON ORE FINES PRICES uS$/t 200 150 100 50 0 Jan’09 Aug’09 Apr’10 Dec’10 China CIF (Spot, 63.5% Fe) Australia CIF (contract) Brazilian CIF (contract) CRU Steelmaking Raw Material Monitor 29 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview IRON ORE PRODuCTION 2,000 1,500 1,394 1,572 1,699 1,680 1,582 mt 1,778 1,000 500 0 2005 2006 2007 2008 2009 2010 Brasil China Australia India ROW Morgan Stanley Research tAGil trAyS SHARE OF IRON ORE PRODuCTION IN 2010 percents 24.9% Australia 20.2% Brasil 16.4% China 12.7% India 6.0% Russia 4.0% Ukraine 3.4% South Africa 12.4% ROW Total Production: 1,778 mt Morgan Stanley Research Tagil tray production is one of the most important crafts in the Urals. The practice came into being in the mid 18th century at factories operated by the Demidov family in Nevyansk and Nizhny Tagil. The painted trays attracted worldwide popularity and were presented as gifts to princes, Russian tsars and European kings. Tagil painting, utilising oil paints, is unique. Dark and light paints are put on a brush at the same time to produce a two-colour stroke and the painting, when complete, is covered in several layers of varnish. Each tray represents a unique creation reflecting the talent and imagination of the painter. The defining features of the art are an inherent richness of color and a sense of elegance that lends itself to the artistic portrayal of flowers and wildlife, particularly certain birds, together with ornamental script. These characteristics have been retained and developed over a period of 250 years and Nizhny Tagil’s tray painting museum provides master classes in the art for the benefit of residents and tourists alike. 30 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview oVerView of the VANAdium mArKet iN 2010 Vanadium is primarily used as an alloying agent in a wide range of specialty steels to provide greater strength, hardness and durability. SHARE OF VANADIuM PRODuCTION AND RESERVES IN 2010 Demand for vanadium is ultimately determined by the steel industry and the upturn in the steel market, together with supply constraints in the producer countries, led to a modest market recovery in 2010. Vanadium reserves are concentrated in China, Russia and South Africa. It is estimated that world resources of vanadium exceed 63 mt, although, due to the fact that vanadium is usually recovered as a by-product, established world resources of the element are not fully indicative of available supplies. Production in 2010 increased by 5% to 56,000 t of vanadium content globally. Most of the output increase was attributable to China (+10% versus 2009) and South Africa (+6%), while production in Russia declined by 3%. Prices for ferrovanadium (85% of vanadium sales) showed a slight recovery during 2010 but remained volatile. The FeV price stabilised at around US$ 30/kg towards the end of the year, while the average price in 2010 was approximately 20% higher versus 2009. The price of Vanadium pentoxide (V2O5), the source of ferrovanadium, performed similarly. 41.1% China 32.1% South Africa 25.0% Russia 1.8% ROW 37.4% China 36.6% Russia 25.7% South Africa 0.3% ROW Total Production: 56,000 t1 1 of Vanadium content Total Reserves: 13.6 mt US Geological Survey Some fACtS ABout eVrAZ ntmK (the urals) The only open air ‘steel manufacturing’ museum in Russia is situated in Nizhny Tagil, on the site of the old Demidovsky iron plant, where first records of pig iron production date back to Christmas Day 1725. Almost half of the production was for export, primarily to the United Kingdom. NTMK’s universal beam mill is the only unit in Russia and the CIS that produces large beams and column sections with lengths that range from 150 to 1,000 millimetres. Documents relating to the work of a group of innovative industrialists at NTMK to develop progressive manufacturing solutions, were published in Forbes Magazine in 2008. 31 AnnuAl RepoRt And Accounts 2010 eConomiC and industry overview CIF EuROPE V2O5 AND FEV PRICES uS$/kg 40 30 20 10 0 Jan’09 Aug’09 Apr’10 Dec’10 V2O5 (min 98%) FeV (70(cid:31)80%) London Metal Bulletin moNumeNt to the firSt ruSSiAN SteAm loComotiVe Father and son, Yefim Cherepanov (1774–1842) and Miron Cherepanov (1803–1849) were Russian inventors and industrial engineers who built the first Russian steam locomotive. They worked for the Demidovs – a famous dynasty of factory owners. Starting in 1810, Yefim Cherepanov constructed a pioneering machine-building plant (Vyisky mechanical plant), equipped with a complete range of innovative metal-cutting equipment including-screw cutting and gear-cutting lathes and serrating machines. From 1822 until his death, Yefim was the chief mechanic of all factories in Nizhny Tagil. His son, Miron, became his apprentice and was appointed his deputy in 1819, eventually succeeding his father following Yefim’s death in 1842. The Cherepanovs were responsible for significant improvements in the quality of the machinery used in blast-furnace operations, iron and copper works, gold- mining, sawmills and flourmills. However, the Cherepanovs earned a special place in history through their work on the steam engine which they persistently tried to introduce into industrial production. From 1820 onwards, the Cherepanovs built some 20 steam engines with a horsepower range of between two and 60. During 1833-1834 they built the first Russian steam locomotive, followed by a second, more powerful version, in 1835. They also built a cast-iron railroad that connected one of their factories to a copper mine. page 34 page 36 page 46 About Ostrava Russia Ostrava is the third largest city in the Czech Republic and the second largest urban agglomeration after Prague. Located close to the Polish border, it is also the administrative centre of the Moravian-Silesian Region. Ostrava was an important crossroad on the prehistoric trading route known as the Amber Road. Archaeological finds have proved that the area surrounding Ostrava has been continually inhabited for 25,000 years. Today’s Moravian Ostrava, whose name was first brought up in the will of the Olomouc bishop Bruno of Schauenburg in 1267, was awarded town status by 1279. The city’s history and growth have been largely influenced by the utilisation of high-quality black coal deposits discovered in the second half of the 18th century. During the 19th century, several mine towers were raised in and around the city and the first steel works were established at Vitkovice by the Olomouc Archbishop Rudolf Habsbursky in 1828. EVRAZ Vitkovice Steel, which is located in Ostrava, is a leading European manufacturer of rolled steel products and one of Europe’s foremost producers of heavy plate. Museums have been established where mines once stood and although not being in the top ten list of tourist attraction in the Czech Republic, Ostrava, while retaining its rich industrial heritage, has effectively transformed itself into an administrative, social and cultural centre. OstrAvA CzeCh RepubliC General Information 49°50’8”N 18°17’33”E GMT +01:00 1267 310,464 people 214 km2 33 AnnuAl RepoRt And Accounts 2010 Business Overview iv w e i v r e v O s s e n i s u B Our visiOn and strategy evraZ is… enrichment through Collaboration Working together as one team, we achieve best results value Created for Our Customer Continually improving our products and services, we strengthen our long-term partnerships with our Customers respect for People Safe working conditions, development of our people and local communities are integral parts of EVRAZ business accountability for actions and results We persistently aspire to achieve our goals and are responsible for the results Zeal for Continuous improvement Developing and implementing new ideas, we make the world stronger, safer and cleaner growth strategy enhancement of raw Materials Base We believe that being just self-sufficient in coal and iron ore falls short of enabling us to take full advantage of the potential of these markets. Consequently, EVRAZ intends to significantly expand its mining platform. In 2010, as a first step towards fulfilling this goal, EVRAZ acquired licences to develop coking coal deposits in the Republic of Tyva, Russia. The mineable reserves associated with these deposits amount to in excess of 700 million tonnes of coking coal. We expect total production from the deposits to reach 10 mtpa of coking coal in 2019. Output on this scale will allow us to not only cover our own needs but, in addition, enjoy an export exposure to the Asian coking coal market. We also commenced construction of a new mine in Kemerovo region which will provide EVRAZ with 2 mtpa of high quality coking coal with effect from 2013. 34 AnnuAl RepoRt And Accounts 2010 Business overview In order to expand our iron ore asset base, we are planning to commence exploration of the Sobstvenno- Kachkanarskoye iron ore deposit which will enable us to reach KGOK’s production of 11 mtpa of saleable iron ore products for several decades. We are also seeking prime Greenfield projects in Russia and on a global basis. Completion of the reconstruction of the 4th BOF and 3rd slab continuous casting machine at NTMK has served to increase crude steel output by up to 0.5 mtpa. Management is also considering various options to facilitate a 2 mtpa increase in steel production at either NTMK or Zapsib. reinforcing eVrAZ’s Position in Current markets Cost-Saving measures We are reinforcing EVRAZ’s position in its current markets by (i) enhancing the quality of our products; (ii) developing our distribution network; and (iii) widening our product portfolio. We are also progressing various initiatives in order to take advantage of the prospective demand for construction steel products that we have identified in certain regions of Russia and overseas. It is important that we continue to expand our business downstream in order to reduce EVRAZ’s exposure to semi-finished steel products. By way of a significant step in this direction EVRAZ has undertaken the construction of two new rolling mills, the Yuzhny Mill in the Rostov Region of Southern Russian, where construction activity is booming, and the Kostanay Mill in Northern Kazakhstan. These new facilities will enable EVRAZ to expand its product mix in line with the local demand (e.g. new rebar grades). In December 2010, EVRAZ acquired the metal distribution and service company INPROM and integrated its distribution operations with EVRAZ’s sales network under a new enterprise that will become the largest steel distributor in the CIS with the ability to provide a wide range of client services in metal processing. In 2010, EVRAZ's distribution network achieved total steel sales of approximately 1.2 million tonnes. The reconstruction of EVRAZ’s rails and beams shop at NKMK and the wheel shop at NTMK, designed to improve quality and enhance the product range, remains on schedule. raising Steel Production Volumes Alongside the projected expansion of our raw material base we plan to expand our steel production in order to increase EVRAZ’s market share in existing markets and establish a presence in new markets with promising growth potential. In response to rising raw material prices around the globe and the higher cost dynamics of gas and electricity in Russia, EVRAZ plans to reduce costs through the use of state-of-the-art technologies and best industry practices. During 2010 EVRAZ started the implementation of the Pulverized Coal Injection technology at Zapsib and NTMK, a development that will bring about a significant reduction in steelmaking costs. the miNiuNi, oStrAVA The Miniuni in Ostrava is an interesting attraction suitable for children and adults alike. An area of around 1.5 hectares houses more than 30 replicas of landmark buildings located in European cities, including: London’s Big Ben, Prague’s Old Town Hall and Berlin’s Brandenburg Gate, all of which are dominated by a 12 metre-high model of the Eiffel Tower. All the models are built to a scale of 1:25 and reproductions of the Wonders of Ancient Times are a recent innovation. Miniature trains on railway lines run across the grounds and a steamship traverses the small waterways. Special exhibitions and entertainment events are regularly organised for children, while the Miniuni’s restaurant offers a variety of European specialties. 35 AnnuAl RepoRt And Accounts 2010 Business overview our BuSiNeSS EVRAZ is a global vertically integrated steel and mining business. The Company has three principal operating segments: Steel, Mining and Vanadium. EVRAZ’s manufacturing facilities produce a wide range of products with a specialised focus on infrastructure. In 2010, the Company’s share of the Russian market in beams, channels and rebars totalled 86%, 56% and 22% respectively. EVRAZ accounts for 90% of rail sales in Russia and ranks second in the country’s rail wheel market. EVRAZ is also a major supplier of semi-finished products – slabs and billets – to world markets. EVRAZ is a prominent player in the European plate market. In the USA EVRAZ is the No 1 producer of rails, one of the largest manufacturers of plate, being the largest manufacturer of armour plate, and is acknowledged as the No 1 North American producer of tubular products, particularly in respect of large diameter pipes. EVRAZ’s mining operations ensure high levels of self- sufficiency in respect of supplies of iron ore and coking coal required for the Company’s steelmaking processes. The Company is an important player in the world vanadium market and produces various vanadium products including ferrovanadium, Nitrovan®, high purity vanadium oxides and a full range of vanadium chemicals that are widely used in steelmaking and other applications. CONSOlIDATED REVENuE BY SEGMENT US$ million 9,772 765 363 1,456 8,978 (1,790) 2009 13,394 815 566 2,507 12,123 (2,617) 2010 Steel Mining Vanadium Other operations Eliminations CONSOlIDATED ADjuSTED EBITDA BY SEGMENT US$ million 2,350 190 935 53 1,439 (267) 2010 1,237 167 279 927 (12) (124) 2009 Steel Mining Vanadium Other operations Unallocated & Eliminations 36 AnnuAl RepoRt And Accounts 2010 Business overview Steel Steel: russia NtmK GENERAl OVERVIEW Several key projects were successfully concluded at NTMK during 2010, the principal development being the completion of the modernisation of the BOF (Basic Oxygen Furnace) shop. Production of 40K beams (out of shaped blanks supplied from ZSMK) was resumed. NTMK’s manufacturing capabilities were strengthened with the launch of a project aimed at the production of continuously cast billets for the rolling of large beams (40K, 60Sh and 70Sh). NTMK, situated in Nizhny Tagil, in the Urals, is Russia’s sole producer of columns for bridge cranes utilising 40K shaped blanks. This year NTMK significally expanded the plant’s output of high quality American Petroleum Institute-certified (API-grade) slabs for delivery to EVRAZ’s North-American operation. The reconstruction of the fourth and final converter in the BOF workshop was duly finalised. Finalisation of the upgrading of heat treatment facilities represented the completion of a six-year modernisation of NTMK’s wheel shop which now ranks as one of the most complex wheel manufacturing units in the world fully equipped to meet European and American specifications. The introduction of a further turning lathe will serve to increase the wheel shop’s production capacity by 19,000 wheels per annum. Negotiations were successfully concluded regarding an extension of the wheel shop which will include the acquisition of additional turning lathes and the reconstruction of the existing lathes, thereby raising prospective capacity of the wheel shop to 520,000 wheels per annum. Certification procedures in respect of rail wheels have been launched in relation to the European and the USA markets. Further developments include the production of backing plate ZhBR 65, and expansion of the range of H-beams. Improvements in the quality of iron ore (in conjunction with KGOK) and coke together with optimal utilisation of two blast furnaces resulted in record levels of pig iron production which reached additional 13,000 tonnes per month. the Brewery muSeum In the Czech Republic beer (Czech: pivo) has a long and significant history. The first brewery in the region is known to have existed as early as 1118. The Ostravar Brewery opened in 1898, followed a year later by the Branik Brewery, two enterprises that would later merge with the Staropramen Brewery. Today, Ostravar is a strong local brand in northern Moravia. The beer is traditionally brewed using bottom fermentation, known for its high concentration of carbon oxide, well-rounded flavour and palatable bitterness. Visitors are invited to tour the Ostravar Brewery, discover the way in which the Czech national drink is brewed and, finally, sample their favourite brand. One of the Museum’s most popular attractions is a tap bar that is more than 60 years old. Numerous other exhibits linked to brewing include various types of barrel, illustrations of how such barrels were made, transport glass dating back to the 1920s and an ancient barrelhead. 37 AnnuAl RepoRt And Accounts 2010 Business Overview The installation of Pulverised Coal Injection Technology is ongoing and, ultimately, will result in annual savings of up to 650 million cubic metres of natural gas at NTMK accompanied by a reduction of more than 20% in coke consumption. Various other measures designed to further productivity were introduced by management during 2010 through a programme dedicated to operational improvements. The overall investment in the modernisation of the converter shop, which increased annual steel capacity by 0.7 million tonnes to 4.5 million tonnes, was US$310 million. The installation of Pulverised Coal Injection Technology is ongoing and, ultimately, will result in annual savings of up to 650 million cubic metres of natural gas at NTMK accompanied by a reduction of more than 20% in coke consumption. In addition, management initiated various courses of action in relation to health, safety (with particular focus on fire risk) and ecology. These included total compliance with the recommendations from Rostekhnadzor, the supervisory body within the Ministry of Natural Resources and Ecology, enhanced utilisation of protective clothing, the modernisation of communal facilities (e.g. showers, canteens, etc) and certain ecological undertakings. Key TargeTs 2011 In 2011 NTMK endeavours to achieve further business growth and operational excellence through implementation of the following measures: The construction of a new ladle furnace (No 4) Increase the annual production capacity of the wheel shop to 520,000 wheels through the installation of six new turning lathes The construction of PCI facilities and commencement of partial replacement of coke and natural gas with PCI Concentrate production of rail fasteners in Nizhnyaya Salda region through moving production out of Novokuznetsk in 2011-2012 Increase vanadium extraction rate to 75% Customer focus at NTMK will include further refinement of the quality of slabs. The production of 40K beam from continuously cast billets will be increased in line with market demand while the rail wheels certification processes in respect of the North American and Italian markets will be finalised. NTMK’s health, safety and environmental agenda for 2011, will focus on the implementation of EVRAZ’s new health and safety rules, the organisation of additional safety training in line with new corporate standards and the carrying out of all scheduled maintenance activities. The expansion of production facilities at NTMK will open up new employment opportunities in 2011 with candidates drawn from within NTMK. Policies designed to retain key employees will also come into effect. ZSMK general Overview Key investment projects at ZSMK during 2010 included the installation of Pulverised Coal Injection (PCI) technology, scheduled for completion in 2012, and the implementation of a slitting process in order to increase production levels of rebar at sections mill 250-1. Refinements were brought to bear on certain aspects of production while efficiency planning was directed at equipment maintenance. There was also considerable focus on safety measures which included total compliance with Rostekhnadzor’s recommendations, the testing of protective clothing in relation to various production processes and the enhancement of safety equipment where appropriate. Working conditions benefited from the implementation of special programme involving the modernisation of the canteen and other communal areas. During 2010 ZSMK commenced delivery of shaped blanks to facilitate NTMK’s production of 40K beam. ZSMK also increased production levels of high quality rebar A500SP, a product that allows for a reduction in the metallic component of reinforced concrete, thereby significantly lowering construction costs. Environmental protection remained a key priority and various ecological programmes (in conjunction with the Kemerovо region’s administration) were implemented. The installation of Pulverised Coal Injection Technology is ongoing and, ultimately, will result in annual savings of up to 600 million cubic metres of natural gas at ZSMK accompanied by a reduction of more than 20% in coke consumption. Key TargeTs 2011 ZSMK’s principal business objectives in 2011 include: Creation of a LEAN office as part of the implementation of the EVRAZ Business System programme Further implementation of the PCI project: design work and preparation of surface for construction (scheduled for 2011–2012) of PCI facilities. The finalisation of the project is expected to come to fruition in the beginning of 2013. In 2011 ZSMK will launch the project to increase capacity of West Siberian Heat and Power Plant (‘Zapsib Power Plant’) from 250 to 400MW 38 AnnuAl RepoRt And Accounts 2010 Business overview Merge NKMK and ZSMK into one legal entity. This step will allow simplification of managerial processes and formulation of single standards in the sphere of health safety and environment, railway, automobile and warehouse logistics, procurement, social policy and human resources management. In 2011 ZSMK is planning to increase the production capacity of the rolled products section. Efficiency of production will be significantly enhanced by the implementation of Single-Minute Exchange of Die (SMED). ZSMK will continue to work on the Health, Safety and Environmental programme during 2011 and will be working closely with the ‘talent pool’ in relation to employee development. NKmK GENERAl OVERVIEW The completion of the first stage of the rail mill modernisation programme at NKMK, located in Novokuznetsk, Siberia, marked the principal development at the plant during 2010. Plant capacity amounts to 750,000 tonnes of rail per annum and investment in state-of-the-art technology has ensured the production of premium quality rails consistent with the most advanced standards in Europe. Management approved the second stage of the modernisation project, scheduled for completion in 2012, which will pave the way for the production of 25 metre and 100 metre rails dedicated to high speed transportation. Further investment encompassed the installation of power generator No 4. The focus on health and safety issues at NKMK largely mirrored the programme undertaken at ZSMK. Priorities included total compliance with Rostekhnadzor’s recommendations, the testing of protective clothing worn by employees in relation to various manufacturing processes and investment in new safety equipment of the highest quality. As with ZSMK, various communal areas and amenities within the plant were modernised and refurbished. Similarly, NKMK also worked closely with the Kemerovo region’s administration in relation to various ecological initiatives. KEY TARGETS 2011 The second stage of the rail mill modernisation programme will continue during 2011 which will also see the introduction of a non-destructive inspection line. NKMK’s principal business objectives in 2011 include: Maximise production that does not utilise pig iron in order to reduce costs Undertake cost reduction project,designed to ultimately cut fixed costs by 20-50% Formation and deployment of a LEAN office in accordance with the implementation of the EVRAZ Business System programme Merge NKMK and ZSMK into one legal entity. This step will allow simplification of managerial processes and formulation of single standards in the sphere of health safety and environment, railway, automobile and warehouse logistics, procurement, social policy and human resources management. NKMK will continue to pursue the plant’s Health, Safety & Environmental programme during 2011 and, as with ZSMK, will work closely with the ‘talent pool’ in order to further employee development. Steel: ukraine GENERAl OVERVIEW 2010 Management’s focus in respect of the Group’s Ukrainian assets during 2010 was primarily on the improvement of the blast furnace workshop at EVRAZ DMZ Petrovskogo and the implementation of programmes designed to achieve operational improvements and increase the output of high-marginal premium steel products. EVRAZ’s Ukrainian coking plants increased their capacity utilisation with overall production volumes reaching 1,849 thousand tonnes of coke per annum. EVRAZ Sukha Balka completed the construction of a dry magnetic separation complex for the production of ore, with an estimated iron content of 60%, and also constructed an independent railway facility which provides free access to Ukrainian Railways’ rail network and readily facilitates the shipment of ore to customers. KEY TARGETS FOR 2011 The key priority for the Ukrainian plants in 2011 will be the integration of all assets into a single business unit (in terms of organisation and management) with the dual objectives of increasing efficiency in relation to the management of the assets and enhancing the focus on financial performance. This integration will be accompanied by improvement of cooperation with distributors and consumers. 39 AnnuAl RepoRt And Accounts 2010 Business overview One of the priorities, in terms of operational activity, will be the optimisation of the blast furnace process with greater focus brought to bear on the utilisation of key performance indicators such as production rates, coke consumption and Fe yield. Management will continue to progress the improvement of the product mix with focusing on of new types of sections. Other specific developments will include: The creation of a more effective sales model for coke and ore with the key aim being the provision of stable load density of coking batteries to ensure a regular production flow through the coke ovens thereby reducing the risk of earlier than planned end of life cycle of coking batteries. EVRAZ’s across the board focus on HSE issues will encompass all of the Company’s Ukranian assets. In addition to improvements and refinements to existing safety precautions, management will implement a series of employee training programmes. The scheduled launch of LEAN, an integral aspect of the EVRAZ Business System. Steel: western europe GENERAl OVERVIEW 2010 Steel markets continued their recovery in Europe during 2010, largely driven by the strong demand in Germany. Prices staged a significant rally during the first half of 2010 compared with the corresponding period of 2009 but as the year progressed demand faltered and prices took their cue: a correction that inevitably exerted pressure on margins. ЕVrAZ Palini e Bertoli EVRAZ Palini e Bertoli exceeded budgeted results with the benefit of various initiatives including an increase in the productivity of the rolling mill and a focused reduction in conversion costs. These developments coincided with a general recovery in key plate markets. eVrAZ Vitkovice Steel EVRAZ Vitkovice Steel’s results were adversely influenced by the dispute with ArcelorMittal Ostrava in respect of pig iron supplies, which led to a five-month idling of the steel shop. In the event, the outcome resulted in a supply agreement, which should yield benefits in 2011. A number of initiatives led to a significant reduction in conversion costs and a major turnaround in the results. Other strategic initiatives – reorganised maintenance procedures and changes to the energy (electric and natural gas) procurement strategy in order to take advantage of the EU’s liberalised energy markets - should further enhance 2011’s performance. Steel: South Africa GENERAl OVERVIEW 2010 South African markets experienced a significant shrink during the second half of the year, largely due to the fact that, following the completion of construction projects in preparation for the 2010 Soccer World Cup, the government deferred the financing of various new infrastructure projects. Relatively stable first half trading gave way to a deterioration in demand which, combined with a 15% appreciation of the South African Rand against the US dollar and an increase in imports, led to a near 20% price decline towards the end of the year. eVrAZ highveld Steel and Vanadium Following a problematic start to the year, when steel production was adversely affected by oxygen shortage, the plant’s performance remained unsatisfactory throughout 2010. Operational issues and equipment malfunctions took their toll on production with approximately 3,000 tonnes of output lost, on average, each month. The aforementioned dynamics of the South African market led to significantly higher exports towards the end of the year which, reflecting the additional costs, negatively influenced the bottom line. A concerted effort on the part of management to address the situation led to a number of initiatives including improvements in the sales structure, quality, production processes, maintenance procedures and procurement practices. Considerable progress was achieved in relation to South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) project with a higher than anticipated assessment from the B-BBEE verification agency expected for 2011. Management approval of a long-term environmental plan paved the way for the start of several projects towards the end of 2010. The development of a 10-year strategy will serve to prioritise and coordinate improvements in efficiencies and restructuring exercises. 40 AnnuAl RepoRt And Accounts 2010 Business overview Steel: North America The creation of a powerful, integrated and diverse steel company in North America has been one of EVRAZ’s primary aims launched in 2010 and will continue through 2011. The establishment of critical integrated functions such as supply chain planning, manufacturing excellence and business development across all three divisions (Flat, Tubular and Long) is integral to the maintenance of EVRAZ’s North American competitive strength. The vertical integration of our steel operations in Russia with the Flat and Tubular divisions of EVRAZ Inc. NA led to excellent financial results from EVRAZ’s North American business in 2010. EVRAZ will continue to develop this integration in 2011. An excellent performance from the Long Division’s rail business was all the more notable in view of the challenging global economic conditions. Demand for large-diameter tubular products in Regina, Canada, proved sufficient to keep the EVRAZ Regina Spiral mill fully utilised throughout 2010, a distinction unequalled by any other large-diameter pipe mill in North America. Encouraging scale of such demand reflects both the quality of EVRAZ’s products and EVRAZ’s focus on clients’ requirements. A number of strategically important CAPEX projects have been initiated in the Flat and Tubular divisions, designed to address both production volumes and margins. A major capital investment project is under way at EVRAZ’s facility in Claymont, Delaware, while, in Alberta, two projects at Calgary and a further two projects at Red Deer will reinforce our competitive position in the OCTG market in Canada and the USA. EVRAZ Inc. NA is preparing a targeted capital programme in respect of EVRAZ Rocky Mountain Steel facility in Pueblo, Colorado, where the focus will be on raising steel making production volumes and accommodating clients’ requirements in respect of the rail product line. A major capital project is also under way at Claymont in relation to the plant’s environmental obligations. EVRAZ Inc. NA’s scrap supply operation represents an integral aspect of EVRAZ’s business and, in order to maximise efficiencies, EVRAZ is in the process of integrating scrap operations in Canada and the US’s Pueblo and Claymont. The scale of EVRAZ’s North American and Canadian asset base is a reflection of management’s confidence in the growth prospects. In line with this, further expansion of the production capabilities of Flat and Long divisions will represent an important part of EVRAZ’s growth strategy in the US and Canada. EVRAZ’s focus on Health and Safety issues at Group level is mirrored across the Company’s operations in North America. The safety of employees is of paramount importance throughout the Group’s operations and various initiatives were implemented at EVRAZ’s North American plants during 2010. The general welfare of employees, ranging from workplace business practices to the quality of communal facilities, represents a further priority which management sees as a mandatory aspect of our business and which links with EVRAZ’s corporate culture and values. Improvements and refinements in relation to safety and employee welfare will continue throughout 2011. KEY TARGETS 2011 The process of integrating EVRAZ’s North American operations will continue in 2011 as will the Company’s focus on Health & Safety issues. Management’s plans to improve operational performance include the introduction of LEAN business practices and enhanced customer focus across the Flat, Tubular and Long business areas: Continue to implement Health & Safety measures Increase sales and revenues in rail business Increase sales in OCTG business and improve profitability Successful completion of capital projects in order to capitalise on returns Expand overall steelmaking capacity Identify additional areas for growth in our Flat and Tubular businesses. Some fACtS ABout eVrAZ vgoK (the urals) Another initiative undertaken in 2010 involved the integration of our maintenance operations, thereby taking advantage of a range of tangible synergies. Considerable benefits are envisaged in relation to the reliability of production equipment, effective cost and investment management and the sharing of knowledge and talent across our locations. This exercise will prove ongoing throughout 2011. In 1836 miners working 80 metres below ground at the Vysokogorsky ore deposit’s Mednorudyansky field discovered one of the largest malachite formations in the world. The boulder was 17 metres long and weighed 380,000 tonnes. To put this in perspective the creation of the unique Malachite Hall at Saint Petesburg's famous State Hermitage Museum required just 2,000 tonnes of malachite. 41 AnnuAl RepoRt And Accounts 2010 Business overview miNiNG mining: Coal GENERAl OVERVIEW 2010 EVRAZ continued to focus on the ongoing improvement in safety levels at Yuzhkuzbassugol, EVRAZ’s Siberian coal mining subsidiary, during 2010. Various programmes, encompassing advance warning and monitoring systems, were implemented in line with the Company’s 2010-2011 safety targets in relation to production processes and practices. The achievement of these targets has been effectively guaranteed by the allocation of additional funds to ensure that all post assessment recommendations made by Rostekhnadzor, the supervisory body within the Ministry of Natural Resources and Ecology, in respect of Yuzhkuzbassugol, are fully addressed as a matter of priority. During 2010, longwalls were repositioned at Yuzhkuzbassugol’s following mines: Abashevskaya, Yesaulskaya, Kusheyakovskaya, Tagaryshskaya, Gramoteinskaya, Alardinskaya and Yubileynaya 2. Longwall procedures are consistent with relatively stable levels of output which, in turn, is integral to the security of supply to EVRAZ’s steel manufacturing operations. Management initiated various projects designed to maintain production levels at Yuzhkuzbassugol’s mines during 2010. These included a preliminary degasification exercise at the Yesaulskaya mine, electrical modifications at the Alardinskaya mine and commencement of the development of the Alardinsky-Vostochny area. The construction of an electricity generator with a capacity of 35/6 Kw was completed at the Osinnikovskaya mine, where work is underway in block No 4 in preparation for coal extraction. Preparations were finalised for the extraction of layer No 15 at the Abashevskaya mine in the Zyryanovsky area. At the Yerunakovskaya-8 mine preparatory work for the construction of the mine was completed. Operations at the Yubileynaya and Tagaryshskaya mines were closed. A further feature of 2010 was the introduction of an automated system to measure electricity consumption throughout the Yuzhkuzbassugol complex. Coking coal production of 7.5 million tonnes in 2010 represented a decrease of 27% сompared with 2009. This reflected a reduction in the economic efficiency of the mines due to the repositioning of longwalls, the delayed launch of the Ulyanovskaya mine, the sale of the Tomusinskaya mine, the closures of the Yubileynaya and Tagaryshskaya mines, temporary stoppages associated with Rostekhnadzor’s monitoring activities, the introduction of new equipment designed to improve safety levels and the legacy of underinvestment in 2009. eArlieSt City iN the world The people of the Czech Republic are early risers in general, none more so than the citizens of Ostrava who regularly go about their business as the rest of Europe sleeps. At 4 a.m., trams start running and the city’s first train leaves for the capital. Newsstands open at 5.30 a.m. and many pubs are already open at 6 a.m. In contrast, 10 p.m. is considered a late night in Ostrava. Some fACtS ABout eVrAZ dmz (ukraine) In 1926 DMZ Petrovskogo (currently EVRAZ DMZ Petrovskogo) commissioned an open-hearth furnace with 100 tonnes of capacity: the largest in the world at that time. The sound of the EVRAZ DMZ Petrovskogo plant hooter can be heard within a radius of 10 kilometres. Souvenir hangers of Misha the Bear, the symbol of the 1980 Moscow Olympic Games, were produced by DMZ Petrovskogo (currently EVRAZ DMZ Petrovskogo) in its consumer goods workshop. 42 AnnuAl RepoRt And Accounts 2010 Business overview Steam coal production of 3.8 million tonnes in 2010 represented a decrease of 8% compared with 2009. The decline reflected the closure of the Tagaryshskaya mine together with difficult geological conditions in relation to the repositioning of longwalls that resulted in the delayed introduction of longwalls at the Kusheyakovskaya mine. Meanwhile, indications are that production volumes at the Gramoteinskaya mine in 2011 will be in line with the output achieved in 2010. KEY TARGETS 2011 In 2011 Yuzhkuzbassugol endeavours to achieve further business growth and operational excellence through implementation of the following measures: Growth of the Business: Launch of the Yerunakovskaya-8 project Restructuring of Yuzhkuzbassugol’s assets in order to maximise operational efficiency in line with Group strategy Ongoing pursuit of several separate initiatives designed to raise the productivity of the mines Operational excellence: Creation of a LEAN office as part of the implementation of the EVRAZ Business System programme Improvement of the investment decision-making process Unification of mining equipment Step by step process approach to managing each operation throughout the business Greater transparency regarding management of supplementary operations (aeration, dewatering, etc). During 2011 customer focus at Yuzhkuzbassugol will centre around improvement of the quality of concentrate, primarily through maintaining consistency in terms of ash content, humidity and calorific value. The introduction of additional safety measures and ongoing improvements to existing precautions will remain the keystone of Yuzhkuzbassugol’s health, safety and environmental agenda during 2011. This includes the development of a comprehensive mine degasification programme, encompassing methane utilisation projects at two mines. The formation of the LEAN office, under the supervision of EVRAZ’s senior management, and the implementation of various aspects of EVRAZ Business System, will prove the drivers of significant efficiencies at Yuzhkuzbassugol during 2011. A further priority will be the selection of some 30 prospective senior managers and the training of management personnel as part of a project which will serve to replenish coal sector expertise and facilitate succession. mining: iron ore The year 2010 witnessed a significant recovery in EVRAZ’s iron ore mining and enrichment operations following the reduced levels of activity in 2009 caused by the global economic malaise. The ore mining subsidiaries within EVRAZ Iron Ore Division produced 68 million tonnes of iron ore, a 7.9% increase over 2009 volumes. Production of saleable iron ore products (iron ore concentrate, sinter and pellets) in 2010 amounted to 17.5 million tonnes and accounted for 92% of EVRAZ’s internal requirements in relation to the Company’s Russian and Ukrainian operations. The Division’s focus during 2010 was on building up production at minimal capital expenditure while enhancing efficiency and safety of production. Accordingly, several improvement of programmes were launched (for completion in late 2010 – early 2011) to stabilise and increase production at EVRAZ KGOK and Evrazruda. Special HSE program supported by external experts and trainers was launched at EVRAZ VGOK. Besides the Division started a 3-year program to upgrade and modernise part of key mining, transportation and grinding facilities at the plants. In the course of upgrading the equipment special attention was paid to comfort- at-work measures: installation of air conditioning units and more comfortable seats in cabins of rock-drilling and excavating machines. Dressing rooms and shower compartments of the plants were started with major reconstruction to comply with new corporate standards. Progress continued on the implementation of an integrated programme focused on development of employees and strengthening relations with municipal community at the town of Kachkanar, where EVRAZ KGOK is located. The multi-faceted project was designed to involve employees in operational improvements, increase productivity, enhance further professional education while giving more support to co-operative programs with local government and key social groups within Kachkanar. A number of measures were introduced to streamline management operations at EVRAZ KGOK, EVRAZ VGOK and EVRAZ Sukha Balka. A number of service subdivisions were span-off and out-sourced. A better-working-condition programme focused on the modernisation of various communal facilities at mines and plants throughout the Iron Ore Division was launched and will be ongoing in 2011. Overall expenditure on social programmes amounted to US$1.3 million in 2010, an increase of 8% compared with 2009. 43 AnnuAl RepoRt And Accounts 2010 Business overview In 2010 key investment projects designed to increase production capacity, raise production volumes and improve the quality and metallurgical value of the iron ore produced included: The reconstruction of Evrazruda’s Abagurskaya enrichment plant started in 2009 was completed and resulted in an increase of iron content in concentrate from 60.3% to 61.7%, thus giving extra value to EVRAZ ZSMK as the only customer for the product. eVrAZ KGoK Improvement program along key stages of EVRAZ KGOK’s production chain (including upgrade and replacement of targeted equipment) contributed to an 11% increase in concentrate production capacity (1Q 2011 vs. 1Q 2010). A subsequent project designed to expand iron ore production capacity at EVRAZ KGOK, in line with strategic output objectives, started in late 2010 should result in additional 10% capacity increase to reach 55 million tonnes by the end of 2011. In accordance with the project plan, the whole scope of upgrading mining, transportation and grinding equipment is to be completed in early 2012. The exploration of the Sobstvenno-Kachkanarskoye field continued. It was marked by EVRAZ KGOK selecting Worley Parsons as design engineers for the new production complex at the field. Worley Parsons, a premier international engineering enterprise, will work in partnership with PiterGorProekt, the Russian mining design and engineering company, which should ensure, that the project complies with both highest international technological standards and Russian regulatory requirements. Implementation of this project will effectively secure increased production of iron ore at EVRAZ KGOK for dozens of years ahead in line with the mounting requirements of its key customers - the steel producers. The modernisation of pellet-indurating machine No 2 at EVRAZ KGOK led to a reduction in gas consumption of 0.8 cubic metres per tonne of pellet production. evrazruda Stabilisation of Evrazruda’s production was achieved at the onset of 2011 as a result of operational improvements and debottlenecking activities undertaken at the company’s subsidiaries in 2010. The debottlenecking (including upgrading and replacement of equipment) was focused on the production chains of Irbinsky and Teysky subsidiaries of Evrazruda. It led to a significant increase in stripping operations and expanded open pit iron ore production capacity. Much of the work to introduce a lime-based ore- preparation technology at the Abagurskaya enrichment plant was accomplished. The project is expected to be completed by mid-2011. The development of Evrazruda’s Sheregeshsky underground mine was underway, which will effectively double annual iron ore production capacity. As per the updated project design and timeframe the estimated investment period is expected to be reduced two years so that now run-of-mine (r-o-m) production capacity of the mine is projected to reach 3.7 million tonnes by 2014. An investment programme, designed to double the production capacity of the Abakansky underground mine and to produce 4 million tonnes of raw ore per annum starting from 2016, commenced. Design and engineering work at the project was assigned to the Moscow-based institute, Giprotsvetmet. Besides, in its strategic endeavours to produce more from open casts Evrazruda acquired a licence for development of the Izykhsky iron ore deposit with reserves in excess of 4.1 million tonnes. The Izykhsky deposit will be developed by Evrazruda’s branch of Irbinsky mine, Krasnoyarsk region. eVrAZ VGoK The lime-based ore-preparation technology was successfully put into operation at EVRAZ VGOK. This facilitates regular, round the year delivery of iron ore concentrate to consumers eliminating the need for a costly heating and drying machines. It also enhanced the metallurgical value of the ore concentrate and significantly increased its sales price. In 2010 EVRAZ VGOK continued search for technologies to modernise its mining, enrichment and tailing facilities to start with implementation in 2011. It also launched a programme focused on industrial safety comprising extensive training courses for personnel, lower and mid-level managers, as well as adoption of industrial best HSE practices. The program is supported by external consulting and training company. 44 AnnuAl RepoRt And Accounts 2010 Business overview eVrAZ Sukha Balka In 2010 the mining company implemented a total reconstruction of its rail infrastructure and rail-car loading facilities. That secured the ore producer with free access to Ukrainian Railways network, which led to a significant increase in production volumes and shipments of sinter ore to consumers. As a direct result of this project the production in 2011 is planned to rise by 35%. Sukha Balka successfully put into operations the new technology of dry magnetic separation of martite- hematite ores. The project at its Yubileynaya mine was designed to improve the quality and increase the commercial value of production, permitting the production of ore with iron content of not less than 60%, the quality of which commands a market premium. Key investment projects in 2011 are as follows: Completion of full-scale feasibility study of the Sobstvenno-Kachkanarskoye deposit (EVRAZ KGOK). Design and preparation works to continue in preparation for ore production to start in 2014. Construction of new sludge dump reservoir at EVRAZ KGOK aimed at decreasing operational costs and improving safety levels of waste storage; scheduled for transition to new areas by 2017. Choice of technology and selection of design engineering company will be made during 2011. Implementation of project designed to increase EVRAZ KGOK’s raw iron ore production capacity from current 50 million to 55 million tonnes per annum in 2012. This development represents the first step towards gradually raising annual capacity of the GOK to 63 million tonnes. Upgrade of pellet-indurating machine No 3 at EVRAZ KGOK as part of modernisation of lumping workshop designed to reduce pellet production unit costs while enhancing quality. Project designed to improve quality of iron ore raw supplies from KGOK to EVRAZ NTMK should increase durability of pellets and sinter. Completion of second stage of reconstruction of lime-based prevention technology line at Evrazruda’s Abagurskaya enrichment plant. Evrazruda will continue to invest in the development of the Sheregeshsky, Kazsky and Abakansky underground mines in order to expand its overall annual production capacity by 25% in 5 years. Tashtagolsky underground mine, a subsidiary of Evrazruda, will finalise the introduction of back-fill mining technology. Between 2011-2015 this project is expected to provide access to valuable ore deposits with the extraction volume projected to increase from 1.6 million to 1.9 million tonnes per annum. Commencement of exploration and development of smaller satellite deposits near Evrazruda’s major fields in the Krasnoyarsk region and Khakassia. Exploration of the Izikhsky depost with estimated reserves of 4.1 million tonnes during 2011 will give way to initial project work with a projected annual production of 0.6 million tonnes of iron ore in 2014. The choice of technology to facilitate the concentration (disposal) of tailings from EVRAZ VGOK’s enrichment process will be made during 2011. This project is expected to stabilise and further generate a 15-20% increase in the production of iron ore raw materials. Further expansion of EVRAZ VGOK’s iron ore base will see design work commence in respect of ore extraction from the Tsentralny open pit. This project is expected to yield up to 7 million tonnes of ore between 2011 and 2020. Modernisation of EVRAZ VGOK’s wet enrichment facilities will be effected in 2011. As a result the Yuzhnaya mine will start direct supplies of ore to wet enrichment plant. This will raise the productivity of VGOK’s enrichment plant by 7%. Finalisation of a feasibility study regarding the prospective construction of a sinter plant in order to process EVRAZ Sukha Balka’s iron ore into raw sinter. The activities above in 2010 enabled the iron ore sector of EVRAZ to overcome the negative effects of recent crisis and to lay down a firm basis for steady development and expansion of the corporate iron ore base in the 5-year period of 2011 - 2014. Some fACtS ABout eVrAZ vgoK (the urals) Clerks of the Russian Imperator Peter the Great were unable to scale the Vysokaya Mountain (mother of the Vysokogorsky ore deposit) because their iron heeled shoes got stuck in the mountain’s surface– in those days the iron content of the ores mined exceeded 60%. EVRAZ Vysokogorsky Ore Mining and Processing Plant, one of the oldest ore mining plants in the world, is celebrating its 300th Anniversary in 2011. 45 AnnuAl RepoRt And Accounts 2010 Business overview VANAdium GENERAl OVERVIEW 2010 Strategic minerals Corporation The vanadium segment achieved good results in 2010 benefiting from the recovery in the global economy and a consequent improvement in the demand for steel. EVRAZ, capitalising on its low cost competitive position and ability to accelerate production in response to customers’ requirements, continued to increase its share of the world vanadium market. All facilities in the vanadium division performed with production increases of more than 50% compared with 2009’s volumes. The principal operational challenges faced by EVRAZ’s management during 2010 included a return to the pre- crisis levels of capacity and operational efficiency, the utilisation of intra-group synergies and the improvement of health, safety and environmental factors throughout all facilities. Vanady-tula Following the acquisition of Vanady-Tula towards the end of 2009, the focus during 2010 was on optimising the plant’s efficiency. During the year an analysis of both the cost structure and the production chain bottleneck was carried out. This resulted in a set of proposals which, upon implementation in 2011, will increase capacity by 3-5% in that year and by up to 10% by 2013. A series of initiatives were proposed with a view to achieving cost savings of up to US$0.5 million per year. In December 2010 Vanady-Tula was selected as a model for implementation of the EVRAZ Business System (EBS) utilising LEAN continuous improvement techniques. During 2011 a major investment project, deploying EBS techniques, will focus on improving safety, social and environmental aspects of the facility. Nikom During 2010, the facility was mainly focused on improving the Group synergies and efficiency by processing vanadium trioxide produced by EVRAZ’s Vametco in South Africa. Nikom also developed new techniques to process a mixture of vanadium pentoxide supplied by Vanady-Tula and vanadium trioxide to produce FeV, a development that achieved extremely high vanadium yields. This has allowed Vametco to operate at full capacity and improve productivity while lowering costs at both plants. In 2011 the facility plans to further increase vanadium trioxide processing levels that will have a commensurate impact on the efficiency of ferrovanadium production. In the second half of 2010, EVRAZ decided to halt the divestiture of Stratcor in favour of growing the corporation’s niche business. In the last quarter of 2010, a total of US$1.5 million was committed to the modernisation of various aspects of the plant. Further investment is planned in 2011 when the focus will be on increasing production volumes and expanding the range of specialty vanadium products available to the chemical and titanium industries. Stratcor is committed to maximising safety precautions in respect of employees and, having suffered from its first ‘lost work day injury’ in six years, will implement further safety improvements with a goal to surpass its previous record. Vametco Vametco’s principal objective in 2010 was to improve production efficiency through optimising the feed mix of vanadium ore and vanadium slag to the process. This, in conjunction with the Nikom collaboration, enabled Vametco to raise production to full capacity during the second half of 2010. Capital expenditure was focused on infrastructure improvement and various safety and environmental projects. In 2011 investment will be directed at the elimination of bottlenecks, further improvement in vanadium recovery rates and ongoing projects in relation to safety improvements and environmental undertakings. In order to fully exploit intra-group synergies, management initiated an inter-divisional project entitled ‘Increasing vanadium production efficiency in the KGOK- NTMK- Vanady-Tula production chain’. The project is designed to analyse and optimise the entire vanadium production chain and, to this end, will utilise LEAN problem-solving instruments (VSA, Standard Work, KPIs, etc.). In 2010, EVRAZ commenced a partnership with ChMZ (Chusovskoy Metallurgical Works) with the intention of using the latter’s idle vanadium slag processing capacities to process NTMK’s slag. As a result, ChMZ processed more than 5,000 tonnes of vanadium slag in 2010. This fully illustrated the benefit of synergies with VGOK (processing ChMZ’s by-product) and NTMK (producing slag with the required composition and utilising ChMZ’s by-product). This partnership will continue through 2011. 46 AnnuAl RepoRt And Accounts 2010 Business overview Reflecting the continuous drive to reduce expenses, optimise productivity, increase efficiency and utilise intra- group synergies, EVRAZ remains one of the lowest cost producers of vanadium in the world. oStrAVA Zoo Key targets 2011 During 2011 the Company will seek to fully capitalise on its competitive advantages in order to further expand its presence in the world vanadium market. Key areas of activity will include: Ongoing focus on health, safety and environmental issues at all facilities; Implementation of EVRAZ Business System throughout the division; Maximisation of vanadium output at all of the Company’s plants; Improve market penetration and focus by channeling all steel sector sales through East Metals; Grow sales to the steel industry through increased conversion of vanadium slag to final FeV products; Enhanced marketing of EVRAZ’s value added Nitrovan® product directed at the steel industry; Expansion of market share of high value vanadium products to chemical and titanium / aerospace industries via Strategic Minerals Corporation’s (Stratcor) operation in North America; Ongoing cost optimisation and improvements in efficiency at all facilities; Identification and utilisation of all possible synergies within the Group. EVRAZ is confident that the advantages of constant supplies of vanadium slag from EVRAZ Highveld and NTMK, a low cost and efficient operational base and focused marketing expertise will enable the Company to offer its enhanced range of vanadium products at highly competitive prices. The health, safety and environmental agenda will remain the focus in 2011 and is expected to be well received by employees throughout the division. Ostrava Zoo covers an area of 100 hectares and is home to some 360 species including various predators, giraffes, zebras, parrots, chimpanzees, lemurs, elephants and rhinoceros to name but a few. The zoo, founded in 1951, attracts a large number of visitors. Falcon demonstrations take place during the summer, while the feeding of the elephants is also a key attraction. In winter, snow permitting, visitors are also able to avail themselves of cross-country skiing facilities within the zoo. In addition to animal feeding activities, guided evening tours, designed to appeal to both children and adults, are also well attended. Various other popular events include: Children’s Day, lampion parades and the decoration of the zoo’s Christmas tree. There are several dedicated children’s corners within the zoo which also features a children’s playground. A Botanical Park was opened in 2007, while the following year saw the construction of new enclosures for cranes and red pandas. Years of planning culminated in the zoo’s first night-time exhibition and a sea aquarium. In 2009 a new section of the zoo, ‘Mala Amazoni’, was opened, the inhabitants of which include capuchin and squirrel monkeys, tropical spiders and frogs. 47 AnnuAl RepoRt And Accounts 2010 Business overview outlooK for 2011 The pattern of global economic recovery, which drove market dynamics through 2010, has continued in 2011. Global steel markets, while remaining distinctly sensitive, have made a promising start to the year. The prices and availability of steelmaking raw materials – iron ore, coking coal and scrap – remain the principal drivers of steel prices. The aforementioned fund raising exercises are solely for refinancing purposes. The Net Debt to last twelve months (LTM) EBITDA ratio is expected to decrease below 2.5 times as of 30 June 2011. In the medium-term we intend to maintain a Net Debt to LTM EBITDA ratio of below two times. Based on our sales at the beginning of 2011, we expect Russian demand for construction steel to increase by more than 10% in 2011 compared with 2010. We are also witnessing improved demand from our international markets as the global economy continues its recovery. We are confident that EVRAZ Group, capitalising on its strengths as a cost efficient vertically integrated and geographically diversified company, is well positioned to pursue its growth strategy and benefit from any upturn in world markets. In 2011, we expect EVRAZ’s Russian and North American steelmaking operations to continue to run at full capacity, while steelmaking capacity utilisation in the Czech Republic and South Africa are expected to increase as operational issues have been resolved and infrastructure markets recover. Following modernisation, completed in November 2010, EVRAZ’s steelmaking plant in Nizhny Tagil, Russia, increased its annual capacity by approximately 0.5 million tonnes. Consequently, we expect our crude steel production volumes in 2011 to increase by 6% compared with 2010’s output. EBITDA in respect of 1Q 2011 totalled US$740 million: 75% higher than 1Q 2010 and 27% higher than 4Q 2010. During 2Q 2011 steel prices in the Russian domestic and international markets, having grown in the early part of the year, showed some downward correction although the average price is expected to be slightly higher than that for the first quarter. We therefore expect 2Q 2011 EBITDA to be slightly higher than in 1Q 2011. Due to the volatility and low visibility of the global commodities and steel markets, we cannot commit to any firm guidance in respect of the second half or full year 2011 financial results. We continue to refinance our short-term maturities through various longer-term instruments in a market where yields are close to their historic lows. In April 2011, EVRAZ launched an US$850 million issue of Eurobonds, due 2018, carrying an interest rate of 6.75%, the lowest ever coupon in respect of an EVRAZ Eurobond issue. Part of the proceeds from the issue was used to purchase approximately US$622 million in aggregate of the principal amount of the outstanding bonds due 2013. We have also issued RUB20 billion of bonds in early June 2011. The proceeds from this issue were used to repay part of the US$950 million Gazprombank loan due in 2014. Some fACtS ABout eVrAZ yuzhkuzbassugol (siberia) Coal mined by Yuzhkuzbassugol is consumed in numerous parts of the world including: Ukraine, Romania, Austria, Poland, Slovenia, Slovakia, Lithuania, Turkey, Bulgaria, Finland, Germany, Italy, the UK, China, Japan and Korea. nKmK (siberia) Over a period of 79 years (as of March 2011) NKMK produced 432,448 kilometres of rail. This is further than the moon’s distance from the Earth (384,400 kilometres) and is equivalent to encircling the Earth 24 times. zsmK (siberia) Over a period of 46 years West Siberian Heat and Power Plant (‘Zapsib Power Plant’ – an energy generating branch of EVRAZ ZSMK) has produced enough kWh of electricty to supply the requirements of Italy’s entire population for one year and those of the citizens of Moscow for five years. 48 AnnuAl RepoRt And Accounts 2010 Business overview Key iNVeStmeNt ProjeCtS Ò Reconstruction of rail mill at nKMK cApeX project targets uS$485m Total CAPEX: Cumulative CAPEX by 31.12.10: uS$225m uS$130m 2011 CAPEX: Capacity of 950k tonnes of high-speed rails, including 450k tonnes of 100 metre rails On-stream by 2013 Ò pulverised coal injection (pcI) at ntMK and ZsMK cApeX project targets Total CAPEX: Cumulative CAPEX by 31.12.10: uS$40m uS$320m 2011 CAPEX: uS$175m Lower coke consumption from 420 to 320 kg/tonne No need for gas consumption On-stream by 2013 Ò construction of Yuzhny and Kostanay rolling mills cApeX project targets Total CAPEX: Cumulative CAPEX by 31.12.10: uS$0m uS$260m 2011 CAPEX: uS$80m Ò expansion of Kachkanar mine Capacity: 450 ktpa of construction products each mill On-stream by 2013 cApeX project targets Total CAPEX: Cumulative CAPEX by 31.12.10: uS$0m uS$80m 2011 CAPEX: uS$50m Iron ore production to be increased to 55 mtpa On-stream by 2012 Ò Reconstruction of rail mill at ntMK cApeX uS$60m Total CAPEX: Cumulative CAPEX by 31.12.10: uS$40m uS$20m 2011 CAPEX: project targets Production of higher-quality rails 550k tonnes capacity On-stream by 2012 Ò Reconstruction of mechanical area at ntMK wheel & tyre mill cApeX Total CAPEX: Cumulative CAPEX by 31.12.10: uS$8m uS$40m 2011 CAPEX: uS$25m project targets Production of higher-quality wheels On-stream by 2011 Ò development of Mezhegey and eastern field coal deposits (tyva, Russia) cApeX project targets Total CAPEX: Cumulative CAPEX by 31.12.10: uS$70m1 uS$27m 2011 CAPEX: TBD Maintaining self-sufficiency in high-quality hard coking coal after depletion of existing deposits On-stream by 2015 and 2021 respectively 1 Acquisition of Mezhegey and Mezhegey East licences This photograph is one of the winners of EVRAZ’s Photo & Picture competition which attracted entries from employees on a global basis and was organised by the EVRAZ Talent Committee. The authors of the photo are Ludmila Chirkina and Anna Chirkina of EVRAZ NTMK page 11 page 59 SheregeSh Russian fedeRation general Information 52°55’30”N 88°2’0”E GMT+05:00 1914 10,254 people 57,1 km2 page 51 page 52 About Sheregesh Russia Sheregesh is a Russian resort situated at the foot of Mustag Mountain in the southern part of the Kemerovo Region. Once a remote mining settlement, the town, named after the Sheregeshev brothers who discovered the area’s iron ore riches in 1912, is now a popular winter sports destination. The ski resort, which nestles in the nearby Zelenaya Mountain, was created some two decades ago and each winter thousands of enthusiasts, mainly from Siberia, flock to Sheregesh to enjoy the skiing and snowboarding facilities. Visitors from Moscow have to endure the notorious Siberian frost during an eight- hour journey, the attraction being a snow mantle with an average depth of four metres, widely acknowledged as ‘the best snow in Russia.’ The resort supports dozens of hotels and many residents let their homes to visitors during the tourist season which typically runs from November to March. The Evrazruda mining company, a subsidiary of EVRAZ, operates the Sheregeshsky mine which supplies iron ore to two of EVRAZ’s metallurgical industrial complexes, ZSMK and NKMK, based in the City of Novokuznetsk. 50 AnnuAl RepoRt And Accounts 2010 Corporate responsibility V y t i l i b i s n o p s e r e t a r o p r o C introduCtion EVRAZ’s approach to corporate responsibility reflects various aspects of the Company’s corporate culture. We believe in the creation of value for the benefit of stakeholders, the constant pursuit of product improvement and innovation, the importance of accountability at all levels and the ongoing education of our employees. Above all, we respect people and the communities in which they live. It is these values and perspectives that, in terms of corporate responsibility, have led to the creation of three key areas of focus: Enrichment through collaboration, Value created for our Customer everyday, Respect for People, Accountability for Actions and Results, Zeal for Continuous Improvement. EVRAZ undertakes these priorities in a transparent manner, mindful of sustainability and in compliance with the highest standards of ethical and business conduct. In view of the global scale of EVRAZ’s operations, the Company utilises the OECD Guidelines for Multinational Enterprises to ensure, as far as possible, a uniform approach to business standards. EVRAZ fully endorses the provisions of the Universal Declaration of Human Rights and strives, at all times, to uphold such principles. To facilitate the cohesion of EVRAZ’s approach to corporate responsibility and the Company’s business strategies we have developed a set of corporate codes designed to regulate all aspects of the Group’s operations. Our Code of Corporate Governance defines EVRAZ’s total commitment to the highest standards of corporate governance. The Code of Business Conduct and Code of Ethics constitute the framework for the management of sustainable development, while our social funding and community activities are governed by the Social Investment Guidelines. In addition, individual entities within the Group have their own specific policies in relation to health, safety and the environment which are fully compliant with, and in many instances go beyond, local legislation. The growth of EVRAZ’s international business operations is accompanied by parallel refinements to relevant aspects of corporate responsibility. Against this background, EVRAZ uses its best endeavors to comply with all environmental laws and regulations applicable in the territories in which it operates. In order to advance our focus on the health and safety of employees, together with environmental issues, EVRAZ’s Board of Directors established a Health, Safety and Environmental Committee during 2010 and created the position of Vice President responsible for Health, Safety and Environment. Such developments serve to underline the importance management attaches to the issues of safety, sustainable development and environmental protection. 51 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility eCoNomiC ProSPerity At EVRAZ we strongly believe that the Company’s future and its long-term sustainability depend not only on our operational efficiency and financial stability but also on the prosperity of the regions in which the Group operates. EVRAZ makes every effort to build a constructive dialogue with, and deliver value to, all of the Company’s stakeholders and, in keeping with this, we contribute to the development of the communities within which we operate. economic Contribution EVRAZ, ranked as one of the world’s premier steel producers and renowned for its infrastructure specialisation, contributes to various global economies both as a major employer and as a corporate taxpayer. EVRAZ prides itself in ‘Making the World Stronger’ and our products are in evidence in almost every country around the globe. EVRAZ is one of the world’s largest rail manufacturers, being the only rail producer in Russia, major producer in the CIS and second largest producer in North America. The Company is the dominant operator in the world vanadium market and one of the leaders in the plate and large diameter pipe markets of Europe and North America. The North American division is one of the world’s largest producers of infrastructure plate, used in the construction of roads and bridges. During 2010 the North American operations supplied steel to various high profile projects including the Willis Avenue Bridge in New York; the Rockies Express Pipeline (REX), one of the largest pipelines ever constructed in the US; and the railway bridge in La Tuque, Quebec. EVRAZ’s steel also features in the infrastructure associated with the APEC-2012 summit to be staged on Russky Island, in the Far East of Russia. Similarly, 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. It is estimated that construction projects related to ‘Sochi 2014’ account for approximately 3% of EVRAZ’s construction product sales in Russia. EVRAZ’s products were used in the construction of South Africa’s World Cup soccer stadiums and the Medupi and Kusile Power Stations. In the Czech Republic, plate produced by EVRAZ Vitkovice Steel is used in the construction of towers for wind power generators, a niche market that extends to Germany, Poland and various other countries. The Czech plant also provided plate for the building of Oasis of the Seas and Allure of the Seas: the largest and innovative cruise ships ever constructed. During 2010 the Czech plant entered the Russian market and delivered plate for the Dzhubga – Lazarevskoye – Sochi gas pipeline. VeNeriN BAShmAChoK The Gornaya Shoriya region is sometimes referred to as the second Alps. The national park is home to more than 60 rare and endangered species of plant, brought in Red List of Threatened Species, one of which is Venerin Bashmachok, also known as the ‘Venus's slipper orchid’. Mythology has it that a peasant found a shoe that belonged to Venus, Goddess of love and beauty, who had lost it in the mud while sheltering from a storm in the northern woods. No sooner did the peasant touch the shoe than it turned into the rare and beautiful flower that we see today, retaining the shape of Venus’s discarded slipper. Some fACtS ABout eVrAZ nKmK (siberia) Over a period of 79 years (as of March 2011) NKMK produced 55.3 million sections of R-65 type rail, the weight of which is nine times greater than the Great Pyramid of Cheops. A total of 420,000 railway platforms would need to be laid end to end to facilitate the transfer of this number of rails. NKMK’s annual output of 700,000 tonnes of rail is equivalent to the weight of the Taipei complex in Taiwan, China: one of the highest skyscrapers in the world. 52 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility In Canada, EVRAZ enjoys a long standing relationship with The United Way – a non-profit volunteer-based organisation that addresses community issues and problems and works towards creating a more favourable environment. EVRAZ also funds various educational programmes together with projects that promote healthy lifestyles among young people. Among its support for community programs in Canada, EVRAZ is an active supporter of Canadian Cancer Society Relay For Life and several chapters of the Association for Community Living – volunteer based groups dedicated to improving the lives of less-fortunate members of their communities. SAGA wAterfAll The Saga Waterfall in the Gornaya Shoriya is a spectacular hydrological natural phenomenon located in a small canyon on the westbank of the river Mrassu. The Sholbychak stream falls a full 15 metres, breaking stones with the force of its descent into the ice-cold lake resplendent with a cavern that leads to the narrow entrance to a tiny cave. Numerous rare and medicinal plants can be found in the canyon including: Venerin Bashmachok Orchid, Siberian Fawn Lily, Martagon, Altay Anemonoides and Primroses. Community Support EVRAZ is passionate about making direct and relevant contributions to the social fabric of the communities in which the Company operates and where our employees live and work. We are proud of our reputation as a distinctive corporate citizen. EVRAZ’s community related programmes are regulated by the Company’s Social Investment Guidelines. The Company’s investment priorities are as follows: Youth: initiatives and projects which assist in the development of young people; Education: enabling individuals of all ages to acquire knowledge, abilities and skills; and Citizenship: fostering favourable neighbourhood values and safe environments in local communities. In accordance with customary international business practice, assistance is provided through charitable foundations established by the Company and managed by local Supervisory Boards. EVRAZ Charity Funds operate in Russia (Siberia and the Urals) and the Czech Republic. EVRAZ’s community contributions in Russia amounted to approximately US$16.7 million (RUB481.3 million) in 2010, the primary consideration being the improvement of living conditions in the towns where EVRAZ’s subsidiaries are located. Investments encompassed several national and civil projects, various youth programmes, support for infant schools and local educational institutions, the construction of sports grounds and the widespread encouragement of sport, educational and cultural activities. The EVRAZ Charity Fund in the Czech Republic was established in 2006 and supports the long-term development of the Moravian-Silesian region. Donations totalled US$514,000 (CZK9 million) during 2010 with funds directed towards medical, educational and psychological support for children suffering from ill health with a special focus on children suffering from cerebral palsy. In 2010 EVRAZ formed the EVRAZ eMalahleni Community Forum for the specific purpose of investing in South Africa’s economic transformation. This project, which is designed to benefit the most vulnerable members of the communities within which EVRAZ Highveld operates, will primarily focus on social development, education and health. During 2010 EVRAZ’s social investments in South Africa amounted to $230,000 (ZAR1.63 million). Total sponsorships and charitable contributions on behalf of EVRAZ in North America totalled US$992,837 in 2010. 53 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility In the united States EVRAZ supports regional Red Cross programmes, local scouting activities and also community efforts that lend support to under-privileged children and families. In 2010, EVRAZ also partnered with local law enforcement agencies, civic and elected leaders, local businesses and neighbourhood organisations in various campaigns designed to raise awareness about crime and drug prevention and causes to encourage community involvement. transformation in South Africa The South African Administration’s ‘Transformation’ agenda complements many of EVRAZ’s core values, not least in relation to the development of local communities and issues of equality. Under the project, the corporate structure of EVRAZ Highveld will be required to reflect the country’s demographics, while management must ensure that the principles associated with the initiative are realised in the communities that come within the region of the Corporation’s operations. In recognition of the importance of the ‘Transformation’ project, EVRAZ Highveld sought to verify its status during 2010 and was externally assessed as a Level 8 Contributor. Management is confident that this ranking will show a significant improvement in 2011. The scale of the project reflects the Administration’s focus on the economic empowerment of communities, in social and business terms, through various State schemes encompassing education, health, housing and supply chain initiatives. Against this background a fully-fledged ‘Transformation’ division, focused on the development of Broad-Based Black Economic Empowerment (B-BBEE) and the implications of the Administration’s new Mining Charter, will come into operation at EVRAZ Highveld in 2011. The new division will facilitate refinements to the Corporation’s ‘Transformation’ strategy and enhanced monitoring of performance against targets in relation to such strategy. GorNAyA ShoriyA reGioN The area known as Hilly Shoriya or ‘Gornaya Shoriya’, is the sourthern part of Kemerovo Oblast, east of the Altay Mountains, in southern Siberia. Often referred to as Siberian Switzerland, in view of its natural beauty, Gornaya Shoriya encompasses a national park which is home to an incredible array of primeval flora and fauna. Tourists visiting Shoriya are drawn by the beautiful natural landscapes where river laced coniferous forests, known as taiga, give way to the frozen undulating reaches of the tundra. Gornaya Shoriya, a fusion of stony bottomed rivers, crystal clear lakes and majestic snow capped mountains, is renowned for its skiing facilities but is also a popular destination in the summer when visitors avail themselves of a host of activities including horseback riding, fishing, canoeing, hiking, the exploration of sinkhole caves, helicopter tours and chair-lift excursions. An abundance of leisure opportunities amid such scenic beauty effectively underwrites the region’s ongoing development as an international tourist destination. This photograph is one of the winners of EVRAZ’s Photo & Picture competition which attracted entries from employees on a global basis and was organised by the Company’s Talent Committee. The authors of the photo are Ludmila Chirkina and Anna Chirkina of EVRAZ NTMK. 54 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility hSe iNformAtioN ANd deVeloPmeNtS EVRAZ operates in an industry associated with potential health, safety and environmental (HSE) risks and, as a result, the Group’s activities are highly regulated through HSE laws. The Group is focused on increasing the level of industrial safety, labour protection and care of the environment across its operations. In 2010 management formed a Health, Safety and Environmental Committee of the Board of Directors to oversee HSE strategy, policy, initiatives and activities and appointed a Vice President of Health, Safety and Environment to coordinate all HSE activities. Some fACtS ABout eVrAZ zsmK (siberia) ZSMK has twice won a gold medal and a diploma in an all-Russian contest entitled Golden Medal (European Quality) under the nomination ‘100 best companies in Russia. Ecology and Ecological Management’ health and Safety The health and safety of EVRAZ’s employees is of paramount importance and the Company is constantly seeking ways in which to protect its people from the risk of harm, with particular regard to the Group’s various production operations and processes. To this end EVRAZ continuously refines and improves the Company’s health and safety management system and acts in compliance with the health and safety laws and regulations applicable in the countries in which it operates. The importance EVRAZ attaches to such issues is reflected in the Company’s formation of a Health, Safety and Environmental Committee, comprised of three independent directors, during 2010 accompanied by the appointment of Alexander Kruchinin as Vice President of Health, Safety and Environment. Mr Kruchinin, a long- standing specialist in industrial safety and ecology, reports directly to Alexander Frolov, Chief Executive of EVRAZ. EVRAZ’s critical indicator relates to the annual incidence of fatal accidents which, in 2010, showed a 21% reduction compared with 2009. In order to monitor internal industrial safety indicators and carry out comparative analysis, the Group applies the Lost Time Incident Frequency Rate (LTIFR). This ratio reflects the number of lost time accidents per 1,000,000 man-hours worked. A lower incidence of accidents was duly reflected in a reduction in EVRAZ’s LTIFR from 2.69 in 2009 to 2.40 in 2010. lOST TIME INCIDENT FREquENCY RATE/ FATAlITIES FREquENCY RATE OF THE GROuP per 1 mln hours worked lOST TIME INCIDENT FREquENCY RATE/FATAlITIES RATE AT STEEl ASSETS per 1 mln hours worked 12 10 8 6 4 2 0 0.6 12 0.5 10 0.4 0.3 0.2 0.1 0 8 6 4 2 0 0.13 2.23 0.18 2.69 0.14 2.40 0.6 0.5 0.4 0.3 0.2 0.1 0 0.1 1.47 0.04 1.34 0.11 1.48 2008 2009 2010 2008 2009 2010 LTIFR FIFR LTIFR FIFR 55 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility implementation of Special Safety Projects at Coal operations Investment in industrial safety and other related matters at Yuzhkuzbassugol totalled RUB 407.1 million (US$14.4 million) in 2010. Expenditure included expert assessments in relation to aspects of industrial safety and the technical condition of certain equipment, the installation of aspiration and conditioning systems, purchases of personal safety equipment, the certification of workplaces, employee training courses and medical inspections. In the fourth quarter of 2010, additional funds of (RUB543.2 million (US$19.2 million) were allocated to industrial safety expenditure to fulfill the requirements of Rostekhnadzor, the supervisory arm of the Ministry of Natural Resources and Ecology. A total of RUB340.8 million (US$12.1 million) of this allocation was utilised in 2010, with the remaining expenditure scheduled for 2011. A special programme at Yuzhkuzbassugol involving the installation of alarm and control systems throughout the mines is well under way and is already in operation at Yerunakovskaya-8, Yubileynaya 2 (formerly Ulyanovskaya) and Yesaulskaya. The total costs associated with this project, including systems that prevent employees from entering danger zones, are estimated at RUB151.6 (US$5.4 million). Projects designed to improve communal facilities are also progressing. Following the development of the Yubileynaya 2 mine, work commenced on the construction of an additional Administration unit, a development that will significantly enhance the scale of amenities (medical services and equipment, showers, canteen facilities, etc.) available to the plant’s 1,300 employees. This project is scheduled to come on stream in 2012 at an estimated cost of RUB295 million (US$10.4 million). EVRAZ has long acknowledged the importance of constantly advancing its technology with regard to the monitoring and control of underground air and gas levels. To this end, a Davis Derby information system, designed to provide data from all of Yuzhkuzbassugol’s mines, is currently on test with the online monitoring of methane levels facilitated by state-of-the-art sensory equipment. Safety and security are closely related and the Company has installed a radio wave scanner at Yubileynaya 2 in order to guard against the possibility of prohibited items being brought into the working area. This pilot scheme commenced in September 2010 at a cost of RUB6.9 million (US$0.2 million). lOST TIME INCIDENT FREquENCY RATE/FATAlITIES RATE AT COAl ASSETS per 1 mln hours worked lOST TIME INCIDENT FREquENCY RATE/FATAlITIES RATE AT IRON ORE ASSETS per 1 mln hours worked 12 10 8 6 4 2 0 10.28 0.3 7.44 0.2 8.48 0.15 0.6 12 0.5 10 0.4 0.3 0.2 0.1 0 8 6 4 2 0 0.2 2.17 0.52 2.96 0.6 0.5 0.4 0.3 0.2 0.1 0 0.2 2.21 2008 2009 2010 2008 2009 2010 LTIFR FIFR LTIFR FIFR 56 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility KiZA CAVerNS Key targets for 2011 The Kiza Caverns are a geological feature of the Shorsky National Park and are situated on the east bank of the Mrassu River, close to where it is joined by the Kiza River, in rock formations located some 80 metres from the river bank. An observation deck has been constructed 30 metres above the cave structure. A glacier formation can be seen close to the cavern entrance which leads to a hall with a clay floor interspersed with boulders. Stalactites, stalagmites and various ice formations are present throughout the cavern. The walls and ceilings are adorned with tubular stalactites, corallites and hangings, providing a magnificent backdrop to flowing cascades, calcite incrustations and pits. The roofs of the cavern are covered with natural patterns and furrows, many of which resemble inscriptions or drawings. There are numerous offshoots to the caverns which extend to 600 metres over two tiers connected via wells that are some 15-metres deep. Humidity levels, at close on 100%, are high and the temperature is approximately four degrees Celsius. Accident reporting: implementation of an instant accident reporting system (Flash Report) throughout the Group’s operations. Accident investigation: development and implementation of internal accident investigation procedures – determination of the cause/causes of the accident (first-hand accounts/in-system data), decisions regarding corrective measures. Focus on implementation of corrective measures and measures designed to reduce detected risks. Lessons learned from accidents: preventative action through the compilation of a list of precautionary measures based on historic experience for distribution to employees. Safety reporting and statistics analysis: development and implementation of an integrated Health and Safety reporting system taking into account Russian and international standards in respect of organisations such as the Global Reporting Initiative (GRI) and Workers Safety Advisers (WSA). Classification and analysis of current aspects of labour protection and industrial safety to identify areas for improvement. Realisation of targeted projects: introduction of safety projects designed to reduce accidents based on analysis of in-system data. environment The Group is aware of the possible environmental consequences of its production processes and pays increasing attention to various aspects of the environment with a view to the prevention or minimisation of any adverse influences. The environmental strategy of the Group is targeted at finding optimal solutions for industrial waste management, reduction of pollutant emissions and rational use of natural resources. environmental Performance EVRAZ continues to invest in modern, environmentally- friendly and energy-efficient technologies and gradually withdraws obsolete equipment which may not be compatible with environmental standards. Total air emissions from the Group’s asset base showed a 4% reduction in 2010 compared with 2009. The Group actively develops plans to reduce waste generation volumes and ensure proper waste storage. In 2010, 96.6% of waste1 and by-products generated as a result of the Group’s operations were reclaimed or reused (Russian steel mills reclaimed or reused 107.6% of waste taking into account waste generated before 2010). Non- recyclable waste was stored in facilities that have been specifically designed for storage to prevent any harmful substances from escaping into the environment. 1 Excluding dumped rocks and grounds 57 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility One major accident, involving the release of tailings, occurred at Evrazruda (Russia) towards the end of 2010. Significant amounts of tailings have already been recovered and further clean-up and rehabilitation activities will be completed in 2011 post the winter period. During 2010, the Group was able to take advantage of its quotas for carbon dioxide emissions within the framework of the Kyoto Protocol. An arrangement, known as the ‘joint implementation project’, was initiated by the Russian government in its endeavours to encourage factories to deploy energy-efficient technologies. Companies that decrease greenhouse gas emissions through the use of their own funds receive a certain amount of quotas, which can be sold on the international market, as a bonus. In 2010 EVRAZ NTMK‘s project was submitted to the quota administrator – Sberbank (state savings bank of the Russian Federation). EVRAZ NTMK was included in the register of sellers, in line with the list of approved projects carried out in accordance with Article 6 of the Kyoto Protocol to the UN Framework Convention on Climate Change. Approval of the project will allow EVRAZ NTMK to exercise its right to sell Emission Reduction Units (ERUs). The Group expects that total revenues from the sale of ERUs under the EVRAZ NTMK project could be in the region of US$28 million. EVRAZ Vitkovice is also involved in a similar process: each year the Government provides EVRAZ Vitkovice with carbon quotas and EVRAZ Vitkovice benefits from emission reduction attainments by selling additional quotas on the market. environmental compliance and commitments The Group believes its operations are in compliance in all material respects with the applicable Environmental legislation of the countries and regions where the Group’s plants are situated. The overall Environmental commitments (the capital and operational expenditure the Group would have to make over a five-year period to address existing environmental issues) may constitute approximately US$326 million (see Note 31 of the 2010 Financial Statements of EVRAZ Group S.A.). Mining operations require large areas of land for mining and waste storage. The mining, extraction and processing activities of the Group normally give rise to obligations for site closure or rehabilitation. The Group’s accounting policy requires the recognition of provisions for the restoration and rehabilitation of each site when a legal or constructive obligation exists to dismantle the assets and restore the site. The provision represents management’s best estimate of the value to retire the assets as they exist at the time of estimation. This provision is periodically reviewed and updated. Information regarding EVRAZ’s closure provisions can be found in Note 25 of the 2010 Financial Statements of EVRAZ Group S.A. In view of the fact that regulatory standards and expectations are constantly evolving, the Group may be exposed to new litigation, increased compliance costs and/or other unforeseen environmental expenses. The level of air emissions typically associated with steel production (nitrogen oxides, sulphur oxides, carbon monoxide and volatile organic compounds VOC) showed a reduction of more than 30% in 2010 compared with 2007. EMISSION DYNAMICS (including: nitrogen oxides NOx, sulphur oxides SOx, carbon monoxide CO, volatile organic compounds VOC) percent Russian and ukrainian Assets1 100 100 96.4 91.2 North American Assets2 100 100 87.1 80 60 40 20 0 74.6 66.8 80 60 40 20 0 75.6 65.3 2006 2007 2008 2009 2010 2007 2008 2009 2010 1 2006-2007 data does not include Ukrainian assets 2 2007 data includes assets acquired by EVRAZ in 2008 58 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility our PeoPle General Strategy EVRAZ’s reputation is synonymous with the calibre of its employees. We have always taken the view that the Company’s principal asset lies in its people. We respect our employees and place a strong emphasis on the safety of their working environments, encourage educational development and contribute towards the well-being of their local communities. employees’ Social Programmes In 2010 EVRAZ implemented a range of social programmes for employees that in many instances, also extended to their families. The investment in social programmes in respect of employees in Russia exceeded US$53 million (RUB1.5 billion). These included: employee insurance plans encompassing life, accident and occupational illness insurance and the co-financing of a voluntary medical insurance programme; recreational activities for employees and their families; support of health programmes (sporting events, healthy eating plans, etc.); support of youth, veteran and women’s organisations; co-financing of employee pension plans; and mortgage schemes. In North America, employer of choice initiatives were introduced at all our North American facilities. These included the development of local educational projects for the benefit of prospective professional employees, the implementation of apprenticeship programmes and the expansion of service awards and employee recognition programmes. Human Resource specialists at all the North American EVRAZ facilities regularly participate in career fairs to attract new talent and promote the steel industry to students. The focus on employee safety is very prominent at EVRAZ’s North American facilities where each site has safety committees to oversee a variety of education, prevention and awareness programmes. At EVRAZ Highveld Steel a Wellness Committee addresses health and social issues among employees including HIV/Aids and tuberculoses. Employees and their families receive free HIV/Aids counselling, testing and anti-retroviral medication from EVRAZ Highveld. A primary health care policy also serves to assist employees with common health issues such as tuberculosis, diabetes and high blood pressure. In addition, the Corporation’s Employee Wellness Programme provides free counselling on various matters including mental health, alcohol and substance abuse and financial planning. Investments in employee programmes in the Czech Republic totalled US$1.5 million (CZK24.8 million). This expenditure encompassed pension and life insurance programmes, sport and recreational activities and various events organised by the trade union. employees development and talent management EVRAZ sees the development of its employees as one of the core constituents of the Company’s success and progress. All the educational programmes launched within the Company have a common purpose, born of a conceptual EVRAZ Academy of Development. The primary goal is to create an evolutive environment that provides our employees with opportunities to appreciate and share best practices, while also offering real possibilities for personal and professional advancement. EVRAZ brings two distinct approaches to bear in the development of its employees: The development of middle managers – particularly plant managers – in terms of general business knowledge and management skills; and Talent management and the evolvement of high potential employees (HiPos). Talent management issues are supervised by a special Talent Committee comprising key EVRAZ executives, all of which are actively involved in, and personally responsible for, tutoring and overseeing any given pool of HiPos. The concept behind the development of high potential employees is based on bespoke programmes specifically designed to address the Company’s strategy and immediate business goals. One of the flagships in this respect is EVRAZ New Leaders Programme, the purpose of which is to develop a new generation of senior managers to ensure continuity of leadership within the Company. 59 AnnuAl RepoRt And Accounts 2010 Corporate responsiBility The ultimate objective, having identified eligible candidates, is to develop them into qualified managers who share the Company’s values, understand its strategy and possess the knowledge and skill sets required to contribute to EVRAZ’s ongoing growth. Work on actual projects being undertaken by EVRAZ and familiarisation with the challenges faced by the Company lie at the heart of the programme which actively utilises the expertise of EVRAZ’s senior executives. The EVRAZ New Leaders programme commenced in 2009 and, in the space of two years, approximately 60% of the 92 graduates who worked on 16 different projects have received further promotion. In 2011 the EVRAZ New Leaders programme is focused on Engineers and Production Managers against a background of growing demand for such expertise in Russia and overseas. Cooperation with labour unions EVRAZ’s cooperation with labour unions is based on respect for the opinion of our employees and the principals of social partnership, equality and openness. EVRAZ is an active member of working groups involved in the formulation of sectoral and regional tariff agreements and was the first steel company to establish the ‘Social Councils’ in Russia and Ukraine in which representatives of the respective trade unions participate. This mechanism serves to broaden the framework of social partnership and encourages the discussion of topical issues raised by our employees. Trade unions contribute to monitoring the Company’s social welfare schemes and discussing the ways to refine and extend such benefits. We value such contributions and intend to maintain trade union involvement in the implementation of certain social projects of EVRAZ. ShereGeSh SKi reSort Sheregesh, surrounded by miles of forest in the heart of the Gornaya Shoriya region of the Altai mountain range, in southern Kemerovo Oblast, is Siberia's most developed winter sports destination. The growing popularity of skiing and snowboarding in Russia has gradually transformed the town since the ski facilities were built on the Zelenaya Mountain some 20 years ago. Sheregesh welcomes more tourists each season and more tourists equate to more hotels, more cafes and more ski lifts. Sheregesh is the only ski friendly area of Russia where snow can be found as early as November. As such, it attracts thousands of skiers and snowboarders, mainly from Siberia, each winter. The foot of the Zelenaya Mountain is sprinkled with hotels and lodges and many local residents let their apartments to visitors during the season which typically runs from November to March. The resort, which stretches across 6 kilometres of land, boasts six ski runs, catering for beginners and intermediate skiers, and five pistes. Heli-skiing facilities and snowmobiles are available for off-piste activity. This is the region where the Russian National snowboard team trains. page 70 page 72 page 79 page 41 About eMalahleni Russia Known as the gateway to Mpumalanga, the town of eMalahleni, formerly Witbank, is located about 100 kilometres east of Johannesburg and Pretoria. The name Witbank is Afrikaans for ‘White Ridge’ which takes its name from a white sandstone outcrop where wagon drivers traditionally rested. In the mid 1800's farmers settled in the Highveld and started to mine coal, for cooking and heating purposes, from outcrops in riverbeds. The town was established in 1890 and officially proclaimed a town in 1903. In March 2006, the town was renamed eMalahleni, the Nguni word for ‘the place of coal’, matching the name of the eMalahleni municipality. The town has historic ties with the young Winston Churchill who, during the Second Boer War in 1899, escaped from prison in Pretoria and was hidden in a nearby mine shaft before making his way to Mozambique. Agricultural and farming activities have become established around eMalahleni which, as home to Africa's premier coalfields, power stations and steel manufacturing operations, has emerged as the energy hub of South Africa. EVRAZ Highveld Steel and Vanadium Corporation is based nearby. eMAlAhleni South AfricA General information 25°52’36”S 29°12’04”E GMT +02:00 1890 150,000 people 55.6 km2 61 AnnuAl RepoRt And Accounts 2010 Corporate GovernanCe IntroduCtIon EVRAZ Group S.A., incorporated as a socieˆteˆ 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 Official List of the UK Listing Authority, with particular regard to the UK Corporate Governance 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 financial 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 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 2010. 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. vI e C n a n r e v o G e t a r o p r o C 62 AnnuAl RepoRt And Accounts 2010 Corporate governanCe the BoArd of direCtorS ANd SeNior mANAGemeNt The following table lists the Company’s directors and senior management as of 30 April 2010: Name Alexander Abramov Alexander Frolov Otari Arshba Karl Gruber Olga Pokrovskaya Terry Robinson Director Chairman of the Board Member of the Remuneration Committee Director Chief Executive Officer Non-executive director Independent non-executive director Chairman of the Remuneration Committee Member of the Health, Safety and Environmental Committee Non-executive director Member of the Audit Committee Independent non-executive director Chairman of the Audit Committee Member of the Health, Safety and Environmental Committee Eugene Shvidler Non-executive director Eugene Tenenbaum Gordon Toll Leonid Kachur Pavel Tatyanin Giacomo Baizini Daniel Harris Natalia Ionova Alexey Ivanov Alexander Kruchinin Oleg Kuzmin Non-executive director Member of the Remuneration Committee Independent non-executive director Chairman of the Health, Safety and Environmental Committee Senior Vice President Senior Vice President Vice President Vice President Vice President Vice President Vice President Vice President Alexander Kuznetsov Vice President Konstantin Lagutin Yury Pavlov Ilya Shirokobrod Timur Yanbukhtin Elena Zhavoronkova Vice President Vice President Vice President Vice President Vice President Dmitry Melnikov has been Secretary to the Board since 2007. Initially elected or appointed Director since April 2005 Chairman since December 2008 Director since April 2005 Chief Executive Officer since January 2007 May 2005 May 2010 May 2010 June 2010 August 2006 April 2005 June 2010 August 2006 August 2006 May 2010 June 2010 June 2002 November 2004 July 2006 February 2008 June 2006 May 2009 August 2010 February 2011 July 2009 January 2010 February 2011 February 2011 February 2007 June 2010 63 annual RepoRt and accounts 2010 thE bOARd (as of 30 April 2011) 1 2 3 4 5 6 7 8 9 64 AnnuAl RepoRt And Accounts 2010 Corporate governanCe 1 Alexander Abramov 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 from the Moscow Institute of Physics and Technology in 1982 and holds a Ph.D. in Physics and Mathematics. 2 Alexander Frolov Director, Chief Executive Officer Born in 1964. 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. 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 EVRAZ Highveld Steel and Vanadium. 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. 3 otari Arshba Non-executive director Born in 1955. 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. 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. 4 Karl Gruber Independent non-executive director Born in 1952. Mr Gruber joined EVRAZ’s Board in May 2010 following the AGM. His extensive experience in the international metallurgical plant business includes eight years as a member of the Managing Board of VOESTALPINE Industrieanlagenbau (VAI), first as Executive Vice President of VAI and subsequently 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. In 2010 Mr Gruber was appointed Chairman and CEO of the Management Board of the LISEC Group. Graduated from Technical High School in 1973 with a Diploma in Mechanical Engineering. 5 olga pokrovskaya Non-executive director, Member of the Audit Committee Born in 1969. Ms Pokrovskaya held several key finance 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. 6 terry Robinson 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 7 eugene shvidler 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 Financial Accounting and an M.Sc. in International Taxation from Fordham University. 8 eugene tenenbaum 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 finance director at Salomon Brothers. Prior to that, he was engaged in corporate finance 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. 9 Gordon toll Independent non-executive director, Chairman of the Health, Safety and Environmental Committee Born in 1947. Mr Toll joined EVRAZ’s Board in May 2010 following the AGM. Mr Toll is Executive Chairman of Satimola Limited, a potash development company operating in Kazakhstan. 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 Richfield Coal. Mr Toll was formerly Chairman of Fortescue Metals Group Limited and Ferrous Limited. He is a member of the Australian Institute of Mining and Metallurgy and a member of the Institute of Directors, UK. He graduated from the 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. departures: Gennady Bogolyubov James W. Campbell Philippe Delaunois On 17 May 2011 following the AGM Duncan Baxter was elected as a new director of the Board of Directors of EVRAZ Group S.A. Mr. Gordon Toll was not re-elected. The company thanks Mr. Toll for his contribution to the Company’s business in 2010. 65 AnnuAl RepoRt And Accounts 2010 Corporate governanCe role of the BoArd 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 specifically 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 officers 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 affiliates; 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 final agenda is sent to Board members not later than five 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 five per cent 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 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 ‘Policy Governing the Board of Directors’. Any shareholder holding at least five per cent 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 a programme designed 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 ensuring that continuing education is available in order for directors to improve and update their knowledge and skills in any area that the Board thinks necessary. Some fACtS ABout eVrAZ zsmK (siberia) Rolled products of ZSMK (currently EVRAZ ZSMK) were used in the construction of the following notable buildings/projects: the Cathedral of Christ the Savior (Moscow); the State Kremlin Palace (Moscow); the Commemorative complex at the Poklonnaya Gora area (Moscow); the Olympic Village (Moscow); the cycle track in the Krylatsky area (Moscow); the Moscow Metro; 60% of Moscow’s residential buildings; the Krasnoyarsky and Sayano-Shushensky Hydro Power Plants (Russia); the Baikal-Amur Highway (Russia); the casino complex which opened in Macau, China, in 2004 and the new Hong Kong International Airport. 66 ANNuAL RePoRT AND AccouNTs 2010 Senior ManageMent (as of 30 April 2011) EVRAZ’s senior management, as custodians of one of the largest vertically integrated steel and mining multinational enterprises in the world, is committed to maximising the potential of the Company’s global asset base for the benefit of all stakeholders. In pursuit of these objectives management has always fostered an ‘open door’ culture in its dealings with the media, the investment community and employees and our credentials in relation to transparency and the quality of corporate governance were acknowledged when EVRAZ received awards for the Best Financial Disclosure and Best Progress in Financial Disclosure in Europe in the 2011 IR Global Rankings survey. 1 2 3 4 Alexander Frolov Chief Executive Officer 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 Officer 5 6 7 Daniel Harris Vice President, Vanadium Assets Natalia Ionova Vice President, Human Resources Alexey Ivanov Vice President, Head of the Steel Division 1 2 3 4 5 6 7 67 ANNuAL RePoRT AND AccouNTs 2010 8 9 Alexander Kruchinin Vice President, Health, Safety and Environment 12 Yury Pavlov Vice President, Procurement oleg Kuzmin Vice President, Corporate Communications 13 Ilya shirokobrod Vice President, Sales 10 Alexander Kuznetsov Vice President, Strategic and Operational Planning 14 Timur Yanbukhtin Vice President, Business Development, International Business 11 Konstantin Lagutin Vice President, Head of Iron Ore Division 15 elena Zhavoronkova Vice President, Legal Affairs Senior Management Changes 1 January 2010 – 30 April 2011 Appointments oleg Kuzmin Vice President, Corporate Communications Alexander Kruchinin Vice President, Health, Safety and Environment Konstantin Lagutin Vice President, Head of Iron Ore Division Yury pavlov Vice President, Procurement ilya shirokobrod Vice President, Sales elena Zhavoronkova Vice President, Legal Affairs DepArtures Aleksey Agoureev Vice President, Corporate Communications igor Gaponov Vice President, Information Technologies igor markov Vice President, Commercial Affairs Dmitry sotnikov Vice President, Head of the Urals Division 8 9 10 11 12 13 14 15 68 AnnuAl RepoRt And Accounts 2010 Corporate governanCe 1 Alexander Frolov Chief Executive Officer 5 daniel Harris Vice President, Vanadium Assets Born in 1954. Mr Harris has held the post of Vice President, Vanadium Assets, since 2008 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 33 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 Officer 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. 6 natalia Ionova Vice President, Human Resources Born in 1966. 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. 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. 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. 7 Alexey Ivanov Vice President, Head of the Steel Division Born in 1975. Mr Ivanov joined EVRAZ in 2002. Prior to his appointment as Head of the Steel Division in May 2011 and 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. Born in 1964. 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. 2 leonid Kachur Senior Vice President, Business Support and Interregional Relations Born in 1961. Mr Kachur joined EVRAZ in 1993 and, as Senior 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 ZIL, the Russian automobile enterprise. Mr Kachur graduated from Moscow State Industrial University in 1984 with a degree in Engineering. 3 pavel tatyanin Senior Vice President, Head of International Business Born in 1974. Mr Tatyanin was appointed Senior Vice President and Head of International Business in July 2009. His responsibilities include the financial 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 has held the following positions within the Group: Deputy Chief Financial Officer and Director for Corporate Finance (2002 – 2004) and Senior Vice President and Chief Financial Officer (2004-2009). Before joining EVRAZ, Mr Tatyanin held various positions in the financial sector. He was Vice President of Adamant Financial Corporation (M&A transactions and asset restructuring) between 1999 and 2001 and before that was Vice President of United Financial Group, Deutsche Bank’s Investment Banking division (1997-1999). 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. 4 Giacomo Baizini Vice President, Corporate Affairs and Chief Financial Officer Born in 1970. Mr Baizini is responsible for finance, treasury, controlling, reporting, IR, taxation, insurance, legal matters and IT. Before taking over as CFO in July 2009 he was responsible for business development in Asia-Pacific, 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 offices 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 firm, where he specialised in cost reduction and operational efficiency programmes in relation to both manufacturing and service industries. Mr Baizini holds a degree in Physics from Oxford University. 69 AnnuAl RepoRt And Accounts 2010 Corporate GovernanCe 8 Alexander Kruchinin Vice President, Health, Safety and Environment Born in 1977. Mr Kruchinin joined EVRAZ in August 2010 as Vice President of Health, Safety and Environment in charge of Russian and overseas operations. Before joining EVRAZ, Mr Kruchinin held various management positions with responsibility for industrial safety, labour and environmental protection. He served as Director for Health, Safety and Environment at Integra between 2007 and 2010 and was Head of Health, Safety and Environment at UC Rusal’s Alumina Division from 2004 to 2007. Prior to this he was Safety Consultant at DuPont de Nemours International (2001-2004). Mr Kruchinin graduated from the Gubkin Russian State University of Oil & Gas and took an internship at The Fuqua School of Business, Duke University, (NC, USA). He received an Executive MBA degree from the Higher School of Management at Saint Petersburg State University in December 2010. 9 oleg Kuzmin Vice President, Corporate Communications Born in 1978. Mr Kuzmin, who is responsible for Corporate Communications and the implementation of Public Relations strategy, joined EVRAZ as Vice President for Corporate Communications in February 2011. Mr Kuzmin has many years experience in Public Relations. Before joining EVRAZ he was a Member of the Management Board and Director for Corporate Affairs of Interpipe (2008-2010) and was previously Head of the Communications and External Affairs Department at EUROCEMENT group (2006-2008). Prior to this he held executive positions at communications agency Ogilvy Public Relations (2002-2006). Mr Kuzmin graduated from Petrozavodsk State University, Department of Law, with a degree in Political Science and gained an Executive MBA at Moscow International Higher Business School ‘Mirbis’. He holds a degree in Political Science and Public Relations from Central European University, a degree in Public Relations from Umea State University (Sweden) and a degree in Sustainable Development from Baltic University (Finland).Mr Kuzmin is a Member of the European Association of Corporate Directors. 10 Alexander Kuznetsov Vice President, Strategic and Operational Planning Born in 1978. 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 financial 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. 11 Konstantin lagutin Vice President, Head of Iron Ore Division Born in 1966. Mr Lagutin joined EVRAZ in January 2010, having served in the preceding five years as an Executive Director of Belon OJSC which, in 2006, was the first coal producer in Russia to go public. During that period Mr Lagutin was responsible for the company’s day-to- day operations and implementation of key investment projects. While at Belon Mr Lagutin was twice awarded the Order of the Honor by the Governor of Kuzbass for his achievements in the region. Prior to this Mr Lagutin held executive positions in the Russian oil and energy sector, where his experience encompassed operational management, production, marketing and sales of non-fuel petroleum products. He was General Director of the Ryazan Refinery between 1998 and 2000. During the periods 2000-2001 and 1995-1998 he held various positions at Alfa-Eco dealing with production and trade operations in the oil and coal sectors. Before that, Mr Lagutin served as Head of the Moscow office of Global Natural Resources, Inc. Mr Lagutin graduated with honors from the Military Institute of the Ministry of Defence, Moscow, in 1990. In 2003 he received an Executive MBA degree from The Fuqua School of Business, Duke University, (NC, USA). 12 Yury pavlov Vice President, Procurement Born in 1962. Mr Pavlov joined EVRAZ in 1996. Prior to his appointment as Vice President for Procurement in January 2011, he was Director for Procurement, a position held since 2008. Before this Mr Pavlov held various positions within EVRAZ’s treasury prior to becoming Head of the Treasury in 2005. He was Head of the Accounts Department between 2002-2003 and formerly Head of the Financial Department of OOO EvrazHolding (2000-2002). Before joining EVRAZ, Mr Pavlov held various positions at the National Research Institute for Physicotechnical and Radio Engineering Measurements, starting his career as an engineer and subsequently becoming Senior Staff Scientist. Mr Pavlov graduated from Moscow Institute of Physics and Technology in 1985. He holds a degree in Economics, Finances and Credit (Financial Management) from the Financial Academy of the Government of the Russian Federation and an MBA degree from The Russian Presidential Academy of National Economy and Public Administration. 13 Ilya shirokobrod Vice President, Sales Born in 1972. Mr Shirokobrod was appointed Vice President, Sales, of the Group in January 2011. He became Managing Director of OOO Trading Company EvrazHolding, a position he retains, in February 2010. Prior to joining EVRAZ Mr Shirokobrod held various management positions at Centravis Limited (the largest producer of seamless stainless pipes in the CIS and the fifth largest in the world) with responsibility for sales to world markets, strategy and business development. He served as Commercial Director and Chief Executive (Russia and Central Asia) of Alcoa CSI between 1999 and 2005 and has also held various commercial positions at Melitta Russland and Tetra Pak. Mr Shirokobrod graduated with honours from Saint Petersburg State Technical University in 1995 with a degree in Physics and also holds a Master of Sciences (Engineering) degree. He received an Executive MBA from Stockholm School of Economics in 2005. 14 timur Yanbukhtin Vice President, Business Development, International Business Born in 1964. Mr Yanbukhtin, who was appointed Vice President, Business Development, International Business in October 2009, joined EVRAZ in 2002 and served as Head of Capital Markets at EvrazHolding. In 2005 he became Vice President and Head of Corporate Finance and, in 2007, was appointed Vice President for Strategy and Business Development. During these years Mr Yanbukhtin was actively involved in various corporate finance transactions including the Company’s IPO, Eurobond issues and global M&A activity. Before joining EVRAZ Mr Yanbukhtin was Director for Business Development at Yandex (2000-2002) and, prior to this, held various positions in Corporate Finance at Pioneer Investments, Salomon Brothers and Alfa Bank. 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. 15 elena Zhavoronkova Vice President, Legal Affairs Born in 1970. Ms Zhavoronkova joined EVRAZ in June 2010 as Vice President for Legal Affairs. Prior to this Ms Zhavoronkova was Head of the Legal Department of United Industrial Corporation (OPK), a diversified holding company (2008-2010). She commenced her career as a legal advisor in 2000 when she joined TMK, a Russian pipe manufacturer, where she served as Head of the legal and contractual branch (2001-2003) before becoming Head of the Legal Department (2003-2008). Ms Zhavoronkova graduated from Moscow State Law Academy with a degree in Legal Affairs in 2002. 70 AnnuAl RepoRt And Accounts 2010 Corporate governanCe Board meetings in 2010 witBANK NAture reSerVe Month January February March April May June July August September October November December Scheduled Board Meetings Circular Board Meetings 21 January 16 February 3 March 29 March 21 April 27 April 20 May 28 June 27 July 31 August 17 September 12 October 1 November 18 November 14 December - - - - 28 May 18 June - - - 15 October - - Board meetings’ Attendance 20101 Alexander Abramov Otari Arshba Gennady Bogolyubov James Campbell Philippe Delaunois Alexander Frolov Olga Pokrovskaya Terry Robinson Eugene Shvidler Eugene Tenenbaum Karl Gruber Gordon Toll Meetings Attended 15 10 0 6 6 15 15 15 13 15 9 9 1 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 24.29% indirect beneficial interest in issued share capital of the Company and Mr Alexander Frolov, Chief Executive of EVRAZ Group, has a 12.14% indirect beneficial interest in issued share capital of the Company. Mr Shvidler, a non-executive director, has a beneficial interest in approximately 3.45% of the Company’s outstanding shares through Lanebrook. Witbank Nature Reserve is a conservationist centre dedicated to the threatened Rocky Highveld Grassland – once one of the world’s best examples of grassland, now a treasure trove of bird and plant life. The nature reserve, situated on the banks of the Groot Olifants River, is rich in hiking trails that traverse a wonderland of birds, game and exotic flora. The bird population, numbering 173 species, represents a bringing together of varieties indigenous to both the Middleveld and the Highveld. A breeding pair of African Fish Eagles have been detected and other interesting species include Black Eagles, Ospreys and Caspian Tern. Varieties of game include springbok, blesbok, eland, zebra, grey rhebuck and black wildebeest or gnu. Recently, kudu and impala have been introduced. Small game species include duiker and steenbok. It is estimated that almost 50 different tree species and some 150 flower varieties grace the reserve including rare ground orchids and various types of Gladioli. The Witbank Nature Reserve and the recreation resort are both situated close to the Witbank Dam. 71 AnnuAl RepoRt And Accounts 2010 Corporate governanCe BoArd ANd SeNior mANAGemeNt remuNerAtioN Mr Arshba, as a member of the Russian Parliament, is not entitled to any remuneration. In 2010, the Board of Directors’ remuneration in relation to performing the Board of Directors responsibilities approximated US$2 million. remuneration of Senior management The remuneration of EVRAZ Group’s senior management consists of: a fixed base salary according to the unified scale, with grades defined for all job categories; a variable performance-based bonus. Annual management bonuses are based on Key Performance Indicators and targets which are defined at the beginning of each year. Some of these targets and indicators may be linked to a measure of team or corporate performance, as well as individual performance, depending upon the employee’s position. Targets are reviewed by a senior management committee to ensure equity and alignment with corporate objectives. Exceptional performance against goals can result in the actual bonus exceeding 100% of the target bonus. Unsatisfactory performance in relation to any particular goal can result in no bonus being paid in respect of that goal. Bonuses are calculated and paid each calendar year following the issue of the previous year’s financial statements depending on the Company’s annual results. Total remuneration paid to the Senior Management consisted of the following: US$ million Salary Perfomance bonuses 2010 2009 9.6 4.8 14.4 7.3 2.9 10.2 2008 10.2 8.8 19.0 The CEO of EVRAZ Group is not granted any specific nonmaterial remuneration. For the purpose of this report ‘Directors’ are defined as members of the Board of Directors of EVRAZ Group S.A. listed on page 68 of this report. ‘Senior Management’ is defined as the Chief Executive Officer and certain Vice Presidents of the Group listed on pages 72-73 of this report. As the CEO of EVRAZ Group S.A. Alexander Frolov falls into both categories, his compensation as Director is included in Remuneration of the Board of Directors and his compensation as the CEO is included in Remuneration of Senior Management table. remuneration of the Board of directors 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 final 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 Alexander Frolov, as the Chief Executive Officer 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 performance-related 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 figures set out by the Board of Directors. 72 AnnuAl RepoRt And Accounts 2010 Corporate governanCe witBANK dAm incentive Plan 2010 On December 14, 2010, the Group adopted Incentive Plan under which certain senior executives (‘participants’) could be gifted 91,354 shares of the Company. Shares under the Incentive Plan 2010 are gifted to the participants upon vesting. According to the Incentive Plan, the vesting date for each tranche shall occur within 90 days after announcement of the annual results. Share ownership by the Board of directors and Senior management As of April 30, 2011, the following directors and senior managers had beneficial interests in EVRAZ shares: Directors Alexander Frolov Alexander Abramov Eugeny Shvidler Senior Managers Leonid Kachur Pavel Tatyanin Timur Yanbukhtin Total holding, Ordinary shares, % 12.14% 24.29% 3.45% 0.21% 0.02% 0.01% Witbank Dam lies a couple of kilometres east of eMalahleni (Witbank). The dam, which was established in 1971, is the largest municipal dam in the southern hemisphere and has a catchment area of more than 3,540 square kilometres. With a holding capacity of 104.6 million cubic metres it is the principal source of water for the municipality of Emalahleni. The water abstraction is by means of a pump station which is currently under upgrade. The dam also hosts various water sports including fishing, skiing, boating and windsurfing. Those in search of more adventurous activities can avail themselves of parasailing and skydiving facilities and 4x4 trails. 73 AnnuAl RepoRt And Accounts 2010 Corporate governanCe BoArd Committee rePortS Audit Committee (As of 31 January 2011) The Audit Committee’s report to the shareholders of Evraz Group S.A. encompasses the committee’s activities from the date of the last report as of 1 January 2010 to 31 December 2010. role of the Committee The Board has delegated to the committee the responsibility for oversight of EVRAZ Group’s financial and operational internal controls and the Group’s financial statements. In relation to these responsibilities the committee has: Reviewed its Board mandate and the Internal Audit Charter. (The Company’s Internal Audit Charter can be found on the Company’s website); Reviewed the form, content and integrity of the Company’s and Group’s published Annual and Interim financial statements; Reviewed the development and effectiveness of the Company’s internal controls and business risk management; Monitored and reviewed arrangements to ensure the objectivity, independence, scope and effectiveness of both the external and internal audit functions; Reviewed the terms of reference of the Group’s Risk 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 financially qualified independent non-executive director; Olga Pokrovskaya, a financially qualified non-executive director; John Heywood, a financially qualified, Board- nominated (not being a director of EVRAZ) member of the Committee. The composition of the membership of the Audit Committee is not compliant with the UK Corporate Governance Code in that Olga Pokrovskaya is not an independent non-executive director and John Heywood is not a director of the Company. The reason for this non- compliance is that the Company’s statutes limit the size of the Board and the number of independent non-executive directors. The Company has one executive director, the Chief Executive, who is connected to the major shareholder, five non-executive directors who are also connected to the major shareholder and three independent non- executive directors. If the Company was to expand the Board to ensure that independent non-executive directors accounted for at least half of the membership, excluding the Chairman, the structure of the Board would be unwieldy (Corporate Governance Code B1). To ensure that the majority of the Audit Committee’s membership is independent and has demonstrable and substantive recent and relevant financial experience, the Board invited and appointed John Heywood as an independent member of the Audit Committee. John Heywood is a past audit partner of PWC and during the latter part of his career was Chief Executive of PWC Eastern Europe until his retirement from the firm in 2006. With regard to Mr Heywood’s standing as a highly valued member of the Audit Committee, it is noteworthy that following upon his retirement from PWC, he chairs the UK Home Office Audit Committee and attends the Home Office Risk Committee meetings. In addition to the Audit Committee papers, Mr Heywood receives copies of all Board minutes and has access to all Board papers to ensure that he is properly and completely informed with regard to performance, strategy, corporate developments and other issues within the Group. Finally, the Board continues to ensure the Audit Committee’s independence through a rigorous regard of the committee’s mandate and authority. Alexey Melnikov, Head of EVRAZ’s Group internal audit, is the Audit Committee’s Secretary. report of the Committee’s Activities in 2010 Meetings and attendance: the Audit Committee held seven meetings during 2010. Olga Pokrovskaya was unable to attend the meeting held on 26 August 2010. The Group’s external auditors, Ernst and Young, the Group’s internal auditors and the Vice President, Corporate Chief Financial Officer attended all meetings. At various meetings the committee received presentations from the Head of Accounting and Controlling directorate, senior members of the Group’s finance team, the Director of Investor Relations, the Senior Vice President, International Business, Vice President, Human Resources, Vice President, the Urals division, Vice President, Mining, Vice President, Information Technologies and the Chief Financial Officer, International Assets. 74 AnnuAl RepoRt And Accounts 2010 Corporate governanCe The principal activities and issues considered during the period 1 January 2010 to 31 December 2010 were: Review of the 2009 Financial Statements, the Management Report, the preliminary results press and stock exchange release and the analysts’ presentation. Review of the external auditors’ management letter following their full year 2009 audit, together with the Company’s management response and intended action. Review of the interim financial results and the interim results statement and analysts’ business and financial presentation together with the associated presentations as with the aforementioned annual financial statements. Review of the accounting policy adopted in 2009, i.e. adoption of a revaluation model under IAS 16 ‘Property Plant and Equipment’ as of 1 January 2009. As a result of this review, comparison with the industry peer group and detailed discussion with the Group’s external auditors, the Audit Committee recommended that the Board should revert back to the cost model for the measurement of property, plant and equipment in respect of the annual accounts to 31 December 2010. In connection with the review of the 2009 full year and 2010 interim accounts, the committee carefully enquired as to all related party transactions. With the exception of raw material purchases from associate enterprises Raspadskaya (coking coal purchases) and Yuzhny GOK, a Ukraine iron ore producer in which Lanebrook holds a 46% beneficial interest but does not have management control, and the return to the Company of a fee related to the acquisition of the Ukraine Steel and Iron ore interests, a transaction approved by the independent non-executive directors. Other related party transactions were minimal. Reviewed the status of Mining Reserves and Resources statements and consequential depletion, amortisation and site restoration provisions and estimates, initiating a new ‘JORC’ valuation exercise. Reviewed internal audit reports, discussed deficiencies and agreed management action and corrective action timelines. In particular, the Audit Committee reviewed in detail the effectiveness of internal control procedures in relation to the Group’s various supply chain activities; the integrity of internal controls within the Group’s trading entities, environmental exposures and provisions and the consistency of Health and Safety statistics. Reviewed the continuing process of developing a Group IT resource and systems strategy, with particular focus on the Group’s legacy systems and disaster recovery programmes. Reviewed the Group’s risk register and made recommendations to directors as to the formalisation of a Group risk appetite metric. Review of the Group’s incidence of fraud and the In addition, the Audit Committee reviewed and discussed all the programmed internal audit reports concerned with the business and financial internal controls and processes together with agreed management remedial action and follow-up reviews. The internal audit function initiated an external review of its operations, procedures and resources in which the Audit Committee and the CEO participated. The Audit Committee reviewed the Group’s external auditor selection policy and recommended to the Board an extension of the requirement to tender for the selection and appointment of the external auditor from two years to five years. 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 firms for due diligence work in connection with acquisitions, listing documentation and 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. In instances where these limits would be exceeded, prior approval to such engagements, together with fee estimates, is required and such engagement mandates have been duly requested by management. On proper diligent enquiry the Audit Committee has generally approved such requests. In the year to 31 December 2010, the interim review and year-end audit fees totalled US$7.8 million. Accounting fees relating to Capital Market transactions totalled US$1.1 million fees for other audit related services amounted to US$33.5 thousand, while fees for other non-audit services were US$701.5 thousand. The increase in non-audit fees largely reflected advisory services in relation to the improvement of production processes and labour efficiencies at one of the Group’s mining operations. This mandate was subject to an open tender process. AuDIT COMMITTEE SElF-ASSESSMENT The Audit Committee undertook a self-assessment of its own activities and conducted assessments with the external auditors, the internal audit function and EVRAZ’s management. management activity in hand to control and reduce such future incidence. Further information regarding the Audit Committee’s activities can be found on the Company’s website. Reviewed the follow-up actions in response to matters raised via the Group’s ‘whistleblowing’ provisions. Reviewed the manpower resource and organisation of the Group’s internal audit function. 75 AnnuAl RepoRt And Accounts 2010 Corporate governanCe remuneration Committee (As of 31 December 2010) Further information regarding the remuneration policy and the Remuneration Committee’s duties and responsibilities can be found on the Company’s website: LTIP was approved by the Board in December 2010. 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: article 10 Corporate Governance Code: article 6.5 The Remuneration Committee, which usually meets before a Board meeting, always presents its conclusion to the Board for final approval. Policy Governing the Board of Directors: articles 6 and 7 Management Remuneration Policy The composition of the Remuneration Committee changed in 2010 and, as of 31 December 2010, consisted of the following members: Karl Gruber, Chairman of the Committee, Independent non-executive director; Eugene Tenenbaum, Non-executive director; Alexander Abramov, Chairman of the Board; Alexander Frolov, CEO, attends the meetings. Dmitry Melnikov, Secretary to the Board, acts as Secretary to the Committee. 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 three times in 2010. In 2010 the committee decided on the bonuses at the CEO-1 level for the year 2009 and also proposed a new long-term incentive programme (LTIP) to the Board within the following parameters. LTIP contemplates that, depending on the year-end results, participants will have the right to receive Company shares/GDRs at a fixed price subject to the following terms and conditions: (i) the total amount of LTIP 2010 shall be up to US$30 million (taking into account the average GDR price in respect of July 2010); (ii) the programme will have a three-year duration period with ‘disbursement’ payable by way of an amount equivalent to a 40% tranche in 2011 and 30% tranches in respect of 2012 and 2013 respectively (effective in each instance, upon the announcement of the annual results provided that such participant is still employed by the Company); (iii) LTIP shall not provide participants with downside protection and ‘disbursement’ will only be made in the form of GDRs; and (iv) specific terms and conditions may be subject to further adjustments taking into account the general principle that the Board of Directors of the Company may modify LTIP upon request by the CEO including (for the avoidance of doubt) a decrease in any tranche. health, Safety and environmental Committee The Health, Safety and Environmental (HSE) Committee was established on 28 July 2010 and comprises the following members: Gordon Toll, Chairman of the Committee; Terry Robinson, Independent director; Karl Gruber, Independent director. The HSE Committee monitors and reviews the Group’s health, safety and environmental policies and practices together with current and prospective regulatory issues in such areas and advises and makes recommendations to the Board of Directors accordingly. The HSE Committee meetings were essentially integrated with the meetings of the Board of Directors (held at least twice annually and more frequently as required). Some fACtS ABout eVrAZ yuzhkuzbassugol (siberia) The Osinnikovskaya coal mine, an offshoot of Yuzhkuzbassugol (EVRAZ's coal mining subsidiary) is 790 metres deep. This equates to the average depth of Lake Baikal, the world’s deepest lake situated in East Siberia. Over a period of 41 years (1969-2010) Yuzhkuzbassugol’s mines have produced 917.8 million tonnes of coal. Transportation of this amount of coal would require 15 million freight cars. 76 AnnuAl RepoRt And Accounts 2010 Corporate governanCe 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. With regard to risk management disciplines, the Group’s executives seek to ensure management awareness and appropriate risk mitigation planning and actions, defined 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 Reporting Council, and the Revised Guidance for Directors on the Combined Code-Internal Control 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, identified 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 profile and supervise the entire risk management process including response procedures. During 2010, the Risk Committee reviewed and updated the Group’s risk matrix together with related risk mitigating actions and delivered its proposals to the Board of Directors for consideration and adoption. The Committee also recommended the development of a risk appetite profile based on the Group’s Impact and Probability risk matrix. Both the risk appetite and the Probability risk matrix with mitigating actions were adopted. The Group’s executive management is charged with embedding the agreed Risk Management related internal controls and mitigating actions throughout the entirety of the Group’s business and operations and through all levels of management and supervisory personnel. Such practices serve to encourage a risk conscious business culture. During 2010 the Risk Committee reviewed plans to extend the risk management process to the entity-level during 2011-2012. While the Risk Committee has the primary responsibility for determination of the Group’s risk, the formulation of the consequential appropriate internal controls and the embedment of risk management throughout the Group, the Audit Committee has the oversight of the effectiveness and scope of the Group-wide set of risk management and internal control policies and procedures. The following core principles are applied to the identification, monitoring and management of risk throughout the organisation: Risks are identified, documented, assessed, monitored, tested and the risk profile communicated to the relevant risk management team on a regular basis; Business management and the risk management team are primarily responsible for ERM and accountable for all risks assumed in their operations; The Board is responsible for assessing the optimum balance of risk through the alignment of business strategy and risk tolerance on an enterprise-wide basis. 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). The Audit Committee has the primary oversight role of the Group’s internal control regime and has direction as to the internal audit function resources and annual audit programme thereby ensuring that the attesting of the adequateness and effectiveness of the Group’s internal controls is an ongoing process throughout the year. EVRAZ’s Head of Internal Audit has attended all the meetings of the Audit Committee and addressed any reported deficiencies in internal control as required by the Audit Committee. The Audit Committee continued to engage with executive management to monitor the effectiveness of internal control and accordingly considered certain deficiencies that had been identified in internal control together with management’s response to such deficiencies. The Audit Committee also agreed timelines for effecting the proposed corrective actions in respect of the aforementioned deficiencies. The annual internal audit programme is predominately risk-based and in 2010 incorporated particular assignments and priorities agreed by the Audit Committee. Further, the scope of the 2010 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, reflecting the developing geographic diversity of the Group’s operations. In the light of this the head office internal audit function has furthered implementation of common internal audit practices throughout the Group. During 2010 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. In 2010 the internal audit function in the Russian Federation and Ukraine passed through the external quality review. Management of the internal audit function is planning actions to respond to observations and recommendations made by the reviewer. Further information regarding the Company’s internal control processes can be found on the Company’s website. 77 AnnuAl RepoRt And Accounts 2010 Corporate governanCe Risks i) Operational a. Safety & Health Description Mitigation Hazardous production • Focus on standardisation of the processes across the b. Plant and equipment downtime Breakdown or stoppage due to improper maintenance/operation or due to economic reasons Group • Development of a critical incident response process • Establishment of HSE Board Committee • Appointment of VP of HSE • Standardisation, streamlining and automation of the production processes • Development of a critical incident response process • Improvement of operational motivation system • Training of personnel • Enhancement of equipment maintenance procedures: – Improvement of operational disciplines – Acceleration of repair schedules – Replacement of non-optimal production equipment • Introduction of specific disaster recovery and business continuity plans c. Environmental (1) Damage caused by pollution with • Compliance with regulatory requirements and d. Security and fraud ii) liquidity iii) Market Volatility a. Competitor actions b. Industry cyclicality obligation to third parties (2) Cost of removing pollutants with obligation to governments or third parties Management and/or employee fraud, illegal/unauthorised acts leading to reputation degradation or a loss of assets and/or financial losses operating permissions • Corrective and preventive internal control measures • Whistleblowing procedures • Cooperation with law enforcement authorities Failure to generate adequate liquidity to meet financial obligations/business needs • Financial planning process Gaining of competitive advantage over the Group Adverse impact of a sustained economic reversal on the Group’s business • Enhanced strategic planning • Strategic investment initiatives • A delivery focused incentive programme c. Customer relations Failure in customer service iv) Cost Competitiveness Loss of cost competitive advantage due to increased production costs • Investments in own raw material base to enhance vertical integration • Monitoring of the effectiveness of the purchasing process • Review of the maintenance and performance metrics of key production plant and equipment • Recycling of waste materials • Negotiation of transport tariffs • Development and implementation of the energy saving programme v) Human Resources a. Ineffective leadership Failure to make effective decisions due to lack of adequate communication • Improvement of communication through Defined training programmes b. Excessive headcount Excessive headcount leading to low productivity c. Industrial relations disputes Tension within labour groups • Enhancement of the corporate culture in line with the Group’s codes of conduct and ethics • Promotion of a motivated environment • Initiatives designed to reduce the cost of labour per unit of production • Personnel motivation • Lean management • Technological improvement • Reduction in lost working hours • Introduction of social programmes • Participation in industry associations • Conclusion of collective bargaining agreements with various trade unions vi) Political vii) External compliance a. Fiscal b. Reporting timelines viii) Reputation Adverse consequences from specific or general political actions • Understanding of the various national political environments Exposure to tax compliance and tax management process in multiple tax jurisdictions • Comprehensive tax registers detailing tax liabilities, timelines and tax risks • A process active management and technical review Failure to meet the deadline in providing Statutory Financial Statements and Tax reporting • Careful planning • Daily management monitoring of the actual closing process and resources availability Loss of business and trading reputation • Pro-active management of potential reputation damaging situations 78 AnnuAl RepoRt And Accounts 2010 Corporate governanCe ShAreholder iNformAtioN Share Capital major Shareholders 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 fixed 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 2010, 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 2010. 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 2010, represented 28.76% of the Company’s issued share capital. 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 beneficial interest in 66.7% of Crosland Global Limited (which represents a 24.29% indirect beneficial interest in the Company) and Mr Alexander Frolov, EVRAZ’s Chief Executive Officer and member of the Board of Directors, has a beneficial interest in 33.3% of Crosland Global Limited (which represents a 12.14% indirect beneficial interest in the Company). Crosland Global Limited has a beneficial interest in 50% of Lanebrook (which represents a 36.43% indirect beneficial interest in the Company). Mr Shvidler, a non-executive director, has a beneficial interest in approximately 3.45% of the outstanding shares of EVRAZ through Lanebrook. None of the Company’s current shareholders has voting rights which differ from those of any other holders of the Company’s shares. Shareholder Structure INSTITuTIONAl GDR HOlDERS – GEOGRAPHIC DISTRIBuTION (AS AT AuGuST 2010) Shareholder Lanebrook Limited BNY (Nominees) Limited2 Including: % of shares (as of 30 April 2011) 71.24%1 28.76%3 shares owned by Lanebrook Limited in the form of GDRs 1.63% shares underlying the stock borrow facility 5.02%4 TOTAl (145,957,121 SHARES) 100% 1 Includes one share held by TMF Corporate Services S.A., a Luxembourg independent secretary company of the Issuer 2 The Bank of New York Mellon serves as Depositary for the Company’s GDR programme 3 One share is represented by three GDRs 4 For information see Note 20 to the Financial Statements. 36% Continental Europe 32% United States 28% United Kingdom 4% Rest of the World 79 AnnuAl RepoRt And Accounts 2010 Corporate governanCe witBANK SKydiViNG CluB If you are a skydiver, you will know all about adrenaline addiction and the pull of gravity – so don't miss out on the chance of a jump during your holiday in South Africa. Skydiving is extremely popular in South Africa and there is no shortage of local clubs. The Witbank Skydiving Club, established in 1980, is situated in the Mpumalanga province of South Africa and is less than an hour's drive from Johannesburg and Pretoria. Participants are offered static line first jump courses every second Saturday and tandem jumps/accelerated free fall options every Saturday and Sunday. The club house is situated next to the Witbank Aerodrome and features a canteen, a large braai (barbecue) area and mattresses for those who wish to stay overnight. Gdr Performance in 2010 EVRAZ’s GDR price, benefiting from the global upturn in both equity and commodity market sentiment, rose steadily during the early part of the year to reach a 2010 high of US$42.72 in April. A subsequent reaction, in line with peers and the wider market, saw the GDR price touch a low of US$21.80 in early July before rallying to US$35.87 at the year end: a near 27% increase compared with 2009’s closing price of US$28.25. The strength of the GDRs, which outperformed the wider sector through 2H10, primarily reflected improved macro prospects. eVrAZ Gdr listing1 Bloomberg Ticker Reuters Ticker LSE Ticker GDR Price At Year End ($) Minimum ($) Maximum ($) EVR LI EVR-LN EVR 2010 35.87 21.80 42.72 Daily Average Volume (000s GDRs) 1,358 2009 28.25 6.40 32.15 1,061 Total Shares Outstanding1 145,957,121 Market Cap. at Year End ($ MM) 15,706.4 12,364.2 1 1 Share=3 GDRs eVrAZ Credit rating Rating Agency Type Rating as of 30-Apr-10 Moody’s LT Corp Family Rating B1/Positive Senior Unsecured Debt B2/Positive Probability of Default B1 Standard & Poor's LT Foreign Issuer Credit B+/Stable LT Local Issuer Credit B+/Stable Fitch LT Issuer Default Rating BB-/Stable Senior Unsecured Debt BB- ST Issuer Default Rating B 80 AnnuAl RepoRt And Accounts 2010 Corporate governanCe GDR PRICE ON lSE IN 2010 US$ 50 40 30 20 10 MM 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0 04(cid:31)Jan 03(cid:31)Mar 05(cid:31)May 03(cid:31)Jul 02(cid:31)Sep 30(cid:31)Oct 31(cid:31)Dec Volume GDR Price RElATIVE PRICE PERFORMANCE VS. PEERS AND INDEXES rebased to 100 US$ 200 150 100 50 04(cid:31)Jan 03(cid:31)Mar 05(cid:31)May 03(cid:31)Jul 02(cid:31)Sep 30(cid:31)Oct 31(cid:31)Dec EVRAZ BE500 Steel1 MICEX RTS Mechel Severstal NLMK 1 Bloomberg Europe Steel Index (BE500 Steel) includes all steel companies of the Bloomberg Europe 500 Index 81 AnnuAl RepoRt And Accounts 2010 Corporate governanCe Annual General meeting The Annual General Meetings are held in Luxembourg on the date set by the Articles of Association of EVRAZ Group S.A. The current date is 15 May. If the day is a legal holiday, the Annual General Meeting will be held on the 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 General Meeting as often as the Board deems necessary, and/or determined by business needs. In addition, one or more shareholders jointly holding at least five per cent of the share capital may request that a general shareholders’ meeting be convened. All resolutions were passed. The shareholders approved the Directors’ Report and the consolidated and stand-alone financial statements for the year ending 31 December 2010, the new composition of the Board of Directors, determined the level of the directors’ and the CEO’s remuneration and re-appointed Ernst & Young as EVRAZ’s external auditor. Copies of the AGM documents are available to download from the corporate website. dividend Policy The Company’s Dividend Policy can be found on the Company’s website. The Policy governing the Annual General Meeting can be found on the Company’s website. dividend information EVRAZ Group’s AGM in respect of the financial year to 31 December 2010 was held on 16 May 2011. The Company did not recommend any dividends in respect of the year to 31 December 2010. Decision on future dividends for the 1H 2011 will depend on the Company’s financial results for the 1st half of 2011. 2011 investor Calendar january 18 Publication of 4Q2010 and Full Year 2010 Operational Results january 20-21 Deutsche Bank 9th Annual Russia One-on-One Conference, London February 3-4 Troika Dialog: The Russia Forum 2011, Moscow March 31 April 15 Publication of 2010 Financial Results; Investor/Analyst Conference Call Publication of 1Q2011 Operational Results May 16-17 Citi Russia Metals and Mining Conference, Moscow May 17 Publication of 1st Interim Management Statement May 31-june 2 VTB Capital Investment Forum Russia Calling: London Session, London june 6 june 8-9 Morgan Stanley: Russia Corporate Day, Paris BCP Securities' 7th Annual Investor Conference, Moscow june 27-28 Renaissance Capital 15th Annual Investor Conference, Moscow july 15 Publication of 2Q2011 Operational Results September 7-9 Deutsche Bank Global Emerging Markets Conference, New York September 12-15 HSBC's Annual CEEMEA Investor Forum, London September 13-14 Unicredit Conference, London October 17 Publication of 3Q2011 Operational Results 82 AnnuAl RepoRt And Accounts 2010 ManageMent report Vii t n e M e g a n a M t R o p e R Responsibility stateMent of the DiRectoRs in Respect of the annual RepoRt anD the financial stateMents We confirm that to the best of our knowledge: • the consolidated financial statements of Evraz Group S.A., prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit 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 perfomance 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 Officer Evraz Group S.A. 30 March 2011 83 AnnuAl RepoRt And Accounts 2010 management report Ernst & Young Socieˆteˆ anonyme 7, rue Gabriel Lippmann Parc d'Activite Sydrall 2 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.S. Luxembourg B 47 771 TVA LU 16063074 Independent auditor's report on legal and regulatory requirements related to consolidated annual management report To the Shareholders and Board of Directors of Evraz Group S.A. 1, Alleˆe Scheffer L-2520 LUXEMBOURG Following our appointment by the General Meeting of the Shareholders dated 17 May 2010 as independent auditor of Evraz Group S.A., we have audited the consolidated financial statements of Evraz Group S.A., which comprise the consolidated statement of financial position as at 31 December 2010, 2009 and 2008, the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of changes in equity, the consolidated statements of cash flows for each year then ended, and a summary of significant accounting policies and other explanatory information, and we have verified the consistency of the accompanying consolidated annual management report for the financial year 2010 with the audited consolidated financial statements. We have issued on 30 March 2010 an unqualified audit opinion on the consolidated financial statements as at 31 December 2010. Board of Directors’ responsibility for the consolidated annual management report The Board of Directors is responsible for the preparation and fair presentation of the consolidated annual management report for the financial year 2010 in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the consolidated annual management report. Responsibility of the ‘reˆviseur d’entreprises agreˆeˆ’ Our responsibility is to verify that the consolidated annual management report for the financial year 2010 is consistent with the consolidated financial statements as at 31 December 2010. Report on other legal and regulatory requirements The accompanying consolidated annual management report for the financial year 2010, which is the responsibility of the Board of Directors, is consistent with the audited consolidated financial statements as at 31 December 2010. Ernst & Young Socieˆteˆ anonyme Cabinet de reˆvision agreˆeˆ Luxembourg, 30 March 2011 Thierry Bertrand A member firm of Ernst & Young Global limited 84 AnnuAl RepoRt And Accounts 2010 management report SeleCted CoNSolidAted fiNANCiAl iNformAtioN The selected consolidated financial information set forth below presents historical consolidated financial information and other operating information of the Issuer as of 31 December 2010, 2009 and 2008 and for the years then ended. The selected consolidated financial information has been extracted without material adjustment from, and should be read in conjunction with, the Consolidated Financial Statements. As disclosed in the Consolidated Financial Statements, certain amounts as of 31 December 2009 and for the year then ended do not correspond to the 2009 published financial statements and reflect adjustments made in connection changes in accounting policies and the completion of initial accounting for acquisition. The selected consolidated financial 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 were affected by the Issuer’s acquisitions and disposals of assets. The operating results of businesses acquired are included in Evraz’s Consolidated Financial Statements for the periods post the respective dates of acquisition. (U.S.$ million) CONSOlIDATED INCOME STATEMENT DATA Revenues Cost of revenues Gross profit Selling and distribution expenses General and administration expenses Other operating expenses Profit from operations Non-operating income and expense, net Profit before tax Income tax expense Net profit Net profit attributable to equity holders of the parent entity Net profit attributable to non-controlling interests Net income per share Weighted average number of shares outstanding Steel segment income statement data Revenues(1) Cost of revenues(1) Gross profit Selling and distribution expenses General and administration expenses Other operating expenses Profit from operations Mining segment income statement data Revenues(1) Cost of revenues(1) Gross margin Selling and distribution expenses General and administration expenses Other operating expenses Profit from operations Vanadium segment income statement data Revenues(1) Cost of revenues(1) Gross margin Selling and distribution expenses General and administration expenses Other operating expenses Profit from operations Year ended 31 December 2010 2009 2008 13,394 (10,319) 3,075 (807) (732) (206) 1,330 (635) 695 (163) 532 548 (16) 3.95 9,772 (8,124) 1,648 (626) (628) (199) 195 (533) (338) 46 (292) (295) 3 (2.19) 20,380 (13,463) 6,917 (856) (895) (1,534) 3,632 (581) 3,051 (1,192) 1,859 1,797 62 14.55 138,638,781 134,457,386 123,931,230 12,123 (10,029) 2,094 (761) (403) (98) 832 2,507 (1,569) 938 (110) (117) (98) 613 566 (501) 65 (23) (36) (16) (10) 8,978 (7,601) 1,377 (614) (351) (264) 148 1,456 (1,281) 175 (58) (93) (33) (9) 363 (368) (5) (20) (26) (1) (50) 17,925 (12,662) 5,263 (777) (472) (1,268) 2,746 3,634 (2,387) 1,247 (40) (138) (98) 971 1,206 (922) 284 (82) (33) 1 170 85 AnnuAl RepoRt And Accounts 2010 management report (U.S.$ million) Other operations income statement data Revenues(1) Cost of revenues(1) Gross margin Selling and distribution expenses General and administration expenses Other operating expenses Profit from operations CONSOlIDATED FINANCIAl POSITION DATA (at period end) Total assets Equity attributable to equity holders of the parent entity Non controlling interests Long-term debt, net of current portion CONSOlIDATED CASH FlOWS DATA Net cash flows (used in)/from operating activities Net cash flows (used in)/from investing activities Net cash flows (used in)/from financing 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 31 December 2010 2009 2008 815 (547) 268 (91) (27) (27) 123 765 (528) 237 (80) (26) (1) 130 1,022 (749) 273 (119) (44) (27) 83 17,601 16,952 19,451 5,751 247 7,097 1,662 (757) (886) 2,350 1,439 53 935 190 7,127 5,167 275 5,931 1,698 179 (2,149) 1,237 927 (12) 279 167 7,230 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. (2) Adjusted EBITDA represents profit from operations plus depreciation, depletion and amortization, impairment of assets, loss (gain) on disposal of property, plant and equipment and foreign exchange loss (gain). 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 financial performance under IFRS and it should not be considered as an alternative to net profit as a measure of operating performance or to cash flows 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 reflect the impact of financing or financing costs on Evraz’s operating performance, which can be significant and could further increase if Evraz were to incur more debt. • Adjusted EBITDA does not reflect the impact of income taxes on Evraz’s operating performance. • Adjusted EBITDA does not reflect the impact of depreciation, depletion and amortization on Evraz’s operating performance. The assets of Evraz’s businesses which are being depreciated and/or amortized will have to be replaced in the future and such depreciation and amortization expense may approximate the cost to replace these assets in the future. Adjusted EBITDA, due to the exclusion of this expense, does not reflect Evraz’s future cash requirements for these replacements. Adjusted EBITDA also does not reflect the impact of a loss on disposal of property, plant and equipment. Reconciliation of Adjusted EBITDA to profit (loss) from operations is as follows: (U.S.$ million) Consolidated Adjusted EBITDA reconciliation Profit from operations depreciation, amortization and depletion impairment of assets (gain)/loss from disposal of property, plant and equipment forex gain/losses Consolidated adjusted EBITDA Steel segment Adjusted EBITDA reconciliation Profit from operations depreciation, amortization and depletion impairment of assets (gain)/loss from disposal of PPE forex gain/losses Steel segment adjusted EBITDA Mining segment Adjusted EBITDA reconciliation Profit from operations depreciation, amortization and depletion impairment of assets (gain)/loss from disposal of PPE forex gain/losses Year ended 31 December 2010 2009 2008 1,330 925 147 52 (104) 2,350 832 558 81 33 (65) 1,439 613 282 20 18 2 195 979 180 39 (156) 1,237 148 624 184 25 (54) 927 (9) 281 (4) 12 (1) 3,632 1,195 880 37 471 6,215 2,746 751 821 11 342 4,671 971 363 56 15 (10) 86 AnnuAl RepoRt And Accounts 2010 management report (U.S.$ million) Mining segment adjusted EBITDA Vanadium segment Adjusted EBITDA reconciliation Profit from operations depreciation, amortization and depletion impairment of assets (gain)/loss from disposal of PPE forex gain/losses Vanadium segment adjusted EBITDA Other operations Adjusted EBITDA reconciliation Profit from operations depreciation, amortization and depletion impairment of assets (gain)/loss from disposal of PPE forex gain/losses Other operations adjusted EBITDA Year ended 31 December 2010 935 2009 279 2008 1,395 (10) 47 16 0 0 53 123 37 30 1 (1) 190 (50) 38 0 0 0 (12) 130 35 0 2 0 170 31 0 0 (1) 200 83 49 3 11 4 167 150 (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 financial 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 financial structure. Evraz believes Net Debt provides an accurate indicator of its ability to meet its financial obligations, represented by gross debt, from its available cash. Net Debt allows Evraz to show investors the trend in its net financial 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 financial structure in terms of sufficiency and cost of capital, level of debt, debt rating and funding cost, and whether Evraz’s financial structure is adequate to achieve its business and financial 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 financial 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: (U.S.$ million) Net debt calculation Add: Long-term loans, net of current portion Short-term loans and current portion of long-term loans Less: Short-term bank deposits Cash and cash equivalents Net Debt Year ended 31 December 2010 2009 2008 7,097 714 (1) (683) 7,127 5,931 1,992 (22) (671) 7,230 6,064 3,922 (25) (930) 9,031 87 AnnuAl RepoRt And Accounts 2010 management report mANAGemeNt’S diSCuSSioN ANd ANAlySiS of fiNANCiAl CoNditioN ANd reSultS of oPerAtioNS The following discussion and analysis of Evraz’s financial condition and results of operations is based on the Consolidated Financial Statements prepared in accordance with IFRS as adopted by the European Union. This discussion should be read in conjunction with the information in ‘Selected Consolidated Financial Information’, ‘Presentation of Financial and Other Information,’ the Consolidated Financial Statements and the notes thereto appearing elsewhere in this Prospectus. This discussion and analysis contains forward looking statements that involve risks and uncertainties. Evraz’s actual results could differ materially from those expressed or implied in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Prospectus, particularly under the headings ‘Risk Factors’ and ‘Forward Looking Statements’. overview Evraz is a vertically integrated steel, mining and vanadium business with operations in Russia, Ukraine, the United States, Canada, South Africa, the Czech Republic and Italy. Evraz produced approximately 15.3 million tons and 16.3 million tons of crude steel in 2009 and 2010, respectively. Management believes that in 2010 Evraz was the largest steelmaker by crude steel volume in Russia, and, according to Metal Expert, Evraz was the largest manufacturer of ‘long products’ (include beams, rebars and rails) for the construction and railway industries in Russian and the CIS in 2010, by volume. According to Steel Business Briefing, Evraz was the 20th largest steel producer in the world by crude steel volume in 2010. Evraz also produces significant quantities of iron ore and coking coal. Most of Evraz’s iron ore and coking coal products are used in its steel making operations. Evraz produced 13.5 thousand tons of ferrovanadium and other finished vanadium products in 2010 as compared to 8.0 thousand tons in 2009. Evraz’s principal assets as of the date of this Prospectus are: • Nine integrated steel production facilities: NTMK, located in Russia’s Nizhny Tagil, in the Sverdlovsk region, is one of the largest integrated steel production mills in Russia as of 31 December 2010 and a producer of vanadium slag; ZapSib, located near Novokuznetsk, in the Kemerovo region, is the largest steel mill in Siberia and the eastern-most integrated steel mill in Russia as of 31 December 2010; NKMK, located in Novokuznetsk in the Kemerovo region, is one of the five largest rail producers in the world as of 31 December 2010; Evraz Vitkovice Steel, located in the Czech Republic, is a leading manufacturer of rolled steel products; Evraz Palini is a steel rolling mill located in Italy; EINA located in the United States, is one of the most diversified steel manufacturing companies in North America; EICA, located in Canada, produces steel pipes and plates; Evraz DMZP, located in Dnepropetrovsk, Ukraine, is an integrated steel mill specializing in the manufacture and sale of billets and construction rolled products; and Evraz Highveld, located in the South Africa, is a producer of steel and vanadium slag. • Four iron ore mining and processing facilities: KGOK, located in the Sverdlovsk region near NTMK; VGOK, located in the Sverdlovsk region near NTMK; Evrazruda, which operates mines in Kemerovo region near ZapSib and NKMK, the Republic of Khakassia and south Krasnoyarsk Krai; and Sukha Balka in Ukraine. • One coal mining company: Yuzhkuzbassugol, located in the Kemerevo region, near ZapSib and NKMK. • Three vanadium production facilities: Stratcor is headquartered in the United States and has operations in the United States and the South Africa; Nikom, a ferrovanadium producer located in the Czech Republic; and Vanady-Tula located in Russia. • Various trading and logistical assets, including Nakhodka Trade Sea Port, one of the largest ports in the Russian Far East as of 31 December 2010 and through which Evraz ships most of its exports and Evraztrans, which owns and operates rail cars in Russia for Evraz. In Russia, Inprom Group (with 35 steel service centers) and EvrazMetall (with 27 metal service centers) finishes and distributes steel products produced mostly by Evraz. Evraz also effectively owns a 40% equity interest in a coking coal producer Raspadskaya through Evraz’s joint venture Corber Enterprises Limited. For additional information on Raspadskaya, please see ‘Business—Mining Business—Raspadskaya’). Evraz listed global depositary receipts (‘GDRs’), on the Official List of the London Stock Exchange on 2 June 2005. Each GDR represents an interest of one-third of one share. Since then the total number of GDRs listed on the LSE increased to 29% of the Issuer’s issued share capital as of 31 March 2011. Business Structure Segments Evraz’s business is divided into four principal segments for IFRS purposes: • the steel production segment, comprising the production and sale of semi-finished and finished 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 logistics (including Nakhodka Trade Sea Port) and supporting activities. 88 AnnuAl RepoRt And Accounts 2010 management report inter-segment Sales Evraz is a vertically integrated steel and mining group. In 2010, Evraz’s mining segment supplied approximately 71% and 51% of Evraz’s steel segment’s total iron ore and coking coal requirements, respectively. The coking coal supply figures include purchases from Raspadskaya. In turn, Evraz’s steel segment supplies grinding balls, mining uprights and coke to Evraz’s mining segment for use in its operations. The objective of Evraz’s vertical integration is not, however, to only use raw materials produced by its subsidiaries. On the contrary, Evraz takes a commercial approach to sourcing its raw materials, and will buy and sell iron ore and coal to third parties depending on a number of factors, including pricing, grade and quality of coal and geographic proximity of raw materials to Evraz’s facilities. Evraz’s inter segment product sales are at arm’s length, and are based on prices equivalent to those that could be commanded from unrelated third parties. Inter-segment transactions are included in the presentation of respective segments. Acquisitions and disposals Evraz has sought to develop an integrated steel and mining business through the purchase of assets that it believes offer significant value creation potential, particularly in the light of Evraz’s implementation of improved working practices and operational methods. Evraz has also, from time to time, disposed of certain assets. See ‘Business—Acquisitions’ and ‘Business—Greenfield Projects’ and ‘Business—Disposals’. The only material acquisitions during the years under review were the acquisition of the entities now referred to as Evraz Claymont Steel, IPSCO Canada, Inprom, Vanady-Tula and Evraz Metall. Significant factors Affecting results of operations General economic Condition Beginning in 2008 and continuing into 2009, the global economy experienced a significant downturn, the effects of which continued to some degree into 2010. According to the IMF, global GDP decreased by 0.8% in 2009 compared to 2008. According to Rosstat, Russian GDP fell by 7.9% from 2008 to 2009, total investments decreased by 16.2% and industrial production fell by 9.3%. This pronounced contraction in industrial activity had a significant impact on both pricing and demand for steel products and iron ore and coal. This in turn had a significant negative impact on Evraz’s financial results for the fourth quarter of 2008 and the year ended 31 December 2009. Evraz 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 such as North America, Europe and South Africa. The second half of 2009 and 2010 was characterized by a number of positive developments in the global economy, as key emerging and developing economies demonstrated a strong demand for raw materials, supported by government stimulus initiatives. This was coupled with general restocking in the steel market and growth of consumption in the U.S. market. Volume and pricing Evraz’s revenue is dependent to a significant extent on pricing and volume of its products. Factors that can impact volume and pricing include (i) levels of global demand for steel products in the construction and other industries, (ii) competition, including from other regional and global steel producers and mining companies, (iii) Evraz’s capacity to handle increased demand for products given facility production capabilities, and (iv) volume of excess product in the market. Evraz’s Russian steelmaking operations have been running at full capacity since 1 July 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 Evraz’s EBITDA margin from 10% in the first half of 2009 to 15% in the second half of 2009. 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 first and fourth quarters of the financial year reflecting 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 first and second quarters of the year. foreign exchange The volatility of local currencies against the U.S. dollar contributed to a general increase in costs in 2010 as compared to 2009, and a general decrease in cost in 2009 as compared to 2008. The table below shows the movements in the average exchange rates of currencies relevant to Evraz’s subsidiaries against the U.S. dollar between 2010 and 2009, and between 2009 and 2008: Currency Rouble Czech Koruna Euro South African Rand Ukrainian Hryvnia Canadian Dollar % Change 2010 vs. 2009 2009 vs. 2008 Operations 4% 0% (5)% 15% (2)% 11% (22)% (10)% (5)% (2)% (32)% (2)% Russian operations Evraz Vitkovice Steel Evraz Palini e Bertoli Evraz Highveld Steel and Vanadium Ukrainian operations Evraz Inc. N.A. Canada 89 AnnuAl RepoRt And Accounts 2010 management report Cost factors Evraz’s business requires large amounts of raw materials, fuel and energy. Evraz purchases these inputs from third party providers and subsidiaries. As a result, Evraz’s operations and results of operations can be impacted by volatility in the costs of, and availability of, these raw material, fuel and energy inputs. In addition, as of 31 December 2010, Evraz employed a total of 110,231 employees. As a result of the large number of employees, staff costs have a significant impact on Evraz’s results of operations. Acquisitions and disposals Evraz’s operating results were affected by the Issuer’s acquisitions and disposals of assets. The operating results of businesses acquired are included in the Consolidated Financial Statements for the periods post the respective dates of acquisition. See, notes 4 and 12 of the Consolidated Financial Statements. Critical Accounting Policies The preparation of financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of equity, assets and liabilities, revenue and expenses. The estimates and underlying assumptions are based on historical experience, available information, future expectations and other factors and assumptions that Evraz considers to be reasonable under the circumstances. Actual results may differ from these estimates. See note 2 to the Consolidated Financial Statements. results of operations for the years ended 31 december 2010, 2009 and 2008 The following table sets out Evraz’s consolidated income statement data for the years ended 31 December 2010, 2009 and 2008. (U.S.$ million) Income statement data Revenue(1) Cost of revenue Gross profit Selling and distribution costs General and administrative expenses Other operating income and expenses, net Profit from operations Non-operating income and expenses, net Profit/(loss) before tax Income tax expense NET PROFIT/(lOSS) Net profit attributable to equity holders of the parent entity Net profit attributable to minority interests Year ended 31 December 2010 2009 2008 Amount Percentage of revenue Amount Percentage of revenue Amount Percentage of revenue 13,394 (10,319) 3,075 (807) (732) (206) 1,330 (635) 695 (163) 532 548 (16) 100.0% (77.0)% 23.0% (6.0)% (5.5)% (1.5)% 9.9% (4.7)% 5.2% (1.2)% 4.0% 4.1% (0.1)% 9,772 (8,124) 1,648 (626) (628) (199) 195 (533) (338) 46 (292) (295) 3 100.0% (83.1)% 16.9% 6.4% (6.4)% (2.0)% 2.0% (5.5)% (3.5)% 0.5% (3.0)% (3.0)% 0.0% 20,380 (13,463) 6,917 (856) (895) (1,534) 3,632 (581) 3,051 (1,192) 1,859 1,797 62 100.0% (66.1)% 33.9% (4.2)% (4.4)% (7.5)% 17.8% (2.9)% 15.0% (5.8)% 9.1% 8.8% 0.3% Note: (1) Includes service revenue of U.S.$250 million, U.S.$267 million and U.S.$390 million for the years ended 31 December, 2010, 2009 and 2008 respectively. Sales of services consist primarily of heat and electricity supply, port charges, transportation and steel coating. In the years ended 31 December 2010, 2009 and 2008, transactions with related parties accounted for approximately 0.3%, 0.3% and 0.4%, respectively, of Evraz’s revenue. In addition, Evraz made purchases from associates (coal from Raspadskaya and iron ore from Yuzhny GOK). See ‘Related Party Transactions’ and note 16 to the Consolidated Financial Statements. revenue Evraz’s consolidated revenue in 2010 totaled U.S.$13,394 million, a 37.1% increase compared to revenue of U.S.$9,772 million in 2009. Increases in both volumes and prices contributed to this revenue growth. Volume increases accounted for U.S.$2,266 or approximately 63% of this revenue growth, while price increases accounted for U.S.$1,356 or approximately 37% of this revenue growth. The steel segment accounted for the majority of the increase in revenue due to higher average prices and sales volumes of steel products. Evraz’s sales volumes of steel products to external customers increased by 8.4%, from 14.3 million tons in 2009 to 15.5 million tons in 2010. The increase in volumes in 2010 compared to 2009 primarily reflected the growth in demand for construction products in Russia, with Evraz’s sales on the Russian market up by 1.4 million tons. Sales volumes in Ukraine remained flat, while the increase on the Russian market was partially offset by a decrease in export sales volumes from Evraz’s Russian and Ukrainian operations, which decreased by 1.1 million tons 90 AnnuAl RepoRt And Accounts 2010 management report as compared to 2009. This decrease in export sales partially reflects Evraz’s strategy to direct sales away from export markets where prices for its steel products were generally lower during the period under review, and to direct sales to domestic CIS markets, where prices for steel products where higher than in export markets. Sales volumes of Evraz’s European and North American operations increased by 0.3 million tons and 0.6 million tons respectively, while steel sales volumes of Evraz’s South African operations remained flat during the period under review. Evraz’s consolidated revenue in 2009 totaled U.S.$9,772 million, a 52.1% decrease compared to revenue of U.S.$20,380 million in 2008. The decrease in steel segment revenue was largely due to a decrease in steel segment sales, which was itself due to the lower average prices and sales volumes of steel products. Evraz’s sales volumes of steel products to third parties decreased by 15.9%, from 17.0 million tons in 2008 to 14.3 million tons in 2009. The decrease in steel sales volumes in 2009 primarily reflected a decrease in demand for construction products in Russia. Evraz’s sales on the Russian market decreased by 2.4 million tons from 2008 to 2009. 1.4 million tons of this decrease in consolidated steel volumes was attributable to construction products. Sales volumes in Ukraine decreased by 0.1 million tons compared to 2008. These decreases in domestic markets were partially offset by the growth of export sales volumes from Evraz’s Russian and Ukrainian operations, which showed a total increase of 0.8 million tons from 2008 to 2009. Sales volumes of Evraz’s European and South African operations decreased by 0.3 million tons and 0.1 million tons, respectively, compared to 2008. Evraz’s Canadian operations, which were acquired in June 2008, achieved approximately the same steel sales volumes in 2009 as in 2008 post acquisition, while sales at Evraz’s U.S. operations decreased by 0.6 million tons, compared to 2008. These decreases were a direct result of the general slowdown experienced by steel markets in 2009 and related cuts in production volumes. The following table shows the average price trends of Evraz’s principal products in 2010, 2009 and 2008 (encompassing semi-annual breakdowns of both the Russian and non-CIS export markets): (U.S.$ per ton, except percentages) 2nd half 1st half 2nd half 1st half 2nd half 1st half Average Russian and CIS prices for Evraz’s Russian and Ukrainian products(1) Year ended 31 December 2010 2009 2008 Income statement data Rebars H-Beams Channels Angles Wire rods Wire Railway products Rails Wheels Flat-rolled products Plates Semi-finished products Slabs Pig Iron Pipe blanks Other steel products Grinding balls Rounds Construction products H-beams Rebars Wire rods Semi-finished products Billets Slabs Pig Iron Flat-rolled products Plates Construction products 618 890 671 636 573 664 556 829 626 594 524 608 442 750 545 503 432 533 371 700 502 450 362 440 637 1,241 599 1,175 554 1,164 519 1,099 869 1,328 1,021 1,000 963 971 802 1,570 630 493 399 579 778 648 611 572 558 546 579 391 725 601 446 392 569 676 574 511 394 271 451 598 438 445 1,050 301 245 409 559 384 972 739 1,109 1,210 951 Average prices for Evraz’s non—CIS operations products(2) 531 519 521 487 488 – 633 490 481 475 414 399 334 683 423 432 393 344 382 275 680 516 851 367 486 893 341 769 Average prices for Evraz’s non—CIS operations products(3) 810 1,155 903 831 804 885 775 1,635 888 721 522 733 854 789 735 606 686 701 660 492 725 South African operations – H-beams 788 797 Flat-rolled products European operations – plates North American operations – commodity plates North American operations – speciality plates South African operations – commodity plates Tubular products 800 829 1,185 893 684 801 1,074 788 723 576 657 915 799 673 1,113 961 680 638 1,059 797 1,315 1,426 1,848 1,154 1,121 1,010 1,782 863 North American operations – large diameter pipes 1,361 1,264 1,248 1,589 1,799 1,450 91 AnnuAl RepoRt And Accounts 2010 management report Notes: (1) Prices for sales denominated in Roubles and Ukrainian Hryvnia are converted into U.S. dollars at the average monthly exchange rate to the U.S. dollar as stated by the CBR and National Bank of Ukraine. Average U.S. dollar prices are calculated as a weighted average of sales prices in the relevant half-year 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 U.S. dollars at the average exchange rate to the U.S. dollar for the period under consideration as stated by the relevant Central bank. The following table presents Evraz’s consolidated revenue by segment for 2010, 2009 and 2008: (U.S.$ million, except percentages) REVENuE BY SEGMENT Steel segment To third parties To mining segment To vanadium segment To other operations TOTAl STEEl SEGMENT Mining segment To third parties To steel segment To other operations TOTAl MINING SEGMENT Vanadium segment To third parties To steel segment TOTAl VANADIuM SEGMENT Other operations To third parties To steel segment To mining segment TOTAl OTHER OPERATIONS Eliminations CONSOlIDATED REVENuE % from steel segment % from mining segment % from vanadium segment % from other operations Year ended 31 December 2010 2009 2008 11,976 8,855 17,623 123 1 23 83 – 40 178 28 96 12,123 8,978 17,925 736 1,747 24 2,507 536 30 566 146 499 170 815 (2,617) 13,394 89.4% 5.5% 4.0% 1.1% 435 1,017 4 1,456 354 9 363 128 508 129 765 (1,790) 9,772 90.6% 4.5% 3.6% 1.3% 1,290 2,340 4 3,634 1,201 5 1,206 266 588 168 1,022 (3,407) 20,380 86.5% 6.3% 5.9% 1.3% The following table presents the geographic breakdown of Evraz’s consolidated revenue in 2010, 2009 and 2008 (based on location of customer) in absolute terms and as a percentage of total revenue. (U.S.$ million, except percentages) Russia Americas Asia Europe CIS Africa Rest of the World TOTAl 2010 4,692 3,163 2,671 1,419 962 484 3 13,394 % of total 35.0% 23.6% 20.0% 10.6% 7.2% 3.6% 0.02% 100% Year ended 31 December 2009 2,950 2,428 2,423 1,028 543 381 19 % of total 30.2% 24.8% 24.8% 10.5% 5.6% 3.9% 0.2% 2008 7,575 4,538 3,217 2,862 1,429 720 39 9,772 100% 20,380 % of total 37.2% 22.3% 15.8% 14.0% 7.0% 3.5% 0.2% 100% Revenue from sales in Russia increased both in absolute terms and as a proportion of total revenue in 2010 as compared to 2009. The principal driver of the higher proportion of revenue from within Russia was the revival of demand for construction products on the Russian market following the reversal in 2009. Revenue from sales in Russia decreased both in absolute terms and as a proportion of total revenue in 2009 as compared to 2008. The principal driver of the higher proportion of revenue outside Russia was the re-orientation of sales of the Russian operations to export markets in view of weak demand on the domestic market. Revenue from sales in the Americas both in absolute terms and decreased slightly as a proportion of total revenue in 2010 as compared to 2009. The principal driver of the lower proportion of revenue from the Americas was the fact that average steel prices in North America increased by only 2%, while Evraz’s average steel prices across all regions increased by 27%. Revenue from sales in the Americas decreased in absolute terms, but increased as a proportion of total revenue in 2009 as compared to 2008. Sales in the Americas accounted for a larger portion of total revenue during the period under review because, even though prices in the Americas decreased by 30% in 2009, they did not decrease as much as prices in other regions, in particular as compared to the Russian market for tubular products. 92 AnnuAl RepoRt And Accounts 2010 management report Revenue from sales in Asia increased in absolute terms, but decreased as a proportion of total revenue in 2010 as compared to 2009. Revenue increased in absolute terms because steel prices increased in 2010 as compared to 2009. The principal driver of the lower proportion of revenue from Asia was decreased exports of semi-finished products from Russia. Revenue from sales in Asia decreased in absolute terms, but increased as a proportion of total revenue in 2009 as compared to 2008. Revenue decreased in absolute terms because steel prices increased in 2009 as compared to 2008. The principal driver of the higher proportion of revenue inside Asia was increased exports of semi-finished products from Russia. Revenue from sales in Europe remained largely constant as a proportion of total revenue in 2010 as compared to 2009. Revenue from sales in Europe decreased both in absolute terms and as a proportion of total revenue in 2009 as compared to 2008. The principal drivers of the lower proportion of revenue inside Europe were decreases in steel volumes of 64% and steel prices of 42%. In 2009, there were decreases in both prices and volumes in the flat products market as well. Revenue from sales in the CIS increased both in absolute terms as a proportion of total revenue in 2010 as compared to 2009. The principal drivers of the higher proportion of revenue from the CIS in 2010 were a 36% increase in steel volumes as well as a 29% increase in average steel prices. Furthermore, the higher proportion of revenue from inside the CIS was principally driven by sales of construction products. Revenue from sales in the CIS decreased both in absolute terms as a proportion of total revenue in 2009 as compared to 2008. The principal drivers of the lower proportion of revenue from the CIS in 2009 were a 46% decrease in steel prices of and decreases in the sales of mining products. STEEl SEGMENT Steel segment revenue increased by 35.0% to U.S.$12,123 million in 2010 as compared to U.S.$8,978 million in 2009. Steel segment revenue was affected by increasing prices for steel products and higher sales volumes during 2010, as described above. Steel segment revenue decreased by 49.9% to U.S.$8,978 million in 2009 compared to U.S.$17,925 million in 2008. Steel segment revenue was affected by decreasing prices for steel products and lower sales volumes during 2009, as described above. The following table presents Evraz’s steel segment sales by major product groups (including intersegment sales) in 2010, 2009 and 2008. (U.S.$ million, except percentages) Construction products(1) Railway products(3) Flat-rolled products(2) Tubular products(4) Semi-finished products(5) Other steel products(6) Other products(7) TOTAl Year ended 31 December 2010 2009 2008 Steel segment sales Percentage of total Steel segment sales Percentage of total Steel segment sales Percentage of total 3,337 1,472 2,007 1,309 2,340 411 1,247 12,123 27.5% 12.1% 16.6% 10.8% 19.3% 3.4% 10.3% 100% 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% 4,588 2,220 3,219 1,861 3,511 560 1,966 17,925 25.6% 12.4% 18.0% 10.4% 19.6% 3.1% 11.0% 100% Notes: (1) (2) (3) (4) (5) (6) (7) Includes rebars, wire rods, wire, H-beams, channels and angles. Includes plates and coils. Includes rails and wheels. Includes large diameter, ERW and seamless pipes and casing and tubing Includes billets, slabs, pig iron, pipe blanks and blooms. Includes rounds, grinding balls, mine uprights and strips. Includes coke and coking products, refractory products, ferroalloys and resale of coking coal. The proportion of revenue attributable to sales of construction products increased in 2010 as compared to 2009 as the result of increased sales volumes and prices of construction products in Russia. The proportion of revenue attributable to sales of construction products decreased in 2009 as compared to 2008 as the result of a decrease in sales volumes of construction products in Russia. The proportion of revenue attributable to sales of railway products decreased slightly in 2010 as compared to 2009 despite an increase in volumes. Management believes that this result is due to increasing price stability in railway products, in particular prices of rails in Russia, which appear to be less affected by fluctuations in the price of steel than in previous periods. The proportion of revenue attributable to sales of railway products was unchanged in 2009 as compared to 2008 despite a decrease in the proportion of volumes attributable to railway products. This was due to the fact that prices of railway products decreased less than prices of other steel products. In 2010, Evraz signed an agreement with Russian Railways that linked the prices for Evraz’s rails supplied to Russian Railways to the market prices of scrap metal. This agreement had the effect of protecting Evraz’s margin. The proportion of revenue attributable to sales of flat-rolled products (primarily plates) increased in 2010 as compared to 2009 due to the growth in sales volumes of Evraz’s North American and European operations. The proportion of revenue attributable to sales of flat-rolled products (primarily plates) decreased in 2009 as compared to 2008 due to an above average decrease in sales volumes compared to other steel products, particularly in Europe. The proportion of revenue attributable to sales of tubular products decreased in 2010 as compared to 2009 despite an increase in volumes. This decrease was largely due to lower average prices for large diameter pipes, ERW pipes and casing and tubing. The proportion of revenue 93 AnnuAl RepoRt And Accounts 2010 ManageMent report attributable to sales of tubular products increased in 2009 as compared to 2008 due to the fact that prices for tubular products in North America were relatively stable at the end of 2008 and the beginning of 2009, therefore limiting the average price decrease in 2009 as compared to the price decrease of other steel products during the same period. The proportion of revenue attributable to sales of semi-finished products decreased in 2010 as compared to 2009 due to a decrease in sales volumes of semi-finished products sold by Evraz’s Russian and Ukrainian operations to export markets as well as to higher volumes of slab re-rolled at Evraz’s European and North American operations (an increase of approximately 0.7 million tons in 2010 as compared to 2009). The proportion of revenue attributable to sales of semi-finished products increased in 2009 as compared to 2008 due to higher sales volumes of semi-finished products sold by Evraz’s Russian and Ukrainian operations to export markets. Revenue from sales of other steel products (mainly rounds, grinding balls and mine uprights sold in Russia) increased in 2010 as compared to 2009 as a proportion of steel segment revenue due to an increase in sales volumes and prices. Revenue from sales of other steel products decreased slightly in 2009 as compared to 2008 as a proportion of steel segment revenue due to a decrease in sales volumes. Revenue attributable to non-steel sales decreased slightly as a proportion of total sales in 2010 as compared to 2009 due to the relative stability of volumes compared to steel products. Revenue attributable to non-steel sales increased in 2009 as compared to 2008 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 totaled U.S.$123 million in 2010 compared to U.S.$83 million in 2009. The increase is attributable to higher sales prices. The fall in steel segment sales to Evraz’s mining segment from U.S.$178 million in 2008 to U.S.$83 million in 2009 reflected lower sales prices and reduced volumes. Revenue from sales in Russia amounted to 35% of Evraz’s steel segment revenue in 2010, compared to approximately 30% in 2009. The increased share of revenue from sales in Russia is primarily attributable to the reallocation of steel volumes from Asian export markets to the Russian market in 2010. Revenue from sales in Russia amounted to approximately 30% of steel segment revenue in 2009, compared to 39% in 2008. The decreased share of revenue from sales in Russia is primarily due to the reallocation of steel volumes from the Russian market to Asian export markets in 2009. Mining SegMent Evraz’s mining segment revenue increased by 72.2% to U.S.$2,507 million in 2010 as compared with U.S.$1,456 million in 2009. This reflected significant growth in the prices of iron ore and coking coal in 2010 as compared to 2009. Total sales volumes of Evraz’s mining segment in 2010 as compared to 2009 remained unchanged in respect of iron ore products and decreased by 18.7% in respect of coal products. In particular, ‘nominal’ sales volumes of coking coal decreased by 9.2% due to the processing of a higher proportion of raw coking coal into coking coal concentrate by Evraz’s mining segment, which was subsequently sold at higher prices. During the period under review, Evraz had a raw coal to concentrate yield of approximately 0.6 tn/tn. The decrease, in respect of total coal product sold, during the period under review reflects the fact that YuKU sold more concentrate in 2010 and less raw coal, which impacted the total tons sold, even though, in terms of concentrate, tons sold for the period remained constant. Sales volumes of steam coal decreased by 37.9% due to lower volumes of raw steam coal mined as some steal coal producers were not operating in 2010. Mining segment revenue fell by 59.9% to U.S.$1,456 million in 2009 as compared to U.S.$3,634 million in 2008. This primarily reflected the lower average prices of iron ore and coal in 2009 as compared to 2008 as well as a decrease in production of iron ore. Sales volumes of iron ore products decreased by 22.1% in 2009 as compared to 2008. Excluding the effect of the resale of iron ore products from Yuzhny GOK (a related party) in 2008, the decline in sales volumes of iron ore in 2009 was only 8.8% as compared to the previous year as some steam coal producers were not operating during the period. Sales volumes of steam coal products decreased by 8.2% in 2009 as compared to 2008, while sales volumes of coking coal increased by 3.7%. The following table presents Evraz’s mining segment sales in 2010, 2009 and 2008: (U.S.$ million, except percentages) iron ore products Iron ore concentrate Sinter Pellets Other Coal products Raw coking coal Coking coal concentrate Raw steam coal Steam coal concentrate Other revenue tOtAL Year ended 31 December 2010 2009 2008 Mining segment sales 1,525 516 369 521 119 901 161 622 107 11 80 2,506 Percentage of total Mining segment sales Percentage of total 60.8% 20.6% 14.7% 20.8% 4.8% 35.9% 6.4% 24.8% 4.3% 0.4% 3.2% 100% 824 311 202 238 73 562 137 268 124 33 70 1,456 56.6% 21.3% 13.9% 16.4% 5.0% 38.6% 9.4% 18.4% 8.5% 2.3% 4.8% 100% Mining segment sales 2,213 625 885 566 137 1,251 259 719 265 8 170 3,634 Percentage of total 60.9% 17.2% 24.3% 15.6% 3.8% 34.4% 7.1% 19.8% 7.3% 0.2% 4.7% 100% 94 AnnuAl RepoRt And Accounts 2010 management report The following table shows the average price trends of the mining segment’s iron ore products in 2010, 2009 and 2008 with half-yearly breakdowns: (U.S.$ million, except percentages) 2nd half 1st half 2nd half 1st half 2nd half 1st half Average prices for Evraz’s mining segment products(1) Year ended 31 December 2010 2009 2008 Iron ore products Concentrate Sinter Pellets Coal products Raw coking coal Coking coal concentrate Raw steam coal Steam coal concentrate 89 109 114 78 142 47 59 88 78 77 60 126 48 81 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 Note: (1) Prices for sales denominated in Roubles and Hryvnia are converted into U.S. dollars at the average semi-annual exchange rate of the Rouble and Hryvnia to the U.S. dollar as stated by the CBR and the National Bank of Ukraine respectively. Evraz also holds an effective 40% equity interest in the Raspadskaya coking coal producer. Revenue attributable to Raspadskaya is therefore not consolidated in the Consolidated Financial Statements and Evraz’s share of its net profits is accounted for as ‘Share of profits (losses) of joint ventures and associates’ See ‘ – Non-operating income and expense’. Mining segment sales to the steel segment amounted to U.S.$1,747 million (69.7% of mining segment sales) in 2010 compared to U.S.$1,017 million (69.8% of mining segment sales) in 2009 and U.S.$2,340 million (64.4% of mining segment sales) in 2008. Approximately 71% of Evraz’s iron ore requirements were met by Evraz’s mining segment in 2010 as compared to 77% in 2009 and 73% in 2008. Around 51% of Evraz’s coking coal requirements were satisfied by supplies from Raspadskaya and YuKU in 2010, as compared to 58% in 2009 and 55% in 2008. Approximately 50% of Evraz’s external sales by Evraz’s mining segment in 2010 were to customers in Russia, as compared to 53% in 2009. The increase in the share of third party sales outside Russia is largely attributable to the growth in export sales of mining products from YuKU and KGOK to Asia. Approximately 53% of external sales by Evraz’s mining segment in 2009 were to customers in Russia compared to 28% in 2008. The higher share of third party sales outside Russia in 2008 was primarily attributable to the resale of iron ore from YuKU to export markets. There were no such resales in 2009. Vanadium Segment Vanadium segment revenue increased by 55.9% to U.S.$566 million in 2010 as compared to U.S.$363 million in 2009. This reflected significantly higher sales volumes and prices in respect of vanadium products in 2010 compared to 2009. Sales volumes increased from 18.4 thousand tons of pure vanadium content in 2009 to 20.6 thousand tons of pure vanadium content in 2010. Following the acquisition of Vanady- Tula in November 2009, revenue from sales of vanadium slag in 2010 were reduced to less than 7% of vanadium segment revenue. Part of the reported slag sold to external customers was purchased back in the form of oxides for further processing within the Group and subsequent sale as finished products. This sale and repurchase is because Evraz’s own processing facilities have been fully utilized. Therefore, Evraz processes part of the slag in China selling slag to Chinese counterparties and purchasing back oxides at market prices. The repurchase had the effect of increasing vanadium sales volumes. Vanadium segment revenue fell by 69.9% from U.S.$1,206 million in 2008 to U.S.$363 million in 2009. This reflected lower prices and sales volumes in respect of vanadium products in 2009 as compared to 2008. Sales volumes of Evraz’s vanadium segment decreased from 26.4 thousand tons of pure vanadium in 2008 to 18.4 thousand tons of pure vanadium in 2009. The following table presents Evraz’s vanadium segment sales in 2010, 2009 and 2008: (U.S.$ million, except percentages) Vanadium in slag Vanadium in alloys and chemicals Other revenue TOTAl Year ended 31 December 2010 2009 2008 Vanadium segment sales Percentage of total Vanadium segment sales Percentage of total Vanadium segment sales Percentage of total 39 516 11 566 6.9% 91.2% 1.9% 100% 60 298 5 363 16.5% 82.1% 1.4% 100% 290 913 3 1,206 24.0% 75.7% 0.3% 100% 95 AnnuAl RepoRt And Accounts 2010 management report The following table presents the average price trends of Evraz’s vanadium products from 2009 through 2010 (encompassing half-yearly breakdowns): (U.S.$ per ton of pure vanadium in the products, except percentages) 2010 2009 2008 2nd half 1st half 2nd half 1st half 2nd half 1st half Year ended 31 December NTMK—Vanadium in slag Evraz Highveld—Vanadium in alloys Stratcor—Vanadium in alloys EMSA—Vanadium in alloys Average prices for Evraz’s vanadium products(1),(2) 15,331 30,583 46,268 29,064 16,620 27,804 29,827 26,788 10,919 26,282 28,072 23,292 6,836 22,501 28,979 19,711 25,152 57,167 53,359 56,734 31,771 55,026 54,550 63,216 Notes: (1) Prices for sales denominated in Roubles are converted into U.S. dollars at the average monthly exchange rate to the U.S. dollar as stated by the CBR. Average U.S. dollar prices are calculated as a weighted average of sales prices in the relevant half-year period. (2) Prices for sales denominated in South African Rands are converted into U.S. dollars at the average exchange rate to the U.S. dollar for the period under consideration as stated by the South African Reserve Bank. OTHER OPERATIONS Evraz’s revenue in respect of its other operations segment increased by 6.5% to U.S.$815 million in 2010 as compared to U.S.$765 million in 2009. This increase was in large part driven by increases in freight prices and Evraztrans’ activities. Evraz’s revenue in respect of its other operations segment decreased by 25.1% to U.S.$765 million in 2009 as compared to U.S.$1,022 million in 2008. Other operations are mostly oriented to service Evraz’s business. Therefore, the decrease was largely attributable to low activity levels, with prices for those services being more stable than steel prices. One exception is sea freight services by Sinano as freight prices also declined significantly. Revenue in respect of Evraz’s other operations segment was largely derived from the following operations (sales figures shown below include sales within the same segment): • Sales at Nakhodka Trade Sea Port, which provides various seaport services to Evraz, totaled U.S.$75 million in 2010 as compared to U.S.$82 million in 2009, and U.S.$81 million in 2008. Inter segment sales accounted for 71%, 58% and 26% of such revenue in 2010, 2009 and 2008, respectively. • Evraztrans acts as a railway forwarder for Evraz’s steel segment. Sales at Evraztrans amounted to U.S.$96 million in 2010 as compared to U.S.$83 million in 2009 and U.S.$98 million in 2008. Evraztrans derives the majority of its revenue from inter segment sales, which accounted for 85%, 92% and 77% of revenue in 2010, 2009 and 2008, respectively. • Metallenergofinance (‘MEF’) supplies electricity to Evraz’s steel and mining segments and to third parties. MEF’s sales amounted to U.S.$371 million in 2010 as compared to U.S.$299 million in 2009 and U.S.$457 million in 2008. Inter segment sales accounted for 81%, 80% and 83% of MEF’s revenue in 2010, 2009 and 2008, respectively. • Sinano Ship Management (‘Sinano’) provides sea freight services to Evraz’s steel segment. Sinano’s sales totaled U.S.$116 million in 2010 as compared to U.S.$92 million in 2009 and U.S.$144 million in 2008. Sinano derives close to 100% of its revenue from inter segment sales. • Evro-Aziatskaya Energy Company (‘EvrazEK’) is an energy generating company which supplies natural gas, steam and electricity to Evraz’s steel and mining segments. In 2010, EvrazEK generated revenue of U.S.$56 million as compared with U.S.$133 million in 2009 and U.S.$169 million in 2008. Inter segment sales accounted for 87%, 94% and 81% of the company’s revenue in 2010, 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 revenue of ZapSib Power Plant amounted to U.S.$84 million in 2010 as compared to U.S.$70 million in 2009 and U.S.$90 million in 2008. Intra group sales accounted for 78%, 82% and 35% of revenue in 2010, 2009 and 2008, respectively. External sales in respect of Evraz’s other operations segment, primarily comprising sales of energy by MEF, EvrazEK and ZapSib Power Plant, the provision of port services by Nakhodka Trade Sea Port and the provision of transportation services by Evraztrans, decreased from U.S.$266 million in 2008 to U.S.$128 million in 2009 and increased to U.S.$146 million in 2010. Nakhodka Trade Sea Port, Evraztrans and Zapsib Power Plant sharply reduced services to third parties in 2009 as compared to 2008. Cost of revenue and gross profit Evraz’s consolidated cost of revenue amounted to U.S.$10,319 million, representing 77.0% of Evraz’s consolidated revenue, in 2010 as compared to U.S.$8,124 million, representing 83.1% of Evraz’s consolidated revenue, in 2009 and U.S.$13,463 million, representing 66.1% of Evraz’s consolidated revenue, in 2008. The increase in gross profit margin in 2010 as compared to 2009 was primarily due to the recovery in steel and vanadium prices following weak demand from Evraz’s principal steel markets in 2009. The steep reduction in gross profit margin in 2009 as compared to 2008 was largely due to the fall in steel and vanadium prices and production cuts in response to the weakness of demand. 96 AnnuAl RepoRt And Accounts 2010 management report The table below presents cost of revenue and gross profit by segment for 2010, 2009 and 2008, including percentage of segment revenue. (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Percentage of segments revenue Amount Amount Year ended 31 December 2010 2009 2008 (84.6)% (12,662) (70.6)% Steel segment Cost of revenue Raw materials Iron ore Coking coal Scrap Other raw materials Semi-finished products Transportation Staff costs Depreciation Energy Other(1) Gross profit Mining segment Cost of revenue Raw materials Transportation Staff costs Depreciation Energy(2) Other(3) Gross profit Vanadium segment Cost of revenue Raw materials Semi-finished products Transportation Staff costs Depreciation Energy Other(3) Gross profit Other operations Cost of revenue Gross profit unallocated Cost of revenue Gross profit Eliminations – cost of revenue Eliminations – gross profit Consolidated cost of revenue Consolidated gross profit (10,029) (82.7)% (5,793) (1,867) (1,443) (1,522) (961) (421) (529) (794) (415) (823) (1,254) 2,094 (47.8)% (15.4)% (11.9)% (12.6)% (7.9)% (3.5)% (4.4)% (6.5)% (3.4)% (6.8)% (10.3)% 17.3% (7,597) (3,577) (1,041) (656) (996) (884) (690) (498) (699) (434) (677) (1,022) 1,381 (39.8)% (11.6)% (7.3)% (11.1)% (9.8)% (7.7)% (5.5% (7.8)% (4.8)% (7.5)% (11.4)% 15.4% (7,219) (2,022) (2,154) (1,795) (1,248) (1,280) (567) (1,012) (589) (904) (1,091) 5,263 (1,569) (62.6)% (1,277) (87.7)% (2,387) (5.7)% (5.6)% (15.8)% (10.7)% (9.8)% (15.0)% 37.4% (88.5)% (35.2)% (0.5)% (0.4)% (11.0)% (7.8)% (12.4)% (21.4)% 11.5% (67.1)% 32.9% (144) (141) (395) (268) (246) (375) 938 (501) (199) (3) (2) (62) (44) (70) (121) 65 (547) 268 5 5 2,322 (295) (6.7)% (8.0)% (24.5)% (18.3)% (13.3)% (16.8)% 12.3% (101.4)% (46.3)% (0.3)% (0.3)% (10.7)% (9.6)% (10.2)% (24.0)% (1.4)% (69.0)% 31.0% (98) (116) (357) (267) (194) (245) 179 (368) (168) (1) (1) (39) (35) (37) (87) (5) (528) 237 4 4 1,642 (148) (705) (239) (501) (354) (245) (343) 1,247 (922) (486) – (1) (65) (37) (58) (275) 284 (749) 273 (7) (7) 3,264 (143) (40.3)% (11.3)% (12.0)% (10.0)% (7.0)% (7.1)% (3.2)% (5.6)% (3.3)% (5.0)% (6.1)% 29.4% (65.7)% (19.4)% (6.6)% (13.8)% (9.7)% (6.7)% (9.4)% 34.3% (76.5)% (40.3)% 0.0% (0.1)% (5.4)% (3.1)% (4.8)% (22.8)% 23.5% (73.3)% 26.7% (10,319) (77.0)% (8,124) (83.1)% (13,463) (66.1)% 3,075 23.0% 1,648 16.9% 6,917 33.9% Notes: (1) (2) (3) Includes repairs and maintenance, auxiliary materials such as refractory products and effect of changes in work-in-progress and finished goods inventories. Includes electricity, heat, natural gas and fuel used in production processes, such as fuel oil. Includes auxiliary materials, repairs and maintenance and effect of changes in work-in-progress and finished goods inventories. STEEl SEGMENT Evraz’s steel segment cost of revenue decreased to 82.7% of steel segment revenue, or U.S.$10,029 million in 2010, from 84.6% of steel segment revenue, or U.S.$7,597 million in 2009, as compared to 70.6% of steel segment revenue, or U.S.$12,662 million in 2008. The principal factors affecting the change in Evraz’s steel segment cost of revenue in absolute terms in 2010 as compared to 2009 were as follows: • Raw material costs increased by 62.0%, primarily due to an increase in prices of all key main raw materials (in particular coking coal and iron ore) and also due to an approximately 6-7% increase in production volumes of pig iron and crude steel. • Costs of semi-finished products decreased by 39.0% due an increase in volumes of inter segment slab re-rolling by approximately 0.7 million tons, and due to reduced purchases of semi-finished products. 97 AnnuAl RepoRt And Accounts 2010 ManageMent report • Transportation costs rose by 6.2%. Railway charges in relation to the transportation of Evraz’s steel products to the relevant ports, which represent a major component of these costs, increased as a result of increased shipments of slabs from Russia for re-rolling within the steel segment, an increase in the average railway tariff in Rouble terms and the appreciation of the Rouble against the U.S. dollar. These increases were, in turn, partially offset by lower export sales volumes of steel products from Russia to Asia. • Staff costs increased by 13.6%. Wages and salaries of production staff rose in accordance with the trade union agreements for all operations. Other factors influencing this increase included increased salaries due to higher production volumes in 2010 as compared to 2009 and the appreciation of the average rates of Rouble, South African Rand and Canadian dollar against the U.S. dollar. • Depreciation and depletion costs decreased by 4.4%. • Energy costs increased by 21.6% due to an increase in production volumes, higher prices in respect of energy sources and the appreciation of the Rouble, South African Rand and Canadian Dollar against the U.S. dollar. • Other costs increased by 22.7%. These costs consisted primarily of contractor services and materials for maintenance and repairs. The increase was also driven by changes in work-in-progress and finished goods inventories and the appreciation of the Rouble, South African Rand and Canadian dollar against the U.S. dollar. The principal factors affecting the change in Evraz’s steel segment cost of revenue in monetary terms in 2009 compared to 2008 were as follows: • Raw material costs decreased by 50.5% due to a decrease in sales volumes and the lower prices of iron ore, coking coal, scrap, ferroalloys, pig iron and steel semi-finished products purchased by the steel operations. • Transportation costs decreased by 12.2%. Railway tariffs in relation to the transportation of Evraz’s steel products to the relevant ports, which represent a major component 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 decrease in transport costs related to the deliveries of raw materials to Russian mills and the depreciation of local currencies against the U.S. dollar. • Staff costs decreased by 30.9%. Staff costs were decreased in part due to staff optimization measures as well as the depreciation of local currencies against the U.S. dollar. • Depreciation and depletion costs decreased by 26.3%. This decrease was largely attributable to increases in the useful life of machinery and equipment and the depreciation of local currencies against the U.S. dollar. • Energy costs decreased by 25.1% due to the reduction in production volumes and the depreciation of local currencies against the U.S. dollar. • Other costs decreased by 6.3%. 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 finished goods inventories on the cost of revenue. The decrease reflected the effect of Evraz’s cost cutting measures and the depreciation of local currencies against the U.S. dollar. Steel segment gross profit increased to U.S.$2,094 million in 2010 from U.S.$1,381 million in 2009, itself a decrease from U.S.$5,263 million in 2008. Gross profit margin amounted to 17.3% of steel segment revenue in 2010 compared to 15.4% in 2009 and 29.4% in 2008. The improvement in gross profit margin in 2010 as compared to 2009 primarily reflected increased prices and volumes of steel products, described above. The decrease in gross profit margin in 2009 as compared to 2008 primarily reflected the decrease in prices and volumes of steel products, described above. Mining segMent Evraz’s mining segment cost of revenue decreased to 62.6% of mining segment revenue, or U.S.$1,569 million, in 2010 from 87.7% of mining segment revenue, or U.S.$1,277 million, in 2009, and 65.7% of mining segment revenue, or U.S.$2,387 million, in 2008. The principal factors affecting the change in mining segment cost of revenue in absolute terms in 2010 compared to 2009 were: • Raw material costs increased by 46.9%. This increase resulted from the higher prices and volumes of external iron ore purchased by the mining segment for processing and the appreciation of the average rates of Russian Rouble against the U.S. dollar. • Transportation costs increased by 21.6% primarily due to higher external transport services at Evrazruda itself due to outsourcing in 2010 and the appreciation of the average rate of the Rouble against the U.S. dollar. • Staff costs increased by 10.6%. The increase was largely attributable to increases of the wages and salaries of production staff, which rose in accordance with trade union agreements for Russia and Ukraine and to appreciation of the average rate of the Rouble against the U.S. dollar. • Depreciation costs remained flat. • Energy costs increased by 26.8% due to the growth in production volumes at KGOK, increases in prices of electricity and natural gas and the appreciation of the average rate of Rouble against the U.S. dollar. • Other costs increased by 53.1%. These costs consisted primarily of contractor services and materials for maintenance and repairs and certain taxes. The increase is largely attributable to increased repairs, maintenance and industrial services at Yuzhkuzbassugol and Evrazruda as well as to the appreciation of the average rate of the Rouble against the U.S. dollar. The principal factors that affected the change in mining segment cost of revenue between the 2009 and 2008 periods were: • Raw material costs decreased by 86.1%. Excluding the effect of the resale of iron ore products from Yuzhny GOK 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 Rouble and Ukrainian Hryvnia against the U.S. dollar. • Transportation costs decreased by 51.5% primarily due to lower export sales volumes of mining products and the weakening of the average rates of the Rouble and Ukrainian Hryvnia against the U.S. dollar. • Staff costs decreased by 28.7%. Factors that affected the decrease were staff optimization and the weakening of the average rates of the Rouble and Ukrainian Hryvnia against the U.S. dollar. • Depreciation costs decreased by 24.6%. This decrease was largely attributable to the depreciation of local currencies against the U.S. dollar. • Energy costs decreased by 20.8%. The decrease is primarily attributable to the weakening of the average rates of the Rouble and Ukrainian Hryvnia against the U.S. dollar. • Other costs decreased by 28.6%. 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 Rouble and Ukrainian Hryvnia against the U.S. dollar. Mining segment gross profit decreased from U.S.$1,247 million in 2008 to U.S.$179 million in 2009 and increased to U.S.$938 million in 2010, representing a gross profit margin of 37.4% of mining segment revenue in 2010 compared to 12.3% in 2009 and 34.3% in 2008. The increase in the gross profit margin in 2010 as compared to 2009 largely reflected substantial growth in the prices of iron ore and coking coal, as described above. The decrease in gross profit margin in 2009 as compared to 2008 was largely attributable to decreases in the average prices of iron ore and coal in 2009 compared to 2008, as described above. 98 AnnuAl RepoRt And Accounts 2010 ManageMent report Vanadium segment Vanadium segment cost of revenue decreased to 88.5% of vanadium segment revenue, or U.S.$501 million, in 2010 from 101.4% of vanadium segment revenue, or U.S.$368 million, in 2009 and 76.5% of vanadium segment revenue, or U.S.$922 million, in 2008. The increase in Evraz’s vanadium segment’s cost of revenue in 2010 as compared to 2009, in monetary terms ,was primarily attributable to higher sales volumes, higher prices of raw materials and acquisition of Vanady-Tula at the end of 2009. The decrease in 2009 as compared to 2008 was primarily attributable to lower sales volumes and the lower prices of raw materials. Gross profit/(loss) of Evraz’s vanadium segment increased to a gross profit of U.S.$65 million in 2010 from a gross loss of U.S.5 million in 2009, itself a decrease from a gross profit of U.S.$284 million in 2008. The aggregate result was a gross profit margin of 11.5% of vanadium segment revenue in 2010 as compared to a loss of 1.4% in 2009 and a profit of 23.5% in 2008, due to the factors described above. Other OperatiOns The other operations segment’s cost of revenue decreased to 67.1% of other operations segment’s revenue, or U.S.547 million, in 2010 from 69.0% of other operations’ revenue, or U.S.$528 million, in 2009, as compared to 73.3% of other operations’ revenue, or U.S.749 million, in 2008. The major components of cost of revenue at Nakhodka Trade Sea Port are staff and inventory costs. The major component of Evraztrans’ cost of revenue is rental and maintenance of railway cars. The major component of MEF’s cost of revenue is the purchase of electricity from power generating companies. The major components of EvrazEK’s cost of revenue 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 revenue are steam coal for power generation, depreciation and staff costs; while the major component of Sinano’s cost of revenue is ship hire fees. The gross profit of Evraz’s other operations segment decreased from U.S.$273 million in 2008 to U.S.237 million in 2009 and increased to U.S.$268 million in 2010 in line with growth in revenue. Gross profit margin amounted to 32.9% of Evraz’s other operations’ revenue in 2010 as compared to 31.0% in 2009 and 26.7% in 2008. The decrease in gross profit in 2009 as compared to 2008 was largely attributable to a decrease in Sinano’s revenue associated with freight services provided to third party ship owners. The corresponding decrease in the costs of these services was reflected in selling and distribution costs discussed below, thereby largely affecting the gross profit margin and having minimal impact on Sinano’s operating profit. Selling and distribution costs Selling and distribution costs increased by 28.9% to U.S.$807 million in 2010, representing 6.0% of consolidated revenue, as compared to U.S.$626 million in 2009, representing 6.4% of consolidated revenue, and U.S.$856 million in 2008, representing 4.2% of consolidated revenue. Selling and distribution costs largely consist of transportation expenses related to Evraz’s selling activities. The following table presents selling and distribution costs by segment in 2010, 2009 and 2008, including as a percentage of segment revenue. (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Amount Percentage of segments revenue Amount Year ended 31 December 2010 2009 2008 steel segment Transportation costs Staff costs Bad debt provision Depreciation Other costs(1) mining segment Transportation costs Staff costs Bad debt provision Other costs(1) Vanadium segment Transportation costs Staff costs Bad debt provision Depreciation Other costs(1) Other operations eliminations unallocated total (6.3)% (3.7)% (0.6)% (0.1)% (1.0)% (0.9)% (4.4)% (2.8)% (0.1)% (0.7)% (0.8)% (4.1)% (1.9)% (0.5)% 0.0% (0.4)% (1.3)% (11.2)% (761) (446) (65) (17) (122) (111) (110) (70) (3) (17) (20) (23) (11) (3) – (2) (7) (91) 178 – (6.9)% (3.9)% (0.5)% (0.3)% (1.2)% (1.0)% (3.9)% (2.4)% (0.2)% (0.5)% (0.8)% (5.5)% (2.8)% (0.6)% 0.0% (0.6)% (1.7)% (10.6)% (620) (347) (46) (29) (112) (86) (57) (35) (3) (7) (12) (20) (10) (2) – (2) (6) (81) 152 – (807) (6.0)% (626) (6.4)% (777) (448) (69) (13) (106) (141) (40) (22) (2) (3) (13) (82) (36) (6) – (4) (36) (119) 162 – (856) (4.3)% (2.5)% (0.4)% (0.1)% (0.6)% (0.8)% (1.1)% (0.6)% (0.1)% (0.1)% (0.4)% (6.8)% (3.0)% (0.5)% 0.0% (0.3)% (3.0)% (11.6)% (4.2)% Note: (1) Includes auxiliary materials such as packaging, port services and customs duties. 99 AnnuAl RepoRt And Accounts 2010 management report STEEl SEGMENT Selling and distribution costs amounted to 6.3%, 6.9% and 4.3% of Evraz’s steel segment revenue in 2010, 2009 and 2008, respectively. The primary factors affecting the changes in the steel segment’s selling and distribution costs in 2010 as compared to 2009 were: • Transportation costs increased by 28.5% primarily due to the increase in trading activity, changes in shipping terms, the growth in the average railway tariff in Rouble terms and the appreciation of the Rouble, South African Rand and Canadian dollar against the U.S. dollar. • Staff costs increased by 41.3%. This increase is attributable to the acquisition of Carbofer in October 2009, an increase in the number of sales staff in North America and Russia and to the appreciation of the Rouble against the U.S. dollar. • Bad debt expense decreased by 41.4% from U.S.$29 million in 2009 to U.S.$17 million in 2010. The decrease in bad debt expense reflects a high level of doubtful debt provisions made against receivables from Russian and Ukrainian customers in 2009. • Depreciation costs increased by 8.9% largely reflecting the appreciation of the South African Rand and Canadian dollar against the U.S. dollar. • Other selling costs increased by 29.1%, primarily due to additional marketing expenses, sales commissions and agent fees related to export sales of Evraz from Russia and Ukraine. The primary factors affecting the changes in the steel segment’s selling and distribution costs in 2009 as compared to 2008 were: • Transportation costs decreased by 22.5% primarily due to the depreciation of local currencies against the U.S. dollar, although this decrease was partially offset by increase in tariffs in Russia. • Staff costs decreased by 33.3%. This decrease was largely attributable to staff optimization measures and depreciation of the average rates of local currencies against the U.S. dollar. • Bad debt expense increased by 123.1% from U.S.$13 million in 2008 to U.S.$29 million in 2009. The increase in bad debt expense reflects an increase doubtful debt provisions made against receivables from Russian and Ukrainian customers. • Depreciation costs increased by 5.7% largely reflecting the contribution of the new Canadian operations. • Other selling costs decreased by 39.0%, primarily due to cost cutting measures and depreciation of the average rates of local currencies against the U.S. dollar. MINING SEGMENT Selling and distribution costs amounted to 4.4%, 3.9% and 1.1% of the mining segment’s revenue in 2010, 2009 and 2008, respectively. The principal factors affecting the changes in the mining segment’s selling and distribution costs in 2010 as compared to 2009 were: • Transportation costs increased by 100.0% due to higher export sales volumes of iron ore and coal and the growth in railway and sea freight prices. • Bad debt expense increased from U.S.$7 million in 2009 to U.S.$17 million in 2010 due to a provision made against accounts receivable from Kazankovskaya mine (an associate of YuKU). • Other selling costs increased by 66.7%, primarily due to additional marketing expenses, sales commissions and agent fees related to Evraz’s export sales from Russia and Ukraine. The principal factors affecting the changes in the mining segment’s selling and distribution costs in 2009 as compared to 2008 were: • Transportation costs increased by 59.1%, due largely to changes in cost allocation between Evraz’s steel and mining segments in the 2009 Consolidated Financial Statement as compared to 2008. • Staff costs increased by approximately 50% in 2009 primarily due to changes in the classification of staff costs in the 2009 Consolidated Financial Statement compared to the 2008 Consolidated Financial Statements. • Bad debt expense increased from U.S.$3 million in 2008 to U.S.$7 million in 2009 due to additional unrecoverable accounts receivable. • Other selling costs decreased by 7.7%, due largely to lower sales commissions and depreciation of the average rates of local currencies against the U.S. dollar. VANADIuM SEGMENT Selling and distribution costs increased to U.S.$23 million in 2010 from U.S.$20 million in 2009 compared to U.S.$82 million of selling and distribution costs in 2008. These movements represented 4.1%, 5.5% and 6.8% of Evraz’s vanadium segment revenue in 2010, 2009 and 2008, respectively. The increase, in monetary terms, in 2010 as compared to 2009 was primarily due to higher trading activity while the decrease in 2009 as compared to 2008 largely related to reductions in freight services, customs duties and sales commissions. OTHER OPERATIONS Selling and distribution costs amounted to 11.2%, 10.6% and 11.6% of other operations’ revenue in 2010, 2009 and 2008, respectively. The increase in selling and distribution costs in 2010 as compared to 2009 was largely attributable to the increased share of third party freight services required in respect of the growth of Sinano’s shipping activities. The decrease in selling and distribution costs in 2009 as compared to 2008 was largely attributable to lower external freight and port services at Sinano. The decrease in gross profit in 2009 as compared to 2008 largely related to a decrease in Sinano’s revenue associated with freight services provided to third party ship owners. The corresponding decrease in the costs of these services was reflected in selling and distribution costs discussed below, thus largely affecting the gross profit margin with minimal impact on Sinano’s operating profit. General and administrative expenses General and administrative expenses increased to U.S.$732 million in 2010 from U.S.$628 million in 2009, itself a decrease from U.S.$895 million in 2008. These movements represented 5.5%, 6.4% and 4.4% of consolidated revenue in 2010, 2009 and 2008 respectively. 100 AnnuAl RepoRt And Accounts 2010 management report The following table presents general and administrative expenses by segment for 2010, 2009 and 2008, including as a percentage of segment revenue. (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Percentage of segments revenue Amount Amount Year ended 31 December 2010 2009 2008 Steel segment Staff costs Taxes, other than on income Other(1) Mining segment Staff costs Taxes, other than on income Other(2) Vanadium segment Staff costs Taxes, other than on income Other(1) Other operations unallocated(3) Eliminations TOTAl (3.3)% (1.3)% (0.7)% (1.3)% 4.7% (2.1)% (1.1)% (1.5)% (6.4)% (3.4)% (0.4)% (2.6)% (3.3)% (403) (163) (82) (158) (117) (53) (27) (37) (36) (19) (2) (15) (27) (155) 6 (3.9)% (1.4)% (0.9)% (1.6)% (6.6)% (3.0)% (1.5)% (2.1)% (7.2)% (3.6)% (0.3)% (3.3)% (3.1)% (350) (126) (80) (144) (96) (44) (22) (30) (26) (13) (1) (12) (24) (138) 6 (2.6)% (1.1)% (0.5)% (1.1)% (3.8)% (1.8)% (0.5)% (1.5)% (2.7)% (1.5)% (0.2)% (1.1)% (4.3)% (472) (193) (90) (189) (138) (66) (17) (55) (33) (18) (2) (13) (44) (211) 3 (732) (5.5)% (628) (6.4)% (895) (4.4)% 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 increased to U.S.$403 million in 2010 from U.S.$350 million in 2009, itself a decrease from U.S.$472 million in 2008. These movements represented 3.3%, 3.9% and 2.6% of the steel segment’s revenue in 2010, 2009 and 2008, respectively. The principal factors affecting the changes in the steel segment’s general and administrative expenses in 2010 as compared to 2009 were: • Staff costs increased by 29.4% due to an increase in salaries in accordance with trade union agreements at the Russian mills, additional hiring of staff, and increase in bonus accruals at the North American operations, lump sum payments to former executives at the South African operations and the appreciation of the average exchange rates of the Rouble, the South African Rand and Canadian Dollar against the U.S. dollar. • Taxes, other than on income tax, and including property, land and local taxes, increased by 2.5%. The increase was primarily due to higher tax base for land tax at the Russian mills and the appreciation of the average exchange rates of the Rouble, South African Rand and Canadian Dollar against the U.S. dollar. • Other general and administrative expenses increased by 9.7%. This increase principally reflected an increase in professional services in North America and Russia related to increased business activities in 2010 and also reflected appreciation of the average exchange rates of the Russian Rouble against U.S. dollar. The principal factors affecting the changes in the steel segment’s general and administrative expenses in 2009 as compared to 2008 were: • Staff costs decreased by 34.7%. This decrease is largely attributable to staff optimization measures and appreciation of the average exchange rates of local currencies against the U.S. dollar. • Taxes, other than on income, including property, land and local taxes, decreased by 11.1%. The decrease primarily reflected depreciation of the average exchange rates of local currencies against the U.S. dollar. • Other general and administrative expenses decreased by 23.8%. The decrease is largely attributable to depreciation of the average exchange rates of local currencies against the U.S. dollar. MINING SEGMENT General and administrative expenses increased to U.S.$117 million in 2010 from U.S.$96 million in 2009, itself a decrease from U.S.$138 million in 2008. These movements represented 4.7%, 6.6% and 3.8% of mining segment revenue in 2010, 2009 and 2008, respectively. The principal factors affecting the changes in the mining segment’s general and administrative expenses in 2010 as compared to 2009 were: • Staff costs increased by 20.5% reflecting a full week working schedule, which was re-introduced in 2010 as the global economy improved and demand for Evraz’s products increased, the growth of salaries in accordance with trade union agreements and the appreciation of the Rouble against the U.S. dollar. • Taxes, other than on income, increased by 22.7% largely due to additional expenses related to land tax at Evrazruda. • Other expenses increased by 23.3% largely due to provisions made at Yuzhkusbassugol for a legal investigation. The principal factors affecting the changes in the mining segment’s general and administrative expenses in 2009 as compared to 2008 were: • Staff costs decreased by 33.3%. The decrease was primarily attributable to staff optimization measures and depreciation of the average exchange rates of local currencies against the U.S. dollar. • Taxes, other than on income, including property, land and local taxes, increased by 29.4%. This increase is because, prior to 2009, all land tax expenses were reflected in a different line item. However, land tax was reflected in general and administrative expenses in 2009. • Other expenses decreased by 45.5% largely due to cost cutting measures and depreciation of the average exchange rates of local currencies against the U.S. dollar. 101 AnnuAl RepoRt And Accounts 2010 management report VANADIuM SEGMENT General and administrative expenses increased to U.S.$36 million in 2010 from U.S.$26 million in 2009, itself a decrease from U.S.$33 million in 2008. These movements represented 6.4%, 7.2% and 2.7% of vanadium segment revenue in 2010, 2009 and 2008, respectively. The increase in Evraz’s general and administrative expenses in 2010 as compared to 2009 was primarily attributable to Evraz’s acquisition of Vanady-Tula in the end of 2009, and the appreciation of the average exchange rates of the Rouble and the South African Rand against the U.S. dollar. The decrease in general and administrative expenses in 2009 as compared to 2008 was largely due to staff optimization measures and the depreciation of the average exchange rates of local currencies against the U.S. dollar. OTHER OPERATIONS General and administrative expenses increased to U.S.$27 million in 2010 from U.S.$24 million in 2009, itself a decrease from U.S.$44 million in 2008. These movements represented 3.3%, 3.1% and 4.3% of other operations segment’s revenue in 2010, 2009 and 2008, respectively. The increase in Evraz’s general and administrative expenses in 2010 as compared to 2009 was primarily attributable to the provision against tax risks related to VAT at Nakhodka Trade Sea Port and the appreciation of the Rouble against the U.S. dollar. The decrease in general and administrative expenses in 2009 as compared to 2008 was largely due to staff optimization measures and depreciation of the average exchange rates of local currencies against the U.S. dollar. uNAllOCATED Unallocated general and administrative expenses are largely 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 increased to U.S.$155 million in 2010 from U.S.$138 million in 2009, itself a decrease from U.S.$211 million in 2008. The increase in 2010, as compared to 2009, was primarily attributable to increases in salaries, the cost of SAP licenses and the appreciation of the average exchange rate of the Rouble against the U.S. dollar. The decrease in 2009, as compared to 2008, was attributable to cost cutting, staff optimization measures and depreciation of the average exchange rates of local currencies against the U.S. dollar. other operating income, net of other operating expenses Other operating income, net of other operating expenses, increased to U.S.$206 million in 2010 from U.S.$199 million in 2009, itself a decrease from U.S.$1,534 million in 2008. These movements represented 1.5%, 2.0% and 7.5% of consolidated revenue in 2010, 2009 and 2008, respectively. Other operating income and expenses consist primarily of social and social infrastructure expenses, gain (loss) on the disposal of property, plant and equipment, impairment of assets and foreign exchange rates gain (loss). Social and social infrastructure expenses include such items as maintenance of medical centers, recreational centers, employee holiday allowances, sponsorship of sports teams and charitable events. The following table presents other operating income and expenses by segment for 2010, 2009 and 2008, including as a percentage of segment revenue. (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Amount Percentage of segments revenue Amount Year ended 31 December 2010 2009 2008 Steel segment Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total Mining segment Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total Vanadium segment Impairment of assets Foreign exchange gain (loss) Total Other operations Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment (47) (33) (81) 65 (2) (98) (9) (18) (20) (2) (49) (98) (16) – (16) (1) (1) (0.4)% (0.3)% (0.7)% 0.5% 0.0% (0.8)% (0.4)% (0.7)% (0.8)% (0.1)% (2.0)% (3.9)% (2.8)% 0.9% (2.8)% (0.1)% (0.1)% (43) (25) (184) 54 (65) (263) (6) (12) 4 1 (22) (35) – – 0 (2) (2) (0.5)% (0.3)% (2.0)% 0.6% (0.7)% (91) (11) (821) (342) (3) (0.5)% (0.1)% (4.6)% (1.9)% 0.0% (2.9)% (1,268) (7.1)% (0.4)% (0.8)% 0.3)% 0.1% (1.5)% (2.4)% 0.0% 0.0% 0.3% (0.3)% (0.3)% (18) (15) (56) 10 (19) (98) – 1 1 (2) (11) (0.5)% (0.4)% (1.5)% 0.3% (0.5)% (2.7)% 0.0% 0.1% 0.1% (0.2)% (1.1)% 102 AnnuAl RepoRt And Accounts 2010 management report Year ended 31 December 2010 2009 2008 (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Amount Percentage of segments revenue Amount Impairment of assets Foreign exchange gain (loss) Other income (expense), net Total unallocated Eliminations TOTAl OTHER OPERATING INCOME AND EXPENSES, NET (3.7)% 0.1% 0.5% (3.3)% (30) 1 4 (27) 32 1 0.0)% 0.0% 0.3% (0.3)% – – 2 (2) 98 1 (0.3)% (0.4)% (0.7)% (2.6)% (3) (4) (7) (27) (141) (1) (206) (1.5)% (199) (2.0)% (1,534) (7.5)% Total social and social infrastructure expenses decreased from U.S.$114 million in 2008 to U.S.$53 million in 2009 and increased to U.S.$64 million in 2010. Evraz’s social and social infrastructure expenses a largely dependant on the general economic climate and the changes in this expense reflect changes in the economy and Russian steel and mining industry. Total loss on the disposal of property, plant and equipment amounted to a loss of U.S.$52 million in 2010 compared to U.S.$39 million in 2009 and U.S.$37 million in 2008. The increase in 2010 was primarily attributable to disposal of assets at the Russian and the South African steel and mining operations. Total impairment of assets amounted to U.S.$147 million in 2010 as compared to U.S.$180 million in 2009 and U.S.$880 million in 2008. Impairment was partly attributable to impairment of goodwill in the amount of U.S.$16 million, U.S.$160 million and U.S.$756 million in 2010 (related to Stratcor), 2009 and 2008 (related to North America and Ukraine), respectively. Evraz also recognized impairment of assets, other than goodwill, in the amounts of U.S.$131 million, U.S.$20 million and U.S.$124 million in 2010, 2009 and 2008 respectively, including impairment of certain items of property, plant and equipment and intangible assets. For an additional discussion on total impairments of assets, see notes 9, 10, 11 to the Consolidated Financial Statements. The total foreign exchange gain (loss) amounted to a gain of U.S.$104 million and U.S.$156 million in 2010 and 2009, and a loss of U.S.$471 million in 2008. The outcome for 2010 includes total foreign exchange gain (loss) included Evraz’s gains in respect of inter segment loans issued to subsidiaries in local currencies, which appreciated against the U.S. dollar between 31 December 2009 and 31 December 2010 (in particular, due to EICA), and gains in respect of inter segment loans issued by subsidiaries in local currencies, which depreciated against U.S. dollar between 31 December 2009 and 31 December 2010 (in particular, Evraz’s Russian operations). The foreign exchange gain in 2009 largely related to the effect of the appreciation of the Canadian dollar against the U.S. dollar, between 31 December 2008 and 31 December 2009, on the inter company loans issued by the Issuer to EICA in Canadian dollars (gain at the Issuer) and in U.S. dollars (gain at EICA). Losses on U.S. dollar denominated borrowings at the Russian operations, due to the depreciation of the Rouble against the U.S. dollar between 31 December 2008 and 31 December 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 the Issuer) in Roubles. 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 U.S. dollar between 31 December 2007 and 31 December 2008. The majority of Evraz’s credit portfolio is maintained in U.S. dollars. Consequently, the depreciation of local currencies against the U.S. dollar resulted in foreign exchange losses being sustained by Evraz’s subsidiaries in relation to bank loans denominated in U.S. dollars. The foreign exchange loss also included Evraz’s losses in respect of inter company loans issued to subsidiaries, in particular to EICA, in local currencies of subsidiaries. Profit from operations Profit from operations was U.S.$1,330 million in 2010, representing 9.9% of consolidated revenue, compared to U.S.$195 million in 2009, representing 2.0% of consolidated revenue, and U.S.$3,632 million in 2008, representing 17.8% of consolidated revenue. The changes in profit from operations are attributable to the decrease in consolidated gross profit margin in 2009 and the subsequent growth in consolidated gross profit margin in 2010, in each case, for the reasons described above. The following table presents profit (loss) from operations by segment for 2010, 2009 and 2008, including as a percentage of segment revenue. Year ended 31 December 2010 2009 2008 (U.S.$ million, except percentages) Amount Percentage of segments revenue Percentage of segments revenue Amount Steel segment Mining segment Vanadium segment Other operations Unallocated Eliminations TOTAl 6.9% 24.5% (1.8)% 15.1% 832 613 (10) 123 (118) (110) 1,330 9.9% 148 (9) (50) 130 (36) 12 195 1.6% (0.6)% (13.8)% 17.0% Percentage of segments revenue 15.3% 26.7% 14.1% 8.1% Amount 2 746 971 170 83 (358) 20 2.0% 3,632 17.8% 103 AnnuAl RepoRt And Accounts 2010 management report Non-operating income and expense Non-operating income and expense include interest income, interest expense, share of profits (losses) of associates and joint ventures, gains (losses) on financial assets and liabilities and other non-operating gains (losses). The table below presents these items for 2010, 2009 and 2008, including as a percentage of consolidated revenue. Year ended 31 December 2010 2009 2008 (U.S.$ million, except percentages) Interest income Interest expense Gain or loss on sale of shares in Group companies Loss on disposal groups classified as held for sale Gain or loss on sale of other investments Gain on financial assets or liabilities Gain/(Loss) on extinguishment of debts Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition Share of profits of associates and joint ventures Dividends received Other non-operating gain or loss TOTAl Amount 13 (728) (1) (4) 1 8 – 4 73 – (1) (635) Percentage of segments revenue Percentage of segments revenue Percentage of segments revenue Amount Amount 0.1% (5.4)% (0.0)% (0.0)% 0.0% 0.1% – 0.0% 0.5% – (0.0)% (4.7)% 40 (677) 1 (5) – (6) 103 6 2 – 3 (533) 0.4% (6.9)% 0.0% (0.1)% – (0.1)% 1.1% 0.1% 0.0% – 0.0% (5.5)% 57 (655) 0 (43) 1 (209) 80 – 194 11 (17) (581) 0.3% (3.2)% – (0.2)% 0.0% (1.0)% 0.4% – 1.0% 0.1% (0.1)% (2.9)% Interest income decreased to U.S.$13 million in 2010, from U.S.$40 million in 2009 and from U.S.$57 million in 2008. Interest income is primarily comprised of interest on bank accounts and deposits. Interest expense increased to U.S.$728 million in 2010 compared to U.S.$677 million in 2009 and U.S.$655 million in 2008. The increase in 2009 primarily reflected higher interest on liabilities relating to employee benefits. The increase in interest expense in 2010 as compared to 2009 related to interest on borrowings, specifically relating to Evraz’s outstanding bonds. Evraz is increasingly replacing its short-term debt with long-term debt, and as a result, the cost of U.S. dollar denominated long-term debt increased during the period under review. Share of profits of associates and joint ventures increased from U.S.$2 million in 2009 to U.S.$73 million in 2010 and was largely related to income attributable to Evraz’s interest in Raspadskaya. Net gain on financial assets and liabilities amounted to gain of U.S.$8 million in 2010 as compared to a net loss of U.S.$6 million in 2009. The net gain in 2010 included a gain from sales of Ukraine VAT government bonds (U.S.$6 million), a net gain on foreign currency swaps on Russian bonds (U.S.$4 million) and a impairment of financial assets of Evraz’s investments in Delong Holdings Limited (‘Delong Holdings’) of U.S.$4 million. The ‘excess of interest in the net fair value of acquiree’s identifiable assets’ in 2010 was U.S.$4 million, all of which was attributable to the acquisition of the Inprom Group. The ‘excess of interest in the net fair value of acquiree’s identifiable assets’ in 2009 was U.S.$6 million, all of which was attributable to the acquisition of Carbofer. Loss on disposal of assets held for sale amounted to U.S.$4 million in 2010 and primarily related to the disposal of the Tomusinskaya 5-6 coal deposit, net of Evraz’s share of the gain on bargain purchase recognized by Raspadskaya. income tax expense (Benefit) Income tax expense amounted to U.S.$163 million in 2010 compared to an income tax benefit of U.S.$46 million in 2009 and with an income tax expense of U.S.$1,192 million in 2008. Evraz’s income tax expense in 2010 was partially offset by a benefit of U.S. $125 million relating to enacting a new tax code in Ukraine. Evraz’s effective tax rate, defined as income tax expense (benefit) as a percentage of profit (loss) before tax, decreased from 39.1% in 2008 to 13.6% in 2009 and increased to 23.5% in 2010. Losses at some subsidiaries cannot be offset against profits earned by other subsidiaries. Therefore, the effective rate depends on general economic situation. Net Profit (loss) Attributable to equity holders of the Parent entity As a result of the factors set forth above, Evraz’s net profit (loss) attributable to equity holders of the parent entity decreased from a profit of U.S.$1,797 million in 2008 to a loss of U.S.$295 million in 2009 and increased to a profit of U.S.$548 million in 2010. Net Profit (loss) Attributable to Non-controlling interests Net profit (loss) attributable to non-controlling interests in subsidiaries amounted to net loss of U.S.$16 million in 2010, representing 3% of total net profit, compared to net profit of U.S.$3 million in 2009, representing 1% of total net loss, and a net profit of U.S.$62 million in 2008, representing 3% of total net profit. Share of net profit (loss) attributable to non-controlling interests largely reflected the offset of losses against profits attributable to different non-controlling shareholders in subsidiaries in 2010, 2009 and 2008. Evraz’s strategy during the periods under review was to acquire non-controlling interests in its subsidiaries. 104 AnnuAl RepoRt And Accounts 2010 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, acquisitions and dividends will represent Evraz’s most significant use of funds for a period of several years. The amount and term of Evraz’s obligations in respect of outstanding debt is described under ‘ – Contractual obligations and commercial commitments’. Evraz’s capital expenditure program is focused on the reconstruction and modernization of its existing production facilities in order to reduce costs, improve process flows and expand its product range. See, ‘Business—Acquisitions and Dispositions—Greenfield Projects’. Evraz also plans to utilize capital expenditure to increase its production, sales and market shares of higher margin products. Evraz spent U.S.$832 million for total annual capital expenditures in 2010. Evraz’s capital expenditure plans are subject to change depending, among other things, on the development of market conditions and the cost and availability of funds. Evraz’s 2011 budget anticipates total capital expenditures for 2011 to be approximately U.S.$1,211 million. See ‘Business’. Evraz’s acquisitions of subsidiaries (net of cash acquired) totaled U.S.$27 million in 2010, while purchases of non-controlling interests in subsidiaries amounted to U.S.$13 million and purchase of interest in associates amounted to U.S.$9 million. CAPITAl RESOuRCES The following table presents Evraz’s cash flow activity for 2010, 2009 and 2008. (U.S.$ million) Net cash flows from operating activities Net cash flows used in investing activities Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year CASH AND CASH EquIVAlENTS AT END OF YEAR Year ended 31 December 2010 1,662 (757) (886) 12 671 683 2009 1,698 179 (2,149) (259) 930 671 2008 4,563 (3,736) (127) 603 327 930 Historically, Evraz has relied on cash flow provided by operations, and short-term and long-term debt, and issues of equity to finance 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 increasingly replace short-term debt with 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 financing arrangements. Evraz intends to finance its capital investment program with a mix of cash flows from operations and financing activities. Evraz seeks long-term financing (with tenures of five to seven years) both domestically and internationally, from banks and the capital markets. Purchases of equipment from major European producers have been and are expected to continue to be backed by European export credit agencies such as Hermes (Germany), OeKB (Austria), KUKE (Poland), SACE (Italy), ODL (Luxembourg), EximBanka SR (Slovakia) and Finnvera (Finland). Net cash provided by operating activities amounted to U.S.$1,662 million in 2010 as compared to U.S.$1,698 million in 2009. Cash provided by operating activities before working capital adjustments increased from U.S.$1,045 million in 2009 to U.S.$2,030 million in 2010. Working capital movements in 2010 and 2009 were largely driven by changes in value of inventories and influence of prices on the amounts of accounts receivable and payable. Net cash used in investment activities totaled U.S.$757 million in 2010 as compared to net cash received from investment activities of U.S.$179 million in 2009. Substantially all the cash used in investment activities related to purchases of property, plant and equipment. Net cash used in financing activities amounted to U.S.$886 million in 2010 compared to U.S.$2,149 million in 2009. This change reflects a reduction in debt and interest paid. In 2010 and 2009, the most significant credit facilities obtained by Evraz directly from capital markets and from international and Russian banks to finance its capital requirements included: Gazprombank $950 Million Credit Facility On 23 October 2009 ZSMK, NTMK and NKMK signed three agreements for credit facilities of U.S.$500 million, U.S.$300 million and U.S.$150 million, each with a tenor of 45 months. As at 31 December 2010, each of the facilities were fully drawn. The facilities are secured with the cross guarantees of the borrowers and a pledge of 50% (less one share) of KGOK. GE Capital u.S.$225 Million Asset Based loan On 18 December 2009 EINA signed a U.S.$225 million four-year committed revolving asset based loan facility (‘ABL’). The facility is secured with the inventories and receivables of the borrower and guaranteed by its operating subsidiaries. The credit facility was arranged by a syndicate of banks coordinated by GE Capital Markets, Inc. Raiffeisenbank u.S.$157 Million Credit Facility On 27 April and 10 December 2010, NKMK and ZSMK signed two unsecured revolving credit line- facility agreements of U.S.$46 million and U.S.$111 million, respectively, with ZAO Raiffeisenbank (Russia), each with a tenor of 36 months. As of 31 December 2010, Evraz has fully drawn down the U.S.$111 million facility. Interest is payable on both facilities at a rate equal to LIBOR plus a margin set at 3.85% per annum. 105 AnnuAl RepoRt And Accounts 2010 management report Nordea Bank u.S.$404 million borrowings On 23, 24 and 29 July 2010 NTMK, ZSMK and TC EvrazHolding drew down the loan facilities from Nordea Bank totaling U.S.$404 million, maturing in June 2014. Interest under this facility is payable at a rate equal to LIBOR plus a margin set at 4.3% per annum. The facilities refinanced Nordea Bank’s loans totaling U.S.$357 million that were due in the fourth quarter of 2010, as well as certain other short-term debt. GE Capital CAD300 Million ABl On 6 September 2010, EICA signed a CAD300 million (approximately U.S.$285 million) four-year committed revolving ABL. The facility is secured with the inventories and receivables of the borrower and guaranteed by its operating subsidiaries. The credit facility was arranged by a group of banks coordinated by GE Capital Markets. u.S.$950 million Syndicated structured credit facility On 19 November 2010, the Issuer signed a U.S.$950 million structured credit facility, maturing in 2015 and secured with assignment of sales proceeds under certain export contracts. Interest under the facility is payable at a rate equal to LIBOR plus a margin calculated with reference to Evraz’s net leverage ratio, currently set at 2.8% per annum. The proceeds of the facility were used to fully prepay the outstanding amount of the U.S.$3,214 million syndicated facility with the final maturity falling on 2012. OOO EvrazHolding Finance Rouble Bond Issues On 26 March 2010, Evraz’s subsidiary OOO EvrazHolding Finance issued a Rouble 15 billion (approximately U.S.$500 million) three-year bond bearing a coupon of 9.25% per annum, payable semi-annually. The bonds were guaranteed by the Issuer. The bonds are admitted to trading on the Moscow Interbank Currency Exchange (‘MICEX’), list ‘B’. On 1 November, 2010 OOO EvrazHolding Finance issued a Rouble 15 billion 5-year bond at a coupon rate of 9.95% per annum payable semi-annually. The bonds were guaranteed by the Issuer. The notes are admitted to trading on MICEX, list ‘V’. Bonds of both issues were included in the Central Bank of Russia’s Lombard list. Proceeds from both issues were used to refinance certain shorter term debt. OOO Sibmetinvest Rouble Bond Issue In October 2009, Evraz’s subsidiary, OOO Sibmetinvest, issued a Rouble 20 billion (approximately US$680 million) five-year bond issue at an annual rate of 13.5%. lIquIDITY As the table below illustrates, Evraz’s estimated liquidity, defined as cash and cash equivalents, amounts available under credit facilities and short-term bank deposits with original maturity of more than three months, totaled U.S.$1,694 million as of 31 December 2010 and U.S.$2,038 million as of 31 December 2009. As of 31 December 2010, Evraz had unutilized borrowing facilities in the amount of U.S.$1,010 million, including U.S.$506 million of committed facilities and U.S.$504 million of uncommitted facilities. Committed facilities consisted of credit facilities available for Russian, North American and European operations in the amounts of U.S.$288 million, U.S.$216 million and U.S.$2 million respectively. Uncommitted facilities consisted of revolving credit lines of U.S.$372 million with western banks for export trade financing at East Metals S.A. and credit facilities available for South African, European, and North American operations in the amounts of U.S.$68 million, U.S.$60 million and U.S.$4 million respectively. Evraz’s current ratio, defined as current assets divided by current liabilities, increased from 1.12 as of 31 December 2009 to 1.77 as of 31 December 2010. The increase in the current ratio primarily resulted from decreases in short-term loans and the current portion of long-term loans due to repayments and refinancing activities on the part of management. Evraz’s corporate treasury monitors the financial requirements of Evraz’s various subsidiaries and has various instruments at its disposal to ensure that each subsidiary has sufficient liquidity to meet its obligations and capital requirements. (U.S.$ million) Estimated liquidity Cash and cash equivalents Amount available under credit facilities Short-term bank deposits TOTAl ESTIMATED lIquIDITY As of 31 December 2010 2009 683 1,010 1 1,694 671 1,345 22 2,038 106 AnnuAl RepoRt And Accounts 2010 management report Contractual Obligations and Commercial Commitments The following table sets forth the principal amount of Evraz’s obligations in respect of loans and borrowings as of 31 December 2010 and 2009 by period: (U.S.$ million) Short-term loans and borrowings (including current portion of long-term borrowings) Long-term loans and borrowings TOTAl Total 625 7,392 8,017 As of 31 December 2010 2009 Less than 1 year 1–2 years 2–5 years More than 5 years Less than 1 year Total 1–2 years 2–5 years More than 5 years 625 – 625 – 308 308 – 6,526 6,526 – 1,909 1,909 – – – 558 558 6,249 – 1,834 3,283 1,132 8,158 1,909 1,834 3,283 1,132 As of 31 December 2010, 2009 and 2008, Evraz had equipment with a carrying value of U.S.$0.0, U.S.$11 million and U.S.$1,131 million, respectively, pledged as collateral under loan agreements. In addition, Evraz pledged inventory with a carrying value of U.S.$203 million, U.S.$81 million and U.S.$648 million as of 31 December 2010, 2009 and 2008, respectively. As of 31 December 2010, 50% (less one share) of Kachkanarsky Mining-and-Processing Integrated Works was pledged as collateral under bank loans. This subsidiary represents 2.4% of the consolidated assets and 0.3% of the consolidated revenue of Evraz as at such date. As of 31 December 2010, the net assets (including intra group balances) of Kachkanarsky Mining-and-Processing Integrated Works were U.S.$1,115 million. As of 31 December 2010 and 2009, Evraz had accrued liabilities in respect of post-employment benefits that Evraz provides to employees of certain of its subsidiaries pursuant to collective bargaining agreements and defined benefit plans of U.S.$315 million and U.S.$307 million respectively. These amounts represent the present value of Evraz’s defined benefit obligation less the fair value of plan assets and adjusted for unrecognized actuarial gains (losses) and past service costs, discounted to present value. Defined contributions are made by Evraz 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. Evraz has no legal or constructive obligation to pay further contributions in respect of such benefits, its only obligation being to pay contributions as they fall due. These contributions are expensed as incurred. As of 31 December 2010, Evraz had contractual commitments for the purchase of production equipment and construction works of approximately U.S.$290 million. Evraz is also involved in a number of social programs designed to support education, health care and the development of the social infrastructure in areas where Evraz’s assets are located. In 2011, Evraz plans to spend approximately U.S.$106 million under these programs. Evraz has made a commitment to reduce environmental pollution and contamination in accordance with an environmental protection program. In the period from 2011 to 2015, Evraz is committed to spending approximately U.S.$326 million under the environmental programs. Tax Contingencies Russian and Ukrainian tax, currency and customs legislation are subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of Evraz may be challenged by the relevant regional and federal authorities. Recent events within Russia suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. 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 estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities, which were identified by management at the 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 Consolidated Financial Statements could be up to approximately U.S.$34 million. Contractual Commitments At 31 December 2010, Evraz had contractual commitments for the purchase of production equipment and construction works for approximately U.S.$290 million. Social Commitments Evraz is involved in a number for social programs aimed to support education, health care and social infrastructure development in towns where Evraz’s assets are located. In 2011, Evraz plans to spend approximately U.S.$106 million under these programs. INFlATION Whereas Evraz’s revenue depend substantially on international prices for steel products, Evraz’s costs are closely linked to domestic cost factors. Inflation moderated in Russia during recent years; although the rate remained at 8.8% in 2010, the same level as in 2009. In 2008, overall price trends during the first three quarters 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. In contrast the fourth quarter of 2008 brought a significant fall in prices in line with the reduction in demand for metallurgical goods in both Russian and global markets caused by the deepening of the recession and the weakening in international trade. However, stabilization of the economic situation due to government stimulus programs in 2009 was followed by a gradual recovery in the prices of metallurgical goods driven by a revival of demand and increased business activity during 2010. The table below shows the trends in consumer price indices from 2008 to 2010 in countries where Evraz has production facilities. 107 AnnuAl RepoRt And Accounts 2010 management report Russian Consumer Price Index, change in Rouble(1) 2008 13.3% 2009 8.8% Ukrainian Consumer Price Index, change in UAH(1) 22.3% 12.3% U.S. Consumer Price Index, change in U.S.D(1) Canadian Consumer Price Index, change in CAD(1) Italian Consumer Price Index, change in EUR(1) Czech Consumer Price Index, change in CZK(1) South African Consumer Price Index, change in ZAR(1) 0.1% 2.3% 2.2% 3.6% 9.5% 2.7% 0.3% 1.0% 1.0% 6.6% Note: (1) Represents the change from 31 December of the prior year to 31 December of the indicated year. 2010 8.8% 9.1% 1.5% 1.8% 1.9% 2.3% 3.3% 2008 to 2010 Source 34.1% Federal State Statistics Service 49.8% 4.4% 4.5% 5.2% 7.0% State Statistics Committee of Ukraine U.S.Bureau of Labor Statistics Statistics Canada Istituto nazionale di statistica Czech Statistical Office 20.6% Statistics South Africa The table below presents changes in the nominal exchange rates of national currencies against the U.S. dollar from 2008 to 2010 in countries where Evraz has production facilities. Nominal Rouble/ U.S.$ exchange rate, change(1) Nominal UAH/ U.S.$ exchange rate, change(1) Nominal CAD/ U.S.$ exchange rate, change(1) Nominal EUR/ U.S.$ exchange rate, change(1) Nominal CZK/ U.S.$ exchange rate, change(1) 2008 (16.5)% (34.4)% (19.3)% (5.5)% (6.6)% 2009 (2.9)% (3.6)% 16.5% 3.5% 5.3% Nominal ZAR/ U.S.$ exchange rate, change(1) (27.1)% 26.2% Note: (1) Represents the change from 31 December of the prior year to 31 December of the indicated year. quANTITATIVE AND quAlITATIVE DISClOSuRES IN RESPECT OF MARKET RISK Overview 2010 2008 to 2010 (0.8)% (19.5)% Source CBR 0.3% 5.7% (7.2)% (2.0)% 11.3% (36.6)% National Bank of Ukraine (0.7)% (9.2)% (3.6)% Bank of Canada The European Central Bank Czech National Bank 2.5% The South African Reserve Bank In the ordinary course of its business Evraz is exposed to risks related to changes in exchange rates, interest rates, commodity prices, energy and transportation tariffs. Evraz does not usually enter into hedging or forward contracts in respect of any of these risks except that Evraz concluded swap contracts in 2009 and 2010 to manage the currency exposure on Rouble denominated bonds in the total amount of 50,000 million Russian Roubles (See note 26 in the Consolidated Financial Statements). Exchange and Interest Rate Risk Evraz’s presentation currency is the U.S. 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 Evraz Highveld and the South African operations of Stratcor, the Hryvnia in respect of the Ukrainian subsidiaries, the Canadian dollar in respect of EICA and the U.S. dollar in respect of other subsidiaries. The Rouble is not a fully convertible currency outside the territory of Russia. Within Russia, official exchange rates are determined daily by the CBR. Market rates may differ from the official rates but the differences are, generally, within narrow parameters monitored by the CBR. Evraz’s products are typically priced in local currencies in respect of domestic sales of Evraz’s operations and U.S. dollars and Euros in respect of international sales. Evraz’s direct costs, including raw materials, labor and transportation, are incurred primarily in the local currencies of the subsidiaries. Other costs, such as interest expense, are incurred largely in Roubles, U.S. dollars and Euros. The mix of Evraz’s revenue and costs is such that appreciation in real terms of the local currencies of its subsidiaries against the U.S. dollar tends to result in an increase in Evraz’s costs relative to its revenue, while depreciation of the local currencies against the U.S. dollar in real terms tends to result in a decrease in Evraz’s costs relative to its revenue. For example, according to the CBR the Rouble depreciated in real terms against the U.S. dollar by 1.1% and 0.4% in 2008 and 2009 respectively and appreciated by 4% in 2010. In addition, nominal depreciation of the local currencies against the U.S. dollar would typically result in a decrease in the reported U.S. dollar value of Evraz’s assets (and liabilities) denominated in local currencies, while nominal appreciation of the local currencies against the U.S. dollar would typically result in an increase in the reported U.S. dollar value of Evraz’s assets (and liabilities) denominated in local currencies. Moreover, nominal appreciation/depreciation of the local currencies against the U.S. dollar generally has a similar effect when the income statements of Evraz’s subsidiaries are translated into U.S. dollars in connection with the preparation of the Consolidated Financial Statements. For example, according to the CBR the average exchange rate of the Rouble against the U.S. dollar appreciated by 2.9% in 2008, underwent a significant depreciation of 21.7% in nominal terms during 2009 and appreciated by 4.5% in 2010. 108 AnnuAl RepoRt And Accounts 2010 management report The following table summarizes Evraz’s outstanding principal amounts of interest bearing debt, including loans and other borrowings, by currency and interest rate method as of 31 December 2010 and 31 December 2009: As of 31 December 2010 2009 u.S. dollar denominated Rouble denominated Euro- denominated Denominated in other currencies u.S. dollar denominated Rouble denominated Euro- denominated Total Denominated in other currencies Total TOTAl DEBT, of which Fixed-rate debt Variable rate debt 6,028 3,957 1,661 1,661 320 135 2,071 – 185 8 – 8 8,017 5,753 7,172 4,080 685 677 287 55 14 – 8,158 4,812 2,264 3,092 8 232 14 3,346 A hypothetical, instantaneous and simultaneous 10% appreciation of the Rouble, Euro, Czech Koruna and South African Rand against the U.S. dollar as of 31 December 2010 would have resulted in an increase of approximately U.S.$221 million in borrowings denominated in Roubles, Euros and Czech Korunas held as of 31 December 2010. Evraz incurs interest rate risk on liabilities with variable interest rates. In case of changes in the current market fixed or variable interest rates, management considers the refinancing of a particular debt on more favorable terms. With regard to cash flow sensitivity analysis for variable rate instruments please refer to note 29 to the Consolidated Financial Statements. Commodity Price Risk Evraz’s revenue is exposed to the market risk of price fluctuations 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 movements in the general market spot prices for steel because sales are either on the spot market or under contracts linked to current market prices. These prices may be influenced 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 fluctuations in prices for the purchase, processing and production of iron ore, coking coal, ferroalloys, scrap and other raw material inputs. Evraz’s exposure to fluctuations in the price of iron ore and coking coal is limited due to its ability to obtain these products from its own production facilities and by strategic sales to third parties of coking coal and iron ore. Where Evraz obtains these products from internal sources, the effect of price fluctuations 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 reflected as an increase in Evraz’s income from affiliates. Electricity, Natural and Transportation 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 fluctuations in the cost of these products. In response of the above risks, Evraz started in 2010 implementation of Pulverized Coal Injection (‘PCI’) technology in the production of pig iron at its Russian steel mills ZSMK and NTMK. This is expected to allow Evraz to use steam coal as fuel for blast furnaces by the end of 2012. PCI is also expected to allow Evraz to discontinue using natural gas in blast furnaces and to save annually up to 650 million cubic meters of natural gas at NTMK and up to 600 million cubic meters at ZSMK. Coke consumption is estimated to decrease by more than 20%. Management believes the initiative will also reduce Evraz’s environmental impact. Russian Operations The Russian electricity sector is characterized by limited competition and regulated prices. Pricing policy is determined by the Federal Tariffs Service, a governmental agency authorized to regulate prices in respect of the power generated by regional electricity companies, power transmission, dispatch services and inter-regional trade, and is influenced by regional energy commissions that are authorized to regulate prices within a specific region. Power may also be purchased from the Federal Wholesale Electricity Market (‘FOREM’). Most sellers of power on the domestic market are regional generation companies and most participants in FOREM are regional generating companies that seek to sell a power surplus to regional generating companies with supply deficits as well as industrial companies granted special access to FOREM. Evraz’s subsidiary MEF has been granted such access to FOREM. In 2009 and in 2010, Evraz’s Russian operations purchased approximately 5,903 million kWh and 6,174 million kWh of electricity, representing approximately 75% and 62% 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 has implemented a liberalization 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 7.7-7.8 U.S. cents per kWh in 2012. Evraz’s average cost of electricity in Russia was 4.63 U.S. cents per kWh in 2009 and 5.5 U.S. cents per kWh in 2010. Assuming a price of 7.8 U.S. cents per kWh, Evraz’s Russian operations would have incurred additional costs of approximately U.S.$189 million and U.S.$144 million in the years ended 31 December 2009 and 2010 respectively. Further electricity price increases may occur in the future as the industry is further restructured and becomes controlled to a greater extent by the private sector. Evraz’s Russian operations also purchase significant amounts of natural gas (2,990 million cubic meters in 2010), primarily for the production of electricity and heat energy at Evraz’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 U.S.$65 per thousand cubic meters and U.S.$82 per thousand cubic meters 109 AnnuAl RepoRt And Accounts 2010 management report in 2009 and 2010 respectively. Despite these recent price increases, natural gas prices in Russia remain significantly 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 reach U.S.$121 per thousand cubic meters in 2012. Assuming a price of U.S.$121 per thousand cubic meters, Evraz’s Russian operations would have incurred additional costs of approximately U.S.$155 million and U.S.$116 million in 2009 and 2010 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 characterized 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 2011 is between U.S.$300–330 which, on the one hand, represents a 5–15% increase in Ukrainian prices compared to 2010 but, on the other hand, is comparable with current price levels in the Czech Republic. In 2010 Evraz’s Ukrainian operations purchased approximately 136 million cubic meters of natural gas at an average price of U.S.$284 per thousand cubic meters. Assuming a price of U.S.$338 per thousand cubic meters (as in Czech Vitkovice Steel in 2010), Evraz’s Ukrainian operations would have incurred additional costs of approximately U.S.$7 million in 2010. Higher natural gas prices, inflation 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 13.1 U.S. cents per kWh corresponds to inflation trends and to current price levels in the Czech Republic. Evraz’s Ukrainian operations purchased approximately 502 million kWh of electricity at an average price of 6.9 U.S. cents per kWh in 2010. Assuming a price of 13.1 U.S. cents per kWh, Evraz’s Ukrainian operations would have incurred additional costs of approximately U.S.$31 million in 2010. Transportation Evraz is also exposed to fluctuations in transportation costs. Transportation costs influence Evraz’s financial results directly as a component of raw material costs and the costs of transporting finished products to Nakhodka Trade 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 inflation and Evraz expects this policy to continue in the immediate future. Consequently, Evraz does not currently expect fluctuations in railway tariffs to have a significant impact on margins. 110 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Contents Viii 111 Index to the Notes to the Consolidated Financial Statements 112 independent auditor's report 113 Consolidated FinanCial statements For the Years ended 31 deCember 2010, 2009 and 2008 113 Consolidated Statement of Operations 114 Consolidated Statement of Comprehensive Income 115 Consolidated Statement of Financial Position 116 Consolidated Statement of Cash Flows 118 Consolidated Statement of Changes in Equity 121 Notes to the Consolidated Financial Statements d e t a d i l o s n o C i s t n e m e t a t s l a C n a n i F 1 3 r e b m e c e d d e d n e s r a e Y 8 0 0 2 d n a 9 0 0 2 0 1 0 2 , , 111 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 index to the notes to the Consolidated Financial statements 1. Corporate information 2. significant accounting policies Basis of Preparation Changes in Accounting Policies Significant Accounting Judgements and Estimates Foreign Currency Transactions Basis of Consolidation Investments in Associates Interests in Joint Ventures 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 Benefits Share-based Payments Revenue Current Income Tax Deferred Income Tax 3. segment information 4. business Combinations Steel and Mining Businesses in Ukraine Claymont Steel IPSCO Inc. Vanady-Tula Steel Dealers Inprom Group Disclosure of Other Information in Respect of Business Combinations 5. Goodwill 6. acquisitions of non-controlling interests in subsidiaries 121 121 121 122 125 128 128 129 129 130 130 130 131 132 132 132 133 133 133 133 133 133 134 134 135 135 135 136 143 143 144 145 146 147 148 149 149 151 income and expenses income taxes 7. 8. 9. property, plant and equipment 10. intangible assets other than Goodwill 11. investments in Joint Ventures and associates Corber Enterprises Limited Kazankovskaya 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 Financial 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 benefits 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 152 153 157 159 161 161 162 162 163 165 167 167 167 169 169 170 170 170 171 172 172 172 173 175 176 181 184 184 185 185 186 186 187 189 190 191 192 192 193 112 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Ernst & Young Socieˆteˆ anonyme 7, rue Gabriel Lippmann Parc d'Activite Sydrall 2 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.S. Luxembourg B 47 771 TVA LU 16063074 Independent auditor's report To the Shareholders and Board of Directors of Evraz Group S.A. 1, Alleˆe Scheffer L-2520 LUXEMBOURG Following our appointment by the General Meeting of the Shareholders dated 17 May 2010, we have audited the accompanying consolidated financial statements of Evraz Group S.A., which comprise the consolidated statements of financial position as at 31 December 2010, 2009 and 2008, the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of changes in equity, the consolidated statements of cash flows for each year then ended, and a summary of significant accounting policies and other explanatory information. Board of Directors’ responsibility for the consolidated financial statements The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as the Board of Directors determines is necessary to enable the preparation and presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Responsibility of the ‘reˆviseur d’entreprises agreˆeˆ’ Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the ‘Commission de Surveillance du Secteur Financier’. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the ‘reˆviseur d’entreprises agreˆeˆ’, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the ‘reˆviseur d’entreprises agreˆeˆ’ considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of Evraz Group S.A. as of 31 December 2010, 2009 and 2008, and of its financial performance and its cash flows for each year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Ernst & Young Socieˆteˆ anonyme Cabinet de reˆvision agreˆeˆ Luxembourg, 30 March 2011 Thierry Bertrand A member firm of Ernst & Young Global Limited 113 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF operations (in millions of us dollars, except for per share information) REvEnuE Sale of goods Rendering of services Cost of revenue Gross profit Selling and distribution costs General and administrative expenses Social and social infrastructure maintenance expenses Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange gains/(losses), net Other operating income Other operating expenses Profit/(loss) from operations Interest income Interest expense Share of profits/(losses) of joint ventures and associates Gain/(loss) on financial assets and liabilities, net Gain/(loss) on disposal groups classified as held for sale, net Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating gains/(losses), net Profit/(loss) before tax Income tax benefit/(expense) nET PRofIT/(Loss) Attributable to: Equity holders of the parent entity Non-controlling interests Earnings/(losses) per share: basic, for profit/(loss) attributable to equity holders of the parent entity, US dollars diluted, for profit/(loss) attributable to equity holders of the parent entity, US dollars Year ended December 31, Notes 2010 2009* 2008 3 3 7 7 7 5, 9, 10 7 7 7 11 7 12 4 8 20 20 $ 13,144 $ 9,505 $ 19,990 250 13,394 (10,319) 3,075 (807) (732) (64) (52) (147) 104 63 (110) 1,330 13 (728) 73 8 (4) 4 (1) 695 (163) $ 532 $ 548 (16) $ 532 267 9,772 (8,124) 1,648 (626) (628) (53) (39) (180) 156 38 (121) 195 40 (677) 2 97 (5) 6 4 (338) 46 390 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) $ (292) $ 1,859 $ (295) $ 1,797 3 62 $ (292) $ 1,859 $ 3.95 $ (2.19) $ 14.55 $ 3.95 $ (2.19) $ 14.50 * The amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made in connection with the changes in accounting policies (Note 2) and the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated financial statements. 114 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF ComprehensiVe inCome (in millions of us dollars) Year ended December 31 of Notes 2010 $ 532 nET PRofIT/(Loss) other comprehensive income Effect of translation to presentation currency Net gains/(losses) on available-for-sale financial assets (Note 13) Net (gains)/losses on available-for-sale financial assets reclassified to profit or loss (Notes 7 an 13) Income tax effect Deferred income tax benefit resulting from reduction in tax rate recognised in equity Decrease in revaluation surplus in connection with the impairment of property, plant and equipment Income tax effect Effect of translation to presentation currency of the Group’s joint ventures and associates Share of other comprehensive income of joint ventures and associates accounted for using the equity method Total other comprehensive income/(loss) 8 9 8 11 2009* $ (292) 108 12 (8) – 4 – (8) 1 (7) (10) (10) 95 64 (8) 4 – (4) – (7) 1 (6) (9) (9) 45 2008 $ 1,859 (2,288) (150) 150 – – 7 – – – (116) (116) (2,397) $ (538) $ (522) (16) $ (538) ToTAL ComPREhEnsIvE InComE/(Loss), nET of TAx $ 577 $ (197) Attributable to: Equity holders of the parent entity Non-controlling interests $ 584 (7) $ 577 $ (228) 31 $ (197) * The amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made in connection with the changes in accounting policies (Note 2) and the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated financial statements. 115 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF FinanCial position (in millions of us dollars) Year ended December 31, Notes 2010 2009* 2008 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 financial 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 financial assets Cash and cash equivalents Assets of disposal groups classified 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 profits Translation difference Non-controlling interests non-current liabilities Long-term loans Deferred income tax liabilities Finance lease liabilities Employee benefits 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 finance 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 non-controlling shareholders 9 10 5 11 8 13 13 14 15 16 17 18 19 12 20 20 20 4 20 21 8 22 23 25 26 27 21 16 28 22 25 4 Liabilities directly associated with disposal groups classified as held for sale 12 ToTAL EquITY And LIABILITIEs $ 8,607 1,004 2,219 750 100 118 103 12,901 2,070 1,213 192 1 80 54 353 52 683 4,698 2 4,700 $ 17,601 $ 375 – 1,742 180 36 – 4,632 (1,214) 5,751 247 5,998 7,097 1,072 38 315 279 143 8,944 1,173 205 714 217 78 180 19 54 6 – 13 2,659 – 2,659 $ 17,601 $ 8,585 1,098 2,186 634 70 66 128 12,767 1,828 1,001 134 1 107 58 258 120 671 4,178 7 4,185 $ 16,952 $ 375 – 1,739 208 36 4 4,065 (1,260) 5,167 275 5,442 5,931 1,231 58 307 176 68 7,771 1,069 112 1,992 235 108 140 17 35 17 – 13 3,738 1 3,739 $ 16,952 $ 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 $ 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 1,479 107 3,922 322 156 154 15 63 – 309 11 6,538 – 6,538 $ 19,451 * The amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made in connection with the changes in accounting policies (Note 2) and the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated financial statements. 116 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF Cash Flows (in millions of us dollars) CAsh fLows fRom oPERATInG ACTIvITIEs Net profit/(loss) Adjustments to reconcile net profit/(loss) to net cash flows from operating activities: Deferred income tax (benefit)/expense (Note 8) Depreciation, depletion and amortisation (Note 7) Loss on disposal of property, plant and equipment Impairment of assets Foreign exchange (gains)/losses, net Interest income Interest expense Share of (profits)/losses of associates and joint ventures (Gain)/loss on financial assets and liabilities, net (Gain)/loss on disposal groups classified as held for sale, net Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating (gains)/losses, net Bad debt expense Changes in provisions, employee benefits and other long-term assets and liabilities Expense arising from the equity-settled awards (Note 24) Share-based payments under cash-settled awards (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 flows from operating activities Cash flows 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 non-controlling interests Purchases of interest in associates/joint ventures 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 classified as held for sale, net of transaction costs (Note 12) Dividends received Other investing activities, net net cash flows from/(used in) investing activities The accompanying notes form an integral part of these consolidated financial statements. Year ended December 31, 2010 2009* 2008 $ 532 $ (292) $ 1,859 (186) 925 52 147 (104) (13) 728 (73) (8) 4 (4) 1 48 (15) 2 (3) (3) (231) 979 39 180 (156) (40) 677 (2) (97) 5 (6) (4) 41 (16) 6 (35) (3) (402) 1,195 37 880 471 (57) 655 (194) 129 43 – 5 33 25 35 – 12 2,030 1,045 4,726 (191) (239) (44) (34) (91) 38 107 80 5 1 680 438 (52) (162) 239 (56) (353) 1 (73) (9) (499) 345 100 165 (355) (3) 238 (203) 51 (2) 1,662 1,698 4,563 (46) 5 (1) 2 – (27) (13) (9) – – 17 29 (832) 21 42 1 54 (757) (28) 40 (3) 114 506 (20) (8) – (67) 48 (16) 20 (441) 6 28 1 (1) 179 (1) 32 (147) 33 – (1,914) (120) – (896) 99 3 29 (1,103) 27 161 70 (9) (3,736) 117 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF Cash Flows (Continued) (in millions of us dollars) Year ended December 31, 2010 2009* 2008 CAsh fLows fRom fInAnCInG ACTIvITIEs Issue of shares, net of transaction costs of $nil, $5 million and $1 million, respectively (Notes 4, 20 and 24) $ – $ 310 Repurchase of vested share-based awards (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 non-controlling shareholders Proceeds from bank loans and notes Repayment of bank loans and notes, including interest Gain on derivatives not designated as hedging instruments (Note 26) 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 financing activities Repayment of loans provided by related parties, including interest Payments under finance leases, including interest Payments of restructured liabilities, including interest Proceeds from sale-leaseback net cash flows from/(used in) financing 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 flow information: Cash flows during the year: Interest paid Interest received Income taxes paid by the Group – – – – – (1) 3,172 (4,142) 31 106 (29) – – (23) – – (886) (7) 12 671 $ 683 $ (594) 11 (341) (3) (5) 7 65 (90) (2) 3,427 (4,987) – (794) (85) 1 – (31) – 38 (2,149) 13 (259) 930 $ 671 $ (586) 29 (141) $ (1) (77) (197) 81 (68) (1,276) (81) 5,657 (3,949) – (54) – – (21) (20) (121) – (127) (97) 603 327 $ 930 $ (565) 44 (1,680) * The amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made in connection with the changes in accounting policies (Note 2) and the completion of initial accounting (Note 4). The accompanying notes form an integral part of these consolidated financial statements. 118 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 Consolidated statement oF Changes in equity (in millions of us dollars) At december 31, 2009 (as previously reported) Change in accounting policies (Note 2) Adjustments to provisional values (Note 4) – – At december 31, 2009 (as restated) 375 Net profit Other comprehensive income/(loss) Reclassification of revaluation surplus to accumulated profits in respect of the disposed items of property, plant and equipment Total comprehensive income/(loss) for the period Acquisition of non-controlling interests in existing subsidiaries (Note 6) Derecognition of non-controlling interests in subsidiaries (Note 20) Share-based payments (Note 24) Dividends declared by the Group’s subsidiaries to non-controlling shareholders (Note 20) – – – – – – – – 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 profits Translation difference non- controlling interests Total Total Equity $ 375 $ – $ 1,739 $ 6,338 $ 36 $ 4 $ 3,164 $ (1,372) $ 10,284 $ 324 $ 10,608 – – – – – – – – – – – – – 1,739 – – – – 1 – 2 – (6,130) – 208 – (6) (22) (28) – – – – – – 36 – – – – – – – – – – 4 – (4) – (4) – – – – 905 112 (5,113) (49) (5,162) (4) – (4) 4,065 (1,260) 5,167 548 – – 46 548 36 – 275 (16) 9 (4) 5,442 532 45 22 – – – – 570 46 584 (7) 577 (3) – – – – – – – (2) (14) (16) – 2 – (6) – (6) 2 (1) (1) AT dECEmBER 31, 2010 $ 375 $ – $ 1,742 $ 180 $ 36 $ – $ 4,632 $ (1,214) $ 5,751 $ 247 $ 5,998 The accompanying notes form an integral part of these consolidated financial statements. 119 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 profits Translation difference non- controlling interests Total Total Equity At december 31, 2008 $ 332 $ (9) $ 1,054 $ 218 $ 30 $ – $ 4,377 $ (1,330) $ 4,672 $ 245 $ 4,917 Net loss* Other comprehensive income/(loss)* Reclassification of revaluation surplus to accumulated profits 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 non-controlling 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 profit to legal reserve (Note 20) Dividends declared by the Group’s subsidiaries to non-controlling shareholders (Note 20) – – – – 43 – – – – – – – – – – – – – – – – – – (5) 12 2 – – – – – – 492 (5) 133 – 65 – – – – – – (7) (3) (10) – – – – – – – – – – – – – – – – – – – – – – 6 – – 4 (295) – – 4 – – – – – – – – – – 3 (292) – – – (5) – – (6) (3) (6) – – 70 – 70 – – – – – – – – – – (295) 67 – (228) 535 (5) 133 (5) 65 (5) 6 (1) – – 3 28 – 31 – – – – – – – – – (292) 95 – (197) 535 (5) 133 (5) 65 (5) 6 (1) – (1) (1) AT dECEmBER 31, 2009 $ 375 $ – $ 1,739 $ 208 $ 36 $ 4 $ 4,065 $ (1,260) $ 5,167 $ 275 $ 5,442 * The amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made in connection with the changes in accounting policies (Note 2). The accompanying notes form an integral part of these consolidated financial statements. 120 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 profits Translation difference non- controlling interests Total Total Equity At december 31, 2007 $ 320 $ – $ 286 $ 211 $ 29 $ – $ 4,108 $ 996 $ 5,950 $ 406 $ 6,356 Net profit 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 non-controlling interests in existing subsidiaries (Notes 4 and 6) Decrease in non-controlling 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 profit to legal reserve (Note 20) Dividends declared by the parent entity to its shareholders (Note 20) Dividends declared by the Group’s subsidiaries to non-controlling shareholders (Note 20) – – – 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) AT dECEmBER 31, 2008 $ 332 $ (9) $ 1,054 $ 218 $ 30 $ – $ 4,377 $ (1,330) $ 4,672 $ 245 $ 4,917 The accompanying notes form an integral part of these consolidated financial statements. 121 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 notes to the Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 1. Corporate information These consolidated financial statements were authorised for issue in accordance with a resolution of the directors of Evraz Group S.A. on March 30, 2011. 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, Alleˆe 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 financial statements of Evraz Group were as follows at December 31: Subsidiary OAO Nizhny Tagil Iron & Steel Plant OAO West-Siberian Iron & Steel Plant OAO Novokuznetsk Iron & Steel Plant Evraz Vitkovice Steel a.s. Evraz Highveld Steel and Vanadium Limited Dnepropetrovsk Iron and Steel Works Evraz Inc. NA Evraz Inc. NA Canada OAO Yuzhkuzbassugol OAO Kachkanarsky Mining-and-Processing Integrated Works OAO Evrazruda OAO Sukha Balka Effective ownership interest, % 2010 2009 2008 Business activity Location 100.00 100.00 100.00 100.00 85.12 96.04 100.00 100.00 100.00 100.00 100.00 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 Steel production 100.00 Steel production 100.00 Steel production Russia Russia Russia 100.00 Steel production Czech Republic 85.12 Steel production South Africa 96.03 Steel production Ukraine 100.00 100.00 100.00 100.00 100.00 99.42 Steel mill Steel mill Coal mining Ore mining and processing Ore mining Ore mining USA Canada Russia Russia Russia Ukraine At December 31, 2010, the Group employed approximately 110,000 employees, excluding joint venture’s and associates’ employees. going Concern These consolidated financial 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 financial, currency and commodity markets resulting from the global economic crisis of 2008–2009. In 2010, the Group reported net profit of $532 million and EBITDA of $2,350 million whereas in 2009 net loss amounted to $(292) million and EBITDA was $1,237 million (Note 3). The Group expects that the recovery will continue in 2011. At December 31, 2010, the Group was in compliance with all of its financial covenants (Note 21). The Board and the management anticipate that the Group will comply with all debt covenants during twelve months after the date of authorisation of issue of these financial statements. 2. significant accounting policies Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (‘IFRS’), as adopted by the European Union (‘EU’). International Financial Reporting Standards are issued by the International Accounting Standard Board (‘IASB’). As of December 31, 2010, all IFRSs that were published by IASB and that are mandatory for application are the same as those adopted by the EU and mandatory in the EU, with the exception of: • IAS 39 ‘Financial Instruments: Recognition and Measurement’, which was partially adopted by the EU; • Improvements to IFRSs issued in May 2010. 122 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Basis of preparation (continued) Both exceptions have no effect on the Group’s consolidated financial statements. As a result, the Group’s consolidated financial statements comply with International Financial Reporting Standards as issued by the IASB. The consolidated financial statements have been prepared under historical cost convention, except as disclosed in the accounting policies below. Exceptions include, but are not limited to, property, plant and equipment at the date of transition to IFRS accounted for at deemed cost, available for sale investments measured at fair value, assets classified as held for sale measured at the lower of their carrying amount or fair value less costs to sell and post-employment benefits measured at present value. ComPLETIon of InITIAL ACCounTInG In 2010, the Group finalised its purchase price allocation for the acquisition of steel dealers (Note 4). As a result, the Group recognised adjustments to the provisional values of identifiable assets, liabilities and contingent liabilities of the entity at the date of acquisition and restated consolidated financial statements as of December 31, 2009 and for the year then ended. Changes in accounting policies In the preparation of these consolidated financial 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 cost model under IAS 16 ‘Property, Plant and Equipment’; • the adoption of new standards and interpretations and revision of the existing standards as of January 1, 2010. 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. As of 1 January 2009, the Group made a voluntary change to its accounting policies to account for 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. Given the difficulties in understanding the effects on the financial statements from the application of the revaluation model and given that most companies in the industry continue to apply the cost model of accounting, the Group’s consolidated financial statements had become non-comparable with its peers. Accordingly, the Group has resolved to revert to the cost model of accounting for all classes of property, plant and equipment as it provides more relevant and reliable information about the Group's financial position and financial performance. In accordance with the requirements of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, this change in accounting policies should be applied retrospectively, therefore, the Group retrospectively adjusted amounts for the year ended December 31, 2009 in these financial statements. The Board of Directors of Evraz Group S.A. approved this change in accounting policy and its retrospective application. The formal shareholders’ approval of this change will be obtained during the forthcoming shareholders' meeting which is scheduled for May, 16, 2011. The Group made certain adjustments to the assets and liabilities as of December 31, 2009 and June 30, 2010 and the financial results for the year ended December 31, 2009 and for the six-month period ended June 30, 2010. The amounts for the year ended December 31, 2008 presented as part of these consolidated financial statements were not affected by the retrospective application. The effects of the retrospective application are summarised below. 123 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Changes in accounting policies (continued) Property, Plant and Equipment (continued) (US$ million) AssETs Property, plant and equipment Goodwill Investments in joint ventures and associates Deferred income tax assets non-current assets Inventories Cash and cash equivalents* Current assets Assets of disposal groups classified as held for sales ToTAL AssETs EquITY And LIABILITIEs Revaluation surplus Accumulated profits Translation difference Equity attributable to equity holders of the parent entity Minority interests Equity Deferred income tax liabilities non-current liabilities ToTAL EquITY And LIABILITIEs (US$ million) Cost of revenue Gross profit Selling and distribution costs General and administrative expenses Loss on disposal of property, plant and equipment Impairment of assets Revaluation deficit on property, plant and equipment Other operating expenses Profit/(loss) from operations Share of profits/(losses) of joint ventures and associates Gain/(loss) on disposal groups classified as held for sale, net Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition* Profit/(loss) before tax Income tax benefit/(expense) nET PRofIT/(Loss) Attributable to: Equity holders of the parent entity Minority interests Earnings/(losses) per share: December 31, 2009 Restated As previously reported Adjustment $ 8,585 2,186 634 70 12,767 1,828 671 4,178 7 $ 14,941 $ (6,356) 2,211 687 40 19,171 1,886 675 4,240 13 (25) (53) 30 (6,404) (58) (4) (62) (6) $ 16,952 $ 23,424 $ (6,472) $ 208 4,065 (1,260) 5,167 275 5,442 1,231 7,771 $ 6,338 $ (6,130) 3,164 (1,372) 10,284 324 10,608 2,537 9,077 901 112 (5,117) (49) (5,166) (1,306) (1,306) $ 16,952 $ 23,424 $ (6,472) Year ended December 31, 2009 Restated $ (8,124) 1,648 As previously reported $ (8,756) 1,016 (626) (628) (39) (180) – (121) 195 2 (5) 6 (338) 46 $ (292) (623) (645) (81) (163) (564) (128) (1,047) (8) (19) 10 (1,600) 339 $ (1,261) $ (295) $ (1,251) 3 (10) $ (292) $ (1,261) Adjustment $ 632 632 (3) 17 42 (17) 564 7 1,242 10 14 (4) 1,262 (293) $ 969 $ 956 13 $ 969 basic and diluted, for profit/(loss) attributable to equity holders of the parent entity, US dollars $ (2.19) $ (9.30) $ 7.11 * the change reflects an adjustment amounting to $4 million made in connection with the completion of initial accounting (Note 4). 124 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Changes in accounting policies (continued) Property, Plant and Equipment (continued) (US$ million) AssETs Property, plant and equipment Goodwill Investments in joint ventures and associates Deferred income tax assets non-current assets Inventories Cash and cash equivalents* Current assets Assets of disposal groups classified as held for sale ToTAL AssETs EquITY And LIABILITIEs Revaluation surplus Accumulated profits Translation difference Equity attributable to equity holders of the parent entity Minority interests Equity Deferred income tax liabilities non-current liabilities ToTAL EquITY And LIABILITIEs (US$ million) Cost of revenue Gross profit General and administrative expenses Loss on disposal of property, plant and equipment Impairment of assets Revaluation deficit on property, plant and equipment Profit/(loss) from operations Share of profits/(losses) of joint ventures and associates Gain/(loss) on disposal groups classified as held for sale, net Profit/(loss) before tax Income tax benefit/(expense) nET PRofIT/(Loss) Attributable to: Equity holders of the parent entity Minority interests Earnings/(losses) per share: June 30, 2010 As previously reported $ 14,736 2,165 738 35 Restated $ 8,170 2,140 717 70 Adjustment $ (6,566) (25) (21) 35 12,365 18,942 (6,577) 1,972 650 4,412 106 2,042 654 4,486 113 (70) (4) (74) (7) $ 16,883 $ 23,541 $ (6,658) $ 189 4,273 (1,575) 5,037 269 5,306 1,193 7,929 $ 7,059 2,990 (1,887) 10,312 319 10,631 2,526 9,262 $ (6,870) 1,283 312 (5,275) (50) (5,325) (1,333) (1,333) $ 16,883 $ 23,541 $ (6,658) Six-month period June 30, 2010 Restated $ (4,919) 1,460 (363) As previously reported $ (5,296) 1,083 (375) (13) (54) – 689 71 (36) 323 (131) (24) (38) (138) 167 22 (52) (264) (6) $ 192 $ (270) $ 190 2 $ 192 $ (267) (3) $ (270) Adjustment $ 377 377 12 11 (16) 138 522 49 16 587 (125) $ 462 $ 457 5 $ 462 basic and diluted, for profit/(loss) attributable to equity holders of the parent entity, US dollars $ 1.37 $ (1.93) $ 3.30 125 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Changes in accounting policies (continued) nEw/REvIsEd sTAndARds And InTERPRETATIons AdoPTEd In 2010 • IfRs 2 (revised) ‘share-based Payment’ – Group Cash-settled share-based Payment Transactions The amendment to IFRS 2 clarified the scope and the accounting for group cash-settled share-based payment transactions. It did not have an impact on the financial position or performance of the Group. • IfRs 3 (revised) ‘Business Combinations’ The revised standard introduced significant changes in the accounting for business combinations occurring from January 1, 2010. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. The adoption of these amendments did not have an effect on the financial position or performance of the Group in 2010. • IAs 27 (revised) ‘Consolidated financial statements’ The revised standard requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners, i.e. such transactions do not give rise to goodwill, nor a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. These amendments did not have a significant impact on the financial position or performance of the Group. • IfRIC 17 ‘distributions of non-Cash Assets to owners’ This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation did not have an effect on the financial position or performance of the Group. • Amendment to IAs 39 ‘financial Instruments: Recognition and measurement’ – Eligible hedged Items The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. The amendment did not have any impact on the financial position or performance of the Group, as the Group has not entered into any such hedges. • Amendments to standards following may 2008 and April 2009 ‘improvements to IfRs’ project These amendments clarify the application of certain provisions of the standards. 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: • 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 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ (effective for annual periods beginning on or after July 1, 2010); • 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 May 2010 ‘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 significant impact on the Group’s results of operations and financial position in the period of initial application. significant 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 significant effect on the amounts recognised in the consolidated financial statements: • 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 financial 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 classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. The determination of what is ‘significant’ 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 identified an impairment of $150 million on available-for-sale investments – quoted shares, which is recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations for the year ended December 31, 2008 (Notes 7 and 13). 126 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) significant accounting Judgements and estimates (continued) 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 significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment of Property, Plant and Equipment The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or 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 inflows 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 flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets. In 2010, 2009 and 2008, the Group recognised an impairment loss of $102 million, $15 million and $117 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 financing, 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 flow-based methods, which require the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. 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 financial 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 2010 and 2009, the Group changed its estimation of useful lives of property, plant and equipment, which resulted in a $10 million increase and $102 million decrease in depreciation expense, respectively as compared to the amounts 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. fair values of Assets and Liabilities Acquired in Business Combinations The Group is required to recognise separately, at the acquisition date, the identifiable 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 flows 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 flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at December 31, 2010, 2009 and 2008 was $2,219 million, $2,186 million and $2,167 million, respectively. More details are provided in Note 5. In 2010, 2009 and 2008, the Group recognised an impairment loss in respect of goodwill in the amount of $16 million, $160 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. 127 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) significant 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 reflect 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 reflected in the amount of a provision when there is sufficient objective evidence that they will occur. In 2010, the independent experts made a re-assessment of site restoration provisions (Note 25). Post-Employment Benefits The Group uses actuarial valuation method for measurement of the present value of post-employment benefit 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 benefits (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, expected rate of return on plan assets, etc.). 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 specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements. As of December 31, 2010, 2009 and 2008, allowances for doubtful accounts in respect of trade and other receivables have been made in the amount of $117 million, $92 million, and $93 million, respectively (Note 29). The Group makes an allowance for obsolete and slow-moving raw materials and spare parts (Note 14). In addition, certain finished goods of the Group are carried at net realisable value (Note 14). Estimates of net realisable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm 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 final 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 significantly 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 significant. In Russia and Ukraine the periods remain open to review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. More details are provided in Note 31. deferred Income Tax Assets Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgments based on the 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 financial position, results of operations and cash flows 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. 128 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Foreign Currency transactions The presentation currency of the Group is the US dollar because the presentation in US dollars is convenient for the major current and potential users of the consolidated financial 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. Non-controlling interest is that portion of the profit or loss and net assets of subsidiaries attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent. Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the parent’s shareholders’ equity. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. ACquIsITIon of suBsIdIARIEs fRom JAnuARY 1, 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. The initial accounting for a business combination involves identifying and determining the fair values to be assigned to the acquiree’s identifiable assets, liabilities and contingent liabilities and the cost of 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 identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the Group accounts for the combination using those provisional values. The Group recognises any adjustments to those provisional values as a result of completing the initial accounting within twelve months of the acquisition date. 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. 129 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) Basis of Consolidation (continued) ACquIsITIon of suBsIdIARIEs PRIoR To JAnuARY 1, 2010 The previous accounting policies relating to business combinations include the following differences as compared with the policies applied strating from January 1, 2010: • Transaction costs directly attributable to the acquisition formed part of the acquisition costs. • The non-controlling interest (formerly known as minority interest) could be measured only at the proportionate share of the acquiree’s identifiable net assets. • Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill. • Contingent consideration was recognised if the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognised as part of goodwill. 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 profits, if negative, in the consolidated financial 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 financial statements at the historical cost of the controlling entity (the ‘Predecessor’). Related goodwill inherent in the Predecessor's original acquisition is also recorded in the financial 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 financial statements as an adjustment to the shareholders' equity. These financial statements, including corresponding figures, 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 non-ConTRoLLInG InTEREsTs The Group derecognises non-controlling interests if non-controlling shareholders have a put option over their holdings. The difference between the amount of the liability recognised in the statement of financial position over the carrying value of the derecognised non-controlling interests is charged to accumulated profits. investments in associates Associates are entities in which the Group generally has between 20% and 50% of the voting rights, or is otherwise able to exercise significant influence, but which it does not control or 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 reflect 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’ profits 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 has legal or constructive obligations to make payments to, or on behalf of, the associate. If the associate subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. 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. interests 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 reflects the Group's share of the results of operations of joint ventures. 130 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) property, plant and equipment The Group’s property, plant and equipment is 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. 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 fiscal 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 18 11 14 5 The Group determines the depreciation charge separately for each significant part of an item of property, plant and equipment. Depletion of mining assets including capitalised site restoration costs is calculated using the units-of-production method based upon proved and probable mineral reserves. Maintenance costs relating to items of property, plant and equipment are expensed as incurred. Major renewals and improvements are capitalised, and the replaced assets are derecognised. The Group has the title to certain non-production and social assets, primarily buildings and facilities of social infrastructure, which are carried at their recoverable amount of zero. The costs to maintain such assets are expensed as incurred. leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific 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 benefits 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 finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to interest expense. The depreciation policy for depreciable leased assets is consistent with that for depreciable assets, which are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term or its useful life. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the statement of operations on a straight-line basis over the lease term. goodwill Goodwill represents the excess of the aggregate of the consideration transferred for an acquisition of a subsidiary or an associte and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the acquiree, the difference is recognised in the consolidated statement of operations. 131 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) goodwill (continued) Goodwill on acquisition of a subsidiary is included in intangible assets. Goodwill on acquisition of an associate is included in the carrying amount of the investments in associates. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently, if events or changes in circumstances indicate that the carrying amount may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. 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 operation within that unit is 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. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. 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 finite or indefinite. Intangible assets with finite 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 finite life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortised, they are tested for impairment annually either individually or at the cash generating unit level. The table below presents the useful lives of intangible assets. Customer relationships Trade names and trademarks Water rights and environmental permits with definite 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 12 1 1 1 45 8 Certain water rights and environmental permits are considered to have indefinite lives as management believes that these rights will continue indefinitely. 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 verified 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 financial 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. 132 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) intangible assets other than goodwill (continued) Emission Rights (continued) 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 classified its investments into the following categories: financial assets at fair value through profit 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 profit or loss, directly attributable transaction costs. The Group determines the classification of its investments after initial recognition. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as held for trading and included in the category ‘financial assets at fair value through profit 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 financial assets with fixed 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 financial assets with fixed or determinable payments and fixed maturity that management has the positive intent and ability to hold to maturity are classified as held-to-maturity. Held-to-maturity investments are carried at amortised cost using the effective yield method. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; these are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the 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 classification 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 profit 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 financial 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 flow analysis or other valuation models. All purchases and sales of financial assets under contracts to purchase or sell financial assets that require delivery of the asset within the time frame generally established by regulation or 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 finished goods and work in progress includes an appropriate share of production overheads based on normal operating capacity, but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less 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 identified. 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 specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar receivables in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. 133 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) 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. 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, 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 specified 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 classified 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 financial 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 outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense. Provisions for site restoration costs are capitalised within property, plant and equipment. 134 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) employee Benefits soCIAL And PEnsIon ConTRIBuTIons Defined 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 benefits. 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 benefits to their employees. The entitlement to these benefits is usually conditional on the completion of a minimum service period. Certain benefit plans require the employee to remain in service up to retirement age. Other employee benefits consist of various compensations and non-monetary benefits. The amounts of benefits are stipulated in the collective bargaining agreements and/or in the plan documents. The Group involves an independent qualified actuary in the measurement of all employee benefits obligations. The liability recognised in the statement of financial position in respect of post-employment benefits is the present value of the defined benefit 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 defined benefit obligation is calculated annually using the projected unit credit method. The present value of the benefits is determined by discounting the estimated future cash outflows using interest rates of high-quality government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related obligations. Actuarial gains and losses are recognised as income or expense when the cumulative unrecognised actuarial gains or losses for each individual plan exceed 10% of the higher of defined benefit obligation and the fair value of plan assets. The excess of cumulative actuarial gains or losses over the 10% of the higher of defined benefit 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 benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognised immediately. The defined benefit asset or liability comprises the present value of the defined benefit 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 benefits 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, 2006 and 2010, the Group adopted management compensation schemes, under which certain directors, senior executives and employees of the Group received remuneration in the form of share-based payment transactions, whereby they rendered 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 the Company’s shares 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 fulfilled, 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 reflects 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. No expense is recognised for awards that do not ultimately vest. Once a share-settled transaction is 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. In this case, the Group makes a transfer between different components of equity. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. 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 modification of the original award, as described in the previous paragraph. 135 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 2. significant accounting policies (continued) share-based payments (continue) Cash-settled share-based payments 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 share-based awards is reflected 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 benefits will flow 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 specific recognition criteria must also be met before revenue is recognised: sALE of Goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. The moment of transfer of the risks and rewards of ownership is determined by the contract terms. REndERInG of sERvICEs The Group’s revenues from rendering of services include electricity, transportation, port and other services. Revenue is recognised when services are rendered. InTEREsT Interest is recognised using the effective interest method. dIvIdEnds Revenue is recognised when the shareholders’ right to receive the payment is established. REnTAL InComE Rental income is accounted for on a straight-line basis over the lease term on ongoing leases. Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the 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 financial 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 profit nor taxable profit or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively 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. 136 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information 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. 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 figures 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 profit/(loss) from operations adjusted for impairment of assets, profit/(loss) on disposal of property, plant and equipment and intangible assets, foreign exchange gains/(losses) and depreciation, depletion and amortisation expense. Segment assets and liabilities are not reviewed by the Group’s chief operating decision maker and presented in these consolidated financial 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 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 financial 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. 137 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information (continued) The following tables present measures of segment profit or loss based on management accounts in accordance with the new accounting policies in respect of segment information. Year ended december 31, 2010 (US$ million) Revenue Sales to external customers Inter-segment sales Total revenue sEGmEnT REsuLT – EBITdA Year ended december 31, 2009 (US$ million) Revenue Sales to external customers Inter-segment sales Total revenue sEGmEnT REsuLT – EBITdA Steel production $ 12,592 359 12,951 $ 1,445 Mining $ 322 2,056 2,378 $ 898 Vanadium products Other operations Eliminations Total $ 280 $ 140 $ – $ 13,334 257 537 $ 90 536 676 (3,208) (3,208) – 13,334 $ 122 $ (155) $ 2,400 Steel production Mining Vanadium products Other operations Eliminations Total $ 9,292 $ 188 $ 226 $ 117 $ – $ 9,823 129 9,421 $ 950 1,160 1,348 $ 179 36 262 $ 12 439 556 $ 110 (1,764) (1,764) – 9,823 $ – $ 1,251 The following table shows a reconciliation of revenue and EBITDA used by management for decision making and revenue and profit or loss before tax per the consolidated financial statements prepared under IFRS. Year ended december 31, 2010 (US$ million) Revenue Forecasted vs. actual revenue Reclassifications and other adjustments REvEnuE PER IfRs fInAnCIAL sTATEmEnTs EBITdA Forecasted vs. actual EBITDA Exclusion of management services from segment result Unrealised profits adjustment Reclassifications and other adjustments Steel production Mining Vanadium products Other operations Eliminations Total $ 12,951 $ 2,378 $ 537 $ 676 $ (3,208) $ 13,334 112 (940) (7) 136 $ 12,123 $ 2,507 $ 1,445 $ 898 (24) 62 (33) (11) (6) (14) 32 – 19 37 (4) 33 $ 566 $ 90 (1) 2 3 (41) (37) (1) 140 $ 815 $ 122 – 591 100 (40) $ (2,617) $ 13,394 $ (155) $ 2,400 – 2 – 66 68 – – 45 – 45 (39) 98 15 33 107 EBITdA based on IfRs financial statements $ 1,439 $ 935 $ 53 $ 190 $ (110) $ 2,507 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 Foreign exchange gains/(losses), net (558) (282) – – (81) (20) (33) 65 (18) (2) (47) (16) – – – (37) – (30) (1) 1 (157) $ 2,350 (924) (16) (131) (52) 64 – – – – – $ 832 $ 613 $ (10) $ 123 $ (110) $ 1,291 Unallocated income/(expenses), net PRofIT/(Loss) fRom oPERATIons Interest income/(expense), net Share of profits/(losses) of joint ventures and associates Gain/(loss) on financial assets and liabilities Loss on disposal groups classified as held for sale Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating gains/(losses), net PRofIT/(Loss) BEfoRE TAx 39 $ 1,330 $ (715) 73 8 (4) 4 (1) $ 695 138 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information (continued) Year ended december 31, 2009 (US$ million) REvEnuE Forecasted vs. actual revenue Reclassifications and other adjustments REvEnuE PER IfRs fInAnCIAL sTATEmEnTs EBITdA Forecasted vs. actual EBITDA Exclusion of management services from segment result Unrealised profits adjustment Reclassifications and other adjustments Steel production Mining Vanadium products Other operations Eliminations Total $ 9,421 $ 1,348 $ 262 $ 556 $ (1,764) $ 9,823 (54) (389) (2) 110 $ 8,978 $ 1,456 $ 950 $ 179 (27) 53 (15) (34) (23) – 30 – 70 100 3 98 $ 363 $ 12 – – – (24) (24) – 209 $ 765 $ 110 – 4 – 53 57 – (26) (53) 2 $ (1,790) $ 9,772 $ – $ 1,251 – – 12 – 12 (27) 87 (3) 65 122 EBITdA based on IfRs financial statements $ 927 $ 279 $ (12) $ 167 $ 12 $ 1,373 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 Foreign exchange gains/(losses), net Unallocated income/(expenses), net PRofIT/(Loss) fRom oPERATIons Interest income/(expense), net Share of profits/(losses) of joint ventures and associates Gain/(loss) on financial assets and liabilities Loss on disposal groups classified as held for sale Excess of interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition Other non-operating gains/(losses), net PRofIT/(Loss) BEfoRE TAx (624) (160) (24) (25) 54 $ 148 (281) (38) (35) – 4 (12) 1 $ (9) – – – – – – (2) – $ (50) $ 130 $ 12 (136) $ 1,237 (978) (160) (20) (39) 55 $ 95 100 $ 195 $ (637) 2 97 (5) 6 4 $ (338) 139 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 profit information regarding business segments for the years ended December 31, 2010, 2009 and 2008 in accordance with the previous accounting policies in respect of segment information. Year ended december 31, 2010 (US$ million) REvEnuE Steel production Mining Vanadium products Other operations Eliminations Total Sales to external customers $ 11,976 $ 736 $ 536 $ 146 $ – $ 13,394 147 12,123 1,771 2,507 30 566 669 815 (2,617) – (2,617) 13,394 $ 832 $ 613 $ (10) $ 123 $ (110) $ 1,448 Share of profits/(losses) of joint ventures and associates (32) 105 – – Investments in joint ventures and associates 32 718 – – $ 11,960 $ 3,293 $ 620 $ 503 $ 16,376 Inter-segment sales ToTAL REvEnuE REsuLT sEGmEnT REsuLT Unallocated expenses PRofIT/(Loss) fRom oPERATIons Other income/(expenses), net Income tax expense nET PRofIT/(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 Impairment losses reversed through statement of operations Impairment losses recognised in other comprehensive income $ 1,636 $ 525 $ 246 $ 50 $ 516 $ 307 $ 10 $ 44 $ 877 123 (579) (96) 15 – – (289) (21) 1 (7) – (22) (16) – – – (37) (30) – – 123 (927) (163) 16 (7) (118) $ 1,330 73 (708) (163) $ 532 750 475 $ 17,601 $ 2,457 9,146 $ 11,603 140 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information (continued) 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 $ 148 $ (9) $ (50) $ 130 $ 12 $ 231 Share of profits/(losses) of joint ventures and associates (1) 3 – – Investments in joint ventures and associates 65 569 – – $ 11,435 $ 3,397 $ 592 $ 516 $ 15,940 Inter-segment sales ToTAL REvEnuE REsuLT sEGmEnT REsuLT Unallocated expenses PRofIT/(Loss) fRom oPERATIons Other income/(expenses), net Income tax expense nET PRofIT/(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 Impairment losses reversed through statement of operations Impairment losses recognised in other comprehensive income $ 1,373 $ 484 $ 155 $ 43 $ 208 $ 150 $ 2 $ 33 $ 393 7 (545) (229) 45 – – (289) (18) 22 (8) 54 (54) – – – – (48) – – – 61 (936) (247) 67 (8) (36) $ 195 2 (535) 46 $ (292) 634 378 $ 16,952 $ 2,055 9,455 $ 11,510 141 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information (continued) Year ended december 31, 2008 (US$ million) REvEnuE Sales to external customers Inter-segment sales ToTAL REvEnuE REsuLT sEGmEnT REsuLT Unallocated expenses PRofIT/(Loss) fRom oPERATIons Steel production Mining Vanadium products Other operations Eliminations Total $ 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 Share of profits/(losses) of joint ventures and associates – 194 – – – Other income/(expenses), net Income tax expense nET PRofIT/(Loss) AssETs And LIABILITIEs Segment assets $ 12,794 $ 3,684 $ 478 $ 547 Investments in joint ventures and associates 10 541 – – Unallocated assets ToTAL AssETs Segment liabilities Unallocated liabilities ToTAL LIABILITIEs $ 1,881 $ 460 $ 101 $ 70 oThER sEGmEnT InfoRmATIon Additions to property, plant and equipment and intangible assets Property, plant and equipment and intangible assets acquired in business combinations Depreciation, depletion and amortisation Impairment losses recognised in statement of operations $ 740 $ 415 $ 9 $ 30 $ 1,194 1,534 (756) (821) – (380) (56) – (43) – – (47) (3) 1,534 (1,226) (880) (358) $ 3,632 194 (775) (1,192) $ 1,859 $ 17,503 551 1,397 $ 19,451 $ 2,512 12,022 $ 14,534 142 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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-finished 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 2010 2009 2008 $ 3,331 $ 2,184 $ 4,949 2,005 1,466 1,309 2,340 383 1,064 77 1,448 1,113 1,008 2,018 236 729 119 3,236 2,221 1,753 3,512 562 1,305 85 11,975 8,855 17,623 330 355 26 25 736 39 493 3 2 537 146 146 175 219 22 19 435 60 290 3 1 354 128 128 708 461 84 37 1,290 290 909 – 2 1,201 266 266 $ 13,394 $ 9,772 $ 20,380 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 Thailand Ukraine Taiwan United Arab Emirates South Africa China Kazakhstan Philippines Germany Italy Czech Republic Austria Poland Korea Turkey Indonesia Vietnam Japan Syria Slovakia Great Britain Jordan Other countries 2010 $ 4,692 1,674 1,451 550 471 459 410 407 367 342 285 219 205 189 188 139 126 118 113 93 71 65 64 28 29 639 2009 $ 2,950 1,543 861 285 233 228 415 298 528 210 250 116 140 120 148 93 174 130 74 226 21 62 51 25 101 490 2008 $ 7,575 3,232 1,283 479 913 504 289 649 172 327 149 417 343 295 415 166 760 192 143 234 121 104 119 173 74 1,252 $ 13,394 $ 9,772 $ 20,380 143 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 3. segment information (continued) None of the Group’s customers amounts to 10% or more of the consolidated revenues. 3. 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 2010 $ 8,245 2,864 2,638 1,029 1,215 515 435 336 154 138 32 2009 2008 $ 7,555 $ 8,252 2,935 2,523 1,131 1,235 455 490 334 148 113 33 3,604 2,415 1,052 1,533 613 646 415 159 723 39 $ 17,601 $ 16,952 $ 19,451 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 2010 $ 764 2009 $ 293 2008 $ 971 34 36 11 4 26 9 30 26 15 14 13 3 50 53 15 19 84 8 $ 884 $ 394 $ 1,200 4. Business Combinations 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). 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 a cash consideration of $1,110 million. In June 2008, that agreement was amended increasing the cash portion of the consideration payable to Lanebrook by $18 million. The Group obtained control over Palmrose on April 14, 2008. The acquisition of 51.4% and 48.6% ownership interests in Palmrose were considered as linked transactions and were accounted for as a single transaction in these financial statements. As a result, on April 14, 2008, the Group effectively acquired 100% ownership interest in Palmrose with a deferred consideration in respect of 48.6% ownership interest. 144 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) steel and mining Businesses in ukraine (continued) In accordance with the accounting policy (Note 2), the Group accounted for this acquisition by applying the pooling of interests method and presented its consolidated financial statements as if the transfer of controlling interest in the subsidiary had occurred from the date of acquisition of the subsidiary by Lanebrook, which was December 11, 2007. As a result, the financial position and the results of operations of Palmrose were included in the Group’s consolidated financial statements beginning December 11, 2007. The table below sets forth the fair values of Palmrose’s consolidated identifiable assets, liabilities and contingent liabilities at the date of its acquisition by the predecessor: (US$ 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 non-controlling interests nET AssETs Purchase consideration GoodwILL In 2007, cash flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiaries Cash paid nET CAsh ouTfLow December 11, 2007 $ 429 1,307 822 2,558 57 377 839 1,273 40 $ 1,245 $ 2,108 $ 863 $ – (1,060) $ (1,060) $68 million paid by the Group to Lanebrook in 2008 was recorded as a distribution to a shareholder in the consolidated statement of cash flows. 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 profits 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 profits 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 non-controlling 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 non-controlling interests acquired amounting to $1 million was charged to accumulated profits. 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. 145 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) Claymont steel (continued) 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 $7 million. As a result, the financial position and the results of operations of Claymont Steel were included in the Group’s consolidated financial statements beginning January 16, 2008. The table below sets forth the fair values of identifiable assets, liabilities and contingent liabilities of Claymont Steel at the date of acquisition: (US$ 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 flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiary Cash paid nET CAsh ouTfLow 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 and 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 affiliates, 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 $65 million. The financial position and the results of operations of IPSCO Inc. were included in the Group’s consolidated financial statements beginning June 12, 2008. 146 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) ipsCo inc. (continued) The table below sets forth the fair values of IPSCO Inc.’s consolidated identifiable assets, liabilities and contingent liabilities at the date of acquisition: (US$ 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 nET AssETs Purchase consideration GoodwILL In 2008, cash flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiary Cash paid nET CAsh ouTfLow June 12, 2008 $ 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 financial position as of December 31, 2008. In 2009, TMK exercised its call option for a 49% ownership interest in NS Group (Note 18). 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 refinery 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 in Vanady-Tula for 3,140 million roubles ($108 million at the exchange rate as of November 2, 2009, the date of the 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 at 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 were exercised before their expiration. During 2008 and 2009, the Group purchased 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, the Group obtained the necessary regulatory approvals. The share options became exercisable and economic benefits have been effectively transferred to the Group since that date. As a result, the financial position and results of operations of Vanady-Tula were included in the Group’s consolidated financial 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 ($95 million at the exchange rate as of the date of the transaction, which was completed on December 15, 2009). 147 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) Vanady-tula (continued) The table below sets forth the fair values of Vanady-Tula’s consolidated identifiable assets, liabilities and contingent liabilities at the date of business combination: (US$ 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 flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiary Cash paid nET CAsh ouTfLow November 2, 2009 $ 54 14 16 84 9 31 40 $ 44 41 $ 110 $ 69 $ – (5) $ (5) At December 31, 2009, the Group’s accounts receivable include $12 million due from the seller. For the period from November 2, 2009 to December 31, 2009, Vanady-Tula reported net profit 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 non-controlling interests in the entity and accrued a liability to the non-controlling shareholders in the amount of $17 million. This transaction resulted in a $5 million charge to accumulated profits. In February, 2010, the Group made an offer to non-controlling shareholders of Vanady-Tula to sell their stakes to the Group. The non-controlling shareholders sold an 11.26% ownership interest to the Group. The Russian legislation allows a shareholder owning more than 95% of a company to increase its stake to 100% through a forced disposal of the shares held by non-controlling shareholders. Consequently, in August 2010, the Group started the buy out of non-controlling shares of Vanady-Tula. In November, 2010, the Group completed the buy-out of the remaining shares (3.90%). The total purchase consideration for a 15.16% ownership interest amounted to 521 million Russian roubles ($18 million at the exchange rate as of the dates of transactions). steel dealers On October 15, 2009, the Group acquired a 100% interest in a holding company owning steel dealers throughout Russia (formerly known as Carbofer). The purchase consideration amounted to $11 million. The financial position and the results of operations of this holding were included in the Group’s consolidated financial statements beginning October 15, 2009. At December 31, 2009, the acquisition was accounted for based on provisional values as the Group, as of the date of authorisation of issue of the financial statements for the year ended December 31, 2009, has not completed purchase price allocation in accordance with IFRS 3 ‘Business Combinations’. In 2010, the Group finalised its purchase price allocation on the acquisition of steel dealers. As a result, the Group recognised adjustments to the provisional values of identifiable assets, liabilities and contingent liabilities at the date of acquisition. 148 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) steel dealers (continued) The table below sets forth the fair values of consolidated identifiable assets, liabilities and contingent liabilities at October 15, 2009: (US$ 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 IdEnTIfIABLE AssETs, LIABILITIEs And ConTInGEnT LIABILITIEs ovER ThE CosT of ACquIsITIon In 2009, cash flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiary Cash paid nET CAsh ouTfLow Provisional fair values Final estimation of fair values $ 7 7 73 45 8 140 119 119 $ 21 $ 11 $ 10 $ 7 7 73 45 4 136 119 119 $ 17 $ 11 $ 6 $ 4 (9) $ (5) In 2010, the Group paid $1 million of purchase consideration. At December 31, 2010, unpaid purchase consideration was $1 million. For the period from October 15 to December 31, 2009, steel dealers reported net loss amounting to $5 million. inprom group On December 22, 2010, the Group acquired 100% in a holding entity owning steel dealers throughout Russia (so called Inprom Group). Purchase consideration consisted of cash amounting to $19 million plus the fair value of a deferred consideration of $21 million. The financial position and the results of operations of Inprom were included in the Group’s consolidated financial statements beginning December 22, 2010. The acquisition was accounted for based on provisional values as the Group, as of the date of authorisation of issue of these financial statements, has not completed purchase price allocation in accordance with IFRS 3 ‘Business Combinations’. The table below sets forth the provisional fair values of consolidated identifiable assets, liabilities and contingent liabilities at the date of acquisition: (US$ million) Property, plant and equipment Other non-current assets Inventories Accounts and notes receivable Cash Total assets Non-current liabilities Current liabilities Total liabilities non-controlling interests nET AssETs Purchase consideration ExCEss of InTEREsT In ThE nET fAIR vALuE of ACquIREE’s IdEnTIfIABLE AssETs, LIABILITIEs And ConTInGEnT LIABILITIEs ovER ThE CosT of ACquIsITIon December 22, 2010 $ 123 26 31 24 8 212 8 161 169 (1) $ 44 $ 40 $ 4 149 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 4. Business Combinations (continued) inprom group (continued) In 2010, cash flow on acquisition was as follows: (US$ million) Net cash acquired with the subsidiary Cash paid nET CAsh ouTfLow $ 8 (18) $ (10) For the period from December 22 to December 31, 2010, Inprom Group reported net loss amounting to $1 million. disclosure of other information in respect of Business Combinations As the acquired subsidiaries either did not prepare financial statements in accordance with IFRS before the business combinations or applied accounting policies that are significantly different from the Group’s accounting policies, it is impracticable to determine revenues and net profit of the combined entity for each year presented on the assumption that all business combinations effected during each year had occurred at the beginning of the respective year. It is impracticable to determine the carrying amounts of each class of the acquirees' assets, liabilities and contingent liabilities, determined in accordance with IFRS, immediately before the combination, because the acquirees did not prepare financial statements in accordance with IFRS before acquisitions. 5. goodwill The table below presents movement in the carrying amount of goodwill. (US$ million) 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 General Scrap Evraz Inc. N.A. Canada (Surrey) Translation difference At december 31, 2009 Adjustment to contingent consideration Impairment Stratcor, Inc. Translation difference AT dECEmBER 31, 2010 Gross amount $ 2,145 1,223 (2) – – – – (443) 2,923 69 (5) – – – – – 94 3,081 8 – – 43 Impairment losses Carrying amount $ – $ 2,145 – – (756) (466) (187) (103) – 1,223 (2) (756) (466) (187) (103) (443) (756) 2,167 – – (160) (100) (49) (4) (7) 21 (895) – (16) (16) (2) 69 (5) (160) (100) (49) (4) (7) 115 2,186 8 (16) (16) 41 $ 3,132 $ (913) $ 2,219 150 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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. NA (formerly Oregon Steel Mills) Oregon Steel Portland Mill OSM Tubular – Portland Mill Rocky Mountain Steel Mills OSM Tubular – Camrose Mills Claymont Steel General Scrap (was a part of IPSCO at the time of IPSCO acquisition) Evraz Inc. NA Canada (formerly IPSCO) Calgary Red Deer Regina Steel Regina Tubular Others Palmrose Dnepropetrovsk Iron and Steel Works Dneprodzerzhinsk Coke Chemical Plant Bagleykoks Dneprokoks Evraz Palini e Bertoli Vanady-Tula Strategic Minerals Corporation Nikom, a.s. Evraz Highveld Steel and Vanadium Limited Evro-Aziatskaya Energy Company 2010 2009 2008 $ 1,130 $ 1,130 $ 1,183 412 – 410 157 135 16 845 232 57 397 137 22 – – – – – 78 66 31 40 29 – 412 – 410 157 135 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 $ 2,219 $ 2,186 $ 2,167 The cash generating units within Evraz Inc. N.A. and Evraz Inc. N.A. Canada represent the smallest identifiable groups of assets, primarily individual mills, that generate cash flows that are largely independent from other assets or groups of assets. Goodwill was tested for impairment as of December 31, 2010. 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 flows projections based on the actual operating results and business plans approved by management and appropriate discount rates reflecting time value of money and risks associated with respective cash generating units. For the periods not covered by management business plans, cash flow projections have been estimated by extrapolating the respective business plans results using a zero real growth rate. For mining operations management business plans cover the full life of mines. The key assumptions used by management in value-in-use calculation are presented in the table below. Evraz Inc. NA Evraz Inc. NA Canada Evraz Palini e Bertoli Vanady-Tula Strategic Minerals Corporation Nikom, a.s. Evraz Highveld Steel and Vanadium Limited Period of forecast, years Pre-tax discount rate, % 5 5 5 5 5 5 5 11.63–13.05 13.05 12.77 13.39 14.28 13.19 14.65 Commodity steel products steel products steel plates vanadium products ferrovanadium products ferrovanadium products ferrovanadium products steel products Average price of the commodity per ton in 2011 $ 899 $ 971 $ 660 $ 26,569 $ 34,980 $ 30,667 $ 38,154 $ 795 151 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 5. goodwill (continued) The calculations of value-in-use are most sensitive to the following assumptions: discount rates Discount rates reflect the current market assessment of the risks specific 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 Nikom cash generating units. A 10% increase in the discount rates would lead to an additional impairment of $55 million. sales prices The prices of the products sold by the Group were estimated using industry research. The average prices for steel products in 2011 were assumed to be 11% higher than the 2010 average. The Group expects that in 2012–2015 the nominal prices will grow on average by 5% and in 2016 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 2011 and 2012 in the impairment test were 10% lower, this would lead to an additional impairment of $27 million. sales Volumes Management assumed that the sales volumes of steel products would increase on average by 5% during 2011 and would grow evenly during the following four 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 2011 and 2012 in the impairment test, this would lead to an additional impairment of $11 million. 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., Nikom and Vanady-Tula cash generating units. If the actual costs were 10% higher than those assumed for 2011 and 2012 in the impairment test, this would lead to an additional impairment of $56 million. 6. acquisitions of non-controlling interests in subsidiaries highveld In 2008, the Group acquired an additional non-controlling interest of 4.2% in Highveld Steel and Vanadium Corporation for a cash consideration of $69 million. The excess of the amounts of consideration over the carrying values of non-controlling interests acquired amounting to $35 million was charged to accumulated profits. 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 non-controlling 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 profits. stratcor In 2010, the Group acquired an additional non-controlling interest of 5.92% in Strategic Minerals Corporation (‘Stratcor’) for a cash consideration of $8 million paid in 2009. The excess of the amount of consideration paid over the carrying value of acquired non-controlling interest amounting to $3 million was charged to accumulated profits. In addition, during the reporting period, the Group fully settled $16 million liability under earn-out payments for the acquisition of Stratcor in 2006 (Note 26). ldpp In 2010, the Group acquired an additional non-controlling interest of 25% in OAO Large Diameter Pipe Plant (‘LDPP’) for a cash consideration of $8 million. The excess of the carrying value of acquired non-controlling interest over the amount of consideration paid amounting to $1 million was recorded in additional paid-in capital. 152 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 7. income and expenses Cost of revenues, selling and distribution costs, general and administrative expenses include the following for the years ended December 31: (US$ million) Cost of inventories recognised as expense Staff costs, including social security taxes Depreciation, depletion and amortisation 2010 2009 2008 $ (5,241) $ (3,849) $ (6,408) (1,743) (925) (1,524) (979) (2,154) (1,195) In 2010 and 2009, the Group made a reversal of the allowance for net realisable value in the amount of $35 million and $177 million, respectively. In 2008, the amount of a write-down of finished goods to net realisable value together with the allowance for obsolete and slow-moving inventories that were recognised as expense amounted to $314 million. The major components of other operating expenses were as follows: (US$ million) Idling, reduction and stoppage of production, including termination benefits Restoration works and casualty compensations in connection with accidents Write-off of Mezhegey licence Other 2010 $ (45) (17) – (48) 2009 $ (70) (1) – (50) 2008 $ (19) (4) (12) (25) $ (110) $ (121) $ (60) 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 significant 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 $32 million. Interest expense consisted of the following for the years ended December 31: (US$ million) Bank interest Interest on bonds and notes Finance charges payable under finance leases Interest on liabilities relating to employee benefits and expected return on plan assets Discount adjustment on provisions Interest on contingent consideration Other Interest income consisted of the following for the years ended December 31: 2010 $ (241) (423) (6) (32) (15) (1) (10) 2009 $ (346) (268) (7) (28) (12) (2) (14) 2008 $ (392) (221) (7) (17) (9) (2) (7) $ (728) $ (677) $ (655) (US$ million) Interest on bank accounts and deposits Interest on loans receivable Interest on loans receivable from related parties Interest on accounts receivable Other Gain/(loss) on financial assets and liabilities included the following for the years ended December 31: (US$ million) Gain/(loss) on available-for-sale financial 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 financial instrument relating to the transaction with 49% ownership interest in NS Group (Note 18) Other 2010 $ 9 1 2 1 – 2009 $ 17 10 6 7 – 2008 $ 37 15 – 1 4 $ 13 $ 40 $ 57 2010 $ (2) – – 4 – 6 2009 $ – 103 (1) 1 (2) (4) 2008 $ (150) 80 (27) (10) (3) (19) $ 8 $ 97 $ (129) 153 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 2010 20.00% 28.00% 10.00% 19.00% 31.40% 28.00% 10.09% 25.00% 35.00% 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% 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. In 2010, a new Tax Code has been adopted in Ukraine, which introduced a gradual reduction in income tax rates from 25% in 2010 to 16% in 2014. In addition, in accordance with the new Tax Code the carrying values of property, plant and equipment per statutory books as of April 1, 2011 will become a new tax base of these assets for income tax calculations. The Group’s subsidiaries measured the respective deferred tax assets and liabilities at December 31, 2010 based on the new tax bases using the announced tax rates and a forecast of temporary differences reversal. 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 benefit/(expense) relating to origination and reversal of temporary differences Deferred income tax benefit relating to changes in tax rates Deferred income tax benefit relating to changes in tax regulations other than tax rates Less: deferred income tax recognised directly in other comprehensive income InComE TAx BEnEfIT/(ExPEnsE) REPoRTEd In ThE ConsoLIdATEd sTATEmEnT of oPERATIons 2010 $ (415) (8) 119 17 125 (1) 2009 $ (179) (6) 219 13 – (1) 2008 $ (1,622) 28 302 107 – (7) $ (163) $ 46 $ (1,192) The major part of income taxes is paid in the Russian Federation. A reconciliation of income tax expense applicable to profit before income tax using the Russian statutory tax rate to income tax expense as reported in the Group’s consolidated financial statements for the years ended December 31 is as follows: (US$ million) Profit before income tax At the Russian statutory income tax rate of 20% (2009: 20%, 2008: 24%) Adjustment in respect of income tax of previous years Deferred income tax benefit resulting from reduction in tax rate Deferred income tax benefit relating to changes in tax regulations other than tax rates Less: deferred income tax recognised directly in other comprehensive income 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 profits in joint ventures and associates Utilisation of previously unrecognised tax losses Benefit arising from early payment of income tax Tax paid on dividends to minorities 2010 $ 695 (139) (8) 17 125 (1) (254) – – 82 – 15 – – – 2009 $ (338) 2008 $ 3,051 68 (6) 13 – (1) (111) – (1) 68 11 – 5 – – (732) 28 107 – (7) (430) 23 (153) (100) 43 25 5 6 (7) InComE TAx ExPEnsE REPoRTEd In ThE ConsoLIdATEd sTATEmEnT of oPERATIons $ (163) $ 46 $ (1,192) 154 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 8. income taxes (continued) In 2008, the effect of non-deductible expenses included $(181) million in respect of impairment of goodwill and $(94) million in respect of non-deductible foreign exchange losses related to Canadian and Luxembourg entities. Deferred income tax assets and liabilities and their movements for the years ended December 31 were as follows: Year ended december 31, 2010 (US$ million) 2010 Change recognised in statement of operations Received from tax authorities Change recognised in other comprehensive income Change due to business combinations Change due to disposal of subsidiaries Translation difference 2009 deferred income tax liabilities: Valuation and depreciation of property, plant and equipment Valuation and amortisation of intangible assets Other deferred income tax assets: Tax losses available for offset Accrued liabilities Impairment of accounts receivable Other Allowance for deferred tax assets nET dEfERREd InComE TAx AssET nET dEfERREd InComE TAx LIABILITY $ 1,074 (184) 274 89 1,437 (38) (7) (229) 150 197 33 140 (55) 465 100 5 67 6 8 (55) 31 24 $ 1,072 (236) – – – – (74) – – – – (74) – 74 (1) – – (1) – – – – – – – 5 – – 5 11 – 5 1 – 17 10 (13) 10 $ 1,257 – – (13) 15 4 29 297 92 1,646 – – – – – – – 5 2 – (1) – 6 203 128 22 132 – 485 (4) 70 (1) (2) (13) 19 $ 1,231 155 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 8. income taxes (continued) Year ended december 31, 2009 (US$ million) 2010 Change recognised in statement of operations Received from tax authorities Change recognised in other comprehensive income Change due to business combinations Change due to disposal of subsidiaries Translation difference 2009 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 $ 1,257 (42) 297 – 92 1,646 203 128 22 132 485 70 (49) (11) 31 (71) 154 (20) (3) 29 160 20 $ 1,231 (211) – – – – – – – – – – – – (1) – – – (1) – – – – – 9 – – – 9 4 – 2 1 7 8 (1) 10 – – – – – – – – – – – – 17 $ 1,274 36 – 3 56 2 1 (1) 8 10 (2) 310 11 58 1,653 43 147 24 94 308 44 44 $ 1,389 156 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 8. income taxes (continued) Year ended december 31, 2008 (US$ million) 2010 Change recognised in statement of operations Received from tax authorities Change recognised in other comprehensive income Change due to business combinations Change due to disposal of subsidiaries Translation difference 2009 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 $ 1,274 (221) 310 11 58 1,653 43 147 24 94 308 44 (39) (43) (85) (388) 14 (3) 2 1 14 27 $ 1,389 (375) – – – – – – – – – – – – (7) – – – (7) – – – – – – 170 177 – 47 394 10 7 – – 17 – (7) 377 – – – – – – – – – – – – (268) $ 1,600 (54) 226 – (10) 54 106 (332) 1,986 (4) (15) (7) (15) (41) 23 158 29 108 318 (5) 22 (296) $ 1,690 As of December 31, 2010, 2009 and 2008, deferred income taxes have been provided for in respect of undistributed earnings of the Group’s subsidiaries amounting to $nil, $nil and $199 million, respectively, as management intended to dividend these amounts. Management does not intend to distribute other accumulated earnings in the foreseeable future. The current tax rate on intra-group dividend income varies from 0% to 10%. At December 31, 2010, the Group has not recognised a deferred tax liability and deferred tax asset in respect of temporary differences of $5,764 million and $2,831 million, respectively (2009: $4,270 million and $2,713 million, respectively; 2008: $4,118 million and $2,826 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. 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 profits of other companies, except for the companies registered in Cyprus where group relief can be applied. As of December 31, 2010, the unused tax losses carry forward approximated $3,365 million (2009: $2,757 million, 2008: $803 million). The Group recognised deferred tax asset of $150 million (2009: $203 million, 2008: $43 million) in respect of unused tax losses. Deferred tax asset in the amount of $655 million (2009: $463 million, 2008: $78 million) has not been recorded as it is not probable that sufficient taxable profits will be available in the foreseeable future to offset these losses. Tax losses of $2,555 million (2009: $1,873 million, 2008: $463 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 $2,535 million (2009: $1,870 million, 2008: $459 million) are available indefinitely for offset against future taxable profits of the companies in which the losses arose and $20 million (2009: $3 million, 2008: $4 million) will expire during 2016–2029. 157 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 9. property, plant and equipment Property, plant and equipment consisted of the following as of December 31: (US$ 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 2010 2009 2008 $ 177 2,536 5,738 483 2,656 84 702 $ 164 2,456 5,342 445 2,617 77 539 $ 157 2,383 4,971 430 2,603 98 691 12,376 11,640 11,333 (854) (2,046) (203) (607) (55) (711) (1,631) (173) (485) (50) (570) (1,218) (133) (359) (35) (3,765) (3,050) (2,315) (4) (5) (6) $ 8,607 $ 8,585 $ 9,012 The movement in property, plant and equipment for the year ended December 31, 2010 was as follows: (US$ million) At december 31, 2009, cost, net of accumulated depreciation and government grants Reclassifications 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 Transfer to/from assets held for sale Change in site restoration and decommissioning provision Translation difference AT dECEmBER 31, 2010, CosT, nET of ACCumuLATEd dEPRECIATIon And GovERnmEnT GRAnTs Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Land Assets under construction Total $ 164 $ 1,745 $ 3,706 $ 272 $ 2,132 $ 27 $ 539 $ 8,585 – – 11 1 (1) – – – – – – 2 1 2 47 54 (9) (4) 4 55 423 (39) 1 6 2 45 (3) 3 25 – 70 (12) (1) – 3 11 (2) – 840 5 (604) (10) – 877 123 – (76) (149) (453) (40) (151) (10) – (803) (4) 3 (4) (6) 2 – (40) 8 (1) (9) – 38 – – – – – (3) (8) 1 (2) (75) 71 (5) – – – – – 1 (65) (117) 3 – – – (6) 15 (7) (90) 73 27 $ 177 $ 1,682 $ 3,688 $ 280 $ 2,049 $ 29 $ 702 $ 8,607 158 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 Reclassifications 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 decommissioning provision Translation difference AT dECEmBER 31, 2009, CosT, nET of ACCumuLATEd dEPRECIATIon And GovERnmEnT GRAnTs Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Land Assets under construction Total $ 157 $ 1,813 $ 3,747 $ 297 $ 2,244 $ 63 $ 691 $ 9,012 5 – – 3 – – – – (4) – – – 3 35 – 31 56 (11) (12) 10 26 346 (26) (1) 1 2 24 (4) 5 11 – 72 (1) (34) – – 15 (1) (151) (445) (43) (147) (17) (28) (33) 15 20 (3) (1) (3) 5 (13) (1) – – 6 68 – – – – – – (4) (4) 22 – (10) – 3 (63) – – – – (2) – 3 2 371 2 (516) (6) – (7) – – – – – 2 – 393 61 – (49) (803) (72) 57 (8) (11) (5) 14 (4) $ 164 $ 1,745 $ 3,706 $ 272 $ 2,132 $ 27 $ 539 $ 8,585 159 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 Reclassifications 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 constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Land 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) (3) 32 – 122 (5) (13) – 15 11 (1) (52) (220) (22) (1) – – (63) (53) – 21 (583) – 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 dEPRECIATIon And GovERnmEnT GRAnTs $ 157 $ 1,813 $ 3,747 $ 297 $ 2,244 $ 63 $ 691 $ 9,012 Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $250 million, $121 million and $145 million as of December 31, 2010, 2009 and 2008, respectively. Impairment losses were identified 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, 2010 was $5 million (2009: $7 million, 2008: $18 million). In 2010, the rate used to determine the amount of borrowing costs eligible for capitalisation was 6.3%, which is the effective interest rate of the specific borrowings. 10. intangible assets other than goodwill Intangible assets consisted of the following as of December 31: (US$ 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 2010 2009 2008 $ 1,353 $ 1,276 $ 1,117 31 64 10 11 53 31 64 9 42 46 28 63 9 66 56 1,522 1,468 1,339 (441) (25) (6) (8) (3) (35) (518) (307) (19) (5) (6) (2) (31) (370) (171) (12) (3) (4) (8) (33) (231) $ 1,004 $ 1,098 $ 1,108 160 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 10. intangible assets other than goodwill (continued) As of December 31, 2010, 2009 and 2008, water rights and environmental permits with a carrying value $56 million had an indefinite useful life. (US$ million) At december 31, 2009, cost, net of accumulated amortisation Additions Amortisation charge Emission allowances granted Emission allowances used/sold/ purchased for the period Impairment loss recognised in statement of operations Impairment losses reversed through statement of operations Translation difference AT dECEmBER 31, 2010, CosT, nET of ACCumuLATEd AmoRTIsATIon Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Total $ 969 $ 12 – (113) – – – 1 55 – (6) – – – – – $ 59 – (1) – – – – – $ 3 $ 40 $ 15 $ 1,098 – (2) – – – – 1 – (1) – – (30) – (1) 7 (4) 6 (5) – – (1) 7 (127) 6 (5) (30) 1 54 $ 912 $ 6 $ 58 $ 2 $ 8 $ 18 $ 1,004 The movement in intangible assets for the year ended December 31, 2009 was as follows: (US$ million) At december 31, 2008, cost, net of accumulated amortisation 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 Customer relationships Trade names and trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Total $ 946 $ 16 $ 60 $ 5 $ 58 $ 23 $ 1,108 – (104) – – (15) 8 134 – (5) – – – 2 (1) – (1) – – – – – – (2) – – – – – – (18) – – – – – 1 (4) 5 (11) – – 1 1 (134) 5 (11) (15) 10 134 $ 969 $ 12 $ 59 $ 3 $ 40 $ 15 $ 1,098 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 trademarks Water rights and environmental permits Patented and unpatented technology Contract terms Other Total $ 627 $ 25 $ 61 – 613 (98) – – – (196) – – (6) – – (3) – – – (1) – – – – $ 7 – – (2) – – – – $ 66 $ 20 $ 806 – 27 (9) – – – (26) 2 7 (8) 12 (1) (4) (5) 2 647 (124) 12 (1) (7) (227) $ 946 $ 16 $ 60 $ 5 $ 58 $ 23 $ 1,108 161 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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) Investment at december 31, 2007 Share of profit/(loss) Dividends distributed Return of capital to a shareholder Assets acquired in business combination (Note 4) Translation difference Investment at december 31, 2008 Additional investments Share of profit/(loss) Impairment of investments Disposal of investments Translation difference Investment at december 31, 2009 Share of profit/(loss) Impairment of investments Group’s share in excess of net assets of ZAO Koksovaya transferred to Raspadskaya over consideration received (Note 12) Translation difference Corber Streamcore Kazankovskaya Other associates $ 573 212 (95) (35) – (114) 541 – 40 – – (12) 569 105 – 52 (8) $ – – – – – – – 42 – – – 2 44 – (23) – $ 15 (14) – – – (1) – – – – – – – – – – – $ 4 – – – 7 (1) 10 13 – (1) (1) – 21 1 (10) – (1) Total $ 592 198 (95) (35) 7 (116) 551 55 40 (1) (1) (10) 634 106 (33) 52 (9) InvEsTmEnT AT dECEmBER 31, 2010 $ 718 $ 21 $ – $ 11 $ 750 Share of profit/(loss) of joint ventures and associates which is reported in the statement of operations comprised the following: (US$ million) Share of profit/(loss), net Impairment of investments Losses recognised in excess of the Group's investment in the associate (Note 13) shARE of PRofITs/(LossEs) of JoInT vEnTuREs And AssoCIATEs RECoGnIsEd In ThE ConsoLIdATEd sTATEmEnT of oPERATIons Corber enterprises limited 2010 $ 106 (33) – $ 73 2009 $ 40 (1) (37) $ 2 2008 $ 198 – (4) $ 194 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 non-controlling interests nET AssETs 2010 $ 798 970 27 77 275 165 2009 $ 864 746 38 44 335 24 2008 $ 935 643 5 56 268 73 2,312 2,051 1,980 361 194 81 636 340 325 186 111 622 291 333 188 102 623 277 $ 1,336 $ 1,138 $ 1,080 162 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 11. investments in Joint Ventures and associates (continued) Corber enterprises limited (continued) The table below sets forth Corber’s income and expenses: (US$ million) Revenue Cost of revenue Other expenses, including income taxes nET PRofIT Attributable to: Equity holders of the parent entity Non-controlling interests nET PRofIT 50% of unrealised profits on transactions with the joint venture Group’s share of profits of the joint venture Kazankovskaya 2010 $ 706 (323) (119) $ 264 $ 214 50 $ 264 (2) $ 105 2009 $ 497 (252) (141) $ 104 $ 82 22 $ 104 (1) $ 40 2008 $ 1,200 (362) (311) $ 527 $ 420 107 $ 527 2 $ 212 ZAO Kazankovskaya (‘Kazankovskaya’) is a coal mining company that was acquaired as part of the purchase of Yuzhkuzbassugol in 2007. The Group owns 50% in Kazankovskaya. The table below sets forth Kazankovskaya’s assets and liabilities as of December 31: (US$ million) Mineral reserves Other property, plant and equipment Inventories Accounts receivable Other current assets Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities nET AssETs/(LIABILITIEs) The table below sets forth Kazankovskaya’s income and expenses: (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) streamcore 2010 $ – – 1 1 1 3 65 4 24 93 2009 $ – 21 2 1 1 25 48 8 15 71 2008 $ 38 46 2 1 1 88 83 – 13 96 $ (90) $ (46) $ (8) 2010 $ 14 (32) (23) $ (41) $ (21) – 2009 $ 15 (26) (55) $ (66) $ (33) (33) 2008 $ 15 (24) (27) $ (36) $ (18) (4) 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 $42 million. The table below sets forth the fair values of Streamcore’s identifiable assets, liabilities and contingent liabilities at the date of acquisition: (US$ million) Property, plant and equipment Inventories Accounts receivable Total assets Deferred income tax liabilities Current liabilities Total liabilities nET AssETs September 4, 2009 $ 59 1 11 71 5 5 10 $ 61 163 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 11. investments in Joint Ventures and associates (continued) Kazankovskaya (continued) The table below sets forth Streamcore’s assets and liabilities as of December 31: (US$ million) Property, plant and equipment Accounts receivable Total assets Non-current liabilities Deferred income tax liabilities Current liabilities Total liabilities nET AssETs 2010 $ 52 17 69 4 – 1 5 $ 64 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 profit GRouP’s shARE of PRofIT of ThE JoInT vEnTuRE 2010 $ 10 (9) (1) $ – $ – Period from September 4 to December 31, 2009 $ 5 (4) (1) $ – $ – 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 Assets classified as held for sale Liabilities directly associated with assets classified as held for sale nET AssETs CLAssIfIEd As hELd foR sALE 2010 $ – 2 2 – $ 2 2009 $ 1 6 7 1 $ 6 2008 $ – 7 7 – $ 7 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 2008–2010. (US$ million) Property, plant and equipment Goodwill Inventory Accounts and notes receivable Assets held for sale acquired in business combinations Total assets Deferred income tax liabilities Non-current liabilities Current liabilities Total liabilities nET AssETs Cash flows 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 InfLow 2010 $ 90 – – 22 – 112 13 1 – 14 $ 98 2010 $ – – 42 $ 42 2009 $ 16 – 3 7 – 26 – 14 14 2008 $ 91 13 35 33 36 208 10 12 22 $ 12 $ 186 2009 $ – – 28 $ 28 2008 $ – (7) 168 $ 161 164 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 12. disposal groups held for sale (continued) At December 31, 2008, receivables in respect of the sold assets in the amount of $10 million were included in accounts receivable. At December 31, 2010 and 2009, the Group owed $5 million in respect of the disposed business units. The disposal groups sold during 2008–2010 are described below. highveld’s Business units In 2008, the Group sold Rand Carbide, a division of Evraz Highveld Steel and Vanadium Corporation (‘Highveld’), producing ferrosilicon and various carbonaceous products. The division was included in the steel segment of the Group’s operations. Cash consideration amounting to $39 million approximated the carrying value of the disposed assets. In addition, for the purpose of acquisition of Highveld in 2007, 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. 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 a 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. sale of Koksovaya In April, 2010, the Group sold ZAO Koksovaya to Raspadskaya, a subsidiary of Corber, the Group’s joint venture, which holds 80% in Raspadskaya. ZAO Koksovaya is an operating hard-coking coal mine, which owns the license for Tomusinskaya 5-6 coal deposit. As part of the transaction, the parties entered into a long-term off-take contract under which Raspadskaya committed to supply to the Group substantially all coal or concentrate produced from coal extracted on the Tomusinskaya 5-6 deposit during 2010–2019. The cash consideration amounted to $40 million. The loss from sale, net of the Group’s share in gain on the transaction recognised by Raspadskaya (Note 11), amounted to $5 million and was included in loss on disposal groups classified as held for sale caption of the consolidated statement of operations. other disposal groups held for sale Other disposal groups held for sale included a few small subsidiaries involved in non-core activities (construction business, trading activity and recreational services) and other non-current assets. 165 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 13. other non-Current assets non-Current Financial assets (US$ million) Investments in Delong Holdings Limited Investments in Cape Lambert Iron Ore Derivatives not designated as hedging instruments (Note 26) 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 purchases of associates and joint ventures Prepaids for purchases of non-controlling interests Long-term input VAT Defined benefit plan asset (Note 23) Fees for future purchases under a long-term contract Other investments in delong holdings limited 2010 $ 37 – 5 9 46 17 3 1 2009 $ 43 – – 18 – 4 1 – 2008 $ 23 10 – 2 38 5 40 – $ 118 $ 66 $ 118 2010 $ – 9 – 11 19 11 53 2009 $ 12 – 8 59 15 12 22 $ 103 $ 128 2008 $ 105 28 – 2 4 – 21 $ 160 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 flat 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. In addition, the beneficial 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 financing 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 are classified as available-for-sale financial assets and measured at fair value based on market quotations. The change in the fair value of these shares is initially recorded in other comprehensive income. At December 31, 2008, the Group assessed the recoverability of these financial assets and considered them as impaired due to a significant 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 financial assets and liabilities caption of the consolidated statement of operations for the year ended December 31, 2008, within gain/(loss) on available-for-sale financial assets (Note 7). The foreign exchange gain amounted to $2 million. 166 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 13. other non-Current assets (continued) investments in delong holdings limited (continued) 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 benefits 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 a 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 financial assets and liabilities caption of the consolidated statement of operations, within gain/(loss) on available-for-sale financial assets (Note 7). In 2010, the Group recognised $6 million impairment loss on Delong shares, including $4 million – through comprehensive income and $2 million – through the statement of operations. 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 financial 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 classified as available-for-sale financial assets and measured at fair value based on market quotations. The change in the fair value of these shares was initially recorded in other comprehensive income. At December 31, 2008, the Group assessed the recoverability of these financial assets and considered them as impaired due to a significant 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 financial assets and liabilities caption of the consolidated statement of operations for the year ended December 31, 2008, within gain/(loss) on available-for-sale financial assets (Note 7). The foreign exchange loss amounted to $8 million. In 2009, the shares of Cape Lambert Iron Ore were sold for a cash consideration of $17 million. The gain in the amount of $7 million was recognised in gain/(loss) on financial assets and liabilities caption of the consolidated statement of operations, within gain/(loss) on available-for-sale financial assets (Note 7). loans issued to related parties At December 31, 2008, 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 profits/(losses) of joint ventures and associates caption of the consolidated statement of operations. In 2010, the Group issued a $46 million loan to Lanebrook Limited, the controlling shareholder of the Group. The loan bears interest of 7.85% per annum and matures on June 22, 2012. Under the agreement, Lanebrook Limited prepaid the full amount of interest totaling $7 million, which was included in other long-term liabilities caption of consolidated statement of financial position as of December 31, 2010 (Note 26). prepayment for purchases of associates and Joint Ventures In 2010, the Group made a prepayment to a key management person for the acquisition of 29% ownership interest in Mediaholding Provincia. This prepayment was included in other non-current assets caption of the consolidated statement of financial position as of December 31, 2010. 167 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 14. inventories Inventories consisted of the following as of December 31: (US$ 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 2010 2009 2008 $ 906 $ 647 68 974 300 144 444 454 198 652 77 724 255 112 367 506 231 737 $ 974 145 1,119 376 156 532 496 269 765 $ 2,070 $ 1,828 $ 2,416 As of December 31, 2010, 2009 and 2008, the net realisable value allowance was $114 million, $145 million, $318 million, respectively. As of December 31, 2010, 2009 and 2008, certain items of inventory with an approximate carrying amount of $203 million, $81 million and $648 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 21). 15. trade and other receivables Trade and other receivables consisted of the following as of December 31: (US$ million) Trade accounts receivable Other receivables Allowance for doubtful accounts Ageing analysis and movement in allowance for doubtful accounts are provided in Note 29. 2010 $ 1,239 72 1,311 (98) 2009 $ 931 160 1,091 (90) 2008 $ 1,365 90 1,455 (86) $ 1,213 $ 1,001 $ 1,369 16. related party disclosures For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. 168 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 16. related party disclosures (continued) Amounts owed by/to related parties at December 31 were as follows: (US$ million) Kazankovskaya Lanebrook Limited Marens Raspadsky Ugol Yuzhny GOK Other entities Less: allowance for doubtful accounts Amounts due from related parties Amounts due to related parties 2010 $ 21 53 – 2 19 9 104 (24) $ 80 2009 $ 14 53 2 1 22 17 109 (2) 2008 $ 10 81 2 1 37 9 140 (3) 2010 $ 1 – – 32 178 6 217 – 2009 $ 1 – – 73 154 7 235 – 2008 $ 1 – – 56 231 34 322 – $ 107 $ 137 $ 217 $ 235 $ 322 Transactions with related parties were as follows for the years ended December 31: (US$ million) Interlock Security Services Kazankovskaya Raspadsky Ugol Yuzhny GOK Other entities Amounts due from related parties Amounts due to related parties 2010 $ 1 6 11 20 8 2009 $ 1 5 11 6 8 2008 $ 1 8 – 57 11 2010 $ 37 14 192 67 20 2009 $ 27 15 107 34 18 2008 $ 32 14 354 631 32 $ 46 $ 31 $ 77 $ 330 $ 201 $ 1,063 In addition to the disclosures presented in this note, the balances and transactions with related parties are disclosed in Notes 4, 11 and 13. 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). 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 a cash consideration of $38 million (Note 18). As part of the transaction, the Group signed a put option agreement that gives the Group the right to sell these shares back to Lanebrook Limited for the same amount. The put option expires on December 31, 2011. Marens is an entity under control of ultimate principal shareholders of the Group. In 2007, the Group granted a short-term interest-bearing loan to Marens for financing the construction of the office building. In 2008, the loan was repaid to the Group, the outstanding balances represent the unpaid interest. OOO Raspadsky Ugol (‘Raspadsky Ugol’), a subsidiary of the Group’s joint venture, sells coal to the Group. Raspadsky Ugol represents approximately 18% of volume of the Group’s coal purchases. The coal was sold at prevailing market prices at the dates of transactions. The Group sells steel products and renders services to Raspadsky Ugol. Yuzhny GOK, the ore mining and processing plant, is an associate of Lanebrook Limited. The Group sold steel products to Yuzhny GOK and purchased iron ore from the entity. The transactions with related parties are based on market prices. Compensation to Key management personnel Key management personnel include the following positions within the Group: • directors of Evraz Group S.A., • vice presidents, • top managers of major subsidiaries. 169 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 16. related party disclosures (continued) Compensation to Key management personnel (continued) In 2010, 2009 and 2008, key management personnel totalled 55, 58 and 60 persons, respectively. Total compensation to key management personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following: (US$ million) Salary Performance bonuses Social security taxes Share-based payments (Note 24) Termination benefits Other benefits 17. other taxes recoverable Taxes recoverable consisted of the following as of December 31: (US$ million) Input VAT Other taxes 2010 $ 21 12 1 1 4 3 2009 $ 18 10 1 3 – 1 2008 $ 22 29 1 18 – 1 $ 42 $ 33 $ 71 2010 $ 241 112 $ 353 2009 $ 173 85 $ 258 2008 $ 257 140 $ 397 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 Financial assets Other current assets included the following as of December 31: (US$ million) 2010 2009 2008 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 profit or loss (Note 13) Other short-term investments $ – 38 1 13 – – $ – 38 22 59 – 1 $ 508 38 25 – 18 – $ 52 $ 120 $ 589 Financial instrument relating to the transaction with a 49% ownership interest in ns group This financial 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 a cash consideration of $508 million. The Group recognised an impairment loss of $3 million, which was included in gain/ (loss) on financial 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 $7 million gain on swaps for the shares of Delong and Cape Lambert Iron Ore, which was included in gain/(loss) on financial assets and liabilities caption of the consolidated statement of operations, within change in the fair value of derivatives. 170 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 19. Cash and Cash equivalents Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of December 31: (US$ 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 2010 $ 306 200 49 46 69 10 1 2 2009 $ 300 170 110 75 14 1 1 – 2008 $ 536 124 177 45 27 12 7 2 $ 683 $ 671 $ 930 2010 2009 2008 257,204,326 257,204,326 157,204,326 145,957,121 145,957,121 122,504,803 Shareholders of Evraz Group are entitled to standard rights provided under the laws of Luxembourg to shareholders of stock companies (‘socieˆteˆ anonyme’). These rights comprise the right to vote at the shareholders meetings and the right to receive dividends. ACquIsITIon of ThE ukRAInIAn BusInEssEs On September 9, 2008, the Company issued 4,195,150 shares with par value of €2 each to settle the remaining liability for the acquisition of Palmrose (Note 4). Share premium on this issue, being the difference between the fair value of the shares measured based on market quotations at that date and nominal value of the issued shares, amounted to $746 million. Transaction costs were $1 million. sCRIP dIvIdEnds On January 30, 2009, the Extraordinary General Meeting approved the modification 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 Starting from May 23, 2007, the Group made a decision to cease the issuance of new shares for the settlement of share-based awards (Note 24). 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 and 2008, 234,813 and 275,994 share options, respectively, were repurchased after vesting. The cash spent on repurchase of vested options, amounting to $3 million and $77 million in 2009 and 2008, respectively, was charged to accumulated profits. TREAsuRY shAREs During 2009 and 2008, the Group purchased 67,569 and 1,037,498 treasury shares, respectively, for $5 million and $197 million, respectively, and sold 135,000 and 970,604 treasury shares, respectively, including 27,902 and 253,104 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 and $107 million in 2009 and 2008, respectively, was charged to accumulated profits. As of December 31, 2008, the Group had 67,431 treasury shares. 171 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 20. Equity (continued) Share Capital (continued) 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 affiliate, 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. 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 financial instrument that creates a financial 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 financial 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 flows 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 financial liability from the fair value of the compound financial 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 during the next five 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 beneficially 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 profit 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 172 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 20. equity (continued) earnings per share (continued) that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares. The following reflects 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 138,623,788 134,457,386 123,495,726 Effect of dilution: share-based awards 14,993 – 435,504 wEIGhTEd AvERAGE numBER of oRdInARY shAREs AdJusTEd foR ThE EffECT of dILuTIon Profit/(loss) for the year attributable to equity holders of the parent, US$ million Basic earnings/(losses) per share Diluted earnings/(losses) per share 138,638,781 134,457,386 123,931,230 $ 548 $ 3.95 $ 3.95 $ (295) $ (2.19) $ (2.19) $ 1,797 $ 14.55 $ 14.50 2010 2009 2008 The weighted average number of ordinary shares for 2008 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 figures 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. The weighted average number of ordinary shares for basic earnings per share does not include 7,333,333 shares issued in 2009 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. In 2010 and 2008, share-based awards (Note 24) had a dilutive effect. In 2009, the Group reported net loss. Consequently, they were antidilutive. In 2010 and 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 financial statements. dividends Dividends declared by Evraz Group S.A. during 2008–2010 were as follows: Final for 2007 Interim for 2008 Date of declaration To holders registered at Dividends declared, US$ million US$ per share 15/05/2008 14/05/2008 29/08/2008 18/09/2008 497 1,011 4.20 8.25 Interim dividends for 2008 include $2 million in respect of treasury shares. The shareholders meeting held May 15, 2009 resolved not to declare final dividends for 2008. The shareholders meeting held May 17, 2010 resolved not to declare dividends for 2009. In addition, certain subsidiaries of the Group declared dividends. The share of non-controlling shareholders in those dividends in 2010, 2009 and 2008 was $1 million, $1 million and $80 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 profit per statutory financial statements. The legal reserve can be used only in case of a bankruptcy. other movements in equity ACquIsITIons of non-ConTRoLLInG InTEREsTs In suBsIdIARIEs In 2010 and 2008, the Group acquired non-controlling interests in certain subsidiaries (Note 6). The excess of acquired non-controlling interests over the consideration amounting to $1 million and $21 million, respectively, was recorded as additional paid-in capital and the excess of consideration over the carrying value of non-controlling interests amounting to $3 million and $37 million, respectively, was charged to accumulated profits. 173 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 20. equity (continued) other movements in equity (continued) dERECoGnITIon of non-ConTRoLLInG InTEREsTs In suBsIdIARIEs In 2009, the Group derecognised non-controlling interests in Vanady-Tula resulting in a $5 million charge to accumulated profits (Note 4). In 2010, the non-controlling shareholder’s right to put a 49% share in Frotora Holdings Ltd. (‘Frotora’) to the Group at fair value of the ownership interest become exercisable. The Group derecognised a 49% ownership interest in Frotora amounting to $6 million and accrued a liability for the same amount. The assets of Frotora comprised mostly the rights under a long-term lease of land to be used for a construction of a commercial sea port in Ukraine. These rights are included in contract terms category of the intangible assets. In 2010, the Group recognised an impairment loss of $30 million in respect of these rights due to the change in plans for the use of this land. 21. loans and Borrowings Short-term and long-term loans and borrowings were as follows as of December 31: (US$ 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 9.25 per cent bonds due 2013 9.95 per cent bonds due 2015 Liabilities under 12.00 per cent rouble bonds due 2011 and 2013 assumed in business combination (Note 4) Unamortised debt issue costs Difference between the nominal amount and liability component of convertible bonds (Note 20) Interest payable 2010 $ 3,472 1,156 2009 $ 4,605 1,156 2008 $ 7,163 1,245 650 577 509 – 656 492 492 13 (192) (104) 90 650 577 509 – 661 – – – (196) (126) 87 – 725 560 300 – – – – (94) – 87 $ 7,811 $ 7,923 $ 9,986 As of December 31, 2010, 2009 and 2008, total interest bearing loans and borrowings consisted of short-term loans and borrowings in the amount of $381 million, $411 million and $2,495 million, respectively, and long-term loans and borrowings in the amount of $7,636 million, $7,747 million and $7,498 million, respectively, including the current portion of long-term liabilities of $244 million, $1,498 million and $1,346 million, respectively. The average effective annual interest rates were as follows at December 31: (US$ million) US dollar Russian rouble Euro Czech koruna Long-term borrowings Short-term borrowings 2010 8.01% 11.17% 5.05% – 2009 7.30% 13.49% 5.11% – 2008 6.56% – 5.54% – 2010 3.06% 12.50% 1.48% – 2009 4.18% 2008 6.40% 13.25% 16.50% 1.46% 3.38% 6.06% 3.49% The liabilities are denominated in the following currencies at December 31: (US$ million) US dollar Russian rouble Euro Czech koruna Unamortised debt issue costs Difference between the nominal amount and liability component of convertible bonds (Note 20) 2010 $ 6,079 1,699 322 7 (192) (104) 2009 2008 $ 7,233 $ 9,345 701 297 14 (196) (126) 364 348 23 (94) – $ 7,811 $ 7,923 $ 9,986 174 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 21. loans and Borrowings (continued) Covenants reset Some of the loan agreements and terms and conditions of 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 financial ratios, including restrictions in respect of indebtedness and profitability. In November 2009, the lenders under certain bank facilities approved the requested amendments to the agreements, which included a reset of the financial covenants. The total principal amount of these borrowings at December 31, 2009 was $2,895 million. As a result, the financial covenant ratios tested on the Group's consolidated numbers were loosened, with no testing for the year 2009; all financial 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 refinance 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 financial 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. These costs were fully paid during 2009 and 2010. 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, 2010, 2009 and 2008, the Group had equipment with a carrying value of $Nil, $11 million and $1,131 million, respectively, pledged as collateral under the loan agreements. In addition, the Group pledged inventory with a carrying value of $203 million, $81 million and $648 million as of December 31, 2010, 2009 and 2008, respectively. At December 31, 2010, 50% less one share of Kachkanarsky Mining-and-Processing Integrated Works were pledged as collateral under bank loans. This subsidiary represents 2.4% of the consolidated assets and 0.3% of the consolidated revenues of the Group. At December 31, 2010, the net assets (including intra-group balances) of Kachkanarsky Mining-and-Processing Integrated Works were $1,115 million. 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 financing a portion of the cost of the acquisition of IPSCO Inc. (Note 4). 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 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. In 2010, the Group issued bonds in the amount of 15,000 million Russian roubles, which bear interest of 9.25% per annum and mature on March 22, 2013 and bonds amounting to 15,000 million Russian roubles, which bear interest of 9.95% per annum and mature on October 26, 2015. The currency and interest rate risk exposures of these transactions 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 a 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 financial 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 a 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 financial assets and liabilities caption of the consolidated statement of operations for the year ended December 31, 2009. 175 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 21. loans and Borrowings (continued) early settlement 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 repaid a bank loan ahead of schedule. As a result, the Group recognised a loss on extinguishment of debts in the amount of $13 million within gain/(loss) on financial 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 refinancing of short-term loans. 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 classified as non-current liabilities in the consolidated statement of financial position as of December 31, 2009. In 2010, the Group fully repaid its liabilities under $1,007 million loan from VEB. unamortised debt issue Costs Unamortised debt issue costs represent agent commission and transaction costs paid by the Group in relation to the arrangement and reset of loans and notes. unutilised Borrowing Facilities The Group had the following unutilised borrowing facilities as of December 31: (US$ million) Unutilised borrowing facilities 2010 $ 1,010 2009 2008 $ 1,345 $ 1,679 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 15 years. The estimated remaining useful life of leased assets varies from 1 to 34 years. The leases were accounted for as finance leases in the consolidated financial 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 2010 $ 1 22 93 10 2009 $ 1 29 101 10 2008 $ – 16 73 – $ 126 $ 141 $ 89 The leased assets are included in property, plant and equipment in the consolidated statement of financial position (Note 9). 176 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 22. Finance lease liabilities (continued) 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 five years Later than five years Less: amounts representing finance charges 2010 2009 2008 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 $ 25 $ 19 $ 24 $ 17 $ 20 $ 15 41 5 71 (14) $ 57 33 5 57 – $ 57 65 7 96 (21) $ 75 51 7 75 – $ 75 41 8 69 (14) $ 55 34 6 55 – $ 55 In the years ended December 31, 2010, 2009 and 2008, the average interest rates under the finance lease liabilities were 9.9%, 10.0% and 10.0%. 23. employee Benefits russian plans In 2008–2010, the Russian subsidiaries of the Group provided regular lifetime pension payments and lump-sum amounts payable at the retirement date. These benefits generally depend on years of service, level of remuneration and amount of pension payment under the collective bargaining agreements. Other post-employment benefits consist of various compensations and certain non-cash benefits. The Group funds the benefits when the amounts of benefits fall due for payment. In 2006, the Group started the process of changing the system of post-employment benefits 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 benefits have been replaced by new defined benefit 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 benefits 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. Defined 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 benefits. 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 labour agreements. These benefits are based on years of service and level of compensation. All these payments are considered as defined benefit plans. usa and Canadian plans The Group’s subsidiaries in the USA and Canada have defined benefit pension plans, post-retirement healthcare and life insurance benefit plans and supplemental retirement plans that cover all eligible employees. Benefits 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 specified dates are no longer eligible to participate in the defined benefit plans. Those employees are instead enrolled in a defined contribution plan and receive a contribution funded by the Group’s subsidiaries equal to 2–3% of annual wages. The new defined contribution plan is funded annually, and participants’ benefits vest after three years of service. The subsidiaries also offer qualified Thrift (401(k)) plans to all of their eligible employees. 177 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 23. employee Benefits (continued) other plans Defined benefit pension plans and a defined contribution plan are maintained by the subsidiaries located in South Africa, Italy and the Czech Republic. defined Contribution plans The Group’s expenses under defined contribution plans were as follows: (US$ million) Expense under defined contribution plans defined Benefit plans 2010 $ 203 2009 $ 187 2008 $ 283 The Russian, Ukrainian and the Other defined benefit plans are mostly unfunded and the USA and Canadian plans are partially funded. The components of net benefit expense recognised in the consolidated statement of operations for the years ended December 31, 2010, 2009 and 2008 and amounts recognised in the consolidated statement of financial position as of December 31, 2010, 2009 and 2008 for the defined benefit plans were as follows: nET BEnEfIT ExPEnsE (RECoGnIsEd In CosT of sALEs And GEnERAL And AdmInIsTRATIvE ExPEnsEs) Year ended december 31, 2010 (US$ million) Current service cost Interest cost on benefit obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Minimum funding requirements Curtailment gain/(loss) nET BEnEfIT ExPEnsE Year ended december 31, 2009 (US$ million) Current service cost Interest cost on benefit obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Minimum funding requirements Curtailment gain/(loss) nET BEnEfIT ExPEnsE Year ended december 31, 2008 (US$ million) Current service cost Interest cost on benefit obligation Expected return on plan assets Net actuarial gains/(losses) recognised in the year Past service cost Minimum funding requirements Curtailment gain nET BEnEfIT ExPEnsE Russian plans Ukrainian plans USA & Canadian plans $ (5) (16) – (3) 6 – $ (5) (8) – – (2) – – $ (14) (34) 28 (4) 1 1 (1) Other plans $ (1) (2) – – – – – Total $ (25) (60) 28 (7) 5 1 (1) $ (18) $ (15) $ (23) $ (3) $ (59) Russian plans Ukrainian plans USA & Canadian plans Other plans $ (5) (11) – – 1 – 1 $ (6) (7) – (1) (2) – – $ (13) (33) 25 (2) (1) 7 (1) $ (1) (2) – (1) – – – Total $ (25) (53) 25 (4) (2) 7 – $ (14) $ (16) $ (18) $ (4) $ (52) Russian plans Ukrainian plans USA & Canadian plans Other plans $ (8) (11) – (2) 1 – 13 $ (4) (4) – – (11) – – $ (11) (24) 25 (5) – (8) – $ (1) (3) – 1 – – – Total $ (24) (42) 25 (6) (10) (8) 13 $ (7) $ (19) $ (23) $ (3) $ (52) 178 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 23. employee Benefits (continued) defined Benefit plans (continued) net benefit expense (recognised in cost of sales and general and administrative expenses) (continued) 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, 2010 (US$ million) Benefit obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost BEnEfIT AssET BEnEfIT LIABILITY december 31, 2009 (US$ million) Benefit obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost BEnEfIT AssET BEnEfIT LIABILITY december 31, 2008 (US$ million) Benefit obligation Plan assets Unrecognised net actuarial gains/ (losses) Unrecognised past service cost BEnEfIT AssET BEnEfIT LIABILITY 2010 $ 44 44 – 2009 $ 66 65 1 2008 $ (101) (101) – Total $ 922 (464) 458 (165) 3 19 Russian plans Ukrainian plans $ 192 $ 77 (1) 191 (68) 12 – – 77 (2) (10) – $ 135 $ 65 USA & Canadian plans $ 629 (463) 166 (95) 1 19 $ 91 Other plans $ 24 – 24 – – – $ 24 $ 315 Russian plans Ukrainian plans USA & Canadian plans Other plans $ 173 $ 72 $ 562 $ 20 (1) 172 (55) 14 – – 72 (4) (12) – (403) 159 (74) – 15 – 20 – – – Total $ 827 (404) 423 (133) 2 15 $ 131 $ 56 $ 100 $ 20 $ 307 Russian plans Ukrainian plans USA & Canadian plans Other plans $ 150 $ 72 $ 475 $ 20 (1) 149 (31) 18 – – 72 (12) (15) – $ 136 $ 45 (316) 159 (67) – 4 $ 96 Total $ 717 (317) 400 (115) 3 4 – 20 (5) – – $ 15 $ 292 179 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 23. employee Benefits (continued) defined Benefit plans (continued) movEmEnTs In BEnEfIT oBLIGATIon (US$ million) At december 31, 2007 Interest cost on benefit obligation Current service cost Past service cost Change in liability due to business combinations Benefits paid Actuarial (gains)/losses on benefit obligation Curtailment gain Translation difference At december 31, 2008 Interest cost on benefit obligation Current service cost Benefits paid Actuarial (gains)/losses on benefit obligation Curtailment gain Disposal of subsidiaries Translation difference At december 31, 2009 Interest cost on benefit obligation Current service cost Past service cost Benefits paid Actuarial (gains)/losses on benefit obligation Disposal of subsidiaries Translation difference AT dECEmBER 31, 2010 Russian plans Ukrainian plans USA & Canadian plans Other plans $ 182 $ 56 $ 275 $ 22 11 8 (1) – (21) 13 (14) (28) 150 11 5 (12) 29 (5) (2) (3) 173 16 5 (4) (13) 17 (1) (1) 4 4 33 – (5) 17 – (37) 72 7 6 (5) (6) – – (2) 72 8 5 – (6) (2) – – 24 11 – 229 (21) (35) – (8) 475 33 13 (43) 46 – – 38 562 34 14 – (37) 39 – 17 3 1 – – (2) 2 – (6) 20 2 1 (2) (5) – – 4 20 2 1 – (1) – – 2 Total $ 535 42 24 32 229 (49) (3) (14) (79) 717 53 25 (62) 64 (5) (2) 37 827 60 25 (4) (57) 54 (1) 18 $ 192 $ 77 $ 629 $ 24 $ 922 The amount of contributions expected to be paid to the defined benefit plans during 2011 approximates $70 million. 180 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 23. employee Benefits (continued) defined Benefit plans (continued) ChAnGEs In ThE fAIR vALuE of PLAn AssETs (US$ million) At december 31, 2007 Change in plan assets due to business combinations Expected return on plan assets Contributions of employer Benefits 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 Benefits paid Actuarial gains/(losses) on plan assets Minimum funding requirements Translation difference At december 31, 2009 Expected return on plan assets Contributions of employer Benefits paid Actuarial gains/(losses) on plan assets Minimum funding requirements Translation difference AT dECEmBER 31, 2010 Russian plans Ukrainian plans USA & Canadian plans Other plans $ 2 $ – $ 199 $ – Total $ 201 – – 21 (21) – – (1) – 1 – 11 (12) 1 – – 1 – 13 (13) – – – $ 1 – – 5 (5) – – – – – – 5 (5) – – – – – 6 (6) – – – 235 25 17 (21) (125) (8) – (6) 316 25 24 (43) 40 7 34 403 28 37 (37) 16 1 15 – – 2 (2) – – – – – – 2 (2) – – – – – 1 (1) – – – 235 25 45 (49) (125) (8) (1) (6) 317 25 42 (62) 41 7 34 404 28 57 (57) 16 1 15 $ – $ 463 $ – $ 464 The major categories of plan assets as a percentage of total plan assets were as follows at December 31: USA & Canadian plans: Equity funds and investment trusts Corporate bonds and notes Shares Property Cash 2010 2009 2008 86% 11% 0% 0% 3% 86% 9% 0% 3% 2% 76% 11% 4% 4% 5% The following table is a summary of the present value of the benefit obligation, fair value of the plan assets and experience adjustments for the current year and previous four annual periods. (US$ million) Defined benefit obligation Plan assets (Deficit)/surplus Experience adjustments on plan liabilities Experience adjustments on plan assets 2010 $ 922 464 (458) 60 9 2009 $ 827 404 (423) 54 24 2008 $ 717 325 (392) (38) 16 2007 $ 535 201 (334) (18) 5 2006 $ 131 24 (107) 11 – 181 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 23. employee Benefits (continued) defined Benefit plans (continued) Changes in the fair value of plan assets (continue) The principal assumptions used in determining pension obligations for the Group’s plans are shown below: 2010 2009 2008 Russian plans ukrainian plans usA & Canadian plans other plans Russian plans ukrainian plans usA & Canadian plans other plans Russian plans ukrainian plans usA & Canadian plans other plans 8% 12.6% 5.1–5.8% 3.9–8.3% 10% 12.4% 5.5–9.3% 4.2–9.5% 8.5% 10.85% 5.75–7.5% 4.3% 12% – 0.9–7.3% – 12% – 1.3–8.5% – 12% – 6.75–8.5% – 8% 8% – 8% – 3% 8% 3.0–3.2% 6.3–7.5% – 6.8–10% – 8% 8% – 9% 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% – Discount rate Expected rate of return on assets Future benefits increases Future salary increase Healthcare costs increase rate The expected long-term rate of return on defined benefit 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 insignificant effects on the Group’s current service cost and the defined benefit obligation. 24. share-based payments On April 25, 2005, September 5, 2006 and December 14, 2010, the Group adopted Incentive Plans under which certain members of the Board of Directors, senior executives and employees (‘participants’) could acquire or be gifted shares of the Company. The exercise price of the options granted on June 15, 2005 under the Incentive Plan 2005 was fixed 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. Shares under the Incentive Plan 2010 will be gifted to the participants upon vesting. The vesting dates under Plan 2005 were determined by the reference to the grant date (June 15, 2005) and became vested on the first, 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 approves the annual results. The actual vesting dates were as follows: December 15, 2005 June 15, 2006 May 11, 2007 June 15, 2007 April 15, 2008 June 15, 2008 May 15, 2009 Incentive Plan 2006 Incentive Plan 2005 – – 99,282 – 148,904 63,685 555,170 – 750,000 – – 1,250,000 248,183 496,369 – 2,618,855 According to the Plan 2010, the vesting date for each tranche is the 90th day after announcement of the annual results. The expected vesting dates under the Plan 2010 are as follows: June 30, 2011 June 30, 2012 June 30, 2013 Incentive Plan 2010 128,759 96,570 96,569 321,898 182 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 24. share-based payments (continued) The plans are administrated by the Board of Directors of the Company. The Board of Directors has the right to accelerate vesting of the grant. In the event of a participant’s employment termination the following rules were established: • Plan 2010: unless otherwise determined by the Board or by a decision of the authorised person, a participant loses the entitlement for the shares that were not gifted up to the date of termination. • Plan 2006: all options granted to a participant, whether vested or not, expired on termination date. • 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-based compensations 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 repurchased the share-based awards 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 indemnification 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 modification 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, the vesting date of the share options held by certain participants resigned from the Group was accelerated. There have been no other modifications or cancellations to the plans during 2008–2010. The Group accounted for share-based compensations at fair value pursuant to the requirements of IFRS 2 ‘Share-based Payment’. The weighted average fair value of share-based awards granted in 2010, 2006 and 2005 was $102.07, $14.15 and $10.88 per share, respectively. The fair value of the share-based awards under the extended portion was $272.34 per share. The fair value of these awards was estimated at the date of grant using the Black-Scholes-Merton option pricing models with the following inputs, including assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rates (%) Expected life (years) Market prices of the shares at the grant dates Incentive Plan 2010 Incentive Plan 2006 Incentive Plan 2005 1.2–1.5 n/a n/a 0.5–2.5 $103.83 4–6 45.37 6–8 55.00 5.42–5.47 4.36–4.59 0.7–2.7 $66.06 0.5–3 $42.90 The liability under cash-settled award was measured using the following assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rates (%) Expected life (years) Market prices of the shares at the reporting date 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-based awards granted in 2005, while for the share options granted in 2006 the historical volatility has been taken. The expected volatility reflects the assumption that it is indicative of future trends which may not necessarily be the actual outcome. 183 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 24. share-based payments (continued) The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share-based awards during the years. outstanding at January 1 Granted during the year Forfeited during the year Exercised during the year: by purchase of shares on the open market by repurchase of vested share-based awards ouTsTAndInG AT dECEmBER 31 Vested at December 31 Exercisable at December 31 2010 No. – 2009 2008 WAEP No. WAEP No. WAEP $ – 370,340 $ 50.71 933,284 $ 48.72 334,755 (12,857) – – – 321,898 – – – – – $ – $ – – (107,625) (262,715) (27,902) (234,813) – – – – – – 48.30 (33,846) 51.70 (529,098) (253,104) (275,994) – 45.13 47.55 $ – $ – – 370,340 $ 50.71 92,751 $ 45.96 5,029 43.50 The weighted average share price at the dates of exercise was $67.29 and $310.22 in 2009 and 2008, respectively. The weighted average remaining contractual life of the share-based awards outstanding as of December 31, 2010 and 2008 was 1.4 years and 0.3 years, respectively. In the years ended December 31, 2010, 2009 and 2008, expense arising from the share-based compensations, was as follows: (US$ million) Expense arising from equity-settled share-based payment transactions Expense arising from cash-settled share-based payment transactions 2010 $ 2 – $ 2 2009 $ – 6 $ 6 2008 $ 2 33 $ 35 In 2010 and 2009, the Group paid $3 million and $35 million in respect of the cash-settled share-based compensations, respectively, $1 million was unpaid at December 31, 2010. 184 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 25. provisions In the years ended December 31, 2010, 2009 and 2008, the movement in provisions was as follows: (US$ million) 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 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, 2010 site restoration Costs Site restoration and decom- missioning costs Legal claims $ 134 $ 15 47 9 (10) 11 (5) – (26) 160 15 12 (1) (6) – 10 190 23 15 20 55 (5) – 7 6 – – – (3) (13) (1) 4 7 – – (3) (2) – 6 18 – – – (5) (2) – Other provisions $ 38 30 – – (1) (9) (3) (3) 52 28 – – (59) (6) – 15 12 – – – (15) (1) – Total $ 187 83 9 (10) 10 (17) (16) (30) 216 50 12 (1) (68) (8) 10 211 53 15 20 55 (25) (3) 7 $ 305 $ 17 $ 11 $ 333 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 6.10% to 13.00% (2009: from 8.00% to 13.00%, 2008: from 6.85% to 11.90%). 26. other long-term liabilities Other long-term liabilities consisted of the following as of December 31: (US$ million) Contingent consideration payable for the acquisition of Stratcor Deferred consideration payable for the acquisition of Inprom (Note 4) Dividends payable under cumulative preference shares of a subsidiary to a related party Employee income participation plans and compensations Tax liabilities Derivatives not designated as hedging instruments (Note 21) Other liabilities Less: current portion (Note 27) 2010 $ 24 21 14 3 33 38 24 157 (14) $ 143 2009 $ 31 – 14 7 18 6 18 94 (26) $ 68 2008 $ 34 – 14 16 18 – 7 89 (31) $ 58 185 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 26. other long-term liabilities (continued) 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. derivatives not designated as hedging instruments In 2009 and 2010, the Group issued rouble-denominated bonds in the total amount of 50,000 million Russian roubles (Note 21). To manage the currency exposure, the Group concluded swap contracts under which it agreed to deliver US dollar-denominated interest payments at the rates ranging from 7.50% to 8.90% per annum plus the notional amount totalling $1,466 million, in exchange for rouble-denominated interest payments plus the notional amount totalling 43,794 roubles ($1,437 million at the exchange rate as of December 31, 2010). The exchange is exercised on approximately the same dates as the payments under the bonds. The swap conracts are summarised in the table below. 13.5 per cent bonds due 2014 9.25 per cent rouble bonds due 2013 9.95 per cent rouble bonds due 2015 Principal, millions of roubles Hedged amount, millions of roubles Swap amount, US$ million Interest rates on the swap amount 20,000 15,000 15,000 50,000 14,019 14,778 14,997 43,794 $ 475 500 491 $ 1,466 7.50%–8.90% 5.75%–5.90% 5.65%–5.88% These swap contracts were not designated as cash flow or fair value hedge. The Group accounted for these derivatives at fair value which was determined using valuation techniques. In 2010 and 2009, the change in fair value of the derivatives, net of realised gain on the swap transactions, amounting to $4 million and $(6) million, respectively, was recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations (Note 7). 27. trade and other payables Trade and other payables consisted of the following as of December 31: (US$ million) Trade accounts payable Accrued payroll Termination benefits Other long-term obligations with current maturities (Note 26) Other payables Maturity profile of the accounts payable is shown in Note 29. 28. other taxes payable 2010 $ 880 229 – 14 50 2009 $ 780 176 1 26 86 2008 $ 1,094 208 2 31 144 $ 1,173 $ 1,069 $ 1,479 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, fines and penalties 2010 $ 90 40 14 10 10 16 2009 $ 67 29 16 5 10 13 2008 $ 72 31 15 9 10 17 $ 180 $ 140 $ 154 186 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 financial 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 significant concentrations of credit risk within the Group. The Group defines counterparties as having similar characteristics if they are related entities. The major customers are Russian Railways and Vanomet AG (4% and 3.3% of total sales, respectively). 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 financial difficulties. The significant 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. The maximum exposure to credit risk is equal to the carrying amount of financial 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 2010 $ 22 5 76 1,216 18 124 683 2009 $ 77 – 104 1,002 5 107 671 2008 $ 2 – 622 1,409 113 156 930 $ 2,144 $ 1,966 $ 3,232 Receivables from related parties in the table above do not include prepayments in the amount of $2 million, $nil and $19 million as of December 31, 2010, 2009 and 2008, respectively. The ageing analysis of trade and other receivables, loans receivable and receivables from related parties is presented in the table below. (US$ million) Not past due Past due Less than six months between six months and one year over one year 2010 2009 2008 Gross amount $ 1,098 377 232 27 118 Impairment $ (8) (109) (16) (10) (83) Gross amount $ 842 364 187 28 149 $ 1,475 $ (117) $ 1,206 Impairment $ (1) (91) (5) (8) (78) $ (92) Gross amount $ 1,035 736 500 166 70 Impairment $ (8) (85) (13) (7) (65) $ 1,771 $ (93) In the years ended December 31, 2010, 2009 and 2008, 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 2010 $ 92 45 (19) (1) 2009 $ 93 40 (40) (1) 2008 $ 79 35 (7) (14) $ 117 $ 92 $ 93 187 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 29. Financial risk management objectives and policies (continued) liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure that it will always have sufficient 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 flows and matching the maturity profiles of financial assets and liabilities. The Group prepares the rolling 12-month financial plan which ensures that the Group has sufficient cash on demand to meet expected operational expenses, financial obligations and investing activities as they arise. The Group exercises 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 financing needs. The Group’s objective is to refinance its short-term debt by long-term borrowings. The Group developed standard payment periods in respect of trade accounts payable and monitors the timeliness of payments to its suppliers and contractors. The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments. Year ended december 31, 2010 (US$ million) fixed-rate debt Loans and borrowings Principal Interest Finance lease liabilities Financial instruments included in long- term liabilities ToTAL fIxEd-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 other 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 $ 7 – – 1 8 235 – – 235 – 104 177 6 13 300 $ 20 55 1 2 78 224 19 5 248 – 795 37 – – 832 $ 124 462 2 11 599 15 56 17 88 – 31 2 – – 33 $ 25 509 3 8 545 283 62 12 357 – – – – – – $ 5,039 $ 538 $ 5,753 955 7 60 6,061 1,487 89 19 1,595 – – – 21 – 21 123 3 21 685 20 4 2 26 5 – – – – 5 2,104 16 103 7,976 2,264 230 55 2,549 5 930 216 27 13 1,191 $ 543 $ 1,158 $720 $ 902 $ 7,677 $ 716 $ 11,716 188 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 29. Financial risk management objectives and policies (continued) 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 fIxEd-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 other 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 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 fIxEd-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 $ 930 $ 2,488 $ 1,091 $ 4,812 $ 5 – – 17 22 242 – – 242 5 196 112 17 13 343 $ 25 32 1 – 58 229 30 5 264 – 647 62 – – 709 $ 273 384 2 1 374 3 7 660 1,314 1,135 103 16 1,254 – 23 14 – – 37 904 69 22 995 – – – – – – 841 7 28 3,364 795 42 32 869 – – – – – – 217 5 25 1,338 41 5 3 49 – – – – – – 1,848 18 78 6,756 3,346 249 78 3,673 5 866 188 17 13 1,089 $ 607 $ 1,031 $ 1,951 $ 2,309 $ 4,233 $ 1,387 $ 11,518 On demand Less than 3 months 3 to 12 months 1 to 2 years 2 to 5 years After 5 years Total $ 8 $ 61 $ 1,727 $ 1,333 $ 1,338 $ 4,587 – – 1 9 414 – – 414 6 519 104 320 949 54 2 – 117 627 59 4 690 – 670 56 – 726 357 3 16 2,103 $ 120 239 3 4 366 633 7 13 1,986 366 8 29 1,741 1,004 1,445 1,907 146 11 121 11 131 20 1,161 1,577 2,058 – 49 24 – 73 – – – – – – – – – – 9 – – 9 – – – – – 1,649 23 63 6,322 5,406 457 46 5,909 6 1,238 184 320 1,748 $ 1,372 $ 1,533 $ 3,337 $ 1,943 $ 4,044 $ 1,750 $ 13,979 Payables to related parties in the tables above do not include advances received in the amount of $1 million, $47 million and $138 million as of December 31, 2010, 2009 and 2008, respectively. 189 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 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 financial 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 fixed and variable rate basis and has other interest-bearing liabilities, such as finance lease liabilities and other obligations. The Group incurs interest rate risk on liabilities with variable interest rates. The Group’s treasury function performs analysis of current interest rates. In case of changes in market fixed or variable interest rates management may consider the refinancing of a particular debt on more favourable terms. The Group does not have any financial assets with variable interest rate. fair value sensitivity Analysis for fixed Rate Instruments The Group does not account for any fixed rate financial assets or liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect the Group’s profits. The Group does not account for any fixed rate financial 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 floating interest rates at the reporting date would have changed profit 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 the Group assessed the volatility of interest rates during the reporting periods. 2010 2009 2008 Basis points Effect on PBT Basis points Effect on PBT Basis points Effect on PBT (US$ million) (US$ million) (US$ million) (25) 100 – – – – (25) 100 $ 4 (17) – – – – 1 $ (2) (25) 100 – – – – (25) 100 $ 8 (30) – – – – 1 $ (2) (53) 53 (106) 106 (33) 33 (30) 30 $ 24 (24) 4 (4) 1 (1) 1 $ (1) 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 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. 190 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 29. Financial risk management objectives and policies (continued) market risk (continued) Currency Risk (continued) 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 sensitivity Analysis 2010 $ 3,419 2009 $ 1,732 (283) 137 1,180 38 (282) 66 41 (1) (43) (297) 108 1,281 22 (154) 41 43 (88) (15) 2008 $ 967 (390) 180 1,611 48 (216) (7) 20 (203) 12 The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held constant, of the Group’s profit before tax. In estimating reasonably possible changes the Group assessed the volatility of foreign exchange rates during the reporting periods. 2010 2009 2008 Change in exchange rate Effect on PBT Change in exchange rate Effect on PBT Change in exchange rate Effect on PBT % (US$ million) % (US$ million) % (US$ million) USD/RUB EUR/RUB EUR/USD CAD/USD EUR/CZK USD/CZK USD/ZAR EUR/ZAR USD/UAH RUB/UAH (9.70) 9.70 (8.79) 8.79 (11.32) 11.32 (10.97) 10.97 (5.30) 5.30 (13.79) 13.79 (13.68) 13.68 (11.59) 11.59 (1.71) 1.71 (9.94) 9.94 (332) 332 25 (25) (16) 16 (129) 129 (2) 2 39 (39) (9) 9 (5) 5 – – 4 (4) (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 (38.76) 38.76 (11.77) 11.77 (14.73) 14.73 (87) 87 34 (34) (26) 26 (249) 249 (5) 5 40 (40) 2 (2) (8) 8 24 (24) (2) 2 Fair Value of Financial instruments The Group uses the following hierarchy for determining and disclosing the fair value of financial 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 significant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs). The carrying amounts of financial 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. The Group held the following financial instruments measured at fair value: 191 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 29. Financial risk management objectives and policies (continued) Fair Value of Financial instruments (continued) (US$ million) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 2010 2009 2008 AssETs mEAsuREd AT fAIR vALuE Available for sale financial assets 37 Financial assets at fair value through profit or loss Derivatives not designated as hedging instruments LIABILITIEs mEAsuREd AT fAIR vALuE Liability at fair value through profit or loss Derivatives not designated as hedging instruments Deferred consideration payable for the acquisition of Inprom (Note 4) – – – – 21 – – 5 – 38 – – – – 16 – – 43 – – – – – – – – – 6 – – – – 12 – – 33 18 – – – – – – – – – – – – – – – – 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 financial instruments which carrying amounts differ from fair values. 2010 2009 2008 (US$ million) Long-term fixed-rate bank loans 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 9.25 per cent bonds due 2013 9.95 per cent bonds due 2015 Carrying amount $ 1,201 1,807 1,144 551 555 499 – 670 502 498 Fair Value $ 1,198 1,663 1,248 650 615 565 – 740 498 496 Liabilities under 12.00 per cent rouble bonds due 2011 and 2013 assumed in business combination 13 12 Carrying amount $ 1,234 2,894 1,132 Fair Value $ 1,197 2,847 1,155 Carrying amount $ 369 4,253 1,260 528 551 497 – 674 – – – 624 554 508 – 667 – – – – 718 567 314 – – – – Fair Value $ 354 3,819 668 – 374 284 302 – – – – $ 7,439 $ 7,685 $ 7,510 $ 7,552 $ 7,481 $ 5,801 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 flows, discounted at the Group’s market rates of interest at the reporting dates. The discount rates used for valuation of financial instruments were as follows: Currency in which financial instruments are denominated 2010 2009 2008 USD EUR RUB Capital management 7.7–8.3% 8.6–9.5% 10.0–16.8% 2.8% 12.0% 7.0% 16.0% 6.6% 23.0% 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. 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 2010. 192 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 29. Financial risk management objectives and policies (continued) Capital management (continued) 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 profits to legal reserve. In addition, the Group monitors distributable profits on a regular basis and determines the amounts and timing of dividends payments. The capital requirements imposed by certain loan agreements include the following: • consolidated equity less goodwill should be at least $2,000 million. 30. non-cash transactions Transactions that did not require the use of cash or cash equivalents were as follows in the years ended December 31: (US$ million) Liabilities for purchases of property, plant and equipment Purchases of property, plant and equipment settled by an offset with accounts receivable 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) Offset of income tax receivable/(payable) against other taxes 2010 $ 70 12 28 – – 17 2009 $ 49 – 2 – – 18 2008 $ 124 – 15 757 938 (52) 31. Commitments and Contingencies operating environment of the group The Group is one of the largest vertically integrated steel producers globally and the largest steel producer in Russia. The Group’s 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 emerging markets with higher economic and political risks. In the wake of the global financial crisis, there are certain signs of general economic recovery. The stabilisation measures introduced by governments to provide liquidity and support debt refinancing have led to stronger customer demand, increased production levels and improved liquidity in the banking sector. Nevertheless, in 2010, there was no material uplift in the ship-building, pipe-making, railway transportation, construction, oil and gas industries which are the major customers of the Group and pricing remains volatile. The global economic climate is unstable and this may negatively affect the Group’s results and financial 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, significant 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 outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities, which were identified 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 financial statements could be up to approximately $34 million. Contractual Commitments At December 31, 2010, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $290 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 2011, the Group plans to spend approximately $106 million under these programmes. 193 AnnuAl RepoRt And Accounts 2010 Consolidated FinanCial statements Years ended december 31, 2010, 2009 and 2008 31. Commitments and Contingencies (continued) environmental protection In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantification 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 specific sites, the assessment stage of each site investigation, preliminary findings 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 financial position and results of operations. In the period from 2011 to 2015, the Group is committed to spend approximately $326 million under the environmental programmes. legal proceedings The Group has been and continues to be the subject of legal proceedings, none of which has had, individually or in aggregate, a significant effect on the Group’s operations or financial position. Possible liabilities, which were identified by the Group at the end of the reporting period as those that can be subject to different interpretations of legislation and are not accrued in these financial statements could be up to approximately $29 million. 32. subsequent events There were no significant events after the reporting date. 194 AnnuAl RepoRt And Accounts 2010 Parent ComPany FinanCial StatementS for the year ended 31 December 2010 Contents 195 reSPonSibility Statement oF the DireCtorS in reSPeCt oF the annual aCCountS oF evraz GrouP S.a. 196 inDePenDent auDitor'S rePort 197 Parent ComPany FinanCial StatementS 197 Balance Sheet 198 Profit and Loss Account 199 Notes to the Annual Accounts IX s t n e m e t a t s l a C n a n I F I 0 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f . y n a p m o C t n e r a p a . s p u o r G z a r v e 195 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 responsiBility statement oF the direCtors in respeCt oF the annual aCCounts oF eVraz group s.a. We confirm 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 financial position of Evraz Group S.A. as of 31 December 2010, and of the results of its operations for 2010. By order of the Board Alexander frolov Chief Executive Officer Evraz Group S.A. 30 March 2011 196 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 Ernst & Young Socieˆteˆ anonyme 7, rue Gabriel Lippmann Parc d'Activite Sydrall 2 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.S. Luxembourg B 47 771 TVA LU 16063074 Independent auditor's report To the Shareholders and Board of Directors of Evraz Group S.A. 1, Alleˆe Scheffer L-2520 LUXEMBOURG Following our appointment by the General Meeting of the Shareholders dated 17 May 2010, we have audited the accompanying annual accounts of Evraz Group S.A., which comprise the balance sheet as at 31 December 2010 and the profit and loss account for the year then ended, and a summary of significant accounting policies and other explanatory information. 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 and presentation of the annual accounts and for such internal control as the Board of Directors determines is necessary to enable the preparation and presentation of annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the ‘reˆviseur d’entreprises agreˆeˆ’ 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 for Luxembourg by the ‘Commission de Surveillance du Secteur Financier’. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 ‘reˆviseur d’entreprises agreˆeˆ’, 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 ‘reˆviseur d’entreprises agreˆeˆ’ 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 sufficient 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 financial position of Evraz Group S.A. as of December 31, 2010, 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 Socieˆteˆ anonyme Cabinet de reˆvision agreˆeˆ Luxembourg, 30 March 2011 Thierry Bertrand A member firm of Ernst & Young Global Limited 197 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 BalanCe sheet (in thousands of eur) AssETs fixed assets Intangible assets financial assets Shares in affiliated undertakings Securities held as fixed assets Loans to affiliated undertakings Other loans Current assets Debtors Amounts owed by affiliated undertakings becoming due and payable within one year Other debtors Cash at bank Prepayments ToTAL AssETs EquITY And LIABILITIEs Capital and reserves Subscribed capital Share premium Legal reserve Non-distributable reserve for own shares (Loss)/profit brought forward Loss for the year 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 affiliated 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 Notes 2010 2009 3 4 4 5 6 5 6 8 8 7 7 9 9 10 10 11 11 2 95,578 118,402 5,442,810 5,282,959 17,816 967,983 329,146 19,228 907,968 329,146 6,757,755 6,539,301 113,925 1,165 115,090 5,778 4,604 53,785 89 53,874 16,727 5,766 6,978,805 6,734,070 291,914 291,914 1,079,487 1,079,487 24,501 329,146 (163,550) (572,443) 24,501 329,146 288 (163,838) 989,055 1,561,498 7,706 7,147 486,454 451,201 26,364 24,453 1,677,743 1,556,157 26,507 710,971 751,821 1,467,843 1,827,202 710,971 9,004 13,835 447,561 – 35,397 10,352 5,496,757 4,751,932 492,993 420,640 6,978,805 6,734,070 The accompanying notes form an integral part of these consolidated financial statements. 198 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 proFit and loss aCCount (in thousands of eur) Charges Value adjustment in respect of intangible fixed assets Value adjustment in respect of current assets Other operating charges Value adjustment in respect of financial assets and of transferable securities held as current assets Interest payable and similar charges – concerning affiliated undertakings – exchange loss – interest expense in respect of notes and bank loans – other Loss on disposal of investments Other taxes Income Other interest receivable and similar income – concerning affiliated undertakings – exchange gain – gain from extinguishment of debts – other Gain on sale of investments Value adjustment in respect of financial assets and of transferable securities held as current assets Loss for the financial year Notes 2010 2009 3 4,5 4 10 4 13 5 7 4 4 40,499 – 43,736 11,729 21,462 38,840 1,412 2,021 97,922 342,666 257,194 745 – 6,582 790,756 8,006 – 289,453 1,522 58,199 9,431 440,663 69,178 141,638 – – 1,347 – 147,788 572,443 790,756 21,074 90,215 1,130 366 22,402 163,838 440,663 The accompanying notes form an integral part of these consolidated financial statements. 199 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 notes to the annual aCCounts for the year ended december 31, 2010 (all monetary amounts are expressed in thousands) 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, Alleˆe 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 the Company. In 2005, Evraz Group became listed on the London Stock Exchange. going Concern These financial 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 financial, currency and commodity markets resulting from the global economic crisis of 2008–2009. The Company reported net loss of EUR 572,443 for the year ended December 31, 2010. The current liabilities were EUR 1,896,783 (including loans due to the Company’s subsidiaries of EUR 1,827,202 with maturities in 2011) and exceeded current assets by EUR 1,781,693. The current maturities are expected to be covered by free cash flows, dividends from subsidiaries and refinancing of current debts. In November 2009, the Company reset certain financial covenants and obtained waivers from its lenders (Notes 3, 7, 9). At December 31, 2009 and 2010, the Company was in compliance with all of its financial 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 Group is one of the largest vertically integrated steel producers globally and the largest steel producer in Russia. The Group’s 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 emerging markets with higher economic and political risks. In the wake of the global financial crisis, there are certain signs of general economic recovery. The stabilisation measures introduced by governments to provide liquidity and support debt refinancing have led to stronger customer demand, increased production levels and improved liquidity in the banking sector. Nevertheless, in 2010, there was no material uplift in the ship-building, pipe-making, railway transportation, construction, oil and gas industries which are the major customers of the Group’s subsidiaries and pricing remains volatile. The global economic climate is unstable and this may negatively affect the Company’s results and financial position in a manner not currently determinable. 2. significant 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 significant accounting policies. Certain reclassifications have been made in the prior year balance sheet to conform to the current year presentation. 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, 2010, the deferred unrealised exchange gains amounted to EUR 487,387 (2009: EUR 418,523). 200 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 2. significant accounting policies (continued) (all monetary amounts are expressed in thousands) 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 outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the 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 benefits will flow to the Company and the revenue can be reliably measured. 3. intangible assets In November 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. In April 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 financial 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. In November 2010, the Company received a new syndicated loan arranged by Deutsche bank (Note 9). Transaction costs in respect of this loan amounting to USD 21,826 (EUR 16,200) were capitalised and amortised on a straight-line basis over the life of the loan. 201 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 (all monetary amounts are expressed in thousands) 4. shares in affiliated undertakings and securities held as Fixed assets shares in affiliated undertakings Mastercroft Limited Strategic Minerals Corporation Vanston Limited Evraz Vitkovice Steel Palmrose Limited Evraz Inc. NA Canada ECS Holdings Europe B. V. East Metals N.A. LLC Evraz Overseas S.A. securities held as fixed assets Delong Holdings Limited mastercroft limited 2010 2009 3,831,982 3,831,982 106,297 42,500 11 879,896 582,038 85 1 – 94,291 42,500 11 732,108 582,038 29 – – 5,442,810 5,282,959 17,816 19,228 5,460,626 5,302,187 At December 31, 2010 and 2009, the Company held 100% of the shares in Mastercroft. 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. NA 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. NA, 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. At December 31, 2010 and 2009, the underlying equity of Mastercroft amounted to EUR 4,108,113 and EUR 3,706,755, respectively. strategic minerals Corporation At December 31, 2009, the Company owned 72.84% of ordinary shares of Strategic Minerals Corporation (‘Stratcor’), including 69.00% of voting shares. The cost of investments amounted to USD 120,471 (EUR 94,291), including transaction costs of USD 1,383 and fair value of contingent consideration amounting to USD 21,161. In 2009, the Company paid USD 7,956 (EUR 5,821) to acquire a 5.92% ownership interest in Stratcor, which was shown as a prepayment in the balance sheet at December 31, 2009. The ownership rights have been transferred to the Company in January 2010. 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 2010, the Company fully repaid to the sellers earn-out liabilities in the amount of USD 16,435 and re-assessed its future synergy payments, which led to an increase in the investments in Stratcor by EUR 6,185 (2009: decrease by EUR 3,500). At December 31, 2010, the Company owned 78.76% of Stratcor, the cost of these investments was equal to EUR 106,297. At December 31, 2010 and 2009, the underlying equity of Stratcor amounted to USD 97,515 (EUR 72,979) and USD 103,697 (EUR 71,982), respectively. 202 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 4. shares in affiliated undertakings and securities held as Fixed assets (continued) (all monetary amounts are expressed in thousands) Vanston limited In 2006, the Company acquired 100% ownership interest in Vanston Limited from Mastercroft for EUR 42.500. Vanston Limited owns Evraz Palini e Bertoli. At December 31, 2010 and 2009, the underlying equity of Vanston amounted to EUR 50,887 and EUR 51,893, respectively. evraz Vitkovice steel Evraz Vitkovice Steel, a steel rolling mill located in the Czech Republic, is a wholly-owned subsidiary of the Company acquired in 2005. At December 31, 2010 and 2009, the underlying equity of Evraz Vitkovice Steel amounted to EUR 118,989 and EUR 333,884, 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, Dneprokoks, Dneprodzerzhinsk Coke Chemical Plant). Lanebrook, the Company’s parent, acquired these production assets in 2007. 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). In June 2008, that agreement was amended increasing the cash portion of the consideration payable to Lanebrook by USD 18,000. On September 9, 2008, the Company issued 4,195,150 shares in exchange for a 48.6% interest in 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). In 2008, the Company recognised an impairment loss in the amount of EUR 721,846 in respect of investments in Palmrose. In 2010 and 2009, an impairment amounting to EUR 147,788 and EUR 19,227, respectively, 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, 2010 and 2009, the underlying equity of Palmrose amounted to EUR 1,576,047 and EUR 1,462,198, respectively. evraz inc. na Canada Evraz Inc. NA Canada is a leading North American producer of steel plate, as well as pipe for the oil and gas industry. The Company acquired a 100% interest in the subsidiary in 2008. On February 27, 2009, Evraz Inc. NA 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. NA Canada (Note 5). At December 31, 2010 and 2009, the underlying equity of Evraz Inc. NA Canada amounted to EUR 684,011 and EUR 542,651, respectively. 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. In 2010 and 2009, the Company contributed EUR 56 and EUR 11, respectively, to the capital of ECS Holdings Europe B.V. At December 31, 2010 and 2009, the underlying equity of ECS Holdings Europe B.V. amounted to EUR (3) and EUR (1), respectively. east metals n.a. llC On March 10, 2010, the Company incorporated a wholly-owned subsidiary in USA – East Metals N.A. LLC. The share capital of the subsidiary amounted to USD 1 (EUR 1). At December 31, 2010, the share capital was unpaid. At December 31, 2010, the underlying equity of East Metals N.A. LLC amounted to EUR (186). 203 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 4. shares in affiliated undertakings and securities held as Fixed assets (continued) (all monetary amounts are expressed in thousands) highveld steel and Vanadium limited Evraz Highveld Steel and Vanadium Limited (‘Highveld’) is one of the largest steel producers in South Africa and a leading producer of vanadium products. The Company acquired a controlling interest in Highveld in 2007. On June 23, 2009, the Company contributed its ownership interest in Highveld (85.12%) 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. evraz inc. na Evraz Inc. NA, located in the United States and Canada, produces plates, pipes, rails and other long steel products. The Company acquired this subsidiary in 2007. In June 2009, the Company made a cash contribution to Evraz Inc. NA 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. NA have been contributed to the share capital of Mastercroft and the loans receivable from Evraz Inc. NA have been transferred to Mastercroft Finance Limited. Gain on disposal of investments in Evraz Inc. NA amounting to USD 515 (EUR 366) was recognised in the profit and loss account for the year ended December 31, 2009. 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. evraz overseas Evraz Overseas S.A., a wholly owned subsidiary located in Switzerland, was established in 2007. At December 31, 2009 and 2010, the investments in Evraz Overseas S.A. were considered as fully impaired and this loss was included in the value adjustment in respect of financial assets. From November 2010, Evraz Overseas S.A. is under liquidation procedures. At December 31, 2010 and 2009, the underlying equity of Evraz Overseas amounted to EUR 495 and EUR (6,866), respectively. delong holdings limited Investments in Delong Holdings Limited represent approximately 10.01% ownership interest in the entity acquired in 2008 for EUR 102,226. The investments are measured at market quotations. 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. In 2010, the Company recognised an impairment loss in the amount of EUR 1,412 due to a decrease in market prices for the shares of Delong. 5. loans to affiliated undertakings and other amounts owed by affiliated undertakings Becoming due and payable within one year Vanston Limited Evraz Highveld Steel and Vanadium Limited Lanebrook Limited Mastercroft Finance Limited Becoming due and payable after more than one year Vanston Limited Lanebrook Limited Evraz Inc. NA Canada Type of receivables 2010 2009 loan other receivables other receivables other receivables loan loan loan – – 39,835 74,090 113,925 17,886 34,426 915,671 967,983 1,081,908 16,886 16 36,883 – 53,785 – – 907,968 907,968 961,753 204 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 5. loans to affiliated undertakings and other amounts owed by affiliated undertakings (continued) (all monetary amounts are expressed in thousands) lanebrook limited On June 18, 2010, the Company entered into a loan agreement with Lanebrook Limited. According to the agreement the Company issued a loan to Lanebrook Limited in the amount of USD 46,000 (EUR 34,426 as of the end of the year). The loan bears interest at the rate of 7.85% and matures after 2 years. At the same time the Company entered into a Guarantee and Indemnity Agreement with Lanebrook Limited for the amount of USD 7,222 (EUR 5,837 as of the date of transaction). The amount of guarantee was offset against interest on loan at the same date. The guarantee amount is amortised over its maturity period. mastercroft Finance limited On November 15, 2010, the Company entered into an assignment agreement with Sberbank with respect to the loans received by Inprom Group from the bank. The amount of the assignment was determined as of December 24, 2010 and amounted to EUR 151,976 (at the exchange rate as of the date of the transaction). The consideration paid was RUR 3,021,654 (EUR 75,221). On December 24, 2010, the Company entered into an assignment agreement with Mastercroft Finance Limited for these loans. The consideration of USD 99,000 (EUR 74,090) was recognised by the Company as an amount receivable from Mastercroft Finance Limited. The Company recognised net income of EUR 358 on these transactions. In the year ended December 31, 2010 and 2009, the movement of loans issued to related parties was as follows: loans denominated in usd Year ended december 31, 2010 Interest rate Maturity date Balance at December 31, 2009 Loans issued to related parties Interest income Settlements of the loans Effect of exchange rate changes Balance at December 31, 2010 Evraz Inc. NA Canada Libor+5.8% 10.12.2014 800,000 – 49,247 (49,247) Lanebrook Limited 7.85% 22.06.2012 – TRAnsLATIon InTo EuR Year ended december 31, 2009 800,000 555,324 46,000 46,000 37,526 1,926 (1,926) 51,173 (51,173) – – 800,000 46,000 846,000 38,601 (38,817) 40,505 633,139 Interest rate Maturity date Balance at December 31, 2008 Unamortised debt issue costs Loans issued to related parties Interest income Settlement of the loans Debt issue costs amortised Effect of exchange rate changes Balance at December 31, 2009 – – – – – – – – – – – 800,000 EvrazHolding LLC 6.00% 14.07.2009 120 Emmy N.A. 10.00% 30.01.2009 507,542 – – – – 3 – (123) (507,542) East Metals S.A. 5.50% 15.12.2009 – – 222,500 838 (223,338) Evraz Inc. NA Canada 7.6225%/ 6.03531% 10.12.2014 800,000 – Evraz Inc. NA loan A 9.17% 26.06.2009 320,000 (1,937) Evraz Inc. NA loan B 9.41% 26.06.2009 295,000 (1,852) Evraz Inc. NA loan C 9.67% 26.06.2009 360,000 (945) Evraz Inc. NA loan D 9.78% 26.06.2009 370,000 Evraz Inc. NA loan E 9.91% 26.06.2009 260,530 – – – – – – – – 61,192 (61,192) 14,924 (334,924) 1,937 14,122 (309,122) 1,852 17,715 (377,715) 945 18,417 (388,417) 13,143 (273,673) – – – – – – – – – – – – TRAnsLATIon InTo EuR 2,093,261 (3,000) 148,621 100,627 (1,784,657) 3,000 (2,528) 555,324 2,913,192 (4,734) 222,500 140,354 (2,476,046) 4,734 – 800,000 LoAns dEnomInATEd In EuRo Year ended december 31, 2010 Vanston Limited 7.20% 31.10.2012 Interest rate Maturity date Balance at December 31, 2009 16,886 16,886 Loans issued to related parties Interest income Settlements of the loans Effect of exchange rate changes Balance at December 31, 2010 – – 1,000 1,000 – – – – 17,886 17,886 205 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 5. loans to affiliated undertakings and other amounts owed by affiliated undertakings (continued) loans denominated in usd (continued) (all monetary amounts are expressed in thousands) Year ended december 31, 2009 Vanston Limited Vanston Limited Vanston Limited Vanston Limited Emmy Interest rate Maturity date 7.20% 7.20% 7.20% 7.20% 8.75% 08.07.2009 08.07.2009 16.07.2009 31.12.2010 03.06.2009 Balance at December 31, 2008 65 784 2,008 27,695 – 30,552 Loans issued to related parties Interest income Settlements of the loans Effect of exchange rate changes Balance at December 31, 2009 – – – – 19 19 2 – – (67) (784) (2,008) 1,466 (12,265) – (19) 1,468 (15,143) – – – (10) – (10) – – – 16,886 – 16,886 loans denominated in Canadian dollars Year ended december 31, 2010 Interest rate Maturity date Balance at December 31, 2009 Loans issued to related parties Interest income Settlements of the loans Effect of exchange rate changes Balance at December 31, 2010 Evraz Inc. NA Canada 8.08% 12.06.2018 533,480 TRAnsLATIon InTo EuR Year ended december 31, 2009 533,480 352,644 – – – 40,378 (151,575) 422,283 40,378 (151,575) – 422,283 29,577 (112,162) 46,899 316,958 Interest rate Maturity date Balance at December 31, 2008 Loans issued to related parties Interest income Settlements of the loans Effect of exchange rate changes Balance at December 31, 2009 Evraz Inc. NA 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, 2010. 6. Capital and reserves subscribed Capital Authorised Ordinary shares of EUR 0.002 each Issued and fully paid Ordinary shares of EUR 0.002 each 2010 2009 257,204,326 257,204,326 145,957,121 145,957,121 Shareholders of the Company are entitled to standard rights provided under the laws of Luxembourg to shareholders of stock companies (‘socieˆteˆ anonyme’). These rights comprise the right to vote at the shareholders meetings and the right to receive dividends. sCRIP dIvIdEnds On January 30, 2009, the Extraordinary General Meeting approved the modification 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 five years as well as the right of the Company to acquire up to 10% of its own shares. 206 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 6. Capital and reserves (continued) subscribed Capital (continued) (all monetary amounts are expressed in thousands) 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 of 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). shAREs LEndInG In 2009, 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 beneficially 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 financial assets in the balance sheet as of December 31, 2010 and 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 for the year ended December 31, 2009. non-dIsTRIBuTABLE REsERvEs In 2009, the Company recognised a non-distributable reserve for the contributed rights under the shares 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 profit per statutory financial statements. The legal reserve can be used only in case of a bankruptcy. In 2009, EUR 839 was allocated to legal reserve. No allocation to legal reserve was made in 2010. dividends No dividends were declared in 2009 and 2010. 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 of December 31, 2010 and 2009, the accrued interest amounted to USD 6,793 (EUR 5,084) and USD 6,793 (EUR 4,715), respectively. In 2009, the Company repurchased the notes due 2015 with the nominal amount of USD 148,100 for a cash consideration of USD 90,028. As a result, the Company recognised gain on extinguishment of debts in the amount of USD 58,072 (EUR 45,378). 207 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 7. non-convertible Bonds (continued) (all monetary amounts are expressed in thousands) 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 of December 31, 2010 and 2009, the accrued interest amounted to USD 28,434 (EUR 21,280) and USD 28,434 (EUR 19,738), respectively. 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 covenants impose restrictions in respect of certain transactions and financial ratios, including restrictions in respect of indebtedness and profitability. In November 2009, the lenders under certain bank facilities approved the requested amendments to the agreements, which included a reset of the financial 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. As a result, the financial covenant ratios tested on the Group's consolidated numbers were loosened, with no testing for the year 2009; all financial 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 refinance 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 financial 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. This amount was fully paid in 2010. 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 of December 31, 2010 and 2009, the accrued interest amounted to USD 10,296 (EUR 7,706) and USD 10,296 (EUR 7,147), respectively. 208 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 (all monetary amounts are expressed in thousands) 9. amounts owed to Credit institutions Year ended december 31, 2010 Interest rate Maturity date Balance at December 31, 2009 Loans recieved Interest expense Settlement of the loans Effect of exchange rate changes Balance at December 31, 2010 Natixis 6.681%+margin 06.06.2011 96,906 Deutsche Bank Libor+margin 23.11.2015 2,087,205 Vhesheconombank Libor+5% 26.05.2010 1,013,528 TRAnsLATIon InTo EuR Year ended december 31, 2009 3,197,639 2,219,658 – – – – – 5,735 (70,314) 64,108 (1,198,220) 25,456 (1,038,984) 95,299 (2,307,518) – – – – 32,327 953,093 – 985,420 71,886 (1,796,391) 242,326 737,479 Interest rate Maturity date Balance at December 31, 2008 Loans recieved Interest expense Natixis 6.681%+margin 06.06.2011 161,400 Deutsche Bank Libor+margin 23.11.2012 2,899,419 Vhesheconombank Libor+5% 26.05.2010 1,006,047 TRAnsLATIon InTo EuR 4,066,866 2,922,229 – – 805,255 805,255 579,682 Settlement of the loans (73,137) (883,077) (897,352) 8,643 70,863 99,578 179,084 (1,853,566) Effect of exchange rate changes Balance at December 31, 2009 – – – 96,906 2,087,205 1,013,528 3,197,639 128,394 (1,302,285) (108,362) 2,219,658 During 2010, the margin on loan from Natixis has been changed from 2.55% to 1.55% and the margin on loan from Deutsche bank has been changed from 1.8% to 3.8% and then reduced to 2.8%. In November 2010, the Company entered into a new structured credit facility agreement for a syndicated loan of USD 950.000 under which Deutsche Bank Amsterdam Branch acted as an agent for all lenders. The conditions of the agreement are the same as for the previous one, except the repayment dates. The new loan bears interest of LIBOR plus 2,8% per annum payable quarterly. The loan is repayable in quarterly installments from February 23, 2012 to November 23, 2015. 10. amounts owed to affiliated undertakings Type of receivables 2010 2009 Becoming due and payable within one year East Metals S.A. Mastercroft Finance Limited KGOK NTMK ZSMK Evrazholding Finance Sibmetinvest Evraz Inc. NA Canada Mastercroft Finance Limited Other related parties Becoming due and payable after more than one year NTMK ZSMK NKMK loan loan loan loan loan loan loan other payables other payables other payables loan loan loan 134,142 305,801 – 301,725 659,056 569,416 42,776 53,478 369 35,919 30,321 28,082 3,151 56,992 44,708 – – – 10 8,817 1,827,202 447,561 224,517 374,195 112,259 710,971 – – – – 2,538,173 447,561 209 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 10. amounts owed to affiliated undertakings (continued) (all monetary amounts are expressed in thousands) In the year ended December 31, 2010 and 2009, the movement in loans received from related parties, all of which were denominated in US dollars, was as follows: Year ended december 31, 2010 Interest rate Maturity date Balance at December 31, 2009 Loans recieved from related parties Interest expense Repayment of the loans Effect of exchange rate changes Balance at December 31, 2010 31.12.2010 40,456 31.12.2011 440,537 Mastercroft Finance Limited East Metals S.A. KGOK KGOK KGOK KGOK KGOK NTMK NTMK NTMK NTMK NTMK NTMK ZSMK ZSMK ZSMK ZSMK ZSMK ZSMK NKMK EvrazHolding Finance Sibmetinvest 7.35% 6.00% 6.00% 7.80% 6.00% 6.50% 6.00% 6.00% 7.80% 7.80% 6.00% 6.50% 6.00% 6.00% 7.80% 7.80% 6.00% 6.50% 6.00% 7.80% 6.00% 6.00% 31.12.2011 31.12.2011 31.07.2011 31.07.2011 30.11.2011 31.12.2011 31.12.2011 23.07.2015 31.07.2011 31.07.2011 30.11.2011 31.12.2011 31.12.2011 23.07.2015 31.07.2011 31.07.2011 30.11.2011 23.07.2015 30.11.2011 30.11.2011 37,000 41,000 4,600 72,899 140,000 116,900 56,000 196,700 183,958 300,000 100,000 312,700 23,000 219,500 182,576 500,000 100,000 236,115 20,000 150,000 57,000 3,978 (81,434) 18,203 (320,500) 511 3,438 2,894 1,228 156 14,734 8,282 14,104 1,731 3,413 11 14,236 7,854 23,507 1,780 2,355 33 7,052 157 – – – – – (46,001) (14,104) – – – – (88,001) (23,507) – – – (7,052) – – – – – – – – – – – – – – – – – – – – – – – 179,240 9,650 76,337 142,894 118,128 56,156 293,536 146,239 300,000 101,731 316,113 23,011 298,142 102,429 500,000 101,780 238,470 20,033 150,000 57,157 4,539 – – – – 82,102 – – – – – 64,406 – – – – – – – – 632,040 71,300 3,121,248 157 129,814 – (580,599) – – 71,457 3,302,503 TRAnsLATIon InTo EuR 438,734 2,410,096 97,922 (440,310) (34,877) 2,471,565 Year ended december 31, 2009 Mastercroft Finance Limited Mastercroft Finance Limited East Metals S.A. East Metals S.A. East Metals S.A. KGOK NTMK ZSMK Evraz Vitkovice Steel Interest rate Maturity date Balance at December 31, 2008 Loans recieved from related parties Interest expense Repayment of the loans Effect of exchange rate changes Balance at December 31, 2009 7.00% 19.10.2009 59,804 124,595 3,268 (187,667) 7.35% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 7.00% 31.12.2010 – 43,300 19.10.2009 124,795 124,850 20.10.2009 31.12.2010 15.12.2010 15.12.2010 31.12.2010 – – – – – 03.02.2009 48,874 296,820 439,000 4,522 81,800 64,170 – 156 2,529 2,807 1,537 17 302 236 315 (3,000) (252,174) (299,627) – – – – (49,189) 233,473 1,179,057 11,167 (791,657) – – – – – – – – – – – 40,456 – – 440,537 4,539 82,102 64,406 – 632,040 TRAnsLATIon InTo EuR 167,761 820,623 8,006 (565,939) 8,283 438,734 210 AnnuAl RepoRt And Accounts 2010 parent CompanY FinanCial statements for the Year ended 31 december 2010 (all monetary amounts are expressed in thousands) 11. other Creditors Other creditors comprise of the following: Becoming due and payable within one year 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) 2010 2009 – 706 4,257 4,041 9,004 13,835 13,835 22,839 121 79 11,408 23,789 35,397 10,352 10,352 45,749 12. income from participating interests In 2010 and 2009, subsidiaries of the Company did not declare and paid any dividends. 13. taxation The Company is subject to all taxes applicable to Luxembourg commercial companies. In 2010, the Company reassessed VAT returns and made a reversal of the tax in the amount of EUR 1,135 that was accrued in 2009. 14. guarantees At December 31, 2010, the Company had the following contingent liabilities with respect to the guarantees issued: Name of affiliated entity which debt was guaranteed by the Company Subject of the guarantee Principal and accrued interest at December 31, 2010 (thousands of EUR) Maturity Sibmetinvest EvrazHolding Finance EvrazHolding Finance Evraz Vitkovice Steel Evraz Vitkovice Steel Evraz Vitkovice Steel TC EvrazHolding NTMK NTMK NTMK NTMK NTMK ZSMK ZSMK ZSMK NKMK NKMK NKMK* bonds bonds bonds credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line credit line * The credit line is not utilised at December 31, 2010, the limit of the guarantee amounts to EUR 55,180. 15. subsequent events There were no significant events after the reporting date. 491,120 368,340 368,340 13,799 3,309 14,074 44,903 37,420 34,651 111,435 22,452 23,618 37,420 111,286 26,194 7,484 5,890 October 10, 2019 March 13, 2020 October 26, 2015 November 30, 2011 December 31, 2011 not defined June 24, 2014 July 29, 2013 June 22, 2014 June 29, 2014 June 27, 2012 December 31, 2018 July 29, 2013 June 29, 2014 June 27, 2012 June 27, 2012 February 28, 2023 – September 30, 2020 211 AnnuAl RepoRt And Accounts 2010 aBBreViations and aCronyms aGm Annual General Meeting boF Basic oxygen furnace Cad The Canadian Dollar Ceo Chief Executive Officer Cis The Commonwealth of Independent States CzK The Czech Koruna m or mln Million mt Million tonnes oCtG Oil Country Tubular Goods p.a. Per annum, annually roW Rest of the world rub The Russian Rouble ebitda Earnings Before Interest, Taxes, Depreciation and Amortisation smed Single-Minute Exchange of Die 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 uK United Kingdom of Great Britain and Northern Ireland 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’ V2o5 Vanadium pentoxide zar The South African Rand erm Enterprise Risk Management erW Electric Resistance Welded eu European Union eur or € The Euro FeV Ferro-vanadium Gdp Gross Domestic Product Gdr Global Depositary Receipts ias International Accounting Standard iFrs International Financial Reporting Standards kt Thousand tonnes ktpa Thousand tonnes per annum kWh Kilowatt-hour libor The London Interbank Offered Rate ld Large diameter pipe lse London Stock Exchange 212 AnnuAl RepoRt And Accounts 2010 glossary oF seleCted terms angle Angle-shaped steel section for construction api-grade slab American Petroleum Institute certified (API quality) slab beam A structural element. Beams are characterised by their profile (the shape of their cross-section). One of the most common types of steel beam is the I-beam, also known as H-beam, or W-beam (wide-flange beam), or a ‘universal beam/column’. Beams are widely used in the construction industry and are available in various standard sizes, e.g. 40-k beam, 60Sh beam, 70Sh beam as mentioned in this report 40-K shaped blanks Semi-finished product used to produce 40-k billet A usually square, semi-finished steel product obtained by continuous casting or rolling of blooms. Sections, rails, wire rod and other rolled products are made from billets 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 efficiency 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 bloom A usually square, semi-finished steel product obtained by continuous casting or rolling of ingots. Blooms are used to make billets and in the manufacture of structural steel products brownfield 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 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 Concentrate A product resulting from ore enrichment, with a high grade of extracted mineral Construction products Include beams, channels, angles, rebars, wire rods, wire and other goods Consumption The physical use of steel by end users Converter A type of furnace that uses pure oxygen in the process of producing steel from cast iron or dry mix Crude steel Steel in its solidified 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 desulfurisation, and add strength. Examples: ferrochrome, ferromanganese, ferrosilicon and ferrovanadium. Flat products or Flat-rolled steel products Include commodity plate, specialty plate and other products in flat shape such as sheet, strip and tin plate Gzh coal Coal graded as gas fat coal Greenfield project The development or exploration of a new project not previously examined iron ore Chemical compounds of iron with other elements, mainly oxygen, silicon, sulphur or carbon. Only extremely pure (rich) iron-oxygen compounds are used for steelmaking. Because 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 long products Include bars, rods and structural products that are ‘long’ rather than ‘flat’ and are produced from blooms or billets open-hearth furnace A vessel used to produce steel, which has been largely superseded by the substantially more efficient basic oxygen furnace (BOF) other steel products Include rounds, grinding balls, mine uprights, strips etc. 213 AnnuAl RepoRt And Accounts 2010 oCtG pipe Oilfield Casing and Tubing Goods or Oil Country Tubular Goods – pipes used in the oil industry slab A common type of semi-finished 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 tubular products Include large diameter line pipes, ERW pipes and casings, seamless pipes and other tubular products Vanadium A grey metal that is normally used as an alloying agent for iron and steel. It is also used to strengthen titanium- based alloys Vanadium pentoxide The chemical compound with the formula V2O5: this orange solid is the most important compound of vanadium. Upon heating, it reversibly loses oxygen 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 solidified iron produced from a blast furnace used for steel production. In liquid form, pig iron is known as hot metal plate A long thin square shaped construction element made from slabs 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. Rebar A500SP is a type of reinforcing bar that allows for a reduction in the metallic component of reinforced concrete, thereby significantly lowering construction costs scrap Iron containing recyclable materials (mainly industrial or household waste) that is generally remelted and processed into new steel semi-finished steel products The initial product forms in the steel making process including slabs, blooms, billets and pipe blanks that are further processed into more finished products such as beams, bars, sheets, tubing, etc. shale gas Shale gas is an unconventional natural gas that exists in certain shale formations. Shale possesses low permeability, and the shale gas boom in recent years reflects the utilisation of modern technology including horizontal drilling, multi stage fracturing and micro seismic monitoring sheet pile A long structural section with interlocking connections single-minute exchange of die (smed) A production method used to fasten the manufacturing process and reduce waste sinter An iron rich clinker formed by heating iron ore fines and coke in a sinter line. The materials, in pellet form, combine efficiently in the blast furnace and allow for more consistent and controllable iron manuracture. 214 AnnuAl RepoRt And Accounts 2010 interesting FaCts aBout eVraz Ò ntmK (the urals) The only open air ‘steel manufacturing’ museum in Russia is situated in Nizhny Tagil, on the site of the old Demidovsky iron plant, where first records of pig iron production date back to Christmas Day 1725. Almost half of the production was for export, primarily to the United Kingdom. NTMK’s universal beam mill is the only unit in Russia and the CIS that produces large beams and column sections with lengths that range from 150 to 1,000 millimetres. Documents relating to the work of a group of innovative industrialists at NTMK to develop progressive manufacturing solutions, were published in Forbes Magazine in 2008. Ò KGoK (the urals) The original meaning of Kachkanar, as in the Kachkanar Mountain that gave birth to the Kachkanarsky Ore Mining and Processing Plant (now EVRAZ KGOK) is something of a mystery. The Tatar translation is ‘Hidden’ or ‘Disappearing’ mountain while the Turco equivalent is 'kesh-kener’ or ‘double-humped camel'. Just for good measure the Ukrainian version is 'kachka' whereby the Kachkanar Mountain transmogrifies into Duck Mountain. EVRAZ Kachkanarsky Ore Mining and Processing Plant pioneered the enrichment of poor in iron content titanomagnetite ores. Ò VGoK (the urals) In 1836 miners working 80 metres below ground at the Vysokogorsky ore deposit’s Mednorudyansky field discovered one of the largest malachite formations in the world. The boulder was 17 metres long and weighed 380,000 tonnes. To put this in perspective the creation of the unique Malachite Hall at Saint Petesburg's famous State Hermitage Museum required just 2,000 tonnes of malachite. Clerks of the Russian Imperator Peter the Great were unable to scale the Vysokaya Mountain (mother of the Vysokogorsky ore deposit) because their iron heeled shoes got stuck in the mountain’s surface–in those days the iron content of the ores mined exceeded 60%. EVRAZ Vysokogorsky Ore Mining and Processing Plant, one of the oldest ore mining plants in the world, is celebrating its 300th Anniversary in 2011. Ò YuzhKuzbassuGol (siberia) Coal mined by Yuzhkuzbassugol is consumed in numerous parts of the world including: Ukraine, Romania, Austria, Poland, Slovenia, Slovakia, Lithuania, Turkey, Bulgaria, Finland, Germany, Italy, the UK, China, Japan and Korea. The Osinnikovskaya coal mine, an offshoot of Yuzhkuzbassugol (EVRAZ's coal mining subsidiary) is 790 metres deep. This equates to the average depth of Lake Baikal, the world’s deepest lake situated in East Siberia. Over a period of 41 years (1969-2010) Yuzhkuzbassugol’s mines have produced 917.8 million tonnes of coal. Transportation of this amount of coal would require 15 million freight cars Ò nKmK (siberia) Over a period of 79 years (as of March 2011) NKMK produced 432,448 kilometres of rail. This is further than the moon’s distance from the Earth (384,400 kilometres) and is equivalent to encircling the Earth 24 times. Over a period of 79 years (as of March 2011) NKMK produced 55.3 million sections of R-65 type rail, the weight of which is nine times greater than the Great Pyramid of Cheops. A total of 420,000 railway platforms would need to be laid end to end to facilitate the transfer of this number of rails. NKMK’s annual output of 700,000 tonnes of rail is equivalent to the weight of the Taipei complex in Taiwan, China: one of the highest skyscrapers in the world. Ò zsmK (siberia) Over a period of 46 years West Siberian Heat and Power Plant (‘Zapsib Power Plant’ – an energy generating branch of EVRAZ ZSMK) has produced enough kWh of electricty to supply the requirements of Italy’s entire population for one year and those of the citizens of Moscow for five years. Rolled products of ZSMK (currently EVRAZ ZSMK) were used in the construction of the following notable buildings/projects: the Cathedral of Christ the Savior (Moscow); the State Kremlin Palace (Moscow); the Commemorative complex at the Poklonnaya Gora area (Moscow); the Olympic Village (Moscow); the cycle track in the Krylatsky area (Moscow); the Moscow Metro; 60% of Moscow’s residential buildings; the Krasnoyarsky and Sayano-Shushensky Hydro Power Plants (Russia); the Baikal-Amur Highway (Russia); the casino complex which opened in Macau, China, in 2004 and the new Hong Kong International Airport. Ò dmz (uKraine) The famous Gogotsky lifting apparatus (electric tool used to convey raw material to blast furnace) was invented at DMZ Petrovskogo (currently EVRAZ DMZ Petrovskogo) by Nikolay Gogotsky, the plant’s engineer. In 1926 DMZ Petrovskogo (currently EVRAZ DMZ Petrovskogo) commissioned an open-hearth furnace with 100 tonnes of capacity: the largest in the world at that time. The sound of the EVRAZ DMZ Petrovskogo plant hooter can be heard within a radius of 10 kilometres. Souvenir hangers of Misha the Bear, the symbol of the 1980 Moscow Olympic Games, were produced by DMZ Petrovskogo (currently EVRAZ- DMZ Petrovskogo) in its consumer goods workshop. 215 AnnuAl RepoRt And Accounts 2010 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. eVraz is a Component of the Following recognised market indices: evrazholding in russia: 15 Dolgorukovskaya str., bld. 4-5, Moscow 127006 +7 495 234 4631 www.evraz.com Dow Jones Emerging Markets Basic Materials Titans 30 Index FTSE Russia IOB Index (15 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 floor 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 Socieˆte Anoneˆme 7, rue Gabriel Lippmann Parc d’Activiteˆ Syrdall 2 L-5365 Munsbach B.P. 780 L-2017 Luxembourg +352 42 124 1 +352 42 124 5555 www.ey.com/luxembourg R.C.S. Luxembourg B 47 771 TVA LU 16063074 availability of annual report EVRAZ Group’s Annual Report for 2010 and those for previous years can be downloaded from the investor/reports www.evraz.com/ To obtain a copy of the Company’s Annual Report, free of charge, or to submit any queries, please contact: Investor Relations: +7 495 232 1370, ir@evraz.com Cautionary statements The EVRAZ Group S.A. Annual Report and Accounts for 2010 contains certain ‘forward looking statements’ which include all statements other than the statements of historical facts that relate to Evraz’s plans, financial 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 reflect 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 reflect 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 financial results and performance of various market participants. rounding Certain figures included in this document have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them. Nizhny TagilKuzbassCalgaryCamroseSheregeshRed DeerHot SpringsPortlandNovokuznetskKachkanarOstravaeMalahleniSan Giorgio di NogaroClaymontPuebloReginaNakhodka
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