Annual Report and Accounts 2011
Delivering today.
Investing for
tomorrow.
INTERNAL SUPPLY
2640
NORTH AMERICA
79
1243
EUROPE
530
AFRICA
314
RUSSIAN EXPORTS
INTERNAL SUPPLY
227
131
7568
INTERNAL SUPPLY
RUSSIA/CIS
570
INTERNAL SUPPLY
2958
RUSSIAN EXPORTS
ASIA
Global Operating Model
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.
Type of business:
Steel Mills
Iron Ore Mining
Coal Mining
Coke Production
Vanadium
Sea Port
Mezhegey Coal Mine in Development
Third Party Steel Products Sales1 (kt) 2011
Internal Supply of Slabs and Billets from
Russian Steel Mills (kt)
1 Excluding routes with sales volumes
below 50kt each, together totalling 160kt.
2011 External Steel
Sales Volumes
by Geography
49%
19%
18%
10%
4%
Russia & CIS
Asia
Americas
Europe
Africa
2011 External Steel
Sales Volumes
by Product
36%
22%
19%
14%
6%
3%
Construction
Semi-finished
Flat rolled
Railway
Tubular
Other
02–15
Business Overview
16–29
Strategy
30–41
Operating Review
04 Who We Are
05 Highlights
06 Production and Trading Subsidiaries
08 EVRAZ Operations
10 Production by Region 2011
12 Chairman’s Statement
14 Chief Executive Officer’s Statement
18 Strategic Context
18 Global Macroeconomic Environment
19 Steel Industry in 2011
20
Iron Ore Market in 2011
21 Coking Coal Market in 2011
22 Vanadium Market in 2011
23 Business Model
23 Our Strategy
25 Key Performance Indicators
26 Principal Risks and Uncertainties
32 Operating Review
33 EVRAZ Business System
34 Steel: Russia
35 Mining: Russia
37 Steel: North America
38 Steel and Mining: Ukraine
39 Steel and Mining: South Africa
39 Steel: Europe
40 Vanadium
42–49
Sustainability
44 Corporate Social Responsibility
50–55
Financial Review
52 Financial Review
56–79
Governance
80–153
Financial Statements
58 Board of Directors
60 Vice Presidents of EVRAZ plc
61 Corporate Governance Report
70 Remuneration Report
74 Directors’ Report
78 Directors’ Responsibility Statements
82
Independent Auditors’ Report to the
Members of EVRAZ plc
84 Consolidated Statement of Operations
85
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Financial Position
Consolidated Statement of
Cash Flows
Consolidated Statement of
Changes in Equity
Notes to the Consolidated
Financial Statements
86
87
89
91
152 Independent Auditors’ Report to the
Members of EVRAZ plc
154 Separate Statement of
Comprehensive Income
155 Separate Statement of
Financial Position
156 Separate Statement of
Cash Flows
157 Separate Statement of
Changes in Equity
158 Notes to the Separate Financial
Statements
161 Glossary of Selected Terms
EVRAZ plc
Annual Report and Accounts 2011
01
EVRAZ plc 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.
The Group is listed on the London Stock Exchange
and is a constituent of the FTSE 100 index.
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Steel
EVRAZ steel business operates
globally, with steelmaking facilities
in Russia, Ukraine, North America,
Europe and South Africa. Most
of the consolidated revenues are
generated by the Steel segment.
Segment Revenue 20111
(US$ million)
14,717
12,123 (2010) +21%
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Mining
EVRAZ seeks to enhance its profitability
and security of supply of raw materials
by increasing vertical integration, in
particular in respect of iron ore and high
quality coking coal. The contribution
to the Group EBITDA from the mining
segment has increased.
Segment Revenue 20111
(US$ million)
3,784
2,507 (2010) +51%
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Vanadium
EVRAZ is the only large-scale
producer of vanadium-rich iron
ore in Russia and among the largest
producers of vanadium slag globally.
Segment Revenue 20111
(US$ million)
665
566 (2010) +17%
1
Includes inter-segment sales.
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
Annual Report and Accounts 2011
03
Construction
of a New Coking
Coal Mine
Yerunakovskaya-VIII
In April of 2011 EVRAZ commenced construction of a new coking
coal mine Yerunakovskaya-VIII.
The Yerunakovskaya-VIII coal field is located 55 km north east
of Novokuznetsk in the Kemerovo region of Russia, the licences
of which cover an area of 7.5 km2.
Operations at the mine are scheduled to start by the middle
of 2013, and we anticipate that it will reach its peak production
capacity of 2 million tonnes per annum of raw coking coal by 2014.
Construction of the access roads is underway and the project is on
schedule. All underground construction works are being carried out
in-house by Yerunakovskaya-VIII’s own contracting crews/teams.
The Yerunakovskaya-VIII Mine Location in Russia
Moscow
Yerunakovskaya-VIII
2 mtpa
2 million tonnes of raw coking coal
(planned production capacity by the end of 2014)
Business
Overview
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04
EVRAZ plc
Annual Report and Accounts 2011
Who We Are
Our Mission
We are a global steel and mining company delivering value to our
infrastructure customers. We make the world Stronger, Safer and Cleaner!
Our principal activities are:
Manufacturing and sale of steel and steel products
Iron ore mining and enrichment
Coal mining and processing
Manufacturing and sale of vanadium products
Trading operations and logistics
In 2011 EVRAZ produced 16.8 million tonnes of crude steel. EVRAZ is:
1. one of the most vertically integrated global steelmakers;
2. one of the lowest cost global steel producers;
3. the market leader in construction steel products;
4. the leading global supplier of steel rails; and
5. globally diversified across a range of geographies.
More information about the Company can be found on pages 5 to 17, 23 to 77.
EVRAZ is a global, vertically-integrated, steel, mining
and vanadium business with operations in the Russian
Federation, Ukraine, the USA, Canada, the Czech Republic,
Italy and South Africa. The Group is listed on the London
Stock Exchange and is a constituent of the FTSE 100
index. The Group employs approximately 112,000 people
and is among the top 20 largest steel companies in the
world by crude steel production volumes.
Our History
The Group’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 EVRAZ, has
been transformed, via a programme
of domestic and cross-border
acquisitions, into a multinational
steelmaking and mining corporation
with a US$17.0 billion asset base.
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.
+59%
Operating cash flow increased by 59%
to US$2,647 million in 2011
E nrichment Through
Collaboration
Working together as one team,
we achieve the best results.
V alue Created for
Our Customer
Continually improving our products
and services, we strengthen
our long-term partnerships
with our customers.
R espect for People
Safe working conditions,
development of our people and
local communities are integral
parts of the EVRAZ business.
A ccountability for
Actions and Results
We persistently aspire to achieve
our goals and are responsible
for the results.
Z eal for Continuous
Improvement
By developing and
implementing new ideas,
we facilitate the sustainable
growth of our company.
EVRAZ plc
Annual Report and Accounts 2011
05
2011 Highlights:
Financial highlights:
Group revenues were US$16,400 million (+22% vs. 2010)
The Group achieved consolidated EBITDA of
US$2,898 million (+23%)
Net profit was US$453 million (-4%)
Operating cash flow was US$2,647 million (+59%)
Net debt was US$6,442 million (-10% vs. 31 December 2010)
Rating upgrades1 by Moody’s, Standard & Poor’s and Fitch to
“Ba3”, “B+” and “BB-“ respectively following a number of debt
issues and refinancings
CAPEX in 2011 amounted to US$1,281 million compared with
US$832 million in 2010
Revised dividend policy with long-term average dividend payout
ratio of at least 25% of the consolidated net profit adjusted for
non-recurring items for the relevant period
Cash final dividend declared of US$0.17/ordinary share of EVRAZ plc
following payment by Evraz Group S.A., the top parent of the Group
until 7 November 2011, in 2011 of an interim dividend of US$0.60
per share/US$0.20 per GDR and a special dividend of US$2.70 per
share/US$0.90 per GDR
Total 2011 ordinary dividend of Evraz Group S.A. and EVRAZ plc
amounted to US$317 million, accounting for approximately 50%
of net profit2
Corporate developments:
EVRAZ plc was admitted to trading on the London Stock Exchange’s
Main Market on 7 November 2011 and joined the FTSE 100 on
19 December 2011 (six years earlier EVRAZ Group S.A.’s Global
Depositary Receipts began trading on the London Stock Exchange)
Sir Michael Peat was appointed as Senior Independent
Non-Executive Director
Alexander Izosimov was appointed as Independent
Non-Executive Director
Operating highlights:
EVRAZ achieved a 23% reduction in lost time injury frequency
rate and a 50% reduction in fatal incident frequency rate in 2011
The steel division produced 16.8 million tonnes (+3%) of crude
steel and sold 15.5 million tonnes (+0%) of steel products
The mining division produced 21.2 million tonnes (+7%) of iron
ore products, 6.3 million tonnes (-16%) of raw coking coal, and
3.0 million tonnes (-23%) of steam coal
The vanadium division produced 20,741 tonnes (+0%)
of vanadium slag and sold 26,632 tonnes (+34%) of
vanadium products
1 Evraz Group S.A. corporate long-term ratings. Moody’s upgraded
Evraz Group S.A. to Ba3 in January 2012.
2 Adjusted for non-recurring items.
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06
07
Production and Trading Subsidiaries
EVRAZ is a large vertically integrated steel, mining
and vanadium business with operations based in
the Russian Federation, the United States, Canada,
Ukraine, the Czech Republic, Italy and South Africa.
As of 31 December 2011:
1
2
With effect from 1 July 2011 production assets of ZSMK and NKMK were merged under the
combined enterprise name EVRAZ United West-Siberian Iron and Steel Plant (EVRAZ ZSMK).
With effect from 1 April 2011 Dnepropetrovsk Coking Plant (‘Dneprokoks’) was merged with
EVRAZ DMZP.
3 40% interest in Raspadskaya Group is held by its management, while 20% is a free float.
EVRAZ Highveld Steel and Vanadium Limited produces both steel and vanadium products.
4
Highveld’s shares have a primary listing on the Johannesburg Stock Exchange.
Russia/CIS
100%
EVRAZ ZSMK1
Russia, a full-cycle steel production mill
comprising coke-chemical production,
blast-furnace production, steelmaking
facilities and rolling mills. Specialises in
the production of construction steel,
rails and semi-finished steel products
100%
EVRAZ NTMK
Russia, an integrated
steel plant that
primarily produces
railway and
construction steel,
pipe blanks and semi-
finished products
96.77%
EVRAZ DMZP2
Ukraine, an integrated
steel plant specialising
in the manufacture of
construction and semi-
finished products
94.37%
EVRAZ Bagliykoks
Ukraine, a coking
plant, that supplies
coke to EVRAZ DMZP
and various local
steelmakers
93.86%
EVRAZ DKHZ
Ukraine, a coke
plant, supplies coke
production to EVRAZ
DMZ Petrovskogo
and various local
steelmakers in
Eastern Europe
North America
100%
EVRAZ North America
Produces higher margin specialty
and commodity steel products.
Headquartered in Chicago (Illinois,
USA) incorporates steelmaking,
rolling mills, rail and rod/bar
manufacturing, tubular operations,
scrap business, cut-to-length
processing centres and sales offices
Europe
100%
EVRAZ Vitkovice
Steel
The largest producer
of steel plates in the
Czech Republic
100%
EVRAZ Palini
e Bertoli
Northern Italy,
produces customised,
high-quality steel plate
products
South Africa
85.12%
EVRAZ Highveld
Steel and Vanadium
Limited 4
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 products
100%
EVRAZ KGOK
Russia, operates open
pit vanadium-rich
iron ore mines and
produces sinter
and pellets
100%
EVRAZ VGOK
Russia, produces
sinter from its iron ore
resources, as well as
iron ore concentrate,
limestone, crushed
stone and other
products
100%
Evrazruda
Russia, produces iron
ore concentrate
99.42%
EVRAZ Sukha
Balka
Ukraine, operates two
underground mines
for the production
of sintering ore
100%
Yuzhkuzbassugol
Russia, one of the
largest coal companies
in Russia that produces
both coking and
steam coal
50.02%
Mezhegeyugol
Russia, owns two
licences for the
development of
hard coal greenfield
sites in Tyva
40%
Raspadskaya3
Equity investment.
Largest Russian
coking coal
producer represents
approximately 12%
of volume of the
Group’s coal purchases
100%
EVRAZ
Vanady-Tula
Russia, the largest
Russian producer and
one of the leading
world producers of
vanadium products
78.76%
Strategic Minerals Corporation
Headquartered in the USA, one of the world’s
leading producers of vanadium alloys and
chemicals for the steel and chemical industries
with production facilities in Hot Springs
(Arkansas, USA) and Brits (South Africa)
100%
EVRAZ Nikom
Czech Republic,
a ferrovanadium
producer
100%
EvrazEK
Russia, an energy
generating company
which supplies natural
gas, steam and
electricity to EVRAZ’s
steel and mining
subsidiaries
100%
EVRAZ Metall
Inprom
Russia, one of the
largest steel distribution
companies in the CIS
with 62 branches in
industrially developed
regions of Russia and
Kazakhstan
100%
EVRAZ Nakhodka
Trade Sea Port
Russia, one of the
largest ports in the
Far East of Russia,
from where EVRAZ’s
subsidiaries ship the
majority of its exports
100%
Evraztrans
Russia, a railway
forwarder for
EVRAZ’s subsidiaries
100%
Metallenergo-
finance
Russia, supplies
electricity to EVRAZ’s
steel and mining
subsidiaries and
to third parties
100%
TC EvrazHolding
Russia, EVRAZ’s
trading company
selling products of
EVRAZ’s Russian
subsidiaries in Russia
100%
East Metals AG
Switzerland, EVRAZ’s
trading company,
EVRAZ’s Russian,
Ukrainian and South
African subsidiaries
make part of their
export sales through
East Metals A.G.
100%
Sinano
Shipmanagement
Limited
Cyprus, provides sea
freight services to
EVRAZ’s subsidiaries
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EVRAZ plcAnnual Report and Accounts 2011EVRAZ plcAnnual Report and Accounts 2011Business OverviewStrategyOperating ReviewSustainabilityFinancial ReviewGovernanceFinancial Statements
08
EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
Annual Report and Accounts 2011
09
EVRAZ Operations
EVRAZ is a global industrial enterprise that spans four
continents and employs approximately 112,000 people.
Moscow
EVRAZ
Vanady-Tula
EVRAZ NTMK
EVRAZ ZSMK
Evrazruda
EVRAZ Nikom
EVRAZ Vitkovice Steel
EVRAZ Bagliykoks
EVRAZ VGOK
EVRAZ KGOK
Raspadskaya
Yuzhkuzbassugol
EVRAZ DMZ Petrovskogo1
Mezhegeyugol
EVRAZ NMTP
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 and Trading
Europe & Russia/CIS
Our manufacturing facilities produce a wide
range of products with a specialised focus
on the infrastructure sector. In 2011, the
Company’s share of the Russian market in
beams, channels and rebars totalled 85%,
61% and 20% respectively.
EVRAZ is also a major supplier of semi-
finished products (slabs and billets) to
world markets and a prominent player
in the European plate market.
Largest crude steel
producer in Russia
No 1 Rail producer
in Russia and globally
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EVRAZ Red Deer
EVRAZ Calgary
EVRAZ Camrose
EVRAZ Regina
EVRAZ Surrey
EVRAZ Portland
EVRAZ
North America
Headquarters
EVRAZ Claymont
EVRAZ Pueblo
EVRAZ
Stratcor
North America
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.
No 1 North American
producer in respect
of rails and large
diameter pipes
EVRAZ Vametco
EVRAZ Highveld Steel and Vanadium
Mapochs Mine
South Africa
EVRAZ Highveld Steel and Vanadium is
South Africa’s second-largest steelmaker,
primary producer of medium and heavy
structural sections and thick plate
in South Africa and a leading producer
of Vanadium products.
EVRAZ is one of the
leading producers of
vanadium globally
1
Includes production facilities of Dnepropetrovsk Coking Plant.
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EVRAZ plc
Annual Report and Accounts 2011
Production
by Region 2011
EVRAZ plc
Annual Report and Accounts 2011
11
Production, Mining Segment
(thousand tonnes)
Russia
Mining segment:
Iron ore concentrate (saleable): 6,447
Sinter: 4,473
Pellets: 5,907
Coking coal (mined): 6,303
Steam coal (mined): 2,965
Ukraine
Mining segment:
Lumpy ore: 2,446
South Africa
Mining segment:
Iron ore fines: 640
Lumpy ore: 1,257
Production, Vanadium Segment
(tonnes, calculated in pure vanadium
equivalent)
Ferrovanadium: 16,708
Nitrovan®: 2,874
Oxides, vanadium aluminium and chemicals:
1,277
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North America
Europe
South Africa
Ukraine
Russia
11.4%
18.5%
32%
38.1%
Flat-rolled
Tubular
Railway
Construction
6.3%
10.3%
8.2%
9.1%
83.4%
Flat-rolled
Construction
Other
31.8%
50.9%
Flat-rolled
Construction
Semi-finished
Other
13.3%
28.9%
57.8%
Construction
Semi-finished
Other
3.2%
5.5%
14.3%
38.4%
38.6%
Construction
Semi-finished
Railway
Other
Flat-rolled
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12
EVRAZ plc
Annual Report and Accounts 2011
Chairman’s Statement
Alexander Abramov
Dear Stakeholders,
2011 was a landmark year in the
development of EVRAZ. We produced
a robust operating performance
in volatile markets, posted strong
financial results, delivered against
key management objectives,
obtained a Premium Listing on
the London Stock Exchange and
entered the FTSE 100 Index.
The Premium Listing of shares of EVRAZ plc
on the London Stock Exchange in November
2011 was clearly a major development and
an important milestone on a journey which
began six years earlier when Evraz Group S.A.’s
Global Depositary Receipts began trading on
the London Stock Exchange.
Alexander Abramov
Chairman
That the group was able to deliver such a
resilient performance in a year characterised
by global economic uncertainty is testament
to the power of our integrated business model,
the sustainability of our strategy and the
efforts of our management team and
employees.
Health, Safety and Environment
As a global organisation, our undertaking
is to make the world stronger, safer and
cleaner and to this end we are increasing
our emphasis on the health, safety and
environmental management of the Group.
The safety of our employees remains our top
priority and the Board is absolutely focused
on improving our safety record. Our disciplined
approach is beginning to deliver results,
and I am pleased to say that our overall HSE
performance has improved again in 2011,
with our key indicators all showing
improvement on the previous year.
The Listing
The Premium Listing of shares of EVRAZ plc
on the London Stock Exchange in November
2011 was clearly a major development and an
important milestone on a journey which began
six years earlier when EVRAZ Group S.A.’s
Global Depositary Receipts began trading
on the London Stock Exchange.
We received overwhelming support from
Evraz Group S.A. shareholders who almost
unanimously accepted the offer to exchange
their GDRs for shares in EVRAZ plc. As the
only steel stock in the UK FTSE All-Share
index, EVRAZ enables investors to gain direct
exposure to this important global sector.
Although the new company, EVRAZ plc,
represents the same underlying assets as
EVRAZ Group S.A., the Listing enabled us to
broaden our shareholder base, improve the
liquidity of the Company shares, and provide
better access to the international capital
markets. Importantly, the Listing also shows
EVRAZ’s commitment to the highest standards
of governance, transparency and information
disclosure.
Our strategy as a global vertically integrated business
is clear. We want EVRAZ to strengthen its position as
a world class steel and mining company and as the
partner of choice for our infrastructure customers.
Strategy
Our strategy as a global vertically integrated
business is clear. We want EVRAZ to
strengthen its position as a world class steel
and mining company and as the partner of
choice for our infrastructure customers.
These priorities are supported by a set of
strategic pillars that underpin our growth:
health, safety and environment; people;
customer focus and the EVRAZ Business
System. We have made major investments
in each of these areas in 2011, helping to
support our platform for growth.
The EVRAZ Business System encompasses
a Group-wide philosophy which aims to
transform the way the organisation conducts
its business. A key feature of this approach
to value creation through greater employee
engagement is the incorporation of Lean1
business principles to create a culture of
continuous improvement. The outcomes of this
approach are benefits for customers in terms
of product quality and costs; an improved
working environment for the workforce and
greater flexibility for the Group to respond to
market change as it occurs.
The CEO Statement and Strategy sections
of this Report provide significant additional
detail but, in essence, EVRAZ aims to attract,
develop and retain the best people at every
level throughout the Company. In 2011,
we renewed our commitment to training
and development including the EVRAZ New
Leaders Programme designed to develop
the next generation of senior management
within the Company.
Governance
EVRAZ is committed to ensuring our
governance arrangements meet with the
highest applicable governance standards.
During 2011 we continued to review and
strengthen our governance, at Board and
at executive level, as part of the process for
admission to the London Stock Exchange as
a Premium listed company. The independent
directors of EVRAZ plc are led by Sir Michael
Peat, the Senior Independent Non-Executive
Director. In addition, on 28 February 2012,
Alexander Izosimov was appointed to the
Board as an additional non-executive director.
As a result, the independent directors now
constitute half the Board of EVRAZ plc.
Dividend
In 2011, the Board approved a new dividend
policy targeting a long-term average payout
ratio of at least 25% of consolidated net
profits (excluding one-off and non-cash items).
We believe that this is a sensible level which
rewards shareholders whilst retaining
sufficient capital for the Group’s future
investment needs.
On the back of our strong financial results,
Evraz Group S.A. made the first dividend
payment since 2008 during 2011 and paid
an interim dividend of US$0.60 per share
of Evraz Group S.A. (US$0.20 per GDR)
and a special dividend of US$2.70 per share
(US$0.90 per GDR). The Board has declared
a cash final dividend for 2011 of US$0.17 per
ordinary share of EVRAZ plc. This gives a total
ordinary dividend for 2011 of US$317 million,
which represents 50% of net profit adjusted
for non-recurring items.
Conclusion
In 2012, EVRAZ will be 20 years old. As a
founder of the company, I am very proud of
what we have achieved over the intervening
years from our beginnings as a small steel
trader, to our current position as a world class
vertically integrated steel and mining company.
We are among the top 20 global steel
producers, the world’s largest producer of
rails, Russia’s leading steel manufacturer and
an international leader in infrastructure and
construction products.
EVRAZ plc
Annual Report and Accounts 2011
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In 2011 driven by our vertically integrated,
global business model, we improved our
competitiveness, maintained our share in key
markets and further improved our cost base.
Whilst the immediate outlook for our markets
remains uncertain, EVRAZ has good overall
momentum and we see opportunities to
enhance our performance on many fronts.
I am confident EVRAZ is well positioned to
create value for shareholders in 2012 and
to continue its record of growth.
Strong results, especially in an industry
as competitive as ours, are not the result
of chance but more the product of the
accumulated efforts, dedication and hard
work of our approximately 112,000
employees. On behalf of the Board I would
like to thank all our management and staff
whose hard work and commitment contributed
so much to our performance in 2011.
Alexander Abramov
Chairman
EVRAZ plc
24 April 2012
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1 For more information on Lean please refer
to pages 32-33 of the report.
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EVRAZ plc
Annual Report and Accounts 2011
Chief Executive Officer’s Statement
Alexander Frolov
Our strategic priorities in 2011 were to grow
our steelmaking raw material base and improve
the performance and efficiency of our existing
mining operations.
Dear Stakeholders,
2011 was a pivotal year for EVRAZ,
a period in which we reinforced
our position as one of the world’s
leading vertically integrated steel
and mining companies. I am
pleased to report that EVRAZ
produced a strong set of results
and a robust operational
performance in 2011, laying a
solid platform for future growth.
In 2011, we also recorded a significant
improvement in both our lost time injury
frequency rate and fatal injury frequency
rate, which fell by 23% and 50% respectively
year-on-year. Our aim is now to make these
improvements sustainable with the ultimate
goal being to operate a zero harm business.
We still have a long way to go and we will
continue to focus on improving our safety
management systems and promoting a
strong safety culture.
The first half of 2011 witnessed a recovery
in the emerging economies matched by
improving demand from developed markets.
However, in the second half of the year,
the combination of a slowing US economy,
fiscal tightening in China and the crisis in
the Eurozone, caused a rapid collapse in
confidence over the prospects for global
growth. This led to significant uncertainty
in steel markets and a noticeable softening
of demand.
Against this challenging backdrop, EVRAZ
reported a good set of results for the year.
Our financial performance was robust,
benefiting from resilient steel demand in our
key markets, a favourable product mix and
higher raw materials prices. As a result, our
revenues increased by 22% to US$16.4 billion,
EBITDA rose by 23% to US$2.9 billion and we
delivered an impressive cash performance,
generating operating cashflow of US$2.6 billion,
up 59% on 2010.
Alexander Frolov
Chief Executive Officer
Our strategic priorities in 2011 were to grow
our steelmaking raw material base and improve
the performance and efficiency of our existing
mining operations. During the year we launched
a number of growth initiatives to improve
productivity and secure our self-coverage in raw
materials. We remain on track to reach our long-
term objective of achieving integration levels in
excess of 100% self-coverage in iron ore and
coking coal supply.
At the same time, we focused on the need for
operational excellence in our steel operations,
firstly, in order to preserve our competitive
advantage as one of the world’s leading
low cost steel producers, and secondly,
to reposition the business and increase our
share of higher value-added finished products.
We made considerable progress in pursuit of
these goals: modernising existing facilities,
investing in new projects and successfully
shifting our production more toward value-
added steel products.
Mining Segment
In 2011, we focused investment on the
development of our iron ore resource base,
primarily the expansion of the Kachkanar iron
ore operations to ensure a steady supply of
iron ore to our steelmaking operations in future
years. As a result, our KGOK plant increased
production of raw iron ore from 52 to 55 million
tonnes. As a result of our continued focus on
debottlenecking our mining segment produced
7% more iron ore products in 2011 compared
to 2010.
One of our challenges in 2011 was to stabilise
our existing coking coal mining operations
and lay the foundation for a future increase
in production. The performance of our coal
mines has been affected in recent years by
a combination of negative factors including
difficult geological conditions, mine shutdowns
and temporary stoppages, divestments and
the impact of more stringent health and safety
requirements. As a result, the production
of raw coking coal fell from 10 million tonnes
in 2009 to 6.3 million tonnes in 2011.
Operations were again disrupted in 2011,
as we had to temporarily halt production at
the Alardinskaya and Osinnikovskaya mines,
for longwall repositionings and additional
implementation of safety equipment. We
completed these works in the fourth quarter,
and restarted operations at all the mines
involved. In October, we launched production
at the Ulyanovskaya mine. As a result,
production rose 19% in the fourth quarter
compared to the third quarter.
In order to increase our coking coal self-
coverage and ensure adequate long-term
supply as existing mines become depleted, we
started construction of the Yerunakovskaya-VIII
mine. We also looked at different options for
developing the Mezhegey coal deposit earlier
than the scheduled 2015 start date.
We expect that implementing all these plans
will result in production volumes of coking coal
in 2012 surpassing the levels of 2011. As a
result, our coking coal self-coverage should
exceed 100% by the end of 2013, which will
help improve the profitability of the business.
Steel Segment
Buoyed by strong contributions from our core
markets of Russia and North America, our
steelmaking business made progress in 2011.
With all our major facilities operating at full
capacity, production volumes of crude steel
rose 3% year on year to 16.8 million tonnes.
Within the product mix, we saw a further shift
away from semi-finished products towards
higher margin, value-added finished products.
As a consequence, the share of finished
products as a proportion of total output
increased to 77% from 75% in 2010, the
highest contribution in our history.
In 2011, we placed special emphasis on cost
reduction and improving our product quality.
We invested in the development of pulverised
coal injection technology (“PCI”) at all our
Russian blast furnaces, in order to significantly
reduce consumption of coking coal and natural
gas in blast furnace production.
The modernisation of our Russian rail mills,
when completed by the end of 2012, will
ensure supply of better quality rails to satisfy
the immediate demand of our major customer
in Russia, Russian Railways. The next stage
will be production of 100-metre heat-treated
rails for high-speed railroads in line with the
Russian long-term state programme to develop
rail transportation in the country. We have also
modernised the wheel production, significantly
improving the quality of railway wheels made
at our plant in Nizhny Tagil, supplied also to
Russian Railways and commercial customers
in Russia and other CIS countries.
Russia, our biggest market, put in a robust
performance. The combination of supply
constraints and higher raw material input
prices led to higher steel prices. The key
drivers of demand continued to be the
construction and infrastructure sectors.
Such was the requirement for construction
steel that, for the first time since before
the financial crisis, demand for construction
steel in Russia outstripped supply.
The domestic market accounted for 69% of
EVRAZ’s Russian and CIS steel mills sales in
2011, compared to 58% in 2010, reflecting
improved demand and the shift to higher
margin finished products. This increase was
fully offset by a decrease in export sales
volumes from EVRAZ’s Russian and Ukrainian
operations, which reflects EVRAZ’s strategy to
direct sales away from export markets where
prices for its steel products were generally
lower in 2011, to domestic CIS markets,
where prices for steel products were higher.
EVRAZ North America produced encouraging
results in 2011. Steel sales volumes remained
at the level of 2010, but prices increased
across all our product groups. We made
investments in capacity expansion, adding
capacity to produce API tubes at our structural
tubing facility in Portland, Oregon and
upgrading our rail facility in Pueblo, Colorado.
The investment in Portland will double the
mill’s total capacity, enabling it to meet the
energy sector’s growing demand for specialist
tubular products. The upgrades at Pueblo will
increase the mill’s total capacity by 10%, to
almost 525,000 metric tonnes of premium
rail annually.
Our results in Europe and South Africa were
mixed. After a strong first half, European steel
demand began to weaken in the second half of
2011. EVRAZ’s European operations increased
full year sales volumes by 8%. In South Africa,
the performance of EVRAZ Highveld Steel was
hit by poor domestic demand and a strong
Rand, which created significant pressure on
both prices and costs.
Vanadium Segment
We are the only large-scale producer of
vanadium in Russia and are well-positioned
among the largest vanadium producers
globally. EVRAZ continued to increase its share
of the world vanadium market capitalising on
its low cost competitive position and ability
to accelerate production in response to
customers’ requirements. As a result, EVRAZ’s
vanadium division has managed to increase
sales by 20% compared to 2010 and decrease
inventories accumulated during crisis years.
Operational Improvements
In order to preserve our competitive advantage
and compete effectively in the global market,
we need to create more value for our
customers and to do so more efficiently by
using fewer resources, which is why we have
introduced the EVRAZ Business System into
the organisation. We are applying Lean
business principles across our operations to
create a culture of continuous improvement.
Our goal is not just to identify cost reductions,
but to change the way our entire organisation
thinks and acts.
In 2011, we streamlined our business further.
We moved into our new headquarters in
Moscow, relocated our North American
headquarters and started the consolidation of
our European assets into a single unit. We also
merged our two major integrated steel plants,
NKMK, the leading rail producer in Russia, and
ZSMK, Siberia’s largest steel mill, into a new
unified business, EVRAZ United West-Siberian
Iron and Steel Plant (“EVRAZ ZSMK”), creating
one of the largest steel plants in Russia.
As these two plants are located in one city –
Novokuznetsk – we believe that such merger
will make the business much more efficient.
Positioned for Growth
We are committed to enhancing our mining
asset base, modernising our steelmaking
facilities and improving product quality in order
to maintain and strengthen our competitive
position in our key markets. Since 2005,
we have invested over US$5.5 billion in key
investment projects aimed to achieve these
goals. Our total capital expenditures in 2011
amounted to US$1.28 billion. Some of the
new investment projects will come on stream
by the end of 2012, starting with the increase
of production at our iron ore mine at Kachkanar,
followed in 2013 by an additional 2 million
tonnes of raw coking coal per annum to be
mined at the Yerunakovskaya-VIII mine, and
the start of mining at the Mezhegey coking
coal deposit, with an estimated 700 million
tonnes of reserves and resources. The
development of new deposits will help to
underpin our goal of reaching integration
levels in excess of 100% self-coverage
in iron ore and coking coal.
By the beginning of 2013, we will also start
using pulverised coal injection technology (PCI)
at all our Russian steelmaking facilities, which
will reduce coking coal consumption by 20%
and eliminate the need for natural gas in
blast furnace production, thus lowering our
steelmaking costs.
We are continuing to modernise and expand
existing steel facilities, commission new steel
mills, and invest in new production technology.
The reconstruction of our Russian rail mills at
EVRAZ ZSMK and EVRAZ NTMK should be
completed in 2012, enabling EVRAZ to increase
its manufacturing capacity for high-speed rails
and improve the quality of the products.
In 2013 we expect two new rolling mills,
in the south of Russia and in Kazakhstan,
to start producing rebars and small sections
from internally supplied billets. This will
allow us to further increase the proportion
of higher value-added products and raise
the profitability of our steel operations.
EVRAZ plc
Annual Report and Accounts 2011
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Outlook
The long-term prospects for global infrastructure,
a sector where EVRAZ has established a strong
reputation and footprint, remain attractive.
As a low cost, vertically integrated global steel
manufacturer, EVRAZ is well placed to benefit
from the increased emphasis on infrastructure
development globally.
In the near-term, the outlook for the global
steel industry is likely to continue to be
challenging in 2012. Our current expectation
is for a modest overall rise in steel consumption,
driven by demand from the emerging markets.
The wider global economy and, in turn, the
steel industry, continues to face challenges
and will likely remain volatile.
However, we have substantial experience
of managing the business in the extremely
challenging environment of late 2008-2009
so we enter this period of uncertainty with
confidence. Inventories at traders and at our
mills and ports are very low and we do not
ship without a pre-payment, which minimises
our credit risk.
We continue to run our steelmaking capacities
at full utilisation and expect the situation to
remain the same in the foreseeable future.
This is expected to result in a slight increase
in volumes of finished steel products in 2012
compared to 2011 due to the completion of
certain maintenance and modernisation projects.
In Russia, steel prices remained largely
unchanged in the first quarter 2012 compared
to the last quarter of 2011, but our cost base
is increasing due to the strengthening rouble.
Prices of steel products have remained broadly
flat since the start of 2012. Russian Railroads
remains a very strong customer and we expect
it to maintain purchase volumes over the next
few years. In addition, we expect to improve
our product mix and generate additional
revenue through our rail mill and wheel
shop modernisation.
In North America, demand for our products
remains strong and its relative performance
so far in 2012 is ahead of the comparable
period in 2011.
CAPEX plans for FY2012 are expected
to remain at the level of 2011 but we
continuously assess the market environment
and have flexibility in our CAPEX plans.
We strongly believe that the quality of
the Group’s asset base, the competitive
advantages we derive from vertical integration,
its low cost position, geographic breadth and
highly experienced management team leave
the Company well positioned to continue
to implement its growth strategy and deliver
value to shareholders.
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Chief Executive Officer
EVRAZ plc
24 April 2012
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
Annual Report and Accounts 2011
17
Increasing the
Production Capacity
of EVRAZ KGOK
to 55 mtpa
In December 2010 EVRAZ launched a project at EVRAZ KGOK
to increase iron ore extraction and production to 55 million tonnes
per annum from the end of 2012.
In order to achieve this targeted increase in production EVRAZ
KGOK will acquire additional mining equipment, modernise the
existing transport infrastructure and upgrade the production
capacities. Delivery of the additional mining equipment is close
to completion and construction works are ongoing.
EVRAZ KGOK Asset Location in Russia
Moscow
EVRAZ KGOK
55 mtpa
55 million tonnes of iron ore per annum
(targeted extraction of iron ore at EVRAZ KGOK after modernisation)
Strategy
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EVRAZ plc
Annual Report and Accounts 2011
Strategic Context
EVRAZ is a global vertically integrated steel,
mining and vanadium business.
EVRAZ’s ability to successfully deliver our
strategy is influenced by both the conduct
of our competitors and external macro-
economic factors which affect ourselves
and our customers.
Global Macroeconomic
Environment
The global economy’s recovery of 2010
continued with strong growth in the first half
of 2011. However, this positive sentiment did
not continue throughout the second half of the
year due to a combination of factors including
a slowdown in the global economy, fragility
in European markets due to the debt crisis
and budget-balancing measures in the USA.
In China, stringent monetary policy controls were
also a key driver of the economic slowdown.
The European debt crisis negatively affected
consumer confidence, which in turn led to
a slowdown in the steel market in the second
half of the year. End-use demand for steel sheet
has weakened, particularly in the automotive
sector where threat of unemployment, fiscal
austerity and personal indebtedness has
diminished the demand for cars. Construction
activity has also been constrained impacting
demand for long products.
China and India continued to be the main
drivers in demand for commodities in 2011
due to ongoing infrastructure development
and continuing urbanisation in Asia. This trend
is expected to continue in 2012.
Real GDP Growth
Percents
12
9
6
3
0
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
China
Russia
World
EU-27
USA
Industrial Production Growth
Global Insight
Percents
20
15
10
5
0
-5
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
China
Russia
World
EU-27
USA
Global Insight
EVRAZ plc
Annual Report and Accounts 2011
19
Steel Industry in 2011
Following increase of 17% in 2010, hot-rolled
finished steel consumption also grew by 6% in
2011, with the majority of additional demand
occurring during the first half of the year.
Share of Crude Steel Production
and Finished Steel Demand
Total Production: 1,515 mt
Total Demand: 1,373 mt
45.4
12.7
7.0
4.8
7.5
11.6
11.1
World steel
7.4
4.1
4.6
4.7
3.8
5.5
11.1
12.0
HRC, Rebar – Black Sea Export
Jan 2010 – Dec 2011
46.7
China
Americas
Europe
Africa/ME
Russia/CIS
India
Japan
South Korea
Rest of the World
There was a slowdown in consumption
growth in the second half of the year, largely
due to the European debt crisis. Crude steel
production has consequently been scaled
back globally with several mill shutdowns
in Europe and Chinese output continuing
to fall after reaching an all-time high in May.
China continued to dominate demand
for finished steel products, accounting for
45.4% of demand in 2011. The growth in
consumption in China was predominantly
driven by the affordable housing scheme
initiated by the Chinese government,
which helped increase consumption
of long products.
We expect a modest increase in steel
consumption of 3.6% in 2012, predominantly
as a result of continued demand in emerging
markets. Additionally, the 2018 FIFA World
Cup in Russia should result in growing demand
for construction steel starting 2014 in the
domestic market, which EVRAZ is well
positioned to benefit from.
In 2011, there was a significant increase in
raw material prices compared to 2010, which
resulted in price increases for end products.
However, raw material prices began to soften
during the latter part of the year as a result
of the slowdown in steel production.
US$/tonne
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800
700
600
500
Jan 10
May 10
Oct 10
Mar 11
Jul 11
Rebar FOB
HRC FOB
Global Crude Steel Production
1Q2010 – 4Q2011
375
370
350
349
353
346
325
300
391
382
379
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
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CRU
The iron ore industry showed strong demand
growth through the first half of 2011 on the
back of improving market sentiment, resulting
in production increases and a favourable
pricing environment. However, prices
weakened in the second half of the year due
to a decrease in global steel production.
Global iron ore production rose 5% to
1,804 mt in 2011. There was strong growth
in production in the major iron ore producing
countries on the back of the positive
macroeconomic fundamentals in the first half
of the year, with Australia producing 478 mt
(+13% versus 2010), Brazil 381 mt (+6%
versus 2010), China 254 mt (+4% versus
2010) and India 236 mt (+5% versus 2010).
These four countries accounted for 71% of
total production worldwide. Additionally, Russia
increased its iron ore output by 3% to 110 mt.
Australia
Brazil
Canada
China
Europe
India
Japan
South Africa
South Korea
Rest of the World
China continued to dominate the seaborne
iron ore market, importing 687 mt (63%)
of the seaborne traded iron ore.
Iron ore fines CIF China prices increased
by an average of 15% in 2011. The sales
structure for the industry has moved towards
an increased use of spot contracts.
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CRU
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EVRAZ plc
Annual Report and Accounts 2011
Iron Ore Market in 2011
The iron ore industry showed strong
demand growth through the first
half of 2011.
Share of Iron Ore Seaborne
Supply and Demand
Total Supply: 959 mt
Total Demand: 1,094 mt
3.5 1.7
8.2
5.0
47.7
8.4
5.0
11.0
12.8
33.9
62.8
Morgan Stanley Research
Spot vs. Contract Iron Ore Fines Prices
Jan 2010 – Dec 2011
250
200
150
100
50
0
Jan 10
Dec 10
China CIF (Spot, 63.5% Fe)
Australia CIF (contract)
Brazilian CIF (contract)
Iron Ore Production
2005-2011
2,000
1,500
1,394
1,000
500
0
1,572
1,699
1,680
1,591
1,705
1,804
2005
2006
2007
2008
2009
2010
2011
Brazil
China
Australia
India
Rest of World
Morgan Stanley Research
EVRAZ plc
Annual Report and Accounts 2011
21
Coking Coal Market in 2011
Global coking coal demand continued
to grow strongly throughout the first
half of 2011.
Share of Coking Coal Seaborne
Exports and Imports
Total Exports: 264 mt
Total Imports: 283 mt
5.3
3.7
5.9
11.0
22.9
6.5
9.4
22.8
51.3
13.5
9.2
13.2
25.4
Russia
Australia
Brazil
China
USA
Europe
Mongolia
India
Japan
South Korea
Canada
Rest of the World
Morgan Stanley Research
Spot vs. Contract Hard Coking Coal Prices
Jan 2010 – Dec 2011
Global coking coal demand continued to grow
strongly throughout the first half of 2011,
resulting in prices increasing significantly due
to a continued supply side deficit, before
softening in the second half of the year.
Global coking coal seaborne exports were
down 2% to 264 mt in 2011. The major coking
coal exporting countries showed growth,
with the exception of Australia whose exports
declined 16% to 134 mt; USA increased 26%
to 60 mt, Canada increased 4% to 29 mt and
Mongolia increased 37% to 14 mt. The four
countries together accounted for nearly 90%
of total worldwide exports.
Coking coal imports were flat at 283 mt
in 2011 driven by the significant increase
in imports in Japan (up 21% to 65 mt) and
China (up 27% to 61 mt). Japan, China and
India accounted for more than 50% of the
global imports.
The Australian contract prices for coal
increased 60% to US$330/t in April 2011,
before decreasing 15% to US$285/t by the
end of the year. The Australian spot price
increased 56% to US$350/t in January 2011,
before decreasing 35% to US$228/t by the
end of the year.
USD$/tonne FOB Australia
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200
100
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Jan 10
Dec 10
Australian Contract
Australian Spot
Coking Coal Exports
2006-2011
mt
Coking Coal Imports
2006-2011
222
230
243
205
269
264
200
100
0
228
242
234
218
200
100
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CRU
mt
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283
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2007
2008
2009
2010
Australia
China
USA
India
Canada
Japan
2011
Russia
2006
2007
2008
2009
2010
2011
Europe
Rest of the World
CRU
22
EVRAZ plc
Annual Report and Accounts 2011
Vanadium Market in 2011
Demand was robust for
vanadium in the first half of 2011.
Share of Vanadium Production
and Reserves
Total Production: 59.5 kt
Total Reserves: 13.6 mt
2.5
0.3
25.7
33.6
38.7
37.4
Vanadium is predominantly used as an
alloying agent to increase the strength of
steel. Nearly 85% of the vanadium used in
this process is ferrovanadium, which is used
as an alloying agent for iron and steel, while
vanadium pentoxide is used as a catalyst for
the production of sulphuric acid. Vanadium
consumption is heavily aligned with levels
of steel production, particularly high-strength
steel grades.
Whilst demand was robust for vanadium in
the first half of 2011, due to strong growth
in steel production, prices for ferrovanadium
and vanadium pentoxide remained at the
same level as 2010 in the first half of 2011,
before decreasing towards the end of the year.
World resources of vanadium exceed 63 mt,
most of which are in China, Russia and South
Africa. However, as vanadium is mainly recovered
as a byproduct or coproduct, these resource
levels are not an indicator of available supplies.
25.2
36.6
China
Russia
South Africa
Rest of the World
CIF Europe V2O5 and FeV Prices
Jan 2010 – Dec 2011
US$/kg
30
20
10
0
Jan 10
May 10
Oct 10
Mar 11
Jul 11
Vanadium pentoxide (min 98%)
Ferrovanadium (70-80%)
Dec 11
Bloomberg
EVRAZ plc
Annual Report and Accounts 2011
23
Business Model
EVRAZ creates value by converting its own mineral
resources into high-end steel products for its large scale
global infrastructure clients. Efficient operations, constant
pursuit of economically attractive asset developments and
search for value-adding M&A transactions are each
fundamental features of EVRAZ’s approach.
Our Strategy
EVRAZ intends to pursue its strategy by
expanding its mining operations, strengthening
its position in existing markets and reducing
costs while maintaining its focus on safety.
Increase Vertical Integration and Enhance
Raw Materials Base
EVRAZ is significantly self-covered in terms
of raw material production and believes that,
in 2011, it ranked by volume in the top three
largest iron ore producers and top five largest
coal producers in Russia.
In 2011, approximately 102% of EVRAZ’s iron
ore requirements and 56% of its steel segment
coking coal requirements were produced by
its own mining subsidiaries. EVRAZ sells a
proportion of its iron ore and coal production
to third parties and purchases a proportion
of its iron ore and coal requirements from third
parties due to grade, processing requirements
and transportation considerations.
EVRAZ seeks to enhance its profitability
and the security of supply of raw materials
by increasing vertical integration. Further
expansion of the EVRAZ mining division will
allow increased volumes of raw materials to be
sold to EVRAZ’s subsidiaries and third parties.
EVRAZ is also in the process of developing the
Yerunakovskaya-VIII mine in Kuzbass, which is
anticipated to start producing high quality hard
coking coal in 2013 and provide EVRAZ with
2 million tonnes per annum. This additional
production will allow EVRAZ to meet all of its
own coking coal requirements (based upon
current production levels) and would also allow
EVRAZ to sell additional amounts to third
parties, particularly in Asia.
As a first step towards delivering this
expansion strategy, after acquisition of the
Mezhegey and Vostochny licences EVRAZ has
begun a feasibility study to develop coking coal
deposits in the Republic of Tyva, Russia. The
total reserves and resources of these deposits
are estimated by the Russian State Mineral
Resources Agency (“Rosnedra”) to be over
700 million tonnes. EVRAZ anticipates that
the Tyva mine could produce 7 million tonnes
of coking coal per annum by 2019.
EVRAZ also aims to further develop its own
already substantial Russian iron ore division,
to both provide feed for EVRAZ’s own steel mills
and to take advantage of favourable iron ore prices.
The KGOK asset in 2011 reached its highest
output in five years, achieving a production rate
of 9.5 million tonnes per annum of saleable iron
ore product through efficiency initiatives and
expansions of capacity.
EVRAZ may explore opportunities to develop
additional greenfield projects as they arise.
Focused efforts are put into hiring and
developing the best workforce as this is the
backbone of EVRAZ’s operations. The health
and safety of employees is at the forefront
of decision making at EVRAZ.
Vertical integration in raw material is a key
competitive advantage of EVRAZ’s business
which supports attractive margins, throughout
the iron ore and coking coal pricing cycle.
The favourable location of EVRAZ’s production
sites in terms of proximity to raw materials
and key global growth markets (CIS, Asia
and South Africa), combined with continuous
modernisation of its operations, helps to
reinforce its market leading position and
increases the quality of higher-end products,
such as rails, wheels and tubes.
At an operational level, EVRAZ continues to
refine an improved management structure
that is focused on enhancing accountability
and decision-making processes. EVRAZ’s
top management has significant relevant
international experience and proven skills
in consistently improving operations. EVRAZ
plc’s Board of Directors combines executive
experience from EVRAZ’s business, with
experienced independent non-executive
directors, to promote transparency and
sound governance.
Competitive Advantage
One of the most vertically integrated global
steel producers:
(cid:114)(cid:1) Low cost producer.
(cid:114)(cid:1) Geographically diversified over four
continents.
(cid:114)(cid:1) Leading market position in long products
in Russia.
(cid:114)(cid:1) World leader in the rail and wheel markets.
(cid:114)(cid:1) Largest producer of vanadium products
globally.
(cid:114)(cid:1) Dynamic and experienced management
team.
EVRAZ is significantly self-covered in terms
of raw material production and believes
that, in 2011, it ranked by volume in the
top three largest iron ore producers and
top five largest coal producers in Russia.
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EVRAZ plc
Annual Report and Accounts 2011
Our Strategy
(Continued)
Strengthen Competitive Position in Its
Existing Markets
EVRAZ plans to strengthen its current market
position by enhancing the quality of its
products, broadening its product portfolio
and developing its distribution network.
EVRAZ believes that in 2011 it was among
the 20 largest steel producers globally by
crude steel volume and the largest producer
of crude steel in Russia. EVRAZ believes that
in 2011 it was the leading producer of railway
steel products in Russia with an estimated
market share of 87% in rails and second-
largest in the country’s rail wheel market.
In the Russian construction sector, EVRAZ
estimates that it had a market share, by
volume, of 85% in H-beams and 61% in
channels during 2011. EVRAZ holds a strong
competitive position as a diversified producer
of a full range of products in the domestic
construction steel market.
In order to maintain its leading position in
the Russian and global rail market in 2012
EVRAZ expects to complete the reconstruction
projects at EVRAZ ZSMK and EVRAZ NTMK
rail and beam mills. These reconstruction
projects will allow both plants to produce higher
grade products to match Russian Railways’
requirements for high speed rails, increase
capacity to 1.6 million tonnes per annum
and export high-end rails to more developed
markets. EVRAZ has also undertaken a rail
production expansion project in order to achieve
production levels of up to 0.6 million tonnes per
annum at its Rocky Mountain facility in the USA.
EVRAZ is looking to expand its position within
potential CIS growth regions, where demand
for steel products is anticipated to experience
superior future growth. In order to achieve this
goal, EVRAZ is investing in two new rolling
mills, one in the Rostov Region of Southern
Russia and another in Northern Kazakhstan.
EVRAZ anticipates that these new facilities
will permit EVRAZ to diversify its product mix,
produce specific products that are in demand
in these regions (e.g. new rebar grades) and
offer its customers better quality products. In
2011, EVRAZ has continued to develop EVRAZ
Metall Inprom, its key distribution channel in
Russia which sold almost 1.7 million tonnes
of steel products during the year.
The construction of a new coal terminal is
currently underway at EVRAZ NTMP – the port
in the far east of Russia. This new terminal
will increase the handling capacities of the
port to 5 million tonnes per annum of coal.
In late 2011 EVRAZ completed the conversion
of EVRAZ Highveld’s furnace into an open slag
bath with the objective of decreasing energy
and coking coal consumption.
Finally all EVRAZ’s assets are currently
undergoing a transformation towards
superior efficiency practices through the
implementation of the EVRAZ Business
System. This initiative is a global programme
of Lean practices which aims to decrease
cash costs (including maintenance CAPEX),
inventory turnover and production losses at
every single plant in the Group.
Enhance Global Leadership Position
in Vanadium Business
EVRAZ is the only large-scale producer
of vanadium-rich iron ore in Russia and it
believes that, during 2011, it was among the
largest producers of vanadium slag globally.
Based on World Steel’s global steel production
forecasts and an expected increase in
vanadium used per tonne of steel, EVRAZ’s
management believes that global vanadium
consumption will increase by up to 33% by
2015 with strong demand growth expected
in China, India and the Middle East. EVRAZ
is a global leader in vanadium production
and aims to increase its production volumes
of final vanadium goods during 2012 by
expanding its vanadium slag processing
capacities to match its slag production levels.
EVRAZ is a leading producer of OCTG pipes
in Western Canada. Given the potential for
increased shale gas drilling in North America,
which requires high quality products, EVRAZ
is looking to enhance its product mix to
match these new requirements and take
full advantage of this recent market trend.
As a first step, in mid-2012, the structural
tubing facility in Portland, Oregon, will add
the production of API tubes to its portfolio.
This will bring the mill’s total capacity from
110,000 to 225,000 tonnes per annum.
Other quality enhancing projects are in
development to ensure EVRAZ, not only
maintains, but also increases its market
share in the North American tubular market.
Enhance Cost Leadership Position
Management believes that Russia is one of
the lowest cost regions for steel production
in the world, enabling EVRAZ to benefit from
lower production costs compared to some of
its competitors elsewhere in the world. EVRAZ
benefits through both the export of low-cost
Russian slab to global markets and the
synergies created by being able to supply
feedstock to certain of its non-Russian
subsidiaries. At EVRAZ NTMK and EVRAZ
ZSMK new pulverised coal injection technology
is in the final stage of implementation and
will be commissioned during 2012. This new
technology will significantly lower production
costs by allowing the two plants to reduce
coking coal consumption by 20% and eliminate
the need for natural gas.
In 2011, EVRAZ KGOK bought an adjacent
power plant and EVRAZ ZSMK is currently
developing its own power plant, in order to
increase self-sufficiency in electricity, and
reduce the effect of the expected increases
in electricity prices.
In 2011, EVRAZ bought a further 24% stake
in Evraztrans, increasing its ownership to
100%, with the aim of optimising logistics
and better controlling all transportation costs,
which are crucial factors in the success of
EVRAZ’s operations.
EVRAZ plc
Annual Report and Accounts 2011
25
Revenue (US$ million)
9,772
13,394
16,400
2009
2010
2011
Revenue is the amount of money received or receivable from sales of our
goods and services during the period. Revenue reflects inflows from assets
and is used as an indication of our growth.
Inventory Turnover (days)
85
70
63
2009
2010
2011
Inventory turnover is the average number of days required to manufacture
and sell inventory. The inventory turnover is determined as the average
quarterly inventory balances for the reported year divided by the cost of
goods sold and multiplied by 365. This is the key indicator of how effectively
we manage the working capital.
Average Cash Cost (including maintenance Capex) of Russian Rolled
Steel Products (US$/tonne)
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Key Performance
Indicators
EVRAZ uses a range of financial
and non-financial KPIs to
measure and manage
its performance.
These KPIs reflect the Company’s focus on product leadership,
cost leadership and safety across all our operations and are used
by management to monitor the Group’s progress. However, this
list is not exhaustive and we also use additional measures
internally to review progress.
Steel Sales Volumes (million tonnes)
14.30
15.50
15.50
2009
2010
2011
We measure our total steel sales in millions of tonnes, combining all types
of steel which we produce around the world.
The volume of steel we sell is a key determinant of our performance and an
indicator of conditions in our markets.
EBITDA (US$ million)
640
2011
2,350
2,898
N/A
2009
N/A
2010
1,237
2009
2010
2011
EBITDA represents profit from operations plus depreciation, depletion and
amortisation, impairment of assets, loss (gain) on disposal of property,
plant and equipment and foreign exchange loss (gain).
EBITDA reflects our fundamental earnings potential, it measures the cash
earnings that can be used to pay interest and repay the principal.
Cash cost represents the cost of revenues and SG&A expenses less
depreciation, foreign exchange (gains)/losses, impairment of assets and
(gain)/loss on disposal of assets (i.e. all major non-cash items) plus
maintenance CAPEX, the result is divided by sales volumes. Raw materials
from EVRAZ’s mining segment are supplied at market prices. We use cash
cost as a measure of our cost effectiveness, because EVRAZ considers
cost leadership as key to its competitive advantage. This indicator has been
included in KPI starting from 2011.
LTIFR (per million hours)
2.69
2.40
1.86
Environmental Fines (2011, US$ million)
N/A
2009
N/A
2010
6.26
2011
2009
2010
2011
Lost time injury frequency rate (LTIFR) represents the number of lost time
(one day or more) injuries divided by total number of hours worked expressed
in millions of hours. We are committed to the highest standards of health
and safety and measuring our performance enables us to identify and
manage issues.
We record all environmental incidents which occur at our operations
to measure compliance with environmental standards covering: water
discharges; air emissions; waste; and general work activity. This KPI
measures our environmental performance in the broadest possible
way and sets out the total sum of fines imposed on EVRAZ in the year.
We are committed to minimising our impacts upon the environment
and have a target of achieving zero incidents. This indicator has been
included in KPI starting from 2011.
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EVRAZ plc
Annual Report and Accounts 2011
Principal Risks and Uncertainties
Effective management of risk is essential to achieving EVRAZ’s objective
of delivering long-term value to shareholders and to the protection of
its assets, people and reputation. Identifying, evaluating and managing
business risks are integral to the way EVRAZ runs its business.
Mitigation
Regular strategic planning, global operations diversifying
risk across a number of key economic markets, increasing
the number of medium and long-term customer contracts,
maintaining a competitive low product cost structure,
prudent financial management.
Regular strategic planning, increasing the number of
medium and long-term customer contracts, maintaining
a competitive low cost product structure, matching
contract product pricing to key input costs, increasing
product portfolio and customer focus strategies to more
robust infrastructure market categories.
Regular strategic planning, positive investment in social
and community projects, effective sustainability activity
in health, safety and environmental programmes, careful
and diligent attention to local and international regulations,
laws and taxation regimes.
In addition to the mitigation actions described above
regarding global economic risks, the Group has
established procedures and dedicated management for
the planning, realisation and commissioning of capital
projects. The Group aims to minimise short-term debt
and secure liquidity to ensure funding of the necessary
capital expenditure.
Strategic Risks
Risk Type
Risk
Global Economy and
Industry Cyclicality
Dependency
on Russian and
North American
Markets
Political
Capital Expenditure
The steel and mining industries are cyclical and strongly
influenced by global economic conditions. As a result,
EVRAZ’s business is highly dependent on, and sensitive to,
the global macroeconomic environment. If macroeconomic
conditions deteriorate or a significant economic contraction
takes place in any of the Group’s key geographic markets,
the Group’s business, financial condition and prospects
could be materially affected. The industries in which the
majority of our steel customers operate, are themselves
cyclical in nature and sensitive to economic conditions.
Renewed weakness in these industries would adversely
affect EVRAZ’s business.
The prices of EVRAZ’s primary commodities and its steel
products are influenced by many factors including demand,
worldwide production capacity, capacity utilisation rates,
raw material costs, exchange rates and trade barriers.
Prices for these commodities may experience significant
fluctuations as a result of these and other factors, any of
which could have a material adverse effect on the Group’s
business, financial condition, the results of operations and
future prospects.
In 2011, EVRAZ derived around 40% of its consolidated
revenues from sales to customers in Russia and about
22% from sales to customers in North America. The overall
success of EVRAZ’s operations is therefore closely tied
to the business and operating environments in these
two regions. Any significant decrease in demand for steel
products or decline in the price of these products in these
territories could result in significantly reduced revenues,
thereby materially adversely affecting EVRAZ’s business,
financial condition, results of operations and future prospects.
Adverse consequences from specific or general political
actions hindering the Group’s long-term planning ability and
limiting its capacity to obtain financing in the international
markets which could have a material adverse effect on
Evraz’s business, financial condition, results of operations
and future prospects.
Steel production and mining are capital intensive
businesses. EVRAZ plans to continue to invest in its
production facilities, maintaining and upgrading existing
facilities, developing new mines and investing in new
projects. In 2011, the Group had capital expenditure of
US$1.28 billion. The Group expects to be able to fund its
current planned capital expenditures from cash generated
from operations and external funding. However, planned
capital expenditures may be adversely affected by the
following factors: changes in the terms of existing financing
arrangements; changes in economic conditions; fluctuations
in the Russian or global steel markets; regulatory
developments; delays in project completion; cost overruns;
and defects in design or construction. It is possible
that EVRAZ may have difficulty in financing its capital
expenditures and external sources of financing may not
be available. The failure to fully finance its planned capital
expenditures at a level intended to grow its business, or to
finance such expenditures at an acceptable cost or at all,
may have an adverse impact on EVRAZ’s business, financial
condition, results of operations and future prospects.
EVRAZ plc
Annual Report and Accounts 2011
27
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Mitigation
The Group has introduced a management structure to
appropriately escalate material HSE issues to Board level.
The Group is actively assessing its environmental impacts
and potential liabilities to improve management of those
exposures.
There are established Group and local HR procedures,
channels for timely communications and negotiations with
trade unions, other representative bodies and authorities.
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Management reporting framework, Group and site
operational KPI’s, regular Management Committee
meetings, PRM (Product and Resource Management)
meetings. Proactive HR skills and management gap
analysis, site and group level in-house training and
established Lean management processes. The above
management mitigation action is supported by specific
investment projects to deliver reduced cost per tonne;
a key example being the investment in PCI facilities at
EVRAZ NTMK and EVRAZ ZSMK.
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Operational Risks
Risk Type
Risk
Health, Safety and
Environmental Risks
Labour Relations
EVRAZ’s operations are subject to a wide range of health,
safety and environmental (HSE) laws, regulations and
standards. Any breach of existing laws and regulations
resulting from health, safety or environmental incidents
may result in the imposition of fines, penalties, or other
actions, which could have a material adverse effect on the
Group’s business, financial condition, results of operations
and future prospects.
The introduction of new laws and regulations may result
in increased costs, or in the event of non-compliance,
also lead to the imposition of substantial penalties or
other actions that could have a material adverse effect
on the Group’s business, financial condition, results of
operations and future prospects.
EVRAZ’s business depends on good labour relations
with employees. Labour disputes, restrictive labour
and employment laws, as well as increasing costs of
skilled labour, could have a material adverse impact on
EVRAZ. Although EVRAZ believes its labour relations
with its employees are good, a strike or a work stoppage
could occur at any of the Group’s facilities or greenfield
operations. At most of the Group’s business units, there
are collective bargaining agreements in place with labour
unions. However, existing agreements may not prevent
future strikes, work stoppages or other labour-related
disputes which could result in a decrease in EVRAZ’s
production levels. They could also lead to adverse publicity
or an increase in costs, which could have a material
adverse effect on EVRAZ’s business, results of operations,
financial condition and future prospects.
Cost Competitiveness EVRAZ operates in markets that are highly competitive.
Competitors include major international steel producers
and mining companies, as well as other Russian steel
and mining producers and producers in other emerging
market countries. The Group’s competitive position as one
of the world’s lowest cost steel producers is dependent
on, among other factors, its ability to manage its cost
base and increase the efficiency and productivity of its
employees. Competition for skilled labour is intense in
the steel and mining industries, and labour costs are
increasing significantly, particularly in Russia. Continued
high demand for skilled labour and labour cost inflation
could make it difficult for the Group to attract qualified
employees at a commercially reasonable cost and such
a difficulty could thus have a material adverse effect
on EVRAZ’s business, results of operations, financial
condition and future prospects.
In addition, EVRAZ’s Russian subsidiaries are in many
instances the largest employers in the cities in which they
operate, which means its ability to reduce the numbers
of its employees may be subject to political and social
considerations. Any inability to make planned reductions in
workforce numbers in order to increase efficiency could have
a material adverse effect on EVRAZ’s business, financial
condition, results of operations and future prospects.
28
EVRAZ plc
Annual Report and Accounts 2011
Principal Risks and Uncertainties
(Continued)
Operational Risks
(continued)
Risk Type
Risk
Business Interruption
The mining, smelting and refining operations of EVRAZ
are subject to a number of operational risks which can
cause prolonged shut downs or production delays.
These include: the availability of raw materials, water
and power, geological and technical challenges, climatic
conditions such as flooding and earthquakes, equipment
failure, interruptions to power supplies, or limitations or
disruptions to transportation services such as railways.
Any such disruptions could have a material adverse effect
on EVRAZ’s operating performance, production levels,
financial condition and future prospects. In addition,
long-term business interruption may result in a loss
of customers and damage to the Group’s reputation.
Financial Risks
Risk Type
Risk
Treasury Risks
EVRAZ, like many large multinational companies, faces
a variety of treasury risks including liquidity risk, credit
risk, currency risk and interest rate risk. Adverse events
or uncertainties affecting the global financial markets
could adversely affect EVRAZ’s ability to raise new debt
or refinance existing debt facilities in the capital markets.
It could also in future lead to higher borrowing costs.
EVRAZ needs ongoing access to liquidity funding in order
to meet its trading requirements, support its existing
operations and invest in new investment projects. There
is a risk that the Group may be unable to obtain the
necessary funds when required or that such funds will
only be available on unfavorable terms. EVRAZ’s borrowing
facilities include a requirement to comply with certain
specified covenants in relation to the level of net debt
and interest cover. A breach of these covenants could
result in a significant proportion of the Group’s borrowings
becoming repayable immediately.
EVRAZ transacts with a variety of commercial and financial
counterparties including customers, financial institutions
and suppliers. Accordingly, the failure or default of a
counter party could give rise to a material loss which may
have an adverse impact on EVRAZ’s business, financial
condition, results of operations and future prospects.
The mix of EVRAZ’s revenues and costs is such that it
is exposed to fluctuations in exchange rates, particularly
between the Rouble and the US dollar. The appreciation
of the Rouble against the US dollar tends to result in
an increase in the EVRAZ Group’s costs relative to its
revenues. Therefore, adverse currency movements may
materially adversely affect EVRAZ’s financial condition
and results of operations.
EVRAZ borrows on both a fixed and variable rate basis
and has other interest-bearing liabilities, such as finance
lease liabilities and other obligations.
EVRAZ incurs interest rate risk on liabilities with variable
interest rates.
Mitigation
The Group has established protocols and procedures
across the Group as a whole such that plans are in place
to ensure business continuity in the Group’s operations in
the event of a major disruption to the Group’s operations.
The Group also carries business interruption insurance
except for mining operations.
Mitigation
EVRAZ 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.
EVRAZ reviews cash flow forecasts, debt profiles and
funding options by the financial team, top management,
the Audit Committee, in respect of Going Concern
deliberations, and by the Board.
To manage credit risk related to cash, EVRAZ 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.
EVRAZ’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 EVRAZ customer base.
Some of EVRAZ’s sales are made on terms of letter of
credit. In addition, EVRAZ requires prepayments from
certain customers. EVRAZ 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, EVRAZ 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.
Natural hedging against foreign exchange risk. The majority
of EVRAZ revenues are received in roubles (for sales in
Russia) and US dollars (almost all sales in other countries).
However, rouble prices in the Russian domestic market
are linked to export parity, so viewed as effectively US
dollar prices with a domestic premium in times of higher
demand. Also, domestic sales in Russia are generally
more profitable compared to exports due to the effect of
transportation costs. When the Russian market performs
well, the rouble appreciates, which leads to both increased
costs and increased revenues in US dollar terms due to
both the domestic premium and the higher proportion
of domestic sales. On the other hand, when the Russian
economy weakens, rouble production costs fall, while steel
prices usually follow the RUB/USD exchange rate trend
and more steel is exported. Finally, almost all of EVRAZ’s
debt is US dollar denominated (including the Rouble bonds
which are swapped into US dollars).
EVRAZ’s treasury function performs analysis of current
interest rates. In the event of changes in market fixed
or variable interest rates management may consider the
refinancing of a particular debt on more favourable terms.
EVRAZ plc
Annual Report and Accounts 2011
29
Financial Risks
(continued)
Risk Type
Taxation
Risk
Mitigation
EVRAZ is exposed to tax compliance and tax management
processes in multiple tax jurisdictions. The integrated
nature of EVRAZ’s worldwide operations can give rise to
uncertainty with regards to the Group’s tax liabilities and
produce conflicting claims from revenue authorities in
relation to the profits to be taxed in specific jurisdictions.
Failure to manage tax risks could lead to additional tax
charges. It could also lead to reputational damage or a
financial penalty for failure to comply with required tax
procedures or other aspects of tax law.
The procedures of tax risk identification and tax
compliance are established. The Audit Committee
reviews tax risk and compliance each half year.
Other Risks
Risk Type
Risk
Control Exercised by
the Major Shareholder
EVRAZ is controlled by Lanebrook (the “Major
Shareholder”), a limited liability company incorporated
under the laws of Cyprus. As at 31 December 2011,
the Major Shareholder held a 72.34% stake in EVRAZ.
As a result of its controlling interest in EVRAZ, the
Major Shareholder has the ability to exert control over
certain actions requiring shareholder approval, including
increasing or decreasing the authorised share capital of
the Company (and disapplying pre-emptive rights), the
election of directors, the declaration of dividends, the
appointment of management and other policy decisions.
While transactions with the Major Shareholder can benefit
the Company, the interests of the Major Shareholder
could at times conflict with the interests of the other
shareholders. Any such conflict of interest could adversely
affect EVRAZ’s business, financial condition and results
of operations.
Mitigation
The board has a balance of 50% independent non-
executive directors who have a duty to protect the ‘minority
shareholder’ regarding General Meeting resolutions,
also to oversee and where appropriate seek independent
valuations of any proposed ‘related party’ transactions.
The Nomination Committee is charged with the selection
of the Chief Executive, succession plans for key senior
management and selection of independent non-executive
directors.
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
3131
Rail Mill Shop
Modernisation
at EVRAZ ZSMK
In January 2010 EVRAZ began reconstruction of a rail mill located
at EVRAZ ZSMK1 with the objective of increasing rail production
volumes to 950,000 tonnes per annum (up to 100% thermo-
strengthened rails) and of manufacturing 100-metre rails
in compliance with all new national standards and in accordance
with the requirements of Russian Railways.
Construction is underway and most of the plant and equipment
is already delivered to site. Commissioning works are planned
to start in October 2012.
1 NKMK and ZSMK steel mills were consolidated under the name EVRAZ United
West-Siberian Iron and Steel Plant (EVRAZ ZSMK) in 2011.
EVRAZ ZSMK Asset Location in Russia
Moscow
EVRAZ ZSMK
950 ktpa
950,000 tonnes of rail per annum
(objectives of increasing rail production)
Operating
Review
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32
Operating Review
EVRAZ is a global, vertically integrated steel and mining
business comprising three principal operating segments: Steel,
Mining and Vanadium. EVRAZ’s mining operations ensure high
levels of self-coverage in respect of supplies of iron ore and
coking coal, required for the Company’s steelmaking processes.
Our manufacturing facilities produce a wide
range of products with a specialised focus
on the infrastructure sector. In 2011, the
Company’s share of the Russian market in
beams, channels and rebars totalled 85%,
61% and 20% respectively. EVRAZ accounts
for 87% 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 and a prominent player
in the European plate market.
In the USA, EVRAZ is the number one producer
of rails, one of the largest manufacturers
of plate, being the largest manufacturer of
armour plate, and is acknowledged as the
number one North American producer in
respect of large diameter pipes.
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, aerospace and
other applications.
2011 was a transformative year for EVRAZ
with a number of landmark events occurring.
In December EVRAZ plc began trading as part
of the FTSE 100 Index of the UK’s leading
public companies, becoming the only steel
and mining company in the UK FTSE
All‑Share Index.
Pursuant to a share exchange offer with
EVRAZ Group S.A., EVRAZ plc became the
new ultimate holding company of the Group,
and EVRAZ Group S.A. became a subsidiary
of the Company. The Company’s shares were
admitted to trading on the London Stock
Exchange’s main market for listed securities
on 7 November 2011 and trade under the
stock symbol EVR.
EVRAZ Business System (EBS)
In 2011, EVRAZ started the implementation
of EBS through all of its units. For more info
on EBS please refer to page 33.
EVRAZ also accomplished a number of
operational objectives during the year.
The PCI project implementation and rail mill
modernisation programme continued at our
Russian steel mills. At our mining operations,
EVRAZ KGOK continued its programme to
increase iron ore production. The Vanadium
division achieved sustainable, high production
levels and an increase in V2O5 production
capacity as a result of continuous improvement
in management processes and technology.
Revenue from External
Sales by Segment
(US$ million)
25,000
20,000
13,394
823
15,000
566
2,507
16,400
966
3,784
10,000
5,000
14,717
12,123
0
(2,625)
(3,732)
-5,000
2010
2011
Steel
Mining
Other operations
Vanadium
Eliminations
Consolidated
EBITDA
(US$ million)
3,600
665
2,800
2,350
144
2,898
197
22
53
2,000
935
1,628
1,200
400
0
-400
1,485
1,262
(267)
2010
(211)
2011
Steel
Mining
Other operations
Vanadium
Unallocated
& Eliminations
Step 1:
Sort
Step 2:
Set & Simplify
Step 3:
Scrub
• Separate unnecessary from the necessary
• Remove things not required for the process
• ‘Red Tag’ removed items
• Identify and list all ‘stuff’ removed
• It may come in handy later!
• Clean the space as you go
• Organise the workplace so ‘value’ can flow freely
• Eliminate non‑value‑adding steps
• Convert from ‘batch’ or ‘craft’ processes to flow
• Aim for 1‑by‑1
• U‑shaped flow is ideal
• Team‑based working
• Clean the new workplace and its equipment
• Clean everything
• Re‑paint and repair
• Make abnormal conditions obvious at‑a‑glance
• Corner painted to see dirt
EVRAZ plcAnnual Report and Accounts 2011
33
EVRAZ Business
System
The practical expression of EVRAZ’s people
and customer-oriented philosophy takes form
as the Evraz Business System (“EBS”). This
is not a rigid company-imposed procedure
but a set of principles that have been proven
in the day-to-day practice of excellent
companies over many years.
The first step in setting up the new Business
System was the introduction of the EVRAZ
Way in 2010 – the Mission, Strategies and
Values of our Company, focused on achieving
results by inspiring our employees to perfect
our processes and bring greater value to
our customers.
Then, to help spread the new philosophy
throughout the Group and involve our
employees in the improvement process,
we focused on implementing the following
four simple tools which are established
standards for most Lean‑oriented companies:
6S
2011 was kicked off with the implementation
of 6S, a six‑step system (Sort, Set in Order,
Scrub, Safety, Standardise, Sustain) used
for improving the organisation of a workplace.
A3
To analyse EVRAZ’s projects and initiatives,
during 2011 many of our employees were
trained in A3 Thinking – a simple and logical
method of problem solving which helps identify
the reasons behind any planned activity and
link it to the company’s overall Strategy.
A3 Thinking uses a systematic approach to
facilitate the understanding of the current and
target states of a problem, the gaps which need
to be resolved and the exact steps which need
to be taken to achieve success. Our goal for
2012 is to have 100% of EVRAZ’s employees
across the world trained in the use of A3s.
VSA
In 2011 EVRAZ started using Value Stream
Analyses to map out processes and identify
sources of waste, unevenness and overburdens
contained within the process mentioned before,
as well as see opportunities for improvement.
By understanding the Current State of a process
and imagining an Ideal State (the simplest way
with zero defects and no resource constraints),
we are able to set up a plan to achieve a
Future State.
In order to preserve our competitive advantage
and compete effectively in the global market,
we need to create more value for our customers
and to do so more efficiently through an
engaged workforce. To achieve these goals will
require a radical transformation in the way our
organisation conducts its business, which is
why we have introduced EBS. EBS incorporates
Lean business principles and tools to create
a culture of continuous improvement. Our
goal is not just to identify possibilities of cost
reductions, but to change the way our entire
organisation thinks and acts.
EBS has three desired outcomes:
• To provide the customer with the highest
quality product, at lowest possible cost, in
a timely manner with the shortest possible
lead times.
• To provide members with a safe work
environment, work satisfaction and fair
treatment.
• To give the Company flexibility to respond
to the market, increase profit through cost
reduction activities and achieve long‑term
prosperity.
EBS strives for the absolute elimination of
waste in all areas to allow members to work
smoothly and efficiently. The foundations of
EBS are built on standardisation, to ensure
a safe method of operation and a consistent
approach to improving cost and quality.
EVRAZ members are encouraged to
continually improve their standard processes
and procedures in order to ensure maximum
quality, improve efficiency and eliminate
waste. This is known as Continuous
Improvement and with time it should be applied
to every sphere of the Company’s activities.
With this in mind, in 2011 we introduced
several Lean instruments into our operations,
with the aim of improving the quality of our
processes and I am pleased to report that
it has resulted in tangible improvements.
MCR
The introduction of Mission Control Rooms
to manage the business was another step
towards simplifying and optimising EVRAZ’s
business processes. MCRs integrate and
make visual all the business processes of
an organisation, such as its goals, KPIs,
activities and initiatives, financial tracking and
countermeasure planning. Throughout 2011,
most of EVRAZ’s facilities have put up their
site‑level MCRs and many have also begun
using Division‑ and shop‑level Mission Control
Rooms and Production Control Boards. In
November 2011, the Moscow‑based senior
management of the Company had also started
building and utilising segment‑level MCRs to
manage the business.
Having started on its new path of long‑term
“health”, EVRAZ has begun instilling the
elements of Lean philosophy in its processes
and employees throughout the entire Group.
Key Targets 2012
The following sections of the report provide a
detailed breakdown of our individual operations’
achievements in 2011 and objectives for 2012.
In general for the year ahead, EVRAZ will
continue incorporating Lean principles across
the Group in order to reduce cost, increase
quality and delivery, and further drive the
philosophy of continuous improvement. The
focus will be on continued implementation
of EVRAZ Business System throughout
the Group with a view to setting the
foundations for:
• 100% employee involvement in
improvement efforts through training
in the use of EBS tools and 6S.
• Setting up an efficient Maintenance
System to increase machine longevity,
lower maintenance time and costs.
• Building a Quality Management System
to drive yield improvement and increase
customer satisfaction.
• Building an Inventory Management System
to decrease working capital.
Step 4:
Safety
Step 5:
Standardise
Step 6:
Sustain
• Resolve all safety issues
• Change things likely to cause injury, stress
or overburden
• Check existing safety equipment
• Improve and innovate to avoid ‘anti‑work’ thinking
• A place for everything and everything in its place
• Re‑paint and repair
• Make abnormal conditions obvious at‑a‑glance
• Label and mark out
• Use standard health and safety (OSHA) colours
• Define the 6S standards
• Innovate to make it impossible to slip back
• Assign responsibilities
• Allocate time at the end of each day/shift for ‘reset’
• Audit regularly
• Manage by walking about
EVRAZ plcAnnual Report and Accounts 2011Business OverviewStrategyOperating ReviewSustainabilityFinancial ReviewGovernanceFinancial Statements 34
EVRAZ plc
Annual Report and Accounts 2011
Operating Review
(Continued)
Steel: Russia
EVRAZ ZSMK
EVRAZ United West-Siberian Iron and Steel
Plant (“EVRAZ ZSMK”), located in the city of
Novokuznetsk, the Kemerovo region, is the
largest steel mill in the Siberian region and
the eastern-most steel mill in the Russian
Federation. It was formed in 2011 via a
merger of two EVRAZ’s steel mills, ZSMK
and NKMK, in order to optimise production,
procurement and logistics, capacity utilisation,
to unify managerial processes and standards
in the areas of health, safety and environment,
human resources management and social
policy.
In 2011, EVRAZ ZSMK produced 7.9 million
tonnes of steel and more than 7.0 million
tonnes of steel products.
EVRAZ ZSMK continued to implement the key
investment projects during the year including:
(cid:114)(cid:1) The rail mill modernisation project that
entered its second stage (see page 30).
In 2011, a non-destructive inspection line
was installed at the rail mill to ensure
consistent premium quality of rails.
(cid:114)(cid:1) The PCI technology (Pulverised Coal
Injection) implementation project
(see page 42).
(cid:114)(cid:1) Finalisation of the slitting project aimed at
reducing idle time at the small sections mill
#1 which will allow it to increase production
by 15%.
There was a considerable focus on labour
protection and safety measures to be
compliant with recommendations of
Rostekhnadzor (Russia’s Federal Service
for Ecological, Technological and Nuclear
Supervision) including provision of new
safety clothing supplies.
Environmental protection remained a priority.
Some of the ecological programmes launched
in 2011 will be continued in 2012:
(cid:114)(cid:1) Water protection (circulating water supply).
(cid:114)(cid:1) Air protection (modernisation of gas
cleaners).
(cid:114)(cid:1) Recycling of waste (recycling of slag).
(cid:114)(cid:1) Replacement of equipment that contains
polychlorinated biphenyl.
For more on HSE please refer to page 44.
Improvements in the blast furnace shop and
the coke and chemical shops helped achieve
record production efficiency at the
blast furnaces.
The launch of new ladle furnace #4 in 2011,
allows an increase in the converter shop
capacity and expands the number of high
quality steel products in the product line.
In 2011, the equipment was bought and
construction of a PCI installation began with
completion of the project expected in 2012.
A programme aimed at by-product waste
recycling was launched, which is aimed at
improving the ecological profile of the
operations as well as benefiting from the
separation of iron and other elements.
Key Targets 2012
Key targets in 2012 include:
(cid:114)(cid:1) Completion of the PCI technology project.
(cid:114)(cid:1) Completion of the first stage of the rail
mill modernisation aimed at enhancing
rail wear resistance and increasing
production volumes.
(cid:114)(cid:1) Expansion of the mechanical treatment
area of the wheel shop to increase shop’s
capacity up to 520,000-580,000 wheels
per year.
(cid:114)(cid:1) Further expansion of product mix
(production of new types of wheels
and beams).
(cid:114)(cid:1) Environmental protection programmes
(including recycling of sludge, changes
in recycling of vanadium convertor slag).
Key Targets 2012
Key targets in 2012 include:
(cid:114)(cid:1) Completion of the rail mill modernisation
and launch of 100-metre head-hardened
rail production.
(cid:114)(cid:1) Completion of the PCI technology project
(beginning of 2013).
(cid:114)(cid:1) Launch of the project to increase the
capacity of West-Siberian Heat and
Power Plant (“Zapsib Power Plant’)
to 3,750 million kw per hour.
(cid:114)(cid:1) Product range expansion.
EVRAZ NTMK
EVRAZ NTMK is one of the largest integrated
steel production plants in Russia with a full
cycle. It is also the world’s biggest processor
of vanadium-enriched titaniferous ores with
succeeding vanadium recovery in blast oxygen
furnaces and in oxygen converters using
proprietary technologies. In 2011, EVRAZ
NTMK produced 4.3 million tonnes of steel
and 4.1 million tonnes of steel products.
EVRAZ NTMK is located approximately 150 km
from the Russian city of Yekaterinburg.
Measures aimed at cost reduction and
improving health and safety as well as
programmes to improve working conditions
continued during 2011.
In 2011, new drawings at continuous casting
machine #3 were developed to enable
production of large beams (40k, 60sh, 70sh)
that will enhance EVRAZ’s market positions
due to the unique character of these new
products. In 2011, a straightening machine,
a press line and a cutting line were installed
at the rail mill as part of the rail mill
modernisation project. Installation of automatic
lines for wheel mechanical treatment carried
out at the wheel shop, enhances quality and
quantity of wheel manufacturing.
Launch of production of new steel grades,
in particular API grade steel for slabs,
helps increase the Company’s presence
in international markets and international
integration of the Group, primarily with
the Group’s North American assets.
Measures aimed at cost reduction and
improving health and safety as well
as programmes to improve working
conditions continued during 2011.
EVRAZ plc
Annual Report and Accounts 2011
35
EVRAZ KGOK continued research and
engineering works for construction of a new
tailings facility, to be completed by 2017.
Utilising the world’s best concentration
technologies, the facility will provide for the
improved storage and containment of waste
material at a new area thus minimising the
environmental impact.
EVRAZ KGOK completed modernisation of
its pellet-indurating kiln #3, decreasing gas
consumption by 1.0 m3 per tonne of pellets.
In 2011, KGOK successfully completed the
project aimed at improving quality of pellets
and sinter supplied to EVRAZ NTMK’s blast
furnaces. The result was increased durability
of pellets and sinter as well as enhanced
EVRAZ NTMK’s efficiency.
Key Targets 2012
(cid:114)(cid:1) Approval of the feasibility study and
the resource statement on Sobstvenno-
Kachkanarskoye ore deposit by appropriate
state authorities.
(cid:114)(cid:1) Completion of Sobstvenno-Kachkanarskoye
ore deposit design and engineering project
documentation to be certified by the State
Expertise Agency, aiming to begin detailed
design works and contracting key
equipment suppliers to commence mine
production in 2015.
(cid:114)(cid:1) Finalisation of the project to increase
the annual capacity of EVRAZ KGOK to
55 million tonnes of raw ore in order to
meet EVRAZ’s long-term requirements.
Evrazruda
Evrazruda comprises nine ore mining and ore
beneficiating branches: in Kemerovo region
(Tashtagol, Kaz, Sheregesh and Gurievsk
mining branches, Abagur and Moundybash
ore benefication plants), in the Khakassia
region (Abakan and Tyoya mining branches)
and in the south of Krasnoyarsk region (Irba
mining branch). In 2011 Evrazruda mined 11.7
million tonnes of ore resulting in a production
of 4.9 million tonnes of ore concentrate
delivered to its only corporate customer
EVRAZ ZSMK (+15% compared to 2010).
In 2011 to meet EVRAZ ZSMK requirements
Evrazruda upgraded ore-benefication
technology and the lime-treatment line at the
Abagur benefication plant, which resulted in a
0.5% increase of metal content and reduction
of humidity down to 4.0% in the final ore
concentrate. This secured regular delay-free
supplies to its EVRAZ customers especially
in winter.
Over the year Evrazruda continued to develop
the Sheregesh underground mine. The project,
scheduled for completion in 2014-2015,
is expected to double annual iron ore
production capacity of the mine. Following the
revisions to the project design, the timeframe
will be reduced by two years with the
run-of-mine production capacity now projected
to reach 3.7 million tonnes per year by 2014.
Significant progress was made in modernising
the Abakan underground mine to increase its
annual mining capacity from two million tonnes
up to 4-6 million tonnes in the next five years.
In 2011 design and engineering works at the
project, which were previously assigned to
Giprotsvetmet, were awarded to Australian
D&E companies of Worley Parsons and
Mining Plus.
At the Tashtagol mine a major project of
back-fill technology application was finished
with works, and back-fill mining (BFM) starting
in an operational testing mode. The essence
of BFM technology is to fill up the mined-out
space with hardening material, which will allow
the mine to use up to 63 million tonnes of
higher-grade ore previously preserved in
surface supporting pillars. Implementation of
this project will also increase the production
capacity of the mine, improve the quality of
the ore mined and will lead to a better
operational efficiency of the Tashtagol branch.
Commissioning of the BMT system was
fully commissioned in March 2012.
Evrazruda obtained a licence for the Izykhsky
iron ore deposit. In 2011 geological exploration
works began at the deposit aiming to complete
a resource statement and prefeasibility study
by the end of 2012.
Mining: Russia
EVRAZ iron ore assets include EVRAZ KGOK
and EVRAZ VGOK in the Urals, and Evrazruda
in Siberia. EVRAZ’s coal asset Yuzhkuzbassugol
is located in Siberia.
Overall 2011 performance of EVRAZ iron ore
assets in Russia demonstrated robust positive
dynamics: total production of saleable iron ore
products amounted to 16.8 million tonnes
(+9% over 2010), average labour productivity
increased by 10.2%.
EVRAZ KGOK
EVRAZ KGOK is one of the top five largest
ore mining enterprises in Russia. It is located
approximately 140 kilometers from EVRAZ
NTMK, in the Sverdlovsk region. At present
EVRAZ KGOK conducts mining operations
at the Gusevogorskoye deposit of titanium
magnetite ores that contain a vanadium alloy
component, allowing production of high-tensile
alloyed steel products. In 2011, EVRAZ KGOK
extracted 54.4 million tonnes of ore, its total
output of saleable products was 9.4 million
tonnes, including 5.9 million tonnes of pellets
and 3.5 million tonnes of sinter.
EVRAZ KGOK continued with the programme
to increase the production of raw iron ore in
line with the Group’s core aim to secure raw
materials for steelmaking. The programme will
be finalised in 2012 providing for substantial
upgrades in mining, transportation and
processing equipment and practices.
The following new equipment was put into
operation: five electric locomotives, five
large-capacity dump trucks, two heavy-duty
electrical drilling rigs, 40 rail dump cars.
This allowed it to reach production capacity
of 55 million tonnes of mined ore per year
(+10% compared to 2010).
In 2011 EVRAZ KGOK finalised geological
exploration at Sobstvenno-Kachkanarskoye
ore deposit and submitted a recourse
statement (Russian standard) for approval to
the Russian Ministry of Natural Resources.
As part of the project to explore the
Sobstvenno-Kachkanarskoye ore deposit the
design and engineering companies of Worley
Parsons (Australia) and St. Petersburg Mining
Project and Engineering Company (Russia)
developed a 3D model of the deposit and
basic engineering solutions to open up and
start production in line with the highest
international technological standards. The
engineering solutions include a state of the
art conveying system of ore transportation
to the benefication plant.
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EVRAZ plc
Annual Report and Accounts 2011
Operating Review
(Continued)
Key Targets 2012
(cid:114)(cid:1) Further implementation of the investment
projects aimed at maintaining and
increasing the production capacity of the
Sheregesh and Kaz underground mines
and development of the Izykhsky deposit
in Irba.
(cid:114)(cid:1) The ongoing Abakan mine modernisation
project (design and engineering works,
contracting mine construction companies
and key equipment suppliers).
EVRAZ VGOK
EVRAZ Vysokogorsky Ore Mining and
Processing Company (“EVRAZ VGOK”)
operates three ore mines, sintering and
benefication workshops. Its assets are located
approximately 10 kilometres from EVRAZ
NTMK in Nizhny Tagil. EVRAZ VGOK mines
from Vysokogorskoye, Lebyazhinskoye,
Yestyuninskoye and Goroblagodatskoye iron
ore deposits. It also buys feedstock from
the market. It is one of the major ore-mining
enterprises in the Urals. EVRAZ VGOK
produces iron ore concentrate, several types
of sinter, limestone, natural stone and other
products for the steelmaking and construction
industries. It supplies finished products to
EVRAZ steel mills NTMK and ZSMK, as well
as to third parties mostly in the Ural region.
In 2011 EVRAZ VGOK mined and purchased
4.4 million tonnes of iron ore and produced
2.4 million tonnes of saleable iron ore
products and 1.6 million tonnes of lime-stone
and crushed stone for construction.
Below Top: Blasting at EVRAZ KGOK Iron Ore Open Pit
Below Bottom: Yuzhkuzbassugol’s Coal
In 2011 the key investment project of VGOK
was the development and construction of the
Tsentralny open-pit mine. Its realisation will
allow it to produce an additional 6.8 million
tonnes of ore in the next eight years. In 2011
design and engineering works were finalised
and in 2012 the ore extraction works will
commence.
This project is in line with a project to increase
the capacity of the Vysokogorsky benefication
plant via modernisation of its ore-feeding
facilities.
As part of operational expense optimisation
VGOK initiated an upgrade of the heating
system of its Yuzhnaya mine. Being
implemented in mid-2012 this initiative
will result in a 60% decrease of energy
consumption used to ventilate the mine.
In 2011, VGOK, supported by mining
consultants from Ernst & Young, drew up a
mid-term production optimisation programme
that provides for 10-15% higher capacity
utilisation in the next two years and a
decrease in operational costs.
Key Targets 2012
EVRAZ VGOK will continue implementing the
Tsentralny open-pit development project,
as well as modernisation of its benefication
plant’s feedstock and water supply systems.
In 2012-2013, EVRAZ VGOK will carry out a
project to build up its production of iron flux
(a special product for EVRAZ NTMK) of up to
1.0 million tonnes by 2014, in line with the
EVRAZ programme to provide additional
feedstock for EVRAZ NTMK’s BOF facilities.
EVRAZ Business System
The introduction of Lean technology to
improve efficiency and productivity began at
the Company’s iron ore mining and enrichment
facilities. More than 300 specialists and
senior managers studied Lean and
participated in workshop sessions focused
on establishing a series of initiatives to be
implemented as part of a 90-day action plan.
Implementation of 6S principles began at all
of the production sites in the Mining segment.
During 2011 the Company’s Mining segment
implemented a range of programmes to
reduce safety and environmental risk,
including the use of third party consultants
to conduct environmental and operational
safety audits. In addition, the Company itself
carried out extensive inspection and testing
programmes relating to technical equipment
for fire and radiation control.
At the Abagurskaya plant of the Company’s
Evrazruda operation a number of measures
for the mitigation and prevention of accidents
at the tailings dump have been completed.
The plant has also completed modernisation
of the gas treatment system which has led
to a reduction of dust emissions into the
environment by a factor of 30 times.
Yuzhkuzbassugol
In 2011 Yuzhkuzbassugol, EVRAZ Siberian
coal mining subsidiary, mined 6.3 million
tonnes of coking coal and 3.0 million tonnes
of steam coal. During the year the Company
focused on building up reliability of its coal
mining operations, as well as continued
restructuring of its mining assets.
EVRAZ plc
Annual Report and Accounts 2011
37
Significant modernisation was conducted at
Yuzhkuzbassugol’s two coal washing plants
helping to maintain productivity and quality of
coal concentrate at levels set by customers.
In Q4 2011, the implementation of EVRAZ
Business System was initiated with extensive
training for Yuzhkuzbassugol employees to
familiarise them with the Lean tools and
practices. Full-time Lean managers were
selected and appointed, over 100
improvements were initiated to enhance
safety and efficiency of day-to-day operations.
In 2012 the Yuzhkuzbassugol assets will be
thoroughly assessed for their technical and
economic potential and ranked in line with
the EVRAZ strategic priorities.
Key Targets 2012
(cid:114)(cid:1) Further implementation of the programme
to significantly improve production
reliability and safety, with a focus on
degassing and ventilation, technical
availability of key equipment, longwall
changeover procedures and personnel;
(cid:114)(cid:1) Launch of a strategic programme to
introduce at the mines the world’s most
reliable and efficient technologies of
directional drilling, highly effective
degassing and ventilation, high-speed
tunnelling, automated roof-bolting, quick
changeovers and others1; and
(cid:114)(cid:1) Development of detailed feasibility
studies to other key mines (according
to re-evaluated strategic priorities).
Steel: North America
EVRAZ North America
EVRAZ North America organises its business
into three primary product groups: Flat
Products, Tubular Products and Long Products.
(cid:114)(cid:1) Flat Products – The Flat Products Group
manufactures steel plate, coil and
structural tubing used in the construction
of liquid storage tanks, vessels, bridges,
rail cars, armour and in the manufacture
of pipes. These products are manufactured
at facilities in Portland, Oregon; Claymont,
Delaware; Regina, Saskatchewan; and
Surrey, British Columbia. The Flat Products
Group also produces coil and plate used
by the Tubular Products Group.
(cid:114)(cid:1) Tubular Products – The Tubular Products
Group produces steel pipe used in energy
applications: large-diameter American
Petroleum Institute (‘‘API’’) grade pipe
used for oil and gas pipelines and
small-diameter API grade welded and
seamless pipe for use in down-hole drilling
and in the collection of oil and gas. These
products are manufactured at facilities in
Portland, Oregon; Calgary, Alberta, Red
Deer and Camrose, Alberta; Regina,
Saskatchewan; and Pueblo, Colorado.
(cid:114)(cid:1) Long Products – The Long Products Group
produces railroad rail and rod and bar
used to make wire products for use in
infrastructure (e.g. bridges and power
transmission towers) at the EVRAZ Rocky
Mountain Steel facility in Pueblo, Colorado.
In addition, the LPG produces round billets
used in the production of both other long
products and tubular products.
In 2011, EVRAZ moved its North American
Headquarters from Portland, Oregon to
Chicago, Illinois to reposition its business
closer to its customers and business partners
and improve internal communication in the US
and Canada.
In 2011, Tagaryshkaya and Yubileinaya-1
mines were shut down, as having low strategic
and economic value for the Company. At the
same time the Company launched a full-scale
project to construct the Yerunakovskaya-VIII
mine. The required documentation (equivalent
to a detailed feasibility study) was developed
and approved by Russian state expertise
agency “Glavgosexpertiza”. Currently detailed
construction drawings have been issued,
mining equipment is acquired, underground
advancement and surface construction
works are underway. The mine is expected
to be commissioned in Q3 2013.
In respect of the Alardinskaya mine, in autumn
2011 Yuzhkuzbassugol applied for a licence to
develop the Alardinsky-Eastern-2 deposit (with
reserves of 32 million tonnes of coking coal).
The licence was awarded in March 2012.
In November 2011, Yuzhkuzbassugol’s
Gramoteinskaya mine applied for a licence
to develop Mencherepsky-Northen deposit
(215 million tonnes of steam coal reserves).
The licence was issued in January 2012,
securing the mine with a resource base
that can last for decades.
Pre-feasibility studies for the construction of
the Tomskaya-Glubokaya mine were completed
in 2011, and a decision on further/final
approvals will be made during 2012.
Following the programme of upgrading
reliability and safety of coal mining operations
Yuzhkuzbassugol mines performed major
modernisation, repair and replacement
activities, including: new longwall mining
set at the Ulyanovskaya mine; capital repair
and replacement of the main conveyor line at
the Abashevskaya mine; major modernisation
of roof supports at the Abashevskaya and
Osinnikovskaya mines; reconstruction
of mainstream conveyor system at
Kusheyakovskaya mine; and reconstruction
of insulating dams at the Alardinskaya,
Osinnikovskaya and the Gramoteinskaya
mines. Two mobile units of nitrogen injections
were purchased and put into operation (as a
preventive measure against oxidation of coal
in abandoned parts of mines). The Flexcom
mine radio system was commissioned at
all the Yuzhkuzbassugol mines, and all the
mines were equipped with automatic access
control systems.
1 The programme is to be developed, initiated and
implemented in co-operation with international
experts and technological companies who specialize
in those particular areas of coal mining technologies.
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EVRAZ plc
Annual Report and Accounts 2011
Operating Review
(Continued)
A challenging year in our pipe operations
driven by lack of activities in construction of
transmission lines, was successfully mitigated
by success in our Flat business. Our Flat
business operations improved productivity
and up-time performance on both east and
west coasts.
We have successfully completed three of our
four strategically important capital projects
in our Tubular operations in Calgary and Red
Deer, which began in 2011 and were focused
on productivity increases and heat-treat
capability expansions. A heat-treat project
will be launched in 2012. We remain a leader
in West Alberta in the small diameter pipe
business and we aim to develop this
relationship beyond our usual markets.
The major capital project underway at
Claymont to ensure the mill’s compliance
with environmental standards progressed
well throughout 2011, and is expected to
be completed in 2013.
2011 was a record year for our Long Division
following a noteworthy achievement by our
steelmaking operation in Pueblo, Colorado,
coupled with a record year for our rail
operations in terms of volume and product mix.
Below Top: Steel Worker
Below Bottom: Plate Production
We have increased our steelmaking
capabilities at EVRAZ Pueblo without
significant capital expenditure by embracing
EVRAZ Business Systems, which is driven by
the Lean manufacturing approach and culture.
In December 2011, we approved over
US$32 million investments in our rail
operations in EVRAZ Pueblo, focused on
quality improvement, productivity and capacity
increases. As a result, the EVRAZ Pueblo
development will enhance our leading position
in the rail business in North America.
Our Company-wide initiative in improving our
working capital position, in both inventory level
management and accounts receivable, further
supported our competitive advantage and will
continue in 2012.
Key Targets 2012
Through our EVRAZ Business System strategy,
we will be focusing on improving our Tubular
business. Our efforts will go into increasing
productivity and first pass yield, which is very
critical for operations profitability and working
capital management.
Long Division will focus on delivering approved
capital projects as it targets what is critical
for our customers: rail quality (strengthening
of surface etc) and volume as we plan to reach
580,000 tonnes capacity in 2013.
As a Company our key strategic steps are
to continue improving our health and safety
performance, focus on our customers through
order delivery and product quality, apply the
EVRAZ Business Systems and implement
growth initiatives at our East coast operations.
Steel and Mining:
Ukraine
In 2011 a new management company, EVRAZ
Ukraine, was formed to unify management
activities, to better co-ordinate EVRAZ’s
different businesses in Ukraine and improve
profitability. EVRAZ Ukraine manages EVRAZ
DMZ named after Petrovsky (“EVRAZ DMZP”)
(including Dneprokoks coking plant), coking
plants EVRAZ Bagliykoks and EVRAZ
Dneprodzerzhinsk Coke and Chemical Plant
(“EVRAZ DKHZ”), EVRAZ Sukha Balka ore
mining plant and trading facility.
EVRAZ DMZP, located in the city of
Dnepropetrovsk, Ukraine, is an integrated
steel mill specialising in the manufacture and
sale of pig iron, steel and rolled products.
In 2011 EVRAZ DMZ Petrovskogo produced
860,000 tonnes of crude steel and 737,000
tonnes of steel products.
EVRAZ’s Ukrainian operations also comprise
three coking plants: EVRAZ Bagliykoks,
Dneprokoks (from 1 April 2011 integrated with
EVRAZ DMZP) and EVRAZ Dneprodzerzhinsky
Coke and Chemical Plant (“EVRAZ DKHZ”),
and EVRAZ Sukha Balka iron ore mine.
The Ukrainian coking plants purchase coal and
process it into metallurgical coke, for onward
sale to steelmakers. The total annual capacity
of the three plants is estimated at 3 million
tonnes of metallurgical coke. In 2011,
Dneprokoks, EVRAZ Bagliykoks and EVRAZ
Dneprodzerzhinsk Coke and Chemical Plant
produced 559,000 tonnes, 545,000 tonnes
and 497,000 tonnes, respectively, of
metallurgical coke.
EVRAZ plc
Annual Report and Accounts 2011
39
In 2011, due to further consolidation within the
Ukrainian metallurgical market and reduced
iron production in the region, we focused our
efforts on securing sales and stabilising coking
plant capacity usage to enhance efficiency and
prolong coke battery life.
EVRAZ Sukha Balka ore mining plant is one of
the leading Ukrainian enterprises specialising
in iron ore underground mining. In 2011,
EVRAZ Sukha Balka mined 2.86 million tonnes
of iron ore and sold 2.91 million tonnes of
sintering ore.
At EVRAZ Sukha Balka a key task has been
to improve the work safety environment at the
mines and reduce injury risks. We undertook
an in-depth safety audit covering all aspects
of risk management and safe working practice
in order to identify and develop a priority action
list. As a result of the findings, we partially
removed the electricity network and changed
the transportation system in order to exclude
the risk of electric hazard; we also carried out
maintenance on shafts, railway tracks and
mining equipment to make for
safer operations.
Steel and Mining:
South Africa
The continued strength of the Rand for the first
three quarters of 2011, and relatively weak
domestic demand created significant pressure
on prices, while energy price increases, trade
union actions and persistently high levels of
inflation contributed to steeply rising costs.
Despite government aspirations, the economy
did not show robust growth in 2011.
EVRAZ Highveld Steel and Vanadium
EVRAZ Highveld Steel and Vanadium
(“EVRAZ Highveld”) is a vertically integrated
steel and vanadium slag (as a by-product
of steelmaking) producer. Its operations
comprise the steelworks at Emalahleni,
Mpumalanga and Mapochs Mine at
Roossenekal, Limpopo. It is South Africa’s
second-largest steel maker and the country’s
primary producer of medium and heavy
structural sections and thick plate. In 2011,
it produced 170,000 tonnes of plate, 117,000
tonnes of coil, 225,000 tonnes of sections
and 61,000 tonnes of vanadium slag.
Key Targets 2012
In 2012, the focus for EVRAZ Ukraine will
be on driving growth and improving its HSE
performance. We will be progressively
introducing new safety equipment for our staff
and safer transportation in our mines during
the year. We also plan new environmental
initiatives including installing an environmental
impact monitoring system at our coking plants
and water recycling projects at EVRAZ DMZP
and EVRAZ Sukha Balka.
Improving growth and productivity is the other
priority in 2012. At EVRAZ Sukha Balka we will
be investing in new equipment at both mines
to improve iron ore extraction productivity
whilst at the same time putting in place
process improvements designed to reduce
operational bottlenecks.
The priority at EVRAZ DMZP will be the blast
furnace operation enhancement to improve
productivity and usage rates and to better
manage the waste products. EVRAZ DMZP
also aims to increase sales within the
high margin Ukrainian operation through
warehousing and logistics improvements.
EVRAZ Highveld worked intensively during the
year to improve diversity at all levels across
the Company. As a result, the Company
secured a higher than expected Level 5
Broad-Based Black Economic Empowerment
(B-BBEE) contributor rating from the South
African government, in recognition of the
significant internal transformation that has
taken place at the Company.
In 2011, a ten-year strategic plan, that paves
the way for greater profitability and increased
efficiency, was signed off by the boards of
EVRAZ and EVRAZ Highveld.
Furnace No 7 at the iron plant was
successfully upgraded from SAF to OSB
technology leading to a safer and more
efficient operation and also the ability to
work with cheaper coal and reduced energy
consumption whilst also producing higher
vanadium output. During the upgrade
period, with reduced iron production, all
operations including the steel plant and
all three rolling mills, were gradually shut
down for intensive maintenance aimed
at improving equipment availability and
predictability. As a result both improved
significantly and reached annual targets
without any additional capital expenditure.
EVRAZ Highveld demonstrated significant
improvements in other areas of performance
and established a solid foundation for future
performance improvement in 2012.
Key Targets 2012
In 2012 EVRAZ Highveld plans to implement
the first phase of developments designed to
increase steel output by 15% and improve
efficiency as well as to reduce costs in order
to improve overall profitability.
Mapochs Mine
In order to increase the reliability of iron ore
supplies to the steel plant we continued to
mine the Uitvlugt deposit during 2011 and
early 2012 which has enabled us to secure
several million tonnes of material using our
existing infrastructure. Significant geological
work to update our iron ore reserves has
continued at the Mapochs Mine with the
drilling of 400 boreholes over a licenced strike
distance of 25 kilometres. The identified
reserves are currently under evaluation in
order to assess their economic viability.
Key Targets 2012
A new washing and screening improvement
project is underway with completion scheduled
for June 2012. Once commissioned, the
project will improve availability of the primary
crushing plant, to over 90 per cent, and
provide greater control of the product
specification.
Steel: Europe
EVRAZ European steel assets, comprising
EVRAZ Vitkovice Steel and EVRAZ Palini e
Bertoli, delivered on all its key operational
priorities during 2011, reorganising
maintenance procedures, renegotiating
energy procurement needs and optimising
transportation needs.
The overall steel sales volumes of EVRAZ
Europe for 2011 were 1.3 million tonnes.
Towards the end of the year, EVRAZ
announced its intention to consolidate all its
European assets including EVRAZ Vitkovice
Steel and EVRAZ Palini e Bertoli into a single
company, EVRAZ Europe (that will manage
both assets which will remain independent
entities), as part of the Company’s strategy
to develop a more profitable and efficient
pan-European business.
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In December 2010, EVRAZ launched project at EVRAZ
KGOK to increase iron ore extraction and production
to 55 million tonnes per annum from the end of 2012
(For information, please refer to page 16 of the report).
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EVRAZ plc
Annual Report and Accounts 2011
Operating Review
(Continued)
EVRAZ Palini e Bertoli
EVRAZ Palini e Bertoli is a plate rolling mill
located in San Giorgio di Nogaro, in the Udine
province of Italy. EVRAZ Palini e Bertoli
supplies its products to a wide range of
customers located in Europe and North
America. In 2011, EVRAZ Palini e Bertoli
rolled about 425,000 tonnes of plate.
In 2011 EVRAZ Palini e Bertoli benefited from
various initiatives including optimisation of
transportation and increases in slab weight.
Despite very challenging markets, its
performance was above internal forecasts.
Antidumping procedure initiated in 2008 was
finally dismissed as unsubstantiated in 2011
reopening US markets, which had retained
robust plate prices throughout the year.
EVRAZ Vitkovice Steel
EVRAZ Vitkovice Steel is a leading European
manufacturer of rolled steel products located
in Ostrava, the Czech Republic. It is one of
Europe’s top producers of heavy plates and
the only producer in the Czech Republic.
In 2011, EVRAZ Vitkovice Steel produced
about 762,000 tonnes of steel and 802,000
tonnes of steel products. It was a record
performance for the last three years,
contributing an operating profit after two years
of losses, albeit lower than budgeted for,
because strong first half gains (mainly due to
the ArcelorMittal pig iron contract) were offset
during the second half of the year when plate
prices in Europe fell on the back of lower
European demand.
Below Top: EVRAZ Stratcor Products
Below Bottom: A picture of jet engine fan
blades that require high quality vanadium
products in their production
Key Targets 2012
In 2012 EVRAZ plans to consolidate its
European business in order to further improve
efficiency and achieve optimisation of the
supply chain.
A number of cost-cutting initiatives at EVRAZ
Vitkovice Steel are aimed at achieving
significant decreases in conversion costs
and ensure profitability even in adverse
market conditions.
In addition to our other targets, in 2012 we
are focusing on improving yields, reducing
transportation costs, headcount optimisation
and maintenance efficiency.
Vanadium
EVRAZ’s Vanadium division achieved good
results in 2011 due to strong demand for
vanadium products supported by a growing
steel market that allowed all facilities in the
EVRAZ Vanadium division to operate at 100%
capacities load. Strong competition led
London Metal Bulletin (“LMB”) quotes to
decrease from approximately US$30/kgV in
FeV in the beginning of the year to US$24/kgV
in FeV by the end of the year. Despite this
EVRAZ continued to increase its share of the
world vanadium market capitalising on its
low-cost competitive position and ability to
accelerate production (by debottlenecking
initiatives at EVRAZ Vanady Tula and EVRAZ
Vametco, inventories depletion) in response to
customers’ requirements. As a result EVRAZ
Vanadium division has managed to increase
sales by approximately 35% compared to 2010
and decrease inventories accumulated during
crisis years.
Implementation of debottlenecking and
production optimisation initiatives allowed
the division to increase productivity by 5%.
Reflecting the continuous drive to reduce
expenses and increase efficiency utilising
intra-group synergies, EVRAZ remains one
of the lowest-cost producers of vanadium
in the world.
The key focus of the management in 2011 was
to improve health, safety and environmental
factors. In order to develop the culture of
safe working conditions and philosophy of
continuous improvements EVRAZ introduced
EVRAZ Business Systems at all facilities. For
more information on Lean and 6S activities
please refer to page 33.
EVRAZ Vanady Tula
Improvements in EVRAZ Vanady Tula’s
management performance in 2010-2011
led to the achievement of sustainable high
production levels and an increase in V2O5
production capacity of 7% compared to 2010.
Another priority of EVRAZ Vanady Tula in
2011 was the development of the tailings
dump material utilisation process through
EVRAZ sintering plants in order to maximise
intercompany synergies. As a result, in 2011
EVRAZ Vanady Tula utilised all tailings that
were produced and did not increase its
tailings deposits.
During 2011, EVRAZ Vanady Tula’s HSE and
social activities included the implementation
of a “Clean-up” project, in addition to 6S
activities. The project has resulted in improved
working conditions and decrease of production
safety risks.
Completion of the rotary kiln seal installation
project and start up of the pulp filtration area
reconstruction project initiated in 2011 will
allow EVRAZ Vanady Tula to improve the
working conditions at the plant and to raise
pentoxide production volumes.
In 2012, EVRAZ Vanady Tula will continue
expanding its Lean tools implementation
and deploy the optimisation project aimed
at improving the maintenance management
system.
EVRAZ plc
Annual Report and Accounts 2011
41
(cid:114)(cid:1) Maximisation of vanadium output at all
of the Company’s plants. Plans for 2012
provide for further increases in production
of oxide at EVRAZ Vanady Tula by 3%, FeV
and Nitrovan® production at EVRAZ Nikom
and EVRAZ Vametco by 11% and 13%
respectively.
(cid:114)(cid:1) Sales strategy will include contract
portfolio optimization to improve margins
by reallocating available Vanadium
products across the markets.
(cid:114)(cid:1) Review of the Vanadium business growth
strategy in order to link it to the EVRAZ
NTMK slag production expansion plans.
(cid:114)(cid:1) Enhance and extend marketing of EVRAZ
value added Nitrovan® product directed
at the global steel industry.
(cid:114)(cid:1) Ongoing cost optimisation and
improvements in efficiency at all facilities.
EVRAZ is confident that the advantages of
constant supplies of vanadium slag from
EVRAZ Highveld and EVRAZ 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
going forward.
EVRAZ Nikom
One of EVRAZ Nikom’s main aims in 2011
was to improve product quality and labour
productivity in addition to successfully
introducing the new improved technological
methods which allowed an increase in
ferrovanadium production by 36%.
EVRAZ Nikom successfully developed the
technology of FeV50 production based on
aluminothermy which appeared as a new
project and proved the ability to produce
FeV50 with high quality and yield that
facilitated expansion of the product line
and increased sales volumes to European
and Asian markets.
In 2012 EVRAZ Nikom will continue to focus
on customers’ requests for high quality
Ferrovanadium. A capacity increase in 2012
by an additional 10% is targeted via the
optimisation of the input raw materials mix,
by using more V2O3 from Vametco, and
maximising technological recovery rates.
EVRAZ Stratcor
The main goal of EVRAZ Stratcor in 2011 was
to reduce costs and to find additional sources
of feedstock to satisfy EVRAZ Stratcor’s
requirements. Several alternative solutions
for the feedstock shortage were defined by
the end of 2011. Should the investment be
approved construction of the facility will source
outside oxides and non-traditional feeds to
allow continued operations.
One of EVRAZ Stratcor 2011’s achievements
was development of a new specialty product,
an electrolyte for vanadium redox batteries.
In 2012 EVRAZ Stratcor’s focus will be on
finalisation and implementation of the solution
to utilise EVRAZ NTMK slag to alleviate
feedstock shortages while also acquiring
all available feedstock from the market.
EVRAZ Vametco
In 2011 EVRAZ Vametco’s primary efforts
were directed at the improvement to operational
culture, productivity increases and efforts
to reduce detrimental ecological impacts.
Several projects designed at reducing
atmospheric emissions and the treatment of
ground water have already been implemented,
or are currently in the planning stage.
Operational improvements carried out in 2011
allowed EVRAZ Vametco to increase vanadium
oxide (“V2O5”) production by 5%. A review of
the Nitrovan® production process allowed the
successful upgrading of finished goods quality
to ensure customer satisfaction.
The implementation of Lean as part of EVRAZ
Business System, 6S activities and training
at the plant have resulted in a substantial
improvement in production culture and
operational safety.
Key Targets 2012
During 2012 the Company will seek to fully
capitalise on its competitive advantages
in order to further expand its presence in
the world vanadium market. Key activities
will include:
(cid:114)(cid:1) Ongoing focus on health, safety and
environmental issues at all facilities.
HSE initiatives in 2012 will include the
implementation of standard personal
protective equipment at all assets and
a pilot health improvement project at
EVRAZ Vanady Tula.
(cid:114)(cid:1) The implementation of EVRAZ Business
System tools throughout the division,
i.e. the finalisation of the 6S roll out at all
facilities, to create model Lean cells and
start implementation of the total preventive
maintenance at all sites.
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
4343
Pulverised Coal
Injection at
EVRAZ ZSMK
In July 2010 EVRAZ began implementation of a PCI technology for
the blast furnace at EVRAZ ZSMK to generate savings compared
to the use of natural gas, improving revenues (due to the sale of
surplus coke) and lowering hot metal production costs. The project
scope includes coal handling and preparation for PCI fuel production
as well as coal transportation facilities.
Construction is underway and most of the equipment is on site.
The plant commissioning phase is scheduled to start in November
2012, and the plant will be fully operational by the beginning of 2013.
EVRAZ ZSMK Asset Location in Russia
Moscow
EVRAZ ZSMK
>20%
More than 20% expected
reduction in coke consumption
Sustainability
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EVRAZ plc
Annual Report and Accounts 2011
Corporate Social Responsibility
Highlights:
Introduction of new Group-wide HSE Policy
to standardise and improve HSE processes
23% reduction in lost time injury frequency rate (LTIFR) and a 50%
reduction in fatal incident frequency rate (FIFR) compared to 2010
Reduction in air emissions of 14% compared to 2010
US$49 million invested in charity and support of social infrastructure
in 2011
Commitment to continued improvement in systems for the collection
of HSE performance data
Air Emission Dynamics
100%
90.1%
76.7%
100
75
50
25
2009
2010
2011
The above graph illustrates the reduction
in the total amount of the key air emissions
Nitrogen Oxides (NOx), Sulphur Oxides (SOx),
Dust and Volatile Organic Compounds (VOC)
rebased to 2009.
Lost time injury frequency rate
Fatal incident frequency rate
(Per 1 million hours worked)
0.18
0.13
0.14
4
2
0.07
2.23
2008
2.69
2009
2.40
2010
1.86
2011
LTIFR
FIFR
Our Approach
Prior to our admission to the Main Market of
the London Stock Exchange in November 2011
we began a process of strengthening and
consolidating at a Group level our processes
for reporting our performance in the areas of
health and safety, environmental performance,
human capital management and community
engagement.
This section of our report provides an overview
of our policies and performance in these
important areas in 2011 as well as an outline
of how we intend to improve our performance
in the years ahead.
Additional relevant disclosures are contained
in the Principal Risks and Uncertainties on
page 26 and the Corporate Governance
Report on page 61.
Strategy and Governance
During 2010 we established a Health Safety
and Environment (“HSE”) Committee of the
Board and the Committee’s membership and
terms of reference were revised in October
2011. The Committee is now chaired by Karl
Gruber, Independent Director, and the other
members are Alexander Frolov, CEO of EVRAZ
plc, and Terry Robinson, Independent Director.
Details of the terms of reference and activities
of the committee are set out in the Corporate
Governance Report on page 61.
0.20
0.16
0.12
0.08
0.04
Led by the Board Committee, we are
committed to improving our HSE performance
through the implementation of improved
production processes, as well as new
management and control systems. In 2011
we appointed our first vice president of HSE,
Alexander Kruchinin. The role of the vice
president is to co-ordinate the HSE function
at Group and site level and report into the
Board Committee on material HSE issues.
In 2011 we adopted a new Group HSE Policy
to standardise and improve HSE processes
across EVRAZ.
The latest versions of the Codes of Ethics
and Business Conduct can be found on the
Company’s web-site.
At a site level each plant manager takes
overall responsibility for HSE compliance, with
the site level HSE function reporting both to
the site management and group level HSE
management. The HSE management system
is subject to periodic Group level audit.
In addition to our own internal codes and
principles, we utilise the OECD (Organisation
for Economic Co-operation and Development)
Guidelines for Multinational Enterprises to
ensure, as far as possible, a uniform approach
to business standards across our global
operations. We fully endorse the provisions
of the Universal Declaration of Human Rights
and strive, at all times, to uphold them.
Key Challenges
As a global Company with operations spanning
activities across the steel production chain
we face a wide range of risks. The significant
cultural and regulatory differences which
exist in the countries where we operate
also represent a challenge in ensuring the
consistent application of policies across
the Group.
HSE Overview
In March 2011 we established our first
Group-wide Safety, Health and Environmental
Policy. Pursuant to the policy, we aim to meet
or exceed all applicable national legislation
and to increase the level of industrial safety,
labour protection and reduce our impact on
the environment across our operations.
During 2011 we also significantly improved
our HSE Reporting System in order to improve
the collection and sharing of appropriate
data across the Group. HSE performance
information is now submitted by subsidiaries
to the corporate HSE Directorates on a
monthly basis to ensure constant monitoring.
Information on any significant incidents is
immediately escalated to management to
enable appropriate investigations to take place
in order to develop preventative and corrective
actions. We expect that the revised system will
lead to an improvement in our ability to assess
our HSE performance in the future.
Health & Safety Performance
We continued to deliver an improved safety
performance in 2011 with a decline in both
fatal accidents as well as in our LTIFR. Group
LTIFR fell by 23% whilst our FIFR fell by 50%.
We will continue to prioritise our performance
in these areas in 2012.
Environmental Performance
EVRAZ’s environmental strategy aims to
find optimal solutions for industrial waste
management, reduce emissions and promote
the efficient use of natural recourses.
In 2011 we spent US$85 million on measures
to ensure environmental legal compliance
and US$31.6 million on projects to improve
our environmental performance. In the period
from 2012 to 2017, the Group is committed
to spending approximately US$303 million
on environmental programmes across
its operations.
We continue to strengthen our management
and reporting systems to enable us to collect
comparable data on our energy consumption
across the Group, with a view to reporting
on our energy consumption in 2013. We are
committed to increasing the number of sites
that have implemented ISO 14001.
Based upon a review of our business, we
believe our four most significant on-going
challenges are:
(cid:114)(cid:1) Health and safety – The health and safety
of our employees is paramount. Our
industry has inherent risk that needs to
be managed effectively to ensure a safe
working environment. We constantly strive
to improve our performance by avoiding
or by mitigating these risks.
(cid:114)(cid:1) The environment – Our operations have the
potential to have significant impact on the
environment through our production and
use of the world’s natural resources. We
are committed to meeting or exceeding
legal requirements in order to reduce
our impacts on the environment and to
maintain our licence to operate.
(cid:114)(cid:1) Human capital management – Retaining
the best talent requires investment in
the development of our employees and
is important to securing our business
for the long-term and drive technological
development.
(cid:114)(cid:1) Community relations – We are long-term
investors in the regions where we operate
and are committed to ensuring that local
communities benefit from our presence.
Targets
As set out above, we are committed to
improving our performance over the long-term,
reflecting our development as a business.
During the year the HSE Committee reviewed
EVRAZ’s performance indicators and activities
against the challenges set out above and
determined a number of strategic, long-term
targets and initiatives:
(cid:114)(cid:1) A consistent reduction in lost time injury
frequency rate and the avoidance of any
fatal accidents across the Group.
(cid:114)(cid:1) Continued implementation of environmental
health and safety management systems in
accordance with ISO 14001 and OHSAS
18001 across the Group to sites which
are not currently certified.
(cid:114)(cid:1) Improving our systems and processes
for collecting and collating key corporate
responsibility performance data from
across the Group.
EVRAZ plc
Annual Report and Accounts 2011
45
Air Emissions
Reduction of air emissions is one of the
key environmental objectives. Our key
emissions primarily comprise nitrogen oxides
(NOx), sulphur oxides (SOx), dust and volatile
organic compounds (VOC), carbon monoxide
(CO), carbon dioxide (CO2) and methane. We
have made significant progress in reducing
emissions to air at our operations through
investments in modern technologies and
by withdrawing obsolete equipment from
production. As a result, we have reduced our
key air emissions of nitrogen oxides (NOx),
sulphur oxides (SOx), dust and volatile organic
compounds (VOC) by 23% (37.8 thousand
tonnes) in the period since 2009 and 14.9%
(21.7 thousand tonnes) during 2011.
For the graph on these key air emissions
please refer to page 44.
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EVRAZ plc
Annual Report and Accounts 2011
Corporate Social Responsibility
(Continued)
The main emissions issue associated with
our coal mining operations is the release of
methane gas after mine degasification. The
concentration of such methane in extracted
air is low and therefore presents particular
difficulties in terms of abatement. However, we
continue to investigate solutions for minimising
the quantity of methane emitted from our
operations.
Waste Management
Where possible we seek to re-use or recycle
waste and by-products in order to minimise
our environmental impacts whilst maximising
operational and financial efficiencies.
Until recently much of the waste we produced
was simply disposed of to landfills, however
we are developing a strategy to reduce waste
storage volumes and to ensure proper waste
disposal.
In total, in 2011 we recycled or reused
109.6%1 of waste and by-products from our
non-mining assets compared to 96.6%in
2010. We have achieved this positive result
through a number of steps, including:
(cid:114)(cid:1) The increase of recycling and use of our
main metallurgical wastes: slag, scale and
sludge. In 2011 we generated 8.6 million
tonnes of metallurgical wastes and, in
conjunction with the development of old
waste deposits, were able to recycle and
use 11.8 million tonnes of metallurgical
wastes. As a result, in 2011 we recycled
and used approximately 135% of the
volume of waste metallurgical materials
generated, 32% more than in 2010 when
we recycled and used 9.1 million tonnes
(103% of waste produced).
Below Top: EVRAZ Protective Clothing
Below Bottom: Workflow Control Room
(cid:114)(cid:1) The development of new products
containing by-products from a number of
other operations. For example, in 2011
EVRAZ VGOK developed a new iron flux
consisting entirely of wastes generated
by three different EVRAZ plants; and
(cid:114)(cid:1) The recycling of ferrous scrap in steel
production. For example, our North
American assets use scrap as their main
raw-material without impacting metal
quality. In 2011 we recycled 3 million
tonnes of scrap, 24.6% more than in
2010 (2.4 million tonnes).
Our strategy for dealing with non-hazardous
mining wastes, such as depleted rock,
tailings and overburden is to use them for land
rehabilitation and the construction of dams or
roads. In 2011, we reused 46.7% (45.6 million
tonnes) of such waste material. In 2010 this
figure was 21.8% or 16.4 million tonnes.
In 2012 we will be looking to increase the
amount of waste and by-products we recycle
even further.
In 2011 there were no significant
environmental incidents. We completed
remediation and clean-up work at Evrazruda
(Russia) in 2011 following a tailings spill
which occurred at the end of 2010.
Water Consumption and Wastewater
Discharge Prevention
Our objective is to be efficient in our use
of water.
The total fresh water intake in 2011
was 495.1 million cubic meters (including
53 million cubic meters of mine waters). It is
1% less than in 2010 (499.6 million cubic
meters). Almost 80% of all the water was
taken from surface sources, such as rivers,
lakes and reservoirs. We continue to work on
developing new strategies to minimise the
impact of our water use.
Human Capital
We are committed to providing equal rights
to our employees regardless of their race,
nationality, gender or sexual orientation.
Differences exist in policies across our
operations as a result of the varied traditions
and cultures which exist in the communities
where we operate. However, we recognise the
importance of diversity in attracting talented
employees and are committed to evaluating
and standardising our performance going
forward.
As of 31 December 2011 we employed almost
112,000 people across Europe, Africa and
North America with the majority located in
Russia and the Commonwealth of Independent
States (“CIS”).
Employment Practices: Attract and Retain
Competition for skilled labour in Russia and
many of the markets in which we operate
is intense. We strive to attract and retain
employees by providing training and career
development opportunities across our assets
worldwide as we strongly believe that diversity
and the sharing of best practice within the
Group brings significant commercial benefits
that will help improve our competitive position.
We employ on the basis of job requirements
and do not discriminate on grounds of
age, ethnic or social origin, gender, sexual
orientation, politics, religion or disability. We
do not employ forced, bonded or child labour.
We recognise the right of all employees to
choose to belong to a union and seek to
bargain collectively. We employ people with
disabilities and make every effort to offer
suitable alternative employment and retraining
to employees who become disabled and can
no longer perform their regular duties.
Employees by Age
1%
25%
26%
18-20
21-30
31-40
41-50
51+
21%
27%
1 The amount of waste recycled or used as
a percentage of annual waste generation,
not including mining waste.
EVRAZ plc
Annual Report and Accounts 2011
47
In 2011, we extended the number of
programmes we have put in place to support
our employees through the provision of
benefits such as health and life insurance,
subsidised meals, free transport to work,
Company-supported mortgage schemes,
retirement benefits and the provision of
recreational activities. In 2011, we had an
employee turnover rate across the Group
of 8%, in line with prior years.
Employment Practices: Develop
In 2011, we increased our focus on the
training and development of our workforce to
ensure that employees at various levels are
provided with the opportunity to fulfil their
potential by developing technical, operational
and managerial skills.
Our educational programmes operate at three
levels: standard training programmes for
current managers and high potential employees
(“HiPo”); professional training; and strategic
tailor-made programmes based on specific
business needs; and arranged for a certain
group of employees worldwide regardless
their location.
We have also developed a structured
approach to HiPo development and put a
strong emphasis on identifying and developing
the leaders of tomorrow. Talent management
issues are supervised by a special Talent
Committee comprising key EVRAZ executives,
all of whom are actively involved in and
personally responsible for, tutoring and
overseeing a given pool of HiPos.
A further underlying element to our employee
development strategy is ensuring the
preservation and wider dissemination of
technical knowledge already held within
EVRAZ. We have launched a special project
designed to collate existing in-depth and up to
date information through the identification of
key expert individuals within the business and
their successors. The main goal of the project
is to ensure that critical information is passed
on, whilst at the same time being included in
educational materials and disseminated to
employees throughout the Group as part of
our in house educational system.
Employment Practices: Retain
Our programmes for our Russian employees
included health and life insurance programmes,
subsidised meals, free transport to work,
company supported mortgage schemes and
the provision of recreational activities.
EVRAZ North America also implemented a wide
range of social programmes with a special
focus on health care issues, retirement plans
and various employee benefits.
To foster better and stronger relations
between employees, EVRAZ Highveld Steel
and Vanadium held various employee events
throughout the year. To address issues
relating to health and safety, EVRAZ Highveld
Steel and Vanadium re-launched its Wellness
Campaign in 2011 headed up by a Wellness
Committee whose membership comprises
Company and trade union representatives.
The Wellness Committee identified health
priorities which formed part of the year’s
wellness programme including HIV/Aids,
tuberculosis, diabetes, high blood pressure
and others. The Wellness Programme
delivered support through counselling for
a variety of social, financial, emotional and
mental health issues in 2011. EVRAZ Highveld
also continued with its Primary Healthcare
Policy which provided medical care to
employees without medical insurance and free
medical testing for HIV, tuberculosis, sugar
and blood pressure. Anti-retroviral treatment
for HIV was also available to employees and
their families.
Employee programmes in the Czech Republic
included cultural and sports activities, health
care programmes, life and pension insurances
and various events.
Employees by Business
Employees by Region
1% 6%
4%2%
1%
12%
22%
Steel
Iron ore
Coal
Vanadium
Other
59%
92%
Russia & CIS
Europe
Africa
North America
EVRAZ New Leaders Programme
Brief overview: The EVRAZ New Leaders
Programme began in 2009 with the goal
of developing a new generation of senior
management within the Company to
ensure continuity of leadership.
Description: The programme runs for one
year and comprises six modules. Fifty-six
EVRAZ employees from Russia, Ukraine,
Czech Republic, Italy, South Africa, the US
and Canada successfully completed the
programme in 2011. This third year of
tailor-made training was intended for those
employees who have higher technical
education and a proven track record in
production. It focused on developing those
managerial, engineering and technological
skills which will enable participants to take
senior positions within the Company in the
future. The curriculum included lectures
(taught by world-renowned professors),
workshops, and group work on project
development. The comprehensive
programme covered many of the complex
issues associated with business
development, such as strategic planning,
project management and negotiations.
In addition, twenty-two of our current top
managers shared their experience with the
participants. The participants faced a real
challenge: to develop a strategic project
to drive the further growth of one of the
world’s leading vertically-integrated steel,
mining and vanadium businesses. The final
exam consisted of presenting the project
to EVRAZs’ top-management.
Results: 38% of those who graduated from
the programme in 2011 have received a
promotion. In the space of three years,
114 employees have graduated from the
programme 74% of whom have been since
promoted to new positions.
Developing a
new generation
of senior
management
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EVRAZ plc
Annual Report and Accounts 2011
Corporate Social Responsibility
(Continued)
Yuzhkuzbassugol Training Centre
EVRAZ takes pride in its professional
growth programmes, using innovative
methods to advance its employees
knowledge and skills. Having certain skills
can be paramount to providing employee’s
safety, especially in mining operations.
A cutting edge Center for Professional
Development has been functioning at the
coal mining company Yuzhkuzbassugol
since the 1970s. The Center serves as a
training facility not only for Yuzhkuzbassugol
but for other mining companies as well.
A model of a belt type conveyor and a
special class for radio communication were
built for practice. In 2010-2011 the Center
introduced a new and unique multimedia
programme, which covers various aspects
of training, including allowing miners to
learn how to operate a tunnelling machine
in a computer game-like environment.
Cooperation with Labour Unions
We respect our employees’ rights and aim to
build a constructive and positive relationship
with the labour unions which represent them.
All our sites operate through the collective
bargaining agreement model.
We generally have high levels of unionisation
at our operations, although this can vary
significantly across operations and countries.
Very high levels of unionisation exist at our
South African and Ukrainian operations. For
example 92% of EVRAZ Highveld’s staff and
100% of employees of Bagleykoks belong to
trade unions. Whilst at EVRAZ Palini only
21.9% of employees are union members and
across EVRAZ North America unionisation is
approximately 58%. In Russia approximately
75% of workforce is unionised and we are
an active member of the Russian Steel
Manufacturers Association through which
we work with the Russian Mining and
Metallurgical Trade Union.
Internal Communications
We are committed to keeping our employees
informed of major corporate developments as
much as possible ensuring they understand
and are aligned with our business strategy.
EVRAZ has a well-developed internal
communications system. We maintain an
anonymous whistle blowing system, that
allows employees to confidentially raise
questions and concerns, including internal
surveys, suggestion boxes and a special
anonymous hotline.
Community Investments
EVRAZ believes in supporting and engaging
with the communities where it operates and
where its employees and their families live and
work. EVRAZ sees contribution to the social
and economic development of these areas as
its responsibility and a key determinant of its
long-term success.
Any charity or donation is conditional upon an
approval request through the Group’s internal
procedures and its approval from a designated
compliance officer. Assistance to schemes
which meet our criteria is provided through
charitable foundations established by the
Company and managed by local Supervisory
Boards. Membership of these Boards
comprises entirely of local community
representatives and their activities are
audited annually.
EVRAZ Charity Funds operate in Russia
(Siberia and the Urals), Czech Republic, South
Africa and the United States. Many projects
EVRAZ supported in Russia in 2011 included
support for children with special needs,
especially those afflicted by cerebral palsy. We
have historically prioritised support for children
with cerebral palsy as treatment for this
condition has been neglected in Russia. We
are currently broadening our focus to include
children with other special needs as well. Our
projects have focused on providing essential
equipment for day care centres, career
development and healthy lifestyle promotion
programmes for youth, such as
the construction of playgrounds.
The EVRAZ Charity Fund in the Czech Republic
was established in 2006 and supports the
long-term development of the Moravian-Silesian
region. In 2011 donations were directed
towards medical, educational and psychological
support for children suffering from various
disabilities of the central nervous system.
EVRAZ plc
Annual Report and Accounts 2011
49
Transformation in South Africa
EVRAZ Highveld has significantly increased
diversity across all levels and has successfully
improved its Broad-Based Black Economic
Empowerment (“B-BBEE”) scorecard
performance as a result. EVRAZ’s B-BBEE
scorecard score is now at Level 5 compliance
(55.48) compared to Level 8 (30.34) in 2010.
This has been delivered through the
establishment of a transformation division
in 2010 which has implemented a range
of activities such as improving the
representation of historically disadvantaged
people in senior management structures,
the development of education programmes,
preferential procurement agreements and
support for the development of local black
owned businesses as preferred suppliers.
The target for 2012 is a score of 58. Employee
input in transformation initiatives was enhanced
in 2011 with the establishment of a Diversity
and Inclusion Forum. The Forum, whose
membership comprises employees and union
representatives, is involved in transformation,
skills development, equal opportunities and
remuneration and awards matters.
Helping Children with Special Needs
Description: EVRAZ Charity Funds in
Russia and the Czech Republic pay special
attention to providing support for children
with special needs, especially those with
cerebral palsy. Several innovative projects
had been introduced in 2011. EVRAZ
funded a centre for hippotherapy in Nizhniy
Tagil – a special kind of physical therapy
where a trained horse is used for
children’s treatment – and a Lekoteka in
Novokuznetsk (a centre for children with
special needs that combines treatment
with education through games). A new
and promising approach was introduced
in Nizhniy Tagil as a result of EVRAZ’s
support: therapy through storytelling.
Other types of activities included art
therapy and aquatic therapy (swimming).
In Novokuznetsk EVRAZ helped parents
of children with cerebral palsy to establish
a regional advocacy group that works to
raise awareness about the disabled and
the issues they are facing.
During 2011, EVRAZ’s social investments in
South Africa were distributed by the EVRAZ
Highveld eMalahleni Community Forum, which
was established in July 2010 and officially
launched in August 2011. The eMalahleni
Community Forum targets the most vulnerable
members of the communities within which
EVRAZ Highveld operates and will primarily
focus on social development, education and
health issues.
In particular, we are supporting a hydroponics
and agricultural project, which combines
realistic, alternative work opportunities for local
people whilst also improving access to basic
nutrition. This project, in the 60-household
village of Makwana, was established in 2011
to support emerging agricultural activities
which are hampered by a water shortage.
After providing training for villagers in 2011,
a hydroponics and agricultural hub will be
established in 2012 as a training centre and
local market that can provide a reliable outlet
of fresh produce from households in the area.
In Canada, EVRAZ is involved with
several non-profit organisations, including
The United Way, Junior Achievement and
others, addressing a variety of issues, such
as family violence, drug abuse and education.
EVRAZ also supports the Canadian Cancer
Society’s Relay for Life, an annual event that
helps celebrate cancer survivors. In the United
States EVRAZ supports several local NGOs
including local scouts’ chapters, child abuse
prevention programmes, an autism awareness
campaign, education initiatives – including
financial literacy training – and programmes
that provide assistance to the needy.
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
5151
Pulverised
Coal Injection at
EVRAZ NTMK
In October 2009 EVRAZ began implementation of a PCI technology
in the blast furnace at EVRAZ NTMK. The use of PCI technology at
EVRAZ NTMK should lead to higher revenues from extra coke sales
and lower hot metal production costs, because of the savings
generated by using PCI fuel in place of natural gas and reducing
the amount of coke used.
The project scope includes: coal storage, batching and
transportation, PCI fuel production and injection.
Construction is underway and commissioning works will start in
August 2012 and the project will be finished by the end of 2012.
EVRAZ NTMK Asset Location in Russia
Moscow
EVRAZ NTMK
>20%
More than 20% expected
reduction in coke consumption
Financial
Review
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EVRAZ plc
Annual Report and Accounts 2011
Financial Review
Giacomo Baizini
Revenues grew by 22% to US$16.4 billion,
driven primarily by price increases, particularly
for steel products. Stronger revenues and
a higher proportion of value-added products
within the revenue mix had a positive impact
on EBITDA, which increased 23% year-on-
year to US$2.9 billion.
Giacomo Baizini
Chief Financial Officer
Basis of Preparation
The consolidated financial statements of the Group on pages 84 to 151 have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), as adopted by the European Union. The presentation currency is US dollars.
Overview
We delivered a solid financial performance in 2011, increasing revenues by 22% to US$16.4 billion and our EBITDA to US$2.9 billion, despite the
volatile market environment.
We also successfully reduced our net debt by 10% to US$6,442 million as of 31 December 2011.
A further key achievement was the Company’s successful incorporation in the UK during 2011 with a Premium Listing on the Main Market of the
LSE. As a result, on 7 December 2011 EVRAZ became a FTSE 100 company and the only steel stock in the UK FTSE All-Share Index.
The listing is enabling us to broaden our shareholder base and provide us with a greater access to international capital markets for our funding
requirements.
Operational Results
Revenue and EBITDA
US$million
Steel production
Mining
Vanadium
Other operations
Unallocated
Eliminations
Total
2011
2010
EBITDA
1,262
1,628
22
197
(243)
32
2,898
Revenue
14,717
3,784
665
966
–
(3,732)
16,400
EBITDA
1,485
935
53
144
(157)
(110)
2,350
Revenue
12,123
2,507
566
823
–
(2,625)
13,394
2009
EBITDA
927
279
(12)
167
(136)
12
1,237
Revenue
8,978
1,456
363
765
–
(1,790)
9,772
Revenues grew by 22% to US$16.4 billion, driven primarily by price increases, particularly for steel products. Stronger revenues and a higher proportion
of value-added products within the revenue mix had a positive impact on EBITDA, which increased 23% year-on-year to US$2.9 billion. Whilst the Steel
division was the major contributor to revenue growth, our mining operations were responsible for more than half the Group’s EBITDA, reinforcing the
value of a strong raw materials asset base.
Below: Premium Listing Market Tombstone
EVRAZ plc
Annual Report and Accounts 2011
53
Despite such growth in EBITDA, the net profit attributable to equity holders of EVRAZ plc in 2011 was US$461 million compared with US$486
million in 2010, a decrease of 5%. This is due to the fact that our net profit line in 2011 was negatively affected by one-off items. In H1 2011
we booked a loss of US$161 million relating to the successful incentivised conversion of our 2014 convertible bonds. In H2 2011 we incurred
US$19 million of expenses for obtaining the Premium listing on the London Stock Exchange. Without these items our 2011 net profit would have
been US$633 million. Our H1 2011 profit was also affected by US$71 million of charges on early repurchase of our 2013 Eurobonds.
Cash Costs
With regard to our cost structure, raw materials and goods for resale represent over 50% of our operating expenses and these costs are largely
dependent on commodity prices and the wider market environment. Auxiliary materials, contractor services, production labour and energy
account for a further 40% and have been subject to inflation during the year.
With regard to personnel expenses for 2012, we have reached agreements with our Russian operations on wage increases to take effect twice
a year, in March/April and October. Wage increases in our operations are agreed at a level of 10-12% for the year in the CIS, and 2-3% for our
international operations.
Capital Requirements
In addition to meeting its working capital requirements, EVRAZ expects that repayments of outstanding debt, capital expenditure, acquisitions
and dividend payments will represent the Company’s most significant use of funds over the coming years.
Our capital expenditure programme is focused on the reconstruction and modernisation of existing production facilities in order to reduce costs,
improve process flows and expand the product range.
We spent US$1.28 billion on total capital expenditure in 2011 compared with US$832 million in 2010, an increase of 54% due to renewed
investment in modernisation projects and mine development.
CAPEX Dynamics
2008-2012
1,103
1,200
1,000
800
600
400
200
1,281
~1,200
832
441
2008
2009
2010
2011
2012F
Investment Projects1
Coal Mine Development2
Iron Ore Mine Development
Maintenance, Steel and Other Operations3
In 2010 includes US$70 million acquisition of Mezhegey and Mezhegey East licences; in 2011 – US$3 million investments in Yerunakovskaya mine
Investment into maintaining and developing mining volumes, such as preparation of coal seams
1
2
3 In 2011 includes US$114 million for EVRAZ new Moscow office and difference between IFRS and management accounting
Cash Flow
EVRAZ’s operations delivered strong cash performance, generating substantial operating cash flows of US$2.6 billion in the period, an
increase of 59% over the previous year. US$1.2 billion of cash flows were used in investing activities, related to own capital expenditure
and a further US$1.3 billion were used for financing activities, principally the payment of interest and dividends. This represented a
significant increase of 42% over 2010 as we made our first dividend payment since 2008, consisting of an interim dividend and a special
dividend, which amounted to $491 million.
Cash Flows Summary
US$ million
Operating
Investing
Financing
2011
2,647
(1,188)
(1,282)
2010
1,662
(744)
(899)
2009
1,698
187
(2,157)
Working capital during the period was stable, decreasing by US$119 million (as compared to the end of 2010) and reflecting the Company’s focus
on effective working capital management despite higher prices and levels of activity.
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EVRAZ plc
Annual Report and Accounts 2011
Financial Review
(Continued)
Net Debt
Over the past three years, EVRAZ has focused on financial management with the objective of reducing its total level of debt and replacing its
short-term debt with longer-term debt to better match its funding to its planned long-term capital expenditure. As a result, in 2011 we undertook
a number of refinancing transactions which amounted to a total of approximately US$2 billion:
(cid:114)(cid:1) US$850 million of new 6.75% Eurobond due 2018 issued in May 2011. We used part of the proceeds from this issue to purchase
approximately US$622 million of the outstanding bonds due in 2013
(cid:114)(cid:1) 20 billion rouble-denominated Bonds (approximately US$721 million) placed in June 2011 at 8.40% to take advantage of the Rouble bond market.
These were swapped into US dollars at rates of 4.45 – 4.60%.
(cid:114)(cid:1) A 5-year US$500 million unsecured credit facility from Gazprombank closed in October 2011 used to prepay the existing US$300 million
secured loan
(cid:114)(cid:1) A 5-year US$610 million revolving facility signed with a consortium of banks by our North American subsidiaries at a record-low 1.5% to 2%
over LIBOR.
In June 2011, we also incentivised a conversion of US$650 million of convertible bonds due in 2014. These transactions helped the Company
to reduce its peak maturities in 2013 and 2014 and extend the average maturity across the debt portfolio, as well as to reduce our consolidated
indebtedness and the average cost of debt.
Net debt at the end of the period was US$6,442 million compared to US$7,184 million at the end of 2010, a decrease of 10% year-on-year.
Furthermore, we have significantly reduced our short-term debt from US$2 billion in December 2009 to US$626 million at the end of 2011.
The average maturity of our debt is now 3.8 years, up from 3.4 years in June 2009.
As a result of our improved financial position, EVRAZ’s credit ratings have been upgraded to B+, Stable from S&P, to Ba3, Stable from Moody’s
and to BB-, Stable from Fitch.
To manage liquidity risk, our target is to maintain a level of liquidity of above US$1 billion at any time. This is cash as well as any undrawn credit
facilities which can be rolled-over for a long-term period.
Dividends
On 10 October 2011 the EVRAZ Board approved a new dividend policy. Under the revised dividend policy EVRAZ is targeting a long-term average
dividend payout ratio of at least 25% of the consolidated net profit calculated in accordance with IFRS and adjusted for non-recurring items.
Dividends are expected to be paid semi-annually. In addition to the regular dividend payments, the Company may also employ special dividends
from time to time at the discretion of the EVRAZ Board to return surplus capital to shareholders.
On the back of our strong financial results, during 2011 Evraz Group S.A. made its first dividend payment since 2008, paying an interim dividend
of US$0.60 per share/US$0.20 per GDR and a special dividend of US$2.70 per share/US$0.90 per GDR. EVRAZ plc has also declared a cash
final dividend of US$0.17 per share. This gives a total ordinary dividend for 2011 of US$317 million, which is approximately 50% of net profit
adjusted for non-recurring items.
Exchange Rate Changes
The Group’s exposure to currency risk is disclosed in Note 29 of the Consolidated Financial Statements. The currency risk is mostly related to the
fluctuations of the Russian rouble against US dollar.
USD/RUB
EUR/USD
CAD/USD
USD/CZK
USD/ZAR
USD/UAH
Average exchange rates
Exchange rates at 31 December
2011
2010
2009
2011
2010
2009
29.3874
30.3692
31.7231
32.1961
30.4769
30.2442
1.3920
1.0108
1.3240
0.9708
1.3948
0.8765
1.2939
0.9833
1.3362
1.0054
17.6878
19.1110
19.0569
19.9400
18.7510
7.2579
7.9677
7.3199
7.9355
8.4307
7.7916
8.1319
7.9898
6.6224
7.9617
1.4406
0.9515
18.368
7.3721
7.9850
The USD/RUB rate was somewhat volatile during 2011, with the rouble strengthening towards the middle of the year and weakening again in the
second half of 2011. This contributed to increasing the costs at our Russian subsidiaries compared to 2010.
Our policy is not to take any specific hedging measures to mitigate fluctuating exchange rates, because we believe that our business is to a large
extent naturally hedged against foreign exchange risk. The majority of EVRAZ revenues are received in roubles (for sales in Russia) and US dollars
(almost all sales in other countries). However, rouble prices in the Russian domestic market are linked to export parity, so viewed as effectively
US dollar prices with a domestic premium in times of higher demand. Also, domestic sales in Russia are generally more profitable compared to
exports due to the effect of transportation costs. When the Russian market performs well, the rouble appreciates, which leads to both increased
costs and increased revenues in US dollar terms due to both the domestic premium and the higher proportion of domestic sales. On the other
hand, when the Russian economy weakens, rouble production costs fall, while steel prices usually follow the RUB/USD exchange rate trend
and more steel is exported. Finally, almost all of EVRAZ’s debt is US dollar denominated (including the Rouble bonds which are swapped
into US dollars).
EVRAZ plc
Annual Report and Accounts 2011
55
Financial Expenses
Our interest expense relating to debt in 2011 was US$654 million, a decrease of 2% compared with US$670 million in 2010 due to a reduction
in total debt. We also realised a gain of US$66 million from the cross-currency swaps on the rouble bonds. This means effectively an interest
expense of US$588 million, which includes amortisation of debt issue costs.
Income Tax
Our income tax expense amounted to US$420 million compared to US$163 million in 2010. EVRAZ’s effective tax rate, defined as income tax
expense (benefit) as a percentage of profit (loss) before tax, increased from 25.8% in 2010 to 48.1% in 2011. EVRAZ’s income tax expense
in 2010 was partially offset by a benefit of US$142 million relating to enacting a new tax code in Ukraine. In 2011, the US$161 million expense
related to the incentivised conversion of the 2014 convertible bonds and the US$71 million of premium paid in the tender of the 2013 Eurobonds
were not deductible.
Outlook
Given the challenging outlook for the industry, we continue carefully to monitor and proactively address any potential issues of future compliance
with the covenants associated with the Company’s financial indebtedness. Furthermore, EVRAZ continues to have substantial financial headroom,
having in excess of US$800 million of cash on our balance sheet at the end of 2011 as well as significant liquidity available in committed and
uncommitted credit lines to support our operations and investment plans. The successful placement of US$600 million of 2017 Eurobonds at
a coupon of 7.40% in April 2012 only helped to strengthen our financial position in preparing for our 2013 maturities.
Debt1 Maturities Schedule (As of 31 December 2011)
2012-2023
US$ million
1,500
1,000
500
532
0
1,287
1,396
1,407
1,206
1,371
29
30
2012
2013
2014
2015
2016
2017
2018
2019-2023
Q1
Q2
Q3
Q4
1 Maturity of loans and borrowings (principal amount)
Giacomo Baizini
Chief Financial Officer
EVRAZ plc
24 April 2012
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EVRAZ plc
Annual Report and Accounts 2011
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
5757
Construction
of Yuzhny
Rolling Mill in the
Rostov Region
In November 2010 EVRAZ began construction of a new rolling mill in
the Rostov Region in order to capture a share of this growth market
in Southern Russia. The main factory and administrative buildings
are currently being built and it is planned that EVRAZ DMZ will
supply billets to the new mill.
Yuzhny rolling mill provides for the production of light section
products on the basis of a universal rolling mill capacity of
450,000 tonnes per annum.
The mill will be will be operational by mid-2013.
The Rostov Region of Russia
Moscow
Rostov Region
450 ktpa
450,000 tonnes of light section production per annum
(expected capacity)
Governance
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Board of Directors
Alexander Abramov,
Non-Executive Chairman
(born 1959)
Alexander Frolov,
Chief Executive Officer
(born 1964)
Olga Pokrovskaya,
Non-Executive Director
(born 1969)
Eugene Shvidler,
Non-Executive Director
(born 1964)
Eugene Tenenbaum,
Non-Executive Director
(born 1964)
Sir Michael Peat,
Senior Independent
Non-Executive Director
(born 1949)
Duncan Baxter,
Independent
Non-Executive Director
(born 1952)
Karl Gruber,
Independent
Non-Executive Director
(born 1952)
Alexander Izosimov,
Independent
Non-Executive Director
(born 1964)
Terry Robinson,
Independent
Non-Executive Director
(born 1944)
59
Member of the Board of
Directors of Evraz Group S.A.
since August 2006. Appointed
to the Board of EVRAZ plc on
14 October 2011.
Member of the Board of
Directors of Evraz Group S.A.
since August 2006. Appointed
to the Board of EVRAZ plc on
14 October 2011.
Member of the Board of
Directors of Evraz Group S.A.
since August 2006. Appointed
to the Board of EVRAZ plc on
14 October 2011.
Appointed to the Board of
EVRAZ plc on 14 October
2011.
Elected as independent
director of Evraz Group S.A.
in May 2011. Appointed to
the Board of EVRAZ plc
on 14 October 2011.
Member of the Board of
Directors of Evraz Group S.A.
since May 2010. Appointed
to the Board of EVRAZ plc
on 14 October 2011.
Appointed to the Board of
EVRAZ plc on 28 February
2012.
Member of the Board of
Directors of Evraz Group S.A.
since April 2005. Appointed
to the Board of EVRAZ plc
on 14 October 2011.
Founded EvrazMetall company,
a predecessor of the Group
in 1992. CEO of EVRAZ Group
until 1 January 2006, Chairman
of the Board until 1 May 2006.
Appointed Chairman of EVRAZ
plc on 14 October 2011.
Joined EvrazMetall in 1994
and served as EvrazMetall’s
Chief Financial Officer from
2002 to 2004 and as Senior
Executive Vice President of
Evraz Group S.A. from 2004
to April 2006. Chairman of the
Board of Directors of Evraz
Group S.A. from May 2006
until December 2008 and
appointed CEO with effect
from January 2007. Elected
CEO of EVRAZ plc on
14 October 2011.
Alexander Abramov served
as non-executive director
from May 2006 until his
re-appointment as Chairman
of the Board on 1 December
2008. A director of OAO
Raspadskaya, 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
organization), director of
OJSC Bank International
Financial Club.
Alexander Frolov has held
various positions at
EvrazMetall and other
companies, predecessors
of Evraz Group S.A., since
joining in 1994 and has been
a member of the Board of
Directors of Evraz Group S.A.
since 2005. Prior to joining
EVRAZ, Mr. Frolov worked
as a research fellow at the
I.V. Kurchatov Institute of
Atomic Energy.
Olga Pokrovskaya is head of
corporate finance at Millhouse
LLC and a member of the
Board of Directors of Highland
Gold Mining Ltd. Since 1997,
Ms. Pokrovskaya has held
several key finance positions
with Sibneft, including head
of corporate finance. From
1991 to 1997, she worked
as a senior audit manager
at the accounting firm
Arthur Andersen.
Eugene Shvidler currently
serves as Chairman of
Millhouse LLC and is a
member of the Board of
Directors of Highland Gold
Mining Ltd. Mr. Shvidler
served as President of
Sibneft from 1998 to 2005.
Eugene Tenenbaum is
currently Managing Director
of MHC (Services) Ltd. and
serves on the Board of
Chelsea FC Plc and Highland
Gold Mining. He served as
Head of Corporate Finance for
Sibneft in Moscow from 1998
through 2001. Mr. Tenenbaum
joined Salomon Brothers in
1994 as Director for Corporate
Finance where he worked until
1998. Prior to that, he spent
five years in Corporate Finance
with KPMG in Toronto, Moscow
and London, including three
years (1990-1993) as National
Director at KPMG International
in Moscow. Mr. Tenenbaum
was an accountant in the
Business Advisory Group at
Price Waterhouse in Toronto
from 1987 until 1989.
Sir Michael Peat is a qualified
chartered accountant with
over 40 years’ experience.
He served as Principal Private
Secretary to HRH The Prince
of Wales from 2002 until
2011. Prior to this, he spent
nine years as the Royal
Household’s Director of
Finance and Property
Services, Keeper of the Privy
Purse and Treasurer to the
Queen and Receiver General
of the Duchy of Lancaster.
Sir Michael Peat was at KPMG
from 1972 and became a
partner in 1985. He left KPMG
in 1993 to devote himself to
his public roles. Sir Michael
Peat is a senior advisor
at Barclays Wealth and
Investment Management and
CQS, and is an independent
non-executive on the Board
of Deloitte LLP. He is an MA,
MBA and Fellow of the
Institute of Chartered
Accountants.
Duncan Baxter, resident in
Jersey, has had many years’
experience of international
banking. He began his career
in banking with Barclays
International Bank in
Zimbabwe before joining RAL
Merchant Bank in 1978. In
1985, he became a director of
Commercial Bank (Jersey) Ltd,
which was subsequently
acquired by Swiss Bank
Corporation (SBC). In 1988,
he became managing director
of SBC Jersey Branch. Since
leaving SBC in 1998 after its
merger with UBS AG, he has
undertaken a number of
consultancy projects for
international banks and
investment management
companies. He is Non-
Executive Chairman of
Highland Gold Mining Ltd and
also holds other non-executive
directorships. Mr. Baxter is
a Fellow of the Institute of
Chartered Secretaries and
Administrators, the Securities
Institute, the Chartered
Institute of Bankers, the
Institute of Management and
the Institute of Directors.
Karl Gruber has extensive
experience in the international
metallurgical mill business.
He held various management
positions, including eight years
as a member of the Managing
Board of VOEST-Alpine
Industrieanlagenbau (VAI), first
as Executive Vice President of
VAI and then as Vice Chairman
of the Managing Board of
Siemens VAI. He also served
as Chairman on the Boards of
Metals Technologies (MT)
Germany and MT Italy.
Terry Robinson is a qualified
chartered accountant and
has 40 years’ international
business experience. He
spent 20 years at Lonrho PLC,
the international mining and
trading group, the last
ten years of which he served
as a main board director.
Since 1998, 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 independent director and
Deputy Chairman of Katanga
Mining Limited and is also
an independent and senior
non-executive director of
Highland Gold Mining Ltd.
He is a Fellow of the Institute
of Chartered Accountants of
England and Wales.
Alexander Izosimov has
extensive managerial and
board experience. From 2003
to 2011, he was President and
CEO of VimpelCom, a leading
emerging market
telecommunications operator.
From 1996 to 2003 he held
various managerial positions
at Mars Inc. and was Regional
President for CIS, Central
Europe and Nordics, and a
member of the executive
board. Prior to Mars Inc,
Mr Izosimov was a consultant
with McKinsey & Co.
(Stockholm, London)
(1991-1996) and was involved
in numerous projects in
transportation, mining,
manufacturing and oil
businesses. Mr.Izosimov
currently serves on the boards
of MTG AB, East Capital AB
and Dynasty Foundation. He
previously served as director
and Chairman of the GSMA
(Global association of mobile
operators) board of directors,
and was also previously a
director of Baltika Breweries,
confectionery company Sladko,
and IT company Teleopti AB.
Member of the Remuneration
Committee and Nominations
Committee.
Member of the Health, Safety
and Environment Committee.
Member of the Audit
Committee.
Member of the Nominations
Committee.
Member of the Remuneration
Committee.
Chairman of the Nominations
Committee and member of the
Audit Committee.
Chairman of the Remuneration
Committee and member of the
Audit Committee.
Chairman of the Health, Safety
and Environment Committee
and member of the
Remuneration Committee.
Member of the Remuneration
Committee and the
Nominations Committee.
Chairman of the Audit
Committee and member of
the Nominations Committee
and of the Health, Safety
and Environment Committee.
Chairman of the Group’s Risk
Committee, which is an
Executive Committee.
58
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EVRAZ plcAnnual Report and Accounts 2011EVRAZ plcAnnual Report and Accounts 2011SustainabilityBusiness OverviewStrategyOperating ReviewSustainabilityFinancial ReviewGovernanceFinancial Statements
60
EVRAZ plc
Annual Report and Accounts 2011
Vice Presidents of EVRAZ plc
Leonid Kachur
Senior Vice President
Business Support and Interregional Relations
Oleg Kuzmin
Vice President
Corporate Communications
Pavel Tatyanin
Senior Vice President
Head of International Business
Alexander Kuznetsov
Vice President
Strategic and Operational Planning
Marat Atnashev
Vice President
Major Projects
Giacomo Baizini
Vice President
Corporate Affairs
Chief Financial Officer
Scott Baus
Vice President
EVRAZ Business System
Grigory Botvinovsky
Vice President
Vanadium Division
Natalia Ionova
Vice President
Human Resources
Aleksey Ivanov
Vice President
Steel Division
Alexander Kruchinin
Vice President
Health, Safety and Environment
Konstantin Lagutin
Vice President
Mining Division
Artem Natrusov
Vice President
Information Technologies
Yury Pavlov
Vice President
Procurement
Ilya Shirokobrod1
Vice President
Sales
Timur Yanbukhtin
Vice President
Development of International Business
Elena Zhavoronkova
Vice President
Legal Affairs
1 On 23 April 2012 Ilya Shirokobrod was appointed Vice President, Head of Division of Railway Products.
EVRAZ plc
Annual Report and Accounts 2011
61
Corporate Governance Report
Introduction
EVRAZ plc is a public company limited by shares incorporated in the United Kingdom. In 2011 pursuant to a share exchange offer with
EVRAZ Group S.A., EVRAZ plc became the new ultimate holding company of the Group, and Evraz Group S.A. became a subsidiary of the
Company. The Company’s shares were admitted to trading on the London Stock Exchange’s main market for listed securities on 7 November
2011, becoming eligible for entry into the FTSE 100 Index and affirming the Company’s commitment to high standards of corporate governance
and control. As part of the listing process, the Company made a number of amendments to its governance documents and Board Committee
charters in line with the UK Corporate Governance Code and best practice. Additionally the Company established a Nominations Committee
prior to the Company’s admission to trading.
Further information on the Company’s Corporate Governance policies and principles are available on our website: www.evraz.com. The UK
Corporate Governance Code is available at www.frc.org.uk.
Compliance with Corporate Governance Standards
Since its admission to listing on the London Stock Exchange’s main market, EVRAZ’s approach to corporate governance is primarily based on the
UK Corporate Governance Code and the Listing Rules of the UK Listing Authority. The Company follows the “comply or explain” approach and
complies with the UK Corporate Governance Code or, if it does not comply, explains the reasons for non-compliance.
As of 31 December 2011 we comply with all the principles and best practice provisions of the UK Corporate Governance Code with the following
exceptions:
(cid:114)(cid:1) Contrary to provisions A.2.1 and A.3.1 of the UK Corporate Governance Code, the Chairman does not meet the independence criteria set out
in the UK Corporate Governance Code. However, the other Directors consider that Alexander Abramov’s long-term relationship with the Group
and his importance to it mean his presence as Chairman is in the best interests of Shareholders. The presence of independent non-executive
directors on the Board also helps to ensure that there are appropriate checks and balances in place.
(cid:114)(cid:1) Contrary to provision C.3.1 of the UK Corporate Governance Code, only two of the three members of the Audit Committee were independent
non-executive directors during 2011. Olga Pokrovskaya is a member of the Audit Committee, but does not meet the independence criteria
set out in the UK Corporate Governance Code. Since more than 50% of EVRAZ activities and operations are based in the Russian Federation,
Olga Pokrovskaya’s technical and regional experience and qualifications, as a past senior audit manager at Arthur Anderson and as Head of
Corporate Finance at Sibneft, is of particular value to the Committee and her experience would be extremely difficult to replicate, particularly
as EVRAZ is seeking to strengthen diversity on its Board. The Company considers that, in light of her involvement with the Group over a
number of years and her experience in this area, her membership of the Audit Committee is to the benefit of the Group. Furthermore, on
28 February 2012 Sir Michael Peat, an independent non-executive director, was appointed to the Audit Committee, and the Company has
therefore been compliant with provision C.3.1 of the UK Corporate Governance Code since that date.
(cid:114)(cid:1) Contrary to provision D.2.1 of the UK Corporate Governance Code, only two of the five members of the Remuneration Committee were
independent non-executive directors during 2011. Mr. Abramov and Mr. Tenenbaum are members of the Remuneration Committee, but do not
meet the independence criteria set out in the UK Corporate Governance Code. However, independent non-executive directors comprise the
majority (these are Mr. Baxter (Chairman of the Remuneration Committee), Mr. Gruber and Mr. Izosimov) and, when matters affecting their
membership of the Board and Mr. Abramov’s chairmanship of the company are discussed, Mr. Abramov and/or Mr. Tenenbaum (as applicable)
will not be present, as required.
Board of Directors
The Board of EVRAZ plc was formed upon its incorporation on 14 October 2011. Prior to this date, the Group was controlled by Evraz Group S.A.
which was responsible for governance and management of the Group. In 2011, EVRAZ plc held four Board meetings between its incorporation and
31 December 2011. Evraz Group S.A. held 11 meetings during the year prior to the listing of EVRAZ and a further three meetings between that
date and 31 December 2011.
The members of the Board of EVRAZ plc as at 31 December 2011 were: Alexander Abramov (Chairman), Alexander Frolov (CEO),
Olga Pokrovskaya, Eugene Shvidler, Eugene Tenenbaum, Duncan Baxter, Karl Gruber, Terry Robinson and Sir Michael Peat.
The following tables set out the attendance of each Director at Evraz Group S.A. and EVRAZ plc Board and committee meetings.
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62
EVRAZ plc
Annual Report and Accounts 2011
Corporate Governance Report (Continued)
Evraz Group S.A. Board Meetings and Committees Attendance During 2011
Board members
Alexander Abramov
Otari Arshba
Duncan Baxter (elected in May 2011)
Alexander Frolov
Karl Gruber
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Gordon Toll (resigned in May 2011)
Board meetings
Remuneration
HSE
Audit
13 of 14
12 of 14
2 of 2
–
10 of 101
2 of 2
14 of 14
13 of 14
14 of 14
14 of 14
12 of 14
11 of 14
4 of 42
–
2 of 2
–
–
–
2 of 2
–
1 of 1
–
–
1 of 1
–
–
–
–
–
1 of 1
–
–
–
–
–
5 of 5
5 of 5
–
–
–
1 Mr. Baxter was elected as a director of Evraz Group S.A. in May 2011. Between the date of his appointment and 31 December 2011, ten board meetings were held,
all of which Mr. Baxter attended.
2 Mr. Toll resigned as a director of Evraz Group S.A. in May 2011. Between 1 January 2011 and the date of his resignation, four board meetings were held, all of which
Mr. Toll attended.
EVRAZ plc Board Meetings Attendance and Committees Attendance During 20111
Board members
Alexander Abramov
Duncan Baxter
Alexander Frolov
Karl Gruber
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Board meetings
Remuneration2
HSE
3 of 4
3 of 4
4 of 4
3 of 4
2 of 4
3 of 4
4 of 4
3 of 4
3 of 4
n/a
n/a
–
n/a
n/a
–
–
–
n/a
–
–
1 of 1
1 of 1
–
–
1 of 1
–
–
Audit3
–
1 of 1
–
–
–
1 of 1
1 of 1
–
–
1 There were no meetings of the Nominations Committee in 2011. The Nominations Committee was established on 14 October 2011 prior to the Company’s admission to
trading on the London Stock Exchange’s main market. For more information about the Nominations Committee please refer to the Nominations Committee section of this
report on page 67.
2 The Remuneration Committee of EVRAZ plc was established on 14 October 2011 prior to the Company’s admission to trading on the London Stock Exchange’s main market.
For more information about the Remuneration Committee please refer to the Remuneration Committee section of this report on pages 66–67 There were no meetings of the
Remuneration Committee in 2011.
3 The Audit Committee met three times between 1 January 2012 and 20 April 2012. All members attended all three meetings with the exception of Sir Michael Peat who
attended one out of the three meetings. The Audit Committee meeting held on 20 April 2012 was attended via a conference call by all members of the Committee.
Board Balance and Independence
As at 31 December 2011, the Board of EVRAZ plc consisted of nine members, comprising eight non-executive directors and one executive
director. In addition, on 28 February 2012, Alexander Izosimov was appointed to the Board as an additional non-executive director. During 2011,
there were four members of the Board (those other than Alexander Frolov, Alexander Abramov, Olga Pokrovskaya, Eugene Shvidler and Eugene
Tenenbaum) that were deemed to be independent in character and judgement pursuant to the UK Corporate Governance Code and free from any
business or other relationship which could materially interfere with the exercise of their independent judgement. In reaching its determination of
independence, the Board concluded that each one provided an objective challenge to management and was willing to stand up to defend their
own beliefs and viewpoints in order to support the ultimate good of the Company and there were no relationships or circumstances likely to
affect, or which could have appeared to affect, the judgement of any of its independent non-executive directors.
For completeness, the Board did consider an arm’s length business arrangement between one of the non-independent directors and the son of
Sir Michael Peat, the senior independent director of the Company, and satisfied itself that this arrangement has no impact on Sir Michael Peat’s
independence. Since the appointment of Alexander Izosimov in February 2012, at least half of the members of the Board are independent
non-executive directors in compliance with the UK Corporate Governance Code. The Company regards this as an appropriate board structure.
The Company notes the Financial Reporting Council’s recent announcement to amend the UK Corporate Governance Code to strengthen the
principle of boardroom diversity.
Role of the Board
The Board and management of EVRAZ aim to pursue objectives in the best interests of EVRAZ, its shareholders and other stakeholders, and
particularly to create long-term value for shareholders.
The EVRAZ Board is responsible for the following key aspects of governance and performance:
(cid:114)(cid:1) Financial and operational performance
(cid:114)(cid:1) Strategic direction
(cid:114)(cid:1) Major acquisitions and disposals
EVRAZ plc
Annual Report and Accounts 2011
63
(cid:114)(cid:1) Overall risk management
(cid:114)(cid:1) Capex and operational budgeting
(cid:114)(cid:1) Business planning
The Board has a formal schedule of matters specifically reserved for its decision. These include the following:
(cid:114)(cid:1) Responsibility for the Group’s long-term objectives and commercial strategy.
(cid:114)(cid:1) Responsibility for the overall management of the Group.
(cid:114)(cid:1) Review of performance in the light of the Group’s strategy, objectives, business plans and budgets and ensuring that any necessary action
is taken to deliver the required performance.
(cid:114)(cid:1) Changes relating to the Group’s management and control structure, capital structure and major changes to corporate structure.
(cid:114)(cid:1) Approval of Group policies and all circulars, prospectuses and listing particulars.
(cid:114)(cid:1) Approval of the Annual Report and accounts, results announcements and interim management statements.
(cid:114)(cid:1) Approval of the dividend policy and any significant changes in accounting policies or practices.
(cid:114)(cid:1) Approval of resolutions and corresponding documentation to be put forward to shareholders at a general meeting.
(cid:114)(cid:1) Ensuring maintenance of a sound system of internal control and risk management.
(cid:114)(cid:1) Changes and appointments to and removals from the Board and Board committees.
(cid:114)(cid:1) Appointment, re-appointment or removal of the external auditor.
(cid:114)(cid:1) Determining the remuneration policy for the directors, Company Secretary and key senior management and remuneration policy of the
non-executives subject to the articles of association and shareholder approval as appropriate.
(cid:114)(cid:1) Undertaking a formal and rigorous review annually of its own performance, that of its Committees and individual directors.
Chairman and Chief Executive
The Board determines the division of responsibilities between the Chairman and the Chief Executive Officer.
The Chairman’s principal responsibility is the effective running of the Board, ensuring that the Board as a whole plays a full and constructive part
in the development and determination of the Group’s strategy and overall commercial objectives. The Chief Executive Officer is responsible for
leading the Group’s operating performance and day-to-day management.
The main roles and responsibilities are outlined below:
Role of the Chairman
The Chairman’s key responsibilities include:
(cid:114)(cid:1) Presiding at all meetings of the shareholders and the Board and being the guardian of the Board’s decision-making processes.
(cid:114)(cid:1) Running the Board, including ensuring delegation of authority to executive directors and management and setting its agenda.
(cid:114)(cid:1) Ensuring that the Board receives accurate, timely and clear information on the Group’s performance and the issues, challenges and
opportunities facing the Group so that the Board takes sound decisions and promotes the success of the Group.
(cid:114)(cid:1) Ensuring that Board agendas take full account of the important, complex and contentious issues facing the Group and the concerns of all
Board members and encouraging active engagement by all members of the Board.
(cid:114)(cid:1) Proposing to the Board, in consultation with the Chief Executive Officer, Company Secretary and Committee Chairmen:
– A Schedule of Reserved Matters for the Board for its decision;
– Terms of Reference for each Board Committee; and
– Other Board policies and procedures.
(cid:114)(cid:1) Initiating succession planning in board appointments to retain and build an effective and complementary Board, and to facilitate the
appointment of effective and suitable members and Chairmen of board committees.
(cid:114)(cid:1) Ensuring that there is effective communication by the Group with its shareholders and ensuring that members of the Board develop
an understanding of the views of the major investors in the Group.
(cid:114)(cid:1) Ensuring there is a properly constructed induction programme for new directors.
(cid:114)(cid:1) Ensuring that the performance of the Board as a whole, its Committees, and individual directors is formally and rigorously evaluated at least
once a year.
(cid:114)(cid:1) Promoting the highest standards of integrity, probity and corporate governance throughout the Group and particularly at Board level.
Role of the Chief Executive Officer
The Chief Executive Officer’s principal responsibility is running the business of the Company and its subsidiaries.
The key responsibilities of the CEO include:
(cid:114)(cid:1) Proposing and developing the Group’s strategy and overall commercial objectives, which he does in close consultation with the Chairman and
the Board.
(cid:114)(cid:1) Implementing, with the executive team, the decisions of the Board and its Committees including those regarding an annual budget and
financial plans, and identification and execution of new business opportunities.
(cid:114)(cid:1) Ensuring that he/she maintains a dialogue with the Chairman on the important and strategic issues facing the Group, and proposing Board
agendas to the Chairman which reflect these.
(cid:114)(cid:1) Providing input to the Chairman and Company Secretary on appropriate changes to the Schedule of Reserved Matters for the Board and Terms
of Reference for each Board Committee.
(cid:114)(cid:1) Providing information and advice on succession planning to the Chairman, the Nominations Committee and other members of the Board,
particularly in respect of executive directors.
(cid:114)(cid:1) Progressing, in conjunction with the Chief Financial Officer and, where relevant, the Chairman, the communication programme with
shareholders.
(cid:114)(cid:1) Commenting on induction programmes for new directors and ensuring that appropriate management time is made available for the process.
(cid:114)(cid:1) Ensuring that the development needs of the executive directors and other senior management reporting to him/her are identified and met.
(cid:114)(cid:1) Ensuring that performance reviews are carried out at least once a year for each of the executive directors and providing input to the wider
Board evaluation process.
(cid:114)(cid:1) Promoting, and conducting the affairs of the Group with the highest standards of integrity, probity and corporate governance.
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EVRAZ plc
Annual Report and Accounts 2011
Corporate Governance Report (Continued)
Board Expertise
The Board has the appropriate skills and experience necessary to discharge its functions. Executive and non-executive directors have the
experience required to contribute meaningfully to the Board’s deliberations and resolutions. Full details of expertise and sector experience
are detailed in the Board of Directors section above.
Induction and Professional Development
The Chairman is responsible for ensuring that there is a properly constructed and timely induction programme for new directors upon joining
the Board. They have full access to a regular supply of financial, operational, strategic and regulatory information to help them discharge their
responsibilities. The Chairman’s duties also include ensuring that the directors continually update their skills and their knowledge of and
familiarity with the Company and the regular review and discussion with each director of their training and development needs.
Performance Evaluation
Since EVRAZ plc was incorporated in October 2011 and only four Board meetings took place between that date and 31 December 2011,
no formal performance evaluation was undertaken during 2011.
The Company intends to conduct regular performance evaluation of the Board going forward in line with the UK Corporate Governance Code.
Board Committees
The four principal committees of the Board are the Audit Committee, the Remuneration Committee, the Nominations Committee and the Health,
Safety and Environment Committee.
Prior to the incorporation of the Company in the UK in October 2011, the Audit Committee, the Remuneration Committee and the Health, Safety
and Environment Committee operated as committees of Evraz Group S.A. for the first ten months of 2011. The terms of reference for all
Committees of EVRAZ plc are available on the Company’s website: www.evraz.com.
Decisions on changes to the structure, size and composition of the Board including appointment of committee members and Chairmen are made
by the Board following recommendations from the Nominations Committee.
Alexander Izosimov was appointed as a member of the Remuneration Committee and the Nominations Committee of EVRAZ Board on
28 February 2012. Sir Michael Peat is no longer a member of the Remuneration Committee and has joined the Audit Committee. Eugene Shvidler
has been appointed to the Nominations Committee.
The Company has also established a Risk Committee which is an Executive Committee accountable to the Group CEO. Further information on the
activities of the Risk Committee can be found in the Risk Management section of the Corporate Governance report.
Audit Committee
The Audit Committee of EVRAZ plc was established on 14 October 2011 as a committee of the Company, as part of the listing process. Prior to
this the Audit Committee was a committee of Evraz Group S.A. On 14 October 2011 the Board approved new Terms of Reference for the
committee which are aligned with the principles of the UK Corporate Governance Code.
Members: Terry Robinson (Chairman), Duncan Baxter, Olga Pokrovskaya and Sir Michael Peat (appointed 28 February 2012).
Role of the Audit Committee
The Audit Committee has responsibility for reviewing EVRAZ’s financial statements and oversees EVRAZ’s relationship with external auditors.
The responsibilities of the Committee include:
(cid:114)(cid:1) Monitoring the integrity of the Company’s financial statements and annual and interim reports, preliminary statements, interim management
statements and other formal announcements relating to its financial performance.
(cid:114)(cid:1) Monitoring and reviewing the Group’s financial and accounting policies and practices including the effectiveness of management processes
and internal controls over financial reporting and operations.
(cid:114)(cid:1) Reviewing and keeping under review the effectiveness of the Internal Controls and Business Risk Management Systems.
(cid:114)(cid:1) Advising the Board on the Company’s risk exposure, risk appetite, tolerance and strategy with consideration as to the financial and economic
environment, and with these issues in mind, reviewing the company’s risk management process.
(cid:114)(cid:1) Reviewing the Company’s Group-wide whistle blowing facilities and the effectiveness of appropriate follow-up processes, and the Company’s
systems and controls for the prevention, detection, reporting and investigation of any incidents of bribery or fraud.
(cid:114)(cid:1) Monitoring and reviewing the effectiveness of the Company’s Internal Audit function, particularly in the context of the Company’s Business
Risk Management Systems.
(cid:114)(cid:1) Reviewing promptly all internal audit reports and management remediation action and timeframes.
(cid:114)(cid:1) Considering and making recommendations to the Board as to shareholders’ resolutions at the Company’s Annual General Meeting for the
appointment, re-appointment or removal of the Company’s external auditor.
(cid:114)(cid:1) Overseeing the selection process for a new external auditor for the Company.
(cid:114)(cid:1) Overseeing the company’s relationship with the external auditor including:
– Making recommendations to the Board as to the external auditor’s remuneration;
– Reviewing and approving non-audit fees; and
– Assessing annually the external auditors’ independence, expertise, effectiveness and objectivity taken as a whole.
(cid:114)(cid:1) Developing and implementing a policy for the supply of non-audit services.
EVRAZ plc
Annual Report and Accounts 2011
65
Meetings
The Audit Committee met five times as a committee of EVRAZ Group S.A. between 1 January 2011 and 14 October 2011 and once as a
committee of EVRAZ plc between 14 October 2011 and 31 December 2011. In addition, the Audit Committee met three times between
1 January 2012 and 20 April 2012. All members attended all three meetings in 2012 with the exception of Sir Michael Peat, who attended one out
of the three meetings. The Audit Committee meeting held on 20 April 2012 was attended via conference call by all members of the Committee.
Only members of the Committee have the right to attend Committee meetings. However, other individuals such as the Chairman of the Board,
Chief Executive Officer, Chief Financial Officer, Company Secretary, the head and members of the Internal Audit Department and members of the
finance function may be invited to attend all or part of any meeting as and when appropriate.
Activities in 2011
The Committee’s principal activities during 2011 including the activities of both Evraz Group S.A. Audit Committee and EVRAZ plc Audit
Committee were:
Financial Reporting
(cid:114)(cid:1) Considering the issues and financial reporting timelines and processes relating to the Group and reporting obligations following the primary
listing of EVRAZ plc.
(cid:114)(cid:1) Considering matters relating to the Committee’s recommendation to the Board relating to annual Financial Statements for the year ended
December 2010 and the audited half year statements as of June 2011, including consideration and testing:
– The Going Concern review;
– The Impairment review of operating assets and goodwill; and
– Other significant accounting judgements and management estimates.
(cid:114)(cid:1) Receiving reports from the external auditors on matters relating to the annual financial statements, including the letter of representation
which were carefully reviewed and discussed with the external auditors.
(cid:114)(cid:1) Post the finalisation of the Financial Statements for the year to December 2010, reviewing and discussing with management and the external
auditors the Management Letter.
(cid:114)(cid:1) Reviewing Evraz Group S.A.’s MD&A, Preliminary and Results Press statements and the full year, December 2010 and half year, June 2011
and the Investor presentations at each reporting date.
(cid:114)(cid:1) Similarly considering matters relating to the Committee’s review and recommendation to the Board with regard to EVRAZ plc’s unaudited
Financial Statements and, the inclusion thereof, in the unaudited Preliminary Results Statement for the year to December 2011, together with
reviewing the draft 2011 Analysts’ presentation. In addition to considering and testing the Impairment review and the significant accounting
judgements and management estimates, the Audit Committee, as a result of the uncertainty and instability of the current economic climate
considered various sensitized group cash flow models, together with a detailed review of the Group’s borrowing covenants. As a consequence,
the Audit Committee reported to the Company’s directors that after their due and careful consideration and approval, it was appropriate that
there was a reasonable expectation that the Group had adequate liquidity and resources to support the going concern Basis of Preparation of
the Financial Statements.
Since 31 December 2011, the Audit Committee’s activities were:
(cid:114)(cid:1) Reviewing the Company’s 2011 Annual Report, its Financial Statements, operating and financial review, Directors’ Report and other reports
for consistency with the Financial Statements and regulatory requirements, and recommending the Annual Report for the approval of the
Company’s directors.
Risk Management
(cid:114)(cid:1) Reviewing the Group’s key risks as detailed and evaluated in the Group’s risk register together with the appropriateness of the scope and
nature of the management’s agreed risk mitigating actions.
External Auditors
(cid:114)(cid:1) Reviewing the external auditor’s terms, independence and scope of engagement and the external audit fee.
Internal Audit
(cid:114)(cid:1) Reviewing and approving the restated Group Internal Audit Charter.
(cid:114)(cid:1) Reviewing the key issues of internal audit and agreeing on the implementation of a system of self-assurance.
(cid:114)(cid:1) Considering the half yearly detailed internal audit reports, including whistle blowing activity.
(cid:114)(cid:1) Considering the half yearly fraud and security reports.
(cid:114)(cid:1) Considering an Internal audit report of the Russian Federation supply chain controls and appropriate remediation action.
Additional issues
(cid:114)(cid:1) Reviewing the listing documents for EVRAZ plc.
(cid:114)(cid:1) Reviewing all related party transactions for the 2010 year end and for 2011 half year.
(cid:114)(cid:1) Reviewing the Long Form Report, the Working Capital Report and the report on financial reporting procedures, prepared by the external auditor
as a consequence of the additional financial due diligence for the Company’s primary listing on the London Stock Exchange.
(cid:114)(cid:1) Making recommendations for the Company’s management to consider:
– The appointment of an in-house Competent Person to keep under review and report on the Company’s significant mining reserves and
resources;
– To set in hand processes to keep under review the parameters for stress testing the Company’s liquidity model.
The Committee met separately with the external auditors, EVRAZ management and internal audit on a regular basis for individual discussion.
In addition, the Committee has invited to meetings the Group’s Head of Accounting and Controlling Directorate and members of the financial
accounting team, the Group CEO, the Senior Vice President and CFO of the International Division, Vice President for IT as well as members
of the internal audit team.
The Committee Chairman has held individual discussions with a significant investing institution concerning corporate governance in general,
risk management and the operation of the Audit Committee.
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EVRAZ plc
Annual Report and Accounts 2011
Corporate Governance Report (Continued)
Non-Audit Services
As reported in previous years, the Group engages accountancy firms for due diligence work in connection with acquisitions and capital market
transactions and for tax advice. Where such services are provided by the external auditors, at the discretion of management, the Committee has
agreed fee limits for the engagement of non-audit services. The limit for such management discretion is for non-audit fees of US$25,000 or less
than US$100,000 in aggregate during the financial year.
In instances where these limits would be exceeded, on the request of management, prior approval to such engagements is required together with
the detail and scope of such engagement mandates and corresponding fees. Such approval is given after proper enquiry in the first instance by the
Audit Committee Chairman and then by subsequent Audit Committee approval. Generally non-audit engagements are subject to a tender process.
The Committee has recorded with management that it is uncomfortable with the current level of non-audit fees, particularly in comparison with
the audit fee. The 2011 audit fee has been increased on a one-off basis by the interim audit connected with the Company’s primary listing.
Similarly the 2011 non-audit fee has been bolstered by significant capital market engagements relating to the Group’s primary listing on the
London Stock Exchange, such fees being the normal responsibility of a Company’s external auditor. While the Audit Committee does not believe
the independence of the external audit is compromised, if engagement of the external auditors for consultative work continues at the 2011 level,
there is a danger that the question of independence of the external advisors will increase, in perception if not in reality.
The cause of the increase is that as part of the Group’s Project Lean, the external auditor is engaged on a number of separate productivity
initiatives and the key issue driving the level of non-audit fees is the scarcity within the CIS of alternative economic and qualified consultants.
The Audit Committee has requested management to investigate alternative consultative processes.
Breakdown of Audit and Non-Audit Fees
Assurance services
Audit of the parent Company of the Group
Audit of the subsidiaries
Total assurance services
Other services
Services in connection with capital market transactions
Other non-audit services not covered above
Total other services
Grand total
2011
US$ million
2010
US$ million
2009
US$ million
4
7
11
3
2
5
2
6
8
1
1
2
16
10
2
5
7
–
–
–
7
Remuneration Committee
The Remuneration Committee of EVRAZ plc was established on 14 October 2011 as a committee of the Company, as part of the listing process.
Prior to this the Remuneration Committee was a committee of Evraz Group S.A. On 14 October 2011 the Board approved new Terms of Reference
for the committee, which are aligned with the principles of the UK Corporate Governance Code.
Members: Duncan Baxter (Chairman), Alexander Abramov (Chairman of the Board), Karl Gruber, Sir Michael Peat and Eugene Tenenbaum.
On 28 February 2012 the following changes occurred in the composition of the Remuneration Committee: (a) Sir Michael Peat left the
Remuneration Committee and was appointed to the Audit Committee of the Group; and (b) Alexander Izosimov was appointed as a member.
Role of the Remuneration Committee
The Remuneration Committee makes recommendations to the Board on management compensation, as well as on the remuneration packages
of the Chairman and the Executive Director.
No directors are involved in deciding their own remuneration. The Committee may invite other individuals to attend such as the Chief Executive
Officer and the Head of Human Resources and external advisers for all or part of any Committee meeting as and when appropriate and
necessary.
Responsibilities of the Remuneration Committee are:
(cid:114)(cid:1) Determining and agreeing with the Board the framework or broad policy for the remuneration of the Chairman of the Board, the Company’s
Chief Executive Officer, the Company Secretary and key senior management and recommend non-executive directors’ remuneration.
(cid:114)(cid:1) Taking into account all factors which it deems necessary to determine such framework or policy including all relevant legal and regulatory
requirements, the provisions and recommendations of the UK Corporate Governance Code and associated guidance.
(cid:114)(cid:1) Reviewing and taking into account the remuneration trends across the Group when setting remuneration policy for directors.
(cid:114)(cid:1) Regularly reviewing the ongoing appropriateness and relevance of the remuneration policy.
(cid:114)(cid:1) Determining the total individual remuneration package of the Chairman of the Board, the Company Secretary and key senior management,
including pension rights, bonuses, benefits in kind, incentive payments and share options or other share awards within the terms of the
agreed policy and in consultation with the Chairman and/or Chief Executive Officer.
(cid:114)(cid:1) Approving awards for participants where existing share incentive plans are in place.
(cid:114)(cid:1) Reviewing and approving any compensation payable to executive directors and senior executives.
(cid:114)(cid:1) Overseeing any major changes in employee benefit structures throughout the Group.
EVRAZ plc
Annual Report and Accounts 2011
67
Activities in 2011
During 2011, the Remuneration Committee of Evraz Group S.A. met twice. The purpose of the meetings was to consider and to make
recommendations to the Board on management compensation, as well as the remuneration packages of the Chairman and the Executive Director.
For the Remuneration Report please refer to page 70.
Nominations Committee
The Nominations Committee was established on 14 October 2011 prior to the Company’s admission to trading on the London Stock Exchange’s
main market.
Members: Sir Michael Peat (Chairman), Alexander Abramov, Terry Robinson, Alexander Izosimov (appointed 28 February 2012), and Eugene
Shvidler (appointed 28 February 2012).
Role of the Nominations Committee
The role of the Nominations Committee is to advise the Board on its composition, making recommendations with respect to addition to or
replacement of Directors when appropriate.
Responsibilities of the Nominations Committee are as follows:
(cid:114)(cid:1) Reviewing regularly the structure, size and composition of the Board and making recommendations to the Board on any appropriate changes.
(cid:114)(cid:1) Identifying and nominating, for the Board’s approval, suitable candidates to fill any vacancies for non-executive and, with the assistance of the
Chief Executive, executive directors.
(cid:114)(cid:1) Planning for the orderly succession of directors to the Board.
(cid:114)(cid:1) Recommending to the Board the membership and chairmanship of the Audit, Remuneration, and Health, Safety and Environmental
committees.
(cid:114)(cid:1) Overseeing senior management development and succession plans to ensure that there is continuity of appropriate executive resource
immediately below Board level.
Meetings
There were no appointments to the Board between the admission of EVRAZ plc to the Main Market of the London Stock Exchange and
31 December 2011, and accordingly the Nominations Committee did not meet during 2011. The Nominations Committee’s objectives
for 2012 are to:
(cid:114)(cid:1) review the plan for the retirement by rotation and re-election of directors of EVRAZ and the framework for Board succession planning for 2012
to 2013; and
(cid:114)(cid:1) enhance the knowledge and skills of the Board through the addition of new, suitably diverse directors.
Health, Safety and Environmental Committee
The Health, Safety and Environmental Committee of EVRAZ plc was established on 14 October 2011 as a committee of the Company, as part
of the listing process. Prior to this the Health, Safety and Environmental Committee was a committee of Evraz Group S.A. The Evraz Board on
14 October 2011 approved new Terms of Reference for the committee, which are aligned with the principles of the UK Corporate Governance
Code and Karl Gruber was elected Chairman of the Committee. The previous Chairman was Gordon Toll who resigned from the Board of Directors
of Evraz Group S.A. in May 2011.
Members: Karl Gruber (Chairman), Alexander Frolov and Terry Robinson.
Role of the Health, Safety and Environmental Committee
The Health, Safety and Environment Committee leads the Board’s thinking on health and safety issues, as well as maintaining responsibility for
environmental, security and local community matters.
Responsibilities of the Health, Safety and Environment Committee are:
(cid:114)(cid:1) Assessing the performance of the Group with regard to the impact of health, safety, environmental and community relations decisions and
actions upon employees, communities and other third parties and on the reputation of the Group.
(cid:114)(cid:1) On behalf of the Board, receiving reports from management concerning all fatalities and serious accidents within the Group and actions taken
by management as a result of such fatalities or serious accidents.
(cid:114)(cid:1) Reviewing the results of any independent audits of the Group’s performance in regard to environmental, health, safety and community
relations matters, review any strategies and action plans developed by management in response to issues raised and, where appropriate
make recommendations to the Board concerning the same.
(cid:114)(cid:1) Making whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
(cid:114)(cid:1) Producing a report on its activities to be included in the Company’s Annual Report.
Meetings
During 2011, the Committee met twice.
Activities in 2011
(cid:114)(cid:1) The Committee approved the HSE Policy and Key Safety Requirement for the Group (which was approved by the Board in March 2011).
(cid:114)(cid:1) The Committee reviewed the performance indicators and activities of the Company with regard to Health, Safety and Environment.
(cid:114)(cid:1) The Committee reviewed the Group’s key HSE risks as detailed and evaluated in the Group’s risk register together with the appropriateness
of the scope and nature of the management’s agreed risk mitigating actions.
(cid:114)(cid:1) The Committee determined the strategic initiatives for 2012.
(cid:114)(cid:1) The Committee approved the approach with regard to selection of a corporate consultant and auditor for continued implementation of the
safety systems ISO 14001 and OHSAS 18001.
(cid:114)(cid:1) Presentation of HSE Group statistics and highlights for the year.
(cid:114)(cid:1) The Committee approached the HSE strategic metrics on 30 November 2011.
(cid:114)(cid:1) HSE Targets for 2012 were approved on 30 November 2011 in the following areas:
– Health and safety;
– Environment; and
– Ongoing safety projects.
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68
EVRAZ plc
Annual Report and Accounts 2011
Corporate Governance Report (Continued)
Risk Management and Internal Control
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.
As a structured and coordinated Group-wide governance approach, the Group’s executives have created an enterprise risk management process
(ERM) designed to identify, quantify, respond to and monitor the consequences of an executive agreed risk schedule that encompasses both
internal and external critical risks. This process is consistent with the listing rules published by the UK Financial Services Authority and is based
on the Turnbull Guidance on Internal Control.
The ERM process is fully supported by the 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.
The Group’s executive management is responsible for 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.
We apply the following core principles to the identification, monitoring and management of risk throughout the organisation:
(cid:114)(cid:1) Risks are identified, documented, assessed, monitored, tested and the risk profile communicated to the relevant risk management team on
a regular basis.
(cid:114)(cid:1) Business management and the risk management team are primarily responsible for ERM and accountable for all risks assumed in their
operations.
(cid:114)(cid:1) 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.
(cid:114)(cid:1) All acquired businesses are brought within the Group’s system of internal control as soon as practicable. OAO Raspadskaya, in which the
Group indirectly holds a 40% interest, is not within the Group’s system of internal control.
Risk Committee
The Risk Committee was established on 14 October 2011 prior to the Company’s admission to trading on the London Stock Exchange’s main
market and the terms of reference were approved by the Risk Committee on 30 November 2011.
The Chairman of the Audit Committee, Terry Robinson, a non-executive director, also chairs the Risk Committee. Further members of the Risk
Committee include the relevant senior and executive management of EVRAZ plc with accountability for delivering appropriate business and
operation risk management mitigation actions as part of their functional responsibility. Furthermore, the Committee invites Head of Group
Internal Audit, members of senior management and Audit Committee members to attend all its meetings.
The Committee meets at least twice a year at appropriate times and at other times as required.
The Committee’s role is one of oversight and supervision of the Group’s risk profile and risk framework. It is tasked with reviewing the overall
risk profile and resulting Risk Register of the Group for completeness and monitoring the related risk management actions and risk event
management ownership within the divisions, functions and at corporate level.
Responsibilities of the Risk Committee include:
(cid:114)(cid:1) Reviewing annually the Group’s internal control and assurance framework to satisfy itself on the design and completeness of the framework
relative to the Group’s activities and risk profile;
(cid:114)(cid:1) Considering and recommending to the Board for approval via the Group Chief Executive and/or the Committee chairman parameters for the
Group’s risk appetite;
(cid:114)(cid:1) Reviewing and monitoring the Group’s risk profile and the appropriateness of the Group’s risk measurement systems;
(cid:114)(cid:1) Reviewing the completeness of the Group’s Principal Risk Categories and appropriateness of the supporting documentation and approving the
creation of new Key Risk Categories in the Risk Register; and
(cid:114)(cid:1) Receiving and reviewing reports that assess the nature and extent of risks facing the Group.
During 2011, the Risk Committee reviewed and updated the Group’s risk matrix together with related risk mitigating actions and delivered its
proposals to the Board 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.
Additionally, regional executive risk committees were established in North America and South Africa to enhance the risk identification process
using a bottom up approach to complement the top down approach which was used for initial risk identification and assessment and preparation
of the Group risk register in 2011.
The Committee also reviewed plans to extend the risk management process to the entity-level during 2012.
Controls
EVRAZ’s internal control systems have been designed to manage rather than eliminate the risk of failure to achieve business objectives and
provide reasonable but not absolute assurance against material misstatement or loss. 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. The process enables the Board and the Audit Committee to review the effectiveness of the system
of internal controls in place within the Group to manage significant business, operational and financial risks (including, environmental, safety and
ethical risks) throughout the year.
EVRAZ plc
Annual Report and Accounts 2011
69
The processes of preparation of Consolidated Financial Statements are designed to prevent any material misstatements and present such
Financial Statements fairly in accordance with the Group’s accounting policies. The use of our standard accounting manual and reporting pack
by our finance teams throughout the group ensures that transactions are recognised and measured in accordance with prescribed accounting
policies and that information is gathered and presented in a consistent way that facilitates the production of the Consolidated Financial
Statements. The Audit Committee considers all significant judgements and estimates made in the preparation of the Financial Statements
for the period and reviews and analyses the Annual Report and Accounts. Each Financial Statements are required to be approved by the Audit
Committee and the Company’s Board.
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 programmes thereby ensuring that the Group’s ongoing internal control process is adequate and effective.
Internal Audit
Internal audit is an independent appraisal function established by the Board to evaluate the adequacy and effectiveness of controls, systems and
procedures, within EVRAZ plc, in order to reduce business risks to an acceptable level in a cost effective manner.
The latest version of the Internal Audit Charter of EVRAZ plc was approved by the Board on 13 December 2011. The role of internal audit in the
Group is to provide an independent, objective, innovative, responsive and effective value-added internal audit service through a systematic and
disciplined approach by assisting management in controlling risks, monitoring compliance, improving the efficiency and effectiveness of internal
control systems and governance processes.
In 2011, EVRAZ’s Head of Internal Audit 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 during the year 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 predominantly risk-based and in 2011 incorporated particular assignments and priorities agreed by the
Audit Committee. Further, the scope of the 2011 annual internal audit plan included a review of the internal control systems of newly acquired
trading 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 2011 the internal audit function worked in cooperation with Ernst & Young, EVRAZ’s external auditor, in conducting their respective
responsibilities for the Group. In 2011 KPMG conducted a quality assessment review of EVRAZ’s internal audit function in Russian Federation
and Ukraine, and the Institute of Internal Auditors (the IIA) in US and Canada, to attest the conformity of EVRAZ’s internal audit activity with the
International Standards for the Professional Practice of Internal auditing developed by the Institute of Internal Auditors as well as best practice in
internal auditing. Based on this review KPMG and the IIA issued reports with the assessment of the respective EVRAZ’s Internal audit activities.
Recommendations of these reports contributed to further refinement of the function.
Further information regarding the Company’s internal control processes can be found on the Company’s website.
Conflicts of Interest
Alexander Abramov is the Chairman of the Company and Alexander Frolov is the CEO. Olga Pokrovskaya, Eugene Shvidler, Alexander Abramov
and Alexander Frolov have been appointed to the Board of Directors of the Company by the major shareholder pursuant to the terms of the
relationship agreement. The indirect and direct shareholdings of these Directors in the share capital of the Company are set out in the Directors’
Report. No other conflicts of interests exist between the private interests of the Directors or Members of Senior Management and their duties to
the Company.
Relations with Shareholders
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 210 individual/group meetings,
conferences and other public events involving the investment community took place during 2011.
The senior independent director is available to shareholders if they have concerns that have not been resolved by contact through the normal
channels of chairman, chief executive or finance director or for which such contact is inappropriate.
Constructive use of Annual General Meeting
The AGM is an opportunity for shareholders to communicate with the Board and the Board welcomes their participation. The Chairman and the
respective Chairmen of the respective Committees will be present at the AGM to answer shareholders’ questions. The next AGM will be held
on 18 June 2012.
Details of the resolutions to be proposed at the next AGM can be found in the Notice of AGM. The Board has determined that voting on all
resolutions at the AGM will be by way of a poll. Each member present in person or by proxy has one vote for each fully paid ordinary share
of which she/he is a holder.
Information Pursuant to the Takeovers Directive
The Company has provided the additional information required by DTR 7.2.7 (directors interests in shares; appointment and replacement
of directors; powers of the directors; restrictions on voting rights and rights regarding control of the Company) in the Directors’ Report.
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EVRAZ plc
Annual Report and Accounts 2011
Remuneration Report
This report has been prepared in accordance with The Companies Act 2006, Schedule 8 of the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008. It also meets the relevant requirements of the Listing Rules of the Financial Services Authority and
describes how the Board has applied the principles of good governance as set out in the UK Corporate Governance Code issued by the Financial
Reporting Council in June 2010.
The Group’s auditors, Ernst & Young LLP, have audited the information contained in the tables set out in the non-executive director Remuneration
and executive director emoluments sections below.
Members of the Remuneration Committee
The EVRAZ plc Remuneration Committee was constituted and appointed by the Board on 14 October 2011, superseding the Evraz Group S.A.
Remuneration Committee, and the members comprised the following non-executive directors during the period to 31 December 2011:
(cid:114)(cid:1) Duncan Baxter (Committee Chairman);
(cid:114)(cid:1) Alexander Abramov;
(cid:114)(cid:1) Eugene Tenenbaum;
(cid:114)(cid:1) Karl Gruber;
(cid:114)(cid:1) Sir Michael Peat
No directors are involved in deciding their own remuneration. The Committee may invite other individuals to attend Committee meetings, in
particular the Chief Executive Officer, the Head of Human Resources and external advisers for all or part of any Committee meeting as and
when appropriate and necessary.
Role of the Remuneration Committee
The Remuneration Committee is a formal committee of the Board and can operate with a quorum of three Committee members. It is operated
according to its Terms of Reference, a copy of which can be found on the Company’s website.
The main responsibilities of the Remuneration Committee are:
(cid:114)(cid:1) To determine and agree with the Board the framework or policy for the remuneration of the Chairman of the Board, the Company’s Chief
Executive Officer, the Company Secretary and key senior management and recommend non-executive directors’ remuneration.
(cid:114)(cid:1) To take into account all factors which it deems necessary to determine such framework or policy, including all relevant legal and regulatory
requirements, the provisions and recommendations of the UK Corporate Governance Code and associated guidance.
(cid:114)(cid:1) To review and take into account the remuneration trends across the Group when setting remuneration policy for directors.
(cid:114)(cid:1) To review regularly the ongoing appropriateness and relevance of the remuneration policy.
(cid:114)(cid:1) To determine the total individual remuneration package of the Chairman of the Board, the Company Secretary and key senior management,
including pension rights, bonuses, benefits in kind, incentive payments and share options or other share awards within the terms of the
agreed policy and in consultation with the Committee Chairman and/or Chief Executive Officer.
(cid:114)(cid:1) To approve awards for participants where existing share incentive plans are in place.
(cid:114)(cid:1) To review and approve any compensation payable to executive directors and senior executives.
(cid:114)(cid:1) To oversee any major changes in employee benefits structures throughout the Group.
During 2011, the Evraz Group S.A. Remuneration Committee met twice. The purpose of the meetings was to consider and to make
recommendations to the Board on management compensation, as well as the remuneration packages of the Chairman and the Executive Director.
Remuneration Policy
The Chairman of the Remuneration Committee, in consultation with the Chairman of the Board and CEO, proposes the level of fees at a
Committee meeting and, subject to approval, the proposal is put forward to the Board for consideration. Subject to Board approval the proposed
fees are put to shareholders at the AGM.
The Company linked remuneration policy with Company strategy through:
(cid:114)(cid:1) Alignment to Company strategy achieved through the operation of a performance related bonus which is based on the achievement of
Company KPIs.
(cid:114)(cid:1) Measuring achievement for bonus against three separate KPIs (EBITDA, relative share price performance and return on assets) ensures focus
is spread across different aspects of Company performance, necessary for long-term success.
(cid:114)(cid:1) Use of relative measures (share price and ROA) to ensure focus is on driving performance compared to the market.
(cid:114)(cid:1) High level of executive director and key management shareholding to promote alignment with creation of shareholder value.
(cid:114)(cid:1) Fixed remuneration to be sufficient to attract and retain world-class talent.
Details of the executive director and non-executive director remuneration policies are given in the sections that follow. The full text of the
Remuneration Policy can be found on the Company’s website.
Currently none of the directors receive any fees paid in shares of the Company and they are not entitled to participate in the Group pension plan
or long-term incentive schemes.
Executive Director’s Remuneration
Mr. Alexander Frolov, as the Chief Executive Officer (CEO) is entitled to a base salary, a performance related bonus and provision of benefits.
As a Member of the Board of Directors he is also entitled to the director’s fee (US$150,000) and any applicable fees for participation in the work
of the Board committees as laid out in the section on non-executive director remuneration. Alexander Frolov’s current shareholding (12.32% of
issued share capital) provides alignment to the delivery of long-term growth in shareholder value. As such, the CEO does not participate in any
long-term incentive plan. However, the Remuneration Committee will review this on an ongoing basis.
EVRAZ plc
Annual Report and Accounts 2011
71
The current balance between fixed and variable pay for the executive director means, at target performance, 50% of remuneration is performance-
related, rising to 66.7% for the achievement of maximum performance. Bonus levels are based on the CEO’s base salary as approved by the
Remuneration Committee on 23 May 2008. The pay and conditions of employees across the group (increasing rate, management remuneration
level) have been taken into account when setting executive director remuneration. The CEO did not hold any external appointments during the year.
Base Salary
The CEO did not receive an increase in base salary in 2011. From 1 March 2012, the CEO salary will be set at a level which was originally
approved by the Remuneration Committee on 23 May 2008, giving a base salary of US$ 2,500,000 (which includes, for the avoidance of doubt,
the directors’ fees, the fees that are paid for committees’ membership and salary in EVRAZ plc subsidiaries). Due to the challenging economic
environment at that time, the CEO voluntarily accepted a decrease in salary and deferred the approved increase in base salary to a later date.
The CEO has waived the right to receive any catch-up payments forgone between 2008 to 2012.
Annual Bonus
The CEO is eligible to participate in a performance-related bonus which is subject to the agreement of the Remuneration Committee and approval
by the Board of Directors. The bonus is linked to the achievement of performance conditions based on predetermined targets set by the Board of
Directors. The target bonus is 100% of base salary with a maximum potential of up to 200% of base salary. The calculation of the bonus is based
on the CEO’s base salary as approved by the Remuneration Committee on 23 May 2008.
The bonus is linked to corporate performance. Three indicators are taken into account when determining the CEO’s annual bonus: EBITDA
(30% weighting), Return on Assets (40% weighting) and Relative Share Price Performance (30% weighting).
Due to the challenging economic environment, the CEO voluntarily deferred his annual bonus payment for the year 2010 in the amount
of US$ 1,340,000. The Remuneration Committee will determine when this payment is made but it is currently expected that part or all
of this will be made in 2012. The extent to which any payments are made in 2012 will be disclosed in the 2012 Annual Report.
For 2011, the CEO has been awarded a bonus of 22.6% of base salary (as noted above, this is calculated by reference to the CEO’s base salary
as approved in 2008). It is expected that this will be also paid in 2012.
Pension and Benefits
The CEO does not participate in any pension plans. Benefits principally consist of a car allowance and private healthcare.
Executive Director’s Remuneration
Key elements of the CEO’s remuneration package are set out below. Further details are contained in the audited table on page 73.
Alexander V. Frolov
Salary1
Director fee2
Bonus
2011
(US$, ‘000)
2010
(US$, ‘000)
817
155
565
790
168
1,3403
1 There was no increase in salary in 2011. The difference is due to exchange rate fluctuations as the CEO’s salary is denominated in roubles.
2 Director’s fee also includes fee for HSE committee membership (pro rata working days).
3 Payment of this bonus was deferred (see above).
Executive Director’s Service Contract
The CEO has a service contract with a subsidiary of EVRAZ Plc.
The terms of the CEO’s service contract are summarised below:
Executive directors
Alexander V. Frolov
Date of contract
Notice period (months)
31 December 2010
N/A*
* The service contract does not provide for any specific notice period and therefore, in the event of termination, the applicable notice period will be as provided for in the
Russian labour code (where the termination is at the company’s initiative the entitlement to pay in lieu of notice is to 3 months’ base salary). Other than entitlement to
notice and a payment in lieu of notice, the CEO will not be entitled to compensation on termination of his contract.
Non-Executive Director Remuneration
The Company’s policy on non-executive director remuneration is based on the following key principles:
(cid:114)(cid:1) Remuneration should be:
–
–
–
–
sufficient to attract and retain world-class non-executive talent;
consistent with recognised best practice standards for non-executive director remuneration;
in the form of cash fees, but with the flexibility to forgo all or part of such fees (after deduction of applicable income tax
and social security contributions) to acquire shares in the Company should the non-executive director so wish; and
set by reference to the responsibilities taken on by the non-executives in chairing the Board and its committees.
(cid:114)(cid:1) Non-executive directors may not participate in the Company’s share incentive schemes or pension arrangements.
A director’s remuneration consists of an annual fee of US$150,000 and a fee 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). There was no
increase in fees for 2011 and the fees for all non-executive directors will remain unchanged for 2012 except for the Chairman. The fee for the
Chairman of the Board was increased at a Board meeting of 28 February 2012 and shall be US$750,000 from the 1 March 2012 (this fee
includes, for the avoidance of doubt, the directors fees and the fees that are paid for committees’ membership). The fees payable for the
chairmanship of a committee include the membership fee, and any director elected chairman of more than one committee is only entitled to
receive fees in respect of one chairmanship.
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EVRAZ plc
Annual Report and Accounts 2011
Remuneration Report (Continued)
In addition the Company contributes an annual amount of US$ 30,000 towards secretarial and administrative expenses of non-executive directors.
Non-executive remuneration payable in respect of 2011 and 2010 is given below (audited information):
Non-Executive Director
Alexander G. Abramov
Duncan Baxter
Karl Gruber
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Otari Arshba2
Gennady Bogolyubov3
James Campbell4
Philippe Delaunois5
Gordon Toll6
2011
(USD, ‘000)
Admin
–
19
30
6
–
30
–
–
–
–
–
–
Total
fees1
179
110
224
48
174
279
150
174
–
–
–
–
Total
179
129
254
54
174
309
150
174
–
–
–
–
Total
fees
174
–
131
–
174
255
162
174
–
57
93
83
75
11
86
119
2010
(USD, ‘000)
Admin
–
–
19
–
–
30
–
–
–
13
13
19
Total
174
–
150
–
174
285
162
174
–
57
106
96
138
1 Total fees include annual fees and fees for committee membership or chairmanship (pro rata working days).
2 Mr. Arshba, as a member of the Russian Parliament, was not entitled to any remuneration.
3, 4, 5 Resigned on 17 May 2010
6 Resigned on 16 May 2010
Directors’ Contracts
Letter of Appointment
Each non-executive director has a Letter of Appointment setting out the terms and conditions covering their appointment. They are required to
stand for election at the first Annual General Meeting following their appointment and, subject to the outcome of the AGM, the appointment is for
a further one year term. Over and above this arrangement, the appointment may be terminated by the Director giving three months’ notice or in
accordance with the Articles of Association.
The Board supports the recommendation in the UK Corporate Governance Code that all directors should be subject to annual re-appointment and
accordingly each non-executive director will stand for re-election at the AGM on 18 June 2012.
The key terms of the non-executive directors’ appointment letters are summarised below:
Non-Executive Directors
Alexander G. Abramov
Duncan Baxter
Karl Gruber
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Share Ownership by the Board of Directors
As at 31 December 2011, the following directors had beneficial interests in EVRAZ shares:
Directors
Alexander Abramov
Alexander Frolov
Eugene Shvidler
There have been no changes in the figures above between 31 December and 24 April 2012.
Date of contract
Notice period (months)
14 October 2011
14 October 2011
14 October 2011
14 October 2011
14 October 2011
14 October 2011
14 October 2011
14 October 2011
3 month
3 month
3 month
3 month
3 month
3 month
3 month
3 month
Total holding,
Ordinary shares, %
24.64%
12.32%
3.50%
EVRAZ plc
Annual Report and Accounts 2011
73
Performance Graph
The following graph shows the Company’s performance compared to the performance of the FTSE 100 Index since admission to the premium
listing segment of the London Stock Exchange on 7 November 2011, measured by total shareholder return. The FTSE 100 Index has been
selected as an appropriate benchmark as it is a broad based index to which the Company belongs and which relates to the London Stock
Exchange.
Total Shareholder Return Performance1
Nov 2011–Dec 2011
£
120
110
100
90
7 Nov 2011
EVRAZ
FTSE 100
1 This graph shows value of hypothetical £100 holding.
30 Dec 2011
Executive Director Emoluments (Audited Information)
The remuneration payable to the executive director in respect of the year is set out below in US dollars (‘000):
Salary
817
Director
fees
155
Annual
bonus
565
Benefits1
Total
2011
Total
2010
130
1,667
2,298
USD, ‘000
Alexander V. Frolov
1 This includes payment for vacations entitlement not used.
Signed on behalf of the Board of Directors
Duncan Baxter
Chairman of the Remuneration Committee
EVRAZ plc
24 April 2012
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EVRAZ plc
Annual Report and Accounts 2011
Directors’ Report
Principal Activities
EVRAZ plc 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. EVRAZ plc has a Premium Listing on the London Stock Exchange. Additional information on the
Group’s operations during the year and the information that fulfils the requirements of the Business Review is provided in the Business Overview,
Strategy, Operating Review, Sustainability, Financial Review and Governance sections of this document, which are deemed to form part of this
report by reference.
Group Reorganisation
In 2011 EVRAZ plc became a new parent company of the Group. EVRAZ plc, registered in the United Kingdom, is a public company limited by
shares. The Company’s shares are traded on the London Stock Exchange’s main market for listed securities and included in the FTSE 100 Index.
The listing of GDRs of Evraz Group S.A. on the London Stock Exchange was cancelled in February 2012. More details on the Group reorganisation
are provided in Note 20 of the Consolidated Financial Statements on page 129.
Sustainable Development
The Sustainability section of this report focuses on the health and safety, environmental and employment performance of the Company’s
operations, and outlines the Company’s core values and commitment to the principles of sustainable development and development of
community relations programmes.
Going Concern
The financial position and performance of the Group and its cash flows are set out in the Financial Review section of the report on pages 52 to 55.
The Directors have considered the Group’s debt maturity and cash flow projections and an analysis of projected debt covenants compliance
for the period to the end of 30 June 2013. The Board is satisfied that the Group’s forecasts and projections, taking into account reasonably
possible changes in trading performance, show that the Group will continue in operation for the foreseeable future and has neither the intention
nor the need to liquidate or materially curtail the scale of its operations.
For this reason the Group continues to adopt the going concern basis in preparing its financial statements. More details are provided in Note 1
of the Consolidated Financial Statements on page 91 including further information regarding certain risks related to projected debt covenant
compliance.
Results and Dividends
On 10 October 2011, the EVRAZ Board approved a new dividend policy. Under the revised dividend policy, EVRAZ is targeting a long-term average
dividend payout ratio of at least 25% of the consolidated net profit calculated in accordance with IFRS and adjusted for non-recurring items.
Dividends are expected to be paid semi-annually. In addition to the regular dividend payments, the Company may also employ special dividends
from time to time at the discretion of the EVRAZ Board to return surplus capital to shareholders.
On the back of our strong financial results, during 2011 Evraz Group S.A. made its first dividend payment since 2008, paying an interim dividend
of US$0.60 per share/US$0.20 per GDR and a special dividend of US$2.70 per share/US$0.90 per GDR. EVRAZ plc has also declared a cash
final dividend of US$0.17 per share. This gives a total ordinary dividend for 2011 of US$317 million, which is approximately 50% of net profit
adjusted for non-recurring items.
Shareholders will be asked to approve the dividend at the Annual General Meeting to be held on 18 June 2012 for payment on 9 July 2012 to
ordinary shareholders on the register on 8 June 2012.
Fixed Assets
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.
The last valuation of land was determined as at 31 March 2010 by an independent professionally qualified valuer. At that time, the market value
of land was 1.7 times higher than its carrying value. At 31 December 2011, the carrying value of land amounted to US$187 million. In the opinion
of the directors, the total market value of land has not decreased significantly since the last valuation.
It is not practicable to estimate the market value of buildings and mineral reserves as at 31 December 2011.
Overseas Branches
EVRAZ does not have any branches. The Company does, however, have a controlling interest in Evraz Group S.A., which owns steel production,
mining and trading companies. Information about the indirect subsidiaries of EVRAZ is provided in the Business Review (Production and Trading
Subsidiaries) section of this report on page 6.
Future Developments
Information on the Group and its subsidiaries’ future developments is provided in the Chairman’s Statement, Chief Executive’s Report, Strategy,
Operational Review and Financial Review sections of this report.
Financial Instruments
The financial risk management and internal control processes and policies and details of hedging policy and exposure to the risks associated with
financial instruments can be found in the Strategy section on page 28, the Financial Review on page 54, the Corporate Governance on pages 68
to 69 sections of this report and in Note 29 of the Consolidated Financial Statements.
EVRAZ plc
Annual Report and Accounts 2011
75
Political and Charitable Donations
No political donations were made in 2011. The Company’s corporate social expenditures support initiatives that benefit the communities local
to the Group’s operations in the areas of sports, education, charity funds, and infrastructure. In 2011, the Company set aside US$49 million for
such initiatives. No donations were made to UK registered charities in 2011.
Events Since the Reporting Date
The major events after 31 December 2011 are disclosed in Note 33 of the Consolidated Financial Statements on page 151.
Directors and Their Interests
Biographical details of the Directors who served on the Board during the year are set out in the Corporate Governance section on pages 58 to 59.
As of 31 December 2011, the following directors and senior managers had beneficial interests in EVRAZ shares:
Directors
Alexander Abramov
Alexander Frolov
Eugene Shvidler
Number of
% of Issued
Ordinary Shares
Ordinary Shares
329,622,798
164,811,399
46,825,407
24.64%
12.32%
3.50%
So far as the Company is aware, since 31 December 2011 to 24 April 2012 (being the last practicable date prior to the publication of this
document), there has been no increase or decrease in the underlying number of beneficial interests held by each of Mr. Abramov, Mr. Frolov and
Mr. Shvidler.
Members of EVRAZ plc Board do not receive share-based compensation.
Powers of Directors
Subject to the Company’s Articles of Association, UK legislation and to any directions given by special resolution, the business of the Company is
managed by the Board, which may exercise all the powers of the Company. The Articles of Association contain specific provisions concerning the
Company power to borrow money and also provide the power to make purchases of any of its own shares. The directors have no existing authority
to allot and issue ordinary shares or to purchase the Company’s own shares, though the Company will be seeking to obtain such authorities at
the next AGM. Further details of the proposed authorities are set out in the Notice of AGM.
Director Appointment and Re-election
The Group by ordinary resolution and the directors have the power at any time to elect any person to be a director, but the number of directors
must not exceed the maximum number fixed by the Articles of Association of the Company. Any person so appointed by the directors will retire
at the next Annual General Meeting and then be eligible for re-election. Under the Articles of Association each director shall retire at the Annual
General Meeting held in the fourth calendar year following the year in which he/she was elected or at such earlier Annual General Meeting as the
directors may decide. In accordance with the UK Corporate Governance Code, the Directors intend to be subject to annual re–elections from 2012.
Directors’ Liabilities (Directors’ Indemnities)
The Company has granted qualifying third party indemnities to each of its directors against any liability that attaches to them in defending
proceedings brought against them, to the extent permitted by the Companies Act. In addition, directors and officers of the Company
and its subsidiaries are covered by directors and officers liability insurance.
Substantial Shareholdings
As of 31 December 2011, the following significant holdings of voting rights in the share capital of the Company had been disclosed to the
Company under Disclosure and Transparency Rule 5.
Lanebrook Ltd.*
Lanebrook Ltd. Affiliates
Igor Kolomoyskiy
Number of
% of Issued
Ordinary Shares
Ordinary Shares
967,561,578
37,499,997
59,865,435
72.34%
2.80%
4.48%
* Lanebrook Ltd. (the Major Shareholder) is a limited liability company incorporated under the laws of Cyprus on 16 March 2006. It was established for the purpose of holding
a majority interest in the Group. Lanebrook Ltd. is controlled by (i) Mr. Abramovich, who holds a beneficial interest in 463,801,971 ordinary shares in EVRAZ plc (34.68%),
(ii) Mr. Abramov, who holds a beneficial interest in 329,622,798 ordinary shares in EVRAZ plc (24.64%), (iii) Mr. Frolov, who holds a beneficial interest in 164,811,399
ordinary shares in EVRAZ plc (12.32%) and (iv) Mr. Shvidler, who holds a beneficial interest in 46,825,407 ordinary shares in EVRAZ plc (3.50%). So far as the Company is
aware, since 31 December 2011 to 24 April 2012 (being the last practicable date prior to the publication of this document), there has been no increase or decrease in the
underlying number of beneficial interests held by each of Mr. Abramov, Mr. Frolov, Mr. Kolomoysky and Mr. Shvidler.
Significant Contractual Arrangements
The Major Shareholder and the Company have entered into a relationship agreement which regulates the ongoing relationship between them,
ensures that the Company is capable of carrying on its business independently of the Major Shareholder and ensures that any transactions
and relationships between the Company and the Major Shareholder are at arm’s length and on normal commercial terms.
This agreement terminates if the Major Shareholder ceases to own or control (directly or indirectly) at least 30% of the ordinary shares in the Company
or if the Major Shareholder ceases to have a larger interest in the Company than the interest of any other shareholder of the Company.
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EVRAZ plc
Annual Report and Accounts 2011
Directors’ Report (Continued)
Under the relationship agreement, the Major Shareholder and the Company agree that: (a) the Major Shareholder has the right to appoint the
maximum number of non-executive directors that may be appointed whilst ensuring that the composition of the Board remains compliant with
the UK Corporate Governance Code for so long as it holds an interest in 30% or more of the Company each appointee a ‘‘Shareholder Director’’;
(b) the Major Shareholder shall, and shall procure, insofar as it is legally able to do so that each of its affiliates (excluding the Company and its
subsidiary undertakings) (the ‘‘Major Shareholder Group’’) shall, save to the extent required by law, exercise its powers so far as it is able so
that the Company is managed in compliance with the requirements of the Companies Act 2006, the Listing Rules and the Disclosure and
Transparency Rules; (c) transactions, relationships and agreements between the Company and/or its subsidiaries (on the one hand) and the
Major Shareholder or a member of the Major Shareholder Group (on the other) shall be entered into and conducted on an arm’s length and
normal commercial basis, unless otherwise agreed by a committee comprising the non-executive directors of the Company whom the Board
considers to be independent in accordance with paragraph B.1.1 of the UK Corporate Governance Code (the ‘‘Independent Committee’’);
(d) the Major Shareholder shall not, and shall procure, insofar as it is legally able to do so, that each member of the Major Shareholder Group
shall not, take any action which precludes or inhibits the Company and/or its subsidiaries from carrying on its business independently of the
Major Shareholder or any member of the Major Shareholder Group; (e) the quorum for any Board meeting of the Company shall be two, of which at
least one must be a Director other than a Shareholder Director and/or a Director who is (or has, in the 12 months prior to the relevant date) any
business or other relationship with the Major Shareholder or any member of the Major Shareholder Group which could materially interfere with the
exercise of his or her independent judgement in matters concerning the Company (‘‘Lanebrook Director’’); (f) the Major Shareholder shall not, and
shall procure, insofar as it is legally able to do so, that each member of the Major Shareholder Group shall not, subject to specified exceptions,
take any action (or omit to take any action) to prejudice the Company’s status as a listed company or its suitability for listing or its ongoing
compliance with the Listing Rules and Disclosure and Transparency Rules; (g) the Major Shareholder shall not, and shall procure, insofar as it is
legally able to do so, that each member of the Major Shareholder Group shall not, exercise any of its voting or other rights and powers to procure
any amendment to the Articles which would be inconsistent with, undermine or breach any of the provisions of the Relationship Agreement, and
will abstain from voting on, and will procure that the Lanebrook Directors abstain from voting on, any resolution to approve a transaction with a
related party (as defined in the Listing Rules) involving the Major Shareholder or any member of the Major Shareholder Group; (h) if any matter
which, in the opinion of an independent director, gives rise to a potential conflict of interest between the Company and/or its subsidiaries (on the
one hand) and the Lanebrook Directors, the Major Shareholder or any member of the Major Shareholder Group (on the other), such matter must
be approved at a duly convened meeting of the Independent Committee or in writing by a majority of the Independent Committee; and (i) for
so long as the Major Shareholder holds an interest in 50% or more in the Company, the Major Shareholder undertakes that it will not and
will use its reasonable endeavours to procure that no other member of the Controlling Shareholder Group becomes involved in any competing
business (subject to certain exceptions) in Russia, the Ukraine or the CIS without giving the Company the opportunity to participate in the relevant
competing business.
The Board is satisfied that the Company is capable of carrying on its business independently of the Major Shareholder and makes its decisions
in a manner consistent with its duties to the Company and stakeholders of EVRAZ plc.
8.875% notes due 2013 and 9.50% notes due 2018, issued by EVRAZ Group S.A., as well as a structured credit facility agreement for a
syndicated loan of US$950 million contain change of control provisions. If a change of control occurs under the terms of these notes, noteholders
will have the option to require Evraz Group S.A. to redeem notes together with interest accrued, if any. Under the structured credit facility terms, in
the event of a change of control over Evraz Group S.A., any lender will have the right to cancel its commitments and declare that amounts relating
to that lender’s participation in the loan become immediately payable. At 31 December 2011, the principal amount of these borrowings amounted
to US$1,993 million, accrued interest was US$21 million.
Supplier Payment Policy and Practice
The Group does not follow any specific published code or standard on payment practice. It is the Group’s policy to agree terms of payments with
suppliers when entering into contracts, though standard payment periods are adopted where possible and the Group monitors the timeliness
of payments. It is the Group’s policy to ensure that suppliers are made aware of the terms of payment and to pay suppliers in accordance with
applicable contract terms.
Trade creditors of the Group at 31 December 2011 were US$ 1,147 million.
Annual General Meeting (“AGM”)
An Annual General Meeting shall be held in each period of twelve months beginning with the day following the Company’s annual accounting
reference date, at such place or places, date and time as may be decided by the Directors.
A live webcast will be provided of the AGM through EVRAZ’s website www.evraz.com. A telephone dial-in facility will also be provided on
a listen-only basis. Further details of the dial-in facility and webcast will be available from EVRAZ’s website www.evraz.com at least one week
in advance of the meeting.
The 2012 AGM will be held on 18 June 2012 in London. At the AGM, shareholders will have the opportunity to put questions to the Board,
including the chairmen of the Board committees.
Full details of the AGM, including explanatory notes, are contained in the Notice of AGM which will be distributed at least 20 working days before
the meeting. The Notice sets out the resolutions to be proposed at the AGM and an explanation of each resolution. All documents relating to the
AGM are available on the Company’s website at www.evraz.com
Electronic Communications
A copy of the 2011 Annual Report, the Notice of the AGM and other corporate publications, reports and announcements are available on the
Company’s website at www.evraz.com. Shareholders may elect to receive notification by email of the availability of the annual report on the
Company’s website instead of receiving paper copies.
Purchase of Own Shares
Details of transactions with treasury shares are provided in Note 20 of the Consolidated Financial Statements on page 129.
EVRAZ plc
Annual Report and Accounts 2011
77
Share Capital
As of 31 December 2011 EVRAZ plc (“the Company”) subscribed share capital is represented by 1,337,560,713 ordinary shares with a nominal
value of US$1 each.
The Company’s issued ordinary share capital ranks pari passu in all respects and carries the right to receive all dividends and distributions
declared, made or paid on or in respect of the ordinary shares.
There are currently no redeemable non-voting preference shares or subscriber shares of the Company in issue.
Articles of Association
The Company’s Articles of Association have been adopted with effect from Admission on 7 November 2011 and contain, among others,
provisions on the rights and obligations attaching to the Company’s shares, including the redeemable non-voting preference shares and the
subscriber shares. The Articles of Association may only be amended by special resolution at a general meeting of the shareholders.
Share Rights
Without prejudice to any rights attached to any existing shares, the Company may issue shares with rights or restrictions as determined by either
the Company by ordinary resolution or, if the Company passes a resolution, the Directors. The Company may also issue shares which are, or are
liable to be, redeemed at the option of the Company or the holder and the directors may determine the terms, conditions and manner of
redemption of any such shares.
Voting Rights
There are no other restrictions on Voting rights or Transfers of shares in the Articles other than those described in these paragraphs.
At a general meeting, subject to any special rights or restrictions attached to any class of shares on a poll, every member present in person or by
proxy has one vote for every share held by him.
A proxy is not be entitled to vote where the member appointing the proxy would not have been entitled to vote on the resolution had he been
present in person. Unless the directors decide otherwise, no member shall be entitled to vote either personally or by proxy or to exercise any
other right in relation to general meetings if any sum due from him to the Company in respect of that share remains unpaid.
The trustee of the Company’s Employee Share Trust is entitled, under the terms of the trust deed, to vote as it sees fit in respect of the shares
held on trust.
Transfer of Shares
The Company’s Articles provide that transfers of certificated shares must be effected in writing, and duly signed by or on behalf of the transferor
and, except in the case of fully paid shares, by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until
the name of the transferee is entered in the Register of Members in respect of those shares. As of the date hereof, the Company does not have
certificated shares. Transfers of uncertificated shares may be effected by means of CREST unless the CREST Regulations provide otherwise.
The directors may refuse to register an allotment or transfer of shares in favour of more than four persons jointly.
Auditors
Ernst & Young is the Company’s auditor and will be proposed at the forthcoming Annual General Meeting.
By order of the Board
Alexander Frolov
Chief Executive Officer
EVRAZ plc
24 April 2012
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EVRAZ plc
Annual Report and Accounts 2011
Directors’ Statement as to Disclosure of Information to Auditors
The directors who were members of the board at the time of approving the directors’ report are listed on pages 58 to 59. Having made enquiries
of fellow directors and of the Company’s auditors, each of these directors confirm that:
(cid:114)(cid:1) To the best of each director’s knowledge and belief, there is no information (that is, information needed by the Group’s auditors in connection
with preparing their report) of which the Company’s auditors are unaware.
(cid:114)(cid:1) Each director has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to
establish that the Company’s auditors are aware of that information.
Responsibility Statement Under the Disclosure and Transparency Rules
Each of the directors listed on pages 58 to 59 confirm that to the best of their knowledge:
(cid:114)(cid:1) The consolidated financial statements of EVRAZ plc, prepared in accordance with International Financial Reporting Standards as adopted
by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole (the ‘Group’).
(cid:114)(cid:1) The Directors’ Report and the Financial Review on pages 74 to 77 and 52 to 55 include a fair review of the development and performance
of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that
they face.
EVRAZ plc
Annual Report and Accounts 2011
79
Statement of Directors’ Responsibilities in Relation to the Annual
Report and the Financial Statements
The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with
applicable United Kingdom law and regulations. Company law requires the directors to prepare Group and parent company financial statements
for each financial year. Under the law, the directors are required to prepare Group financial statements under IFRSs as adopted by the European
Union and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under Company Law the directors must not approve the Group and parent company financial statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Group and parent company and of the profit or loss of the Group and parent company for that
period. In preparing each of the Group and parent company financial statements the directors are required to:
(cid:114)(cid:1) Present fairly the financial position, financial performance and cash flows of the Group and parent company.
(cid:114)(cid:1) Select suitable accounting policies in accordance with IAS8 Accounting Policies, changes in Accounting Estimates and Errors and then apply
them consistently.
(cid:114)(cid:1) Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
(cid:114)(cid:1) Make judgements and estimates that are reasonable.
(cid:114)(cid:1) Provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other events and conditions on the Group’s and parent company’s financial
position and financial performance.
(cid:114)(cid:1) State that the Group and parent company financial statements have been prepared in accordance with IFRSs as adopted by the European
Union, subject to any material departures discloses and explained in the financial statements.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Group and parent company and enable them to
ensure that the financial statements comply with the Companies Act 2006 and, with respect to the Group financial statements, Article 4 of the
IAS Regulation. They are also responsible for safeguarding the assets of the Group and parent company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The directors are also responsible for preparing the Director’s Report, the Directors’ Remuneration Report and the Corporate Governance Report
in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and
Transparency Rules of the United Kingdom Listing Authority. Legislation in the United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
By order of the Board
Alexander Frolov
Chief Executive Officer
EVRAZ plc
24 April 2012
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EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2011
Annual Report and Accounts 2011
81
81
Construction of
Kostanay Rebar
Mill in Kazakhstan
In December 2010 EVRAZ started construction of a Rebar Mill
in the city of Kostanay, in order to access the growth potential of
the Kazakhstan construction market. Kostanay mill is expected to
supply 450,000 tonnes per annum of rebar of all grades. The main
manufacturing plant and administrative buildings are currently under
construction and the mill will be operational by mid-2013.
Location of Kostanay City in Kazakhstan
Kostanay
450 ktpa
450,000 tonnes of rebar per annum
(expected capacity)
Financial
Statements
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EVRAZ plc
Annual Report and Accounts 2011
Independent Auditor’s Report to the Members of EVRAZ plc
We have audited the group financial statements of EVRAZ PLC for the year ended 31 December 2011 which comprise the Consolidated
Statement of Operations, the Consolidated Statement of Comprehensive Income, The Consolidated Statement of Financial Position, the
Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Equity and the related notes 1 to 33. The financial
reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs)
as adopted by the European Union.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities set out on page 79, the directors are responsible for the
preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit
and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing
(UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation
of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to
identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the group financial statements:
(cid:114)(cid:1) give a true and fair view of the state of the group’s affairs as at 31 December 2011 and of its profit for the year then ended;
(cid:114)(cid:1) have been properly prepared in accordance with IFRSs as adopted by the European Union; and
(cid:114)(cid:1) have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the group financial statements are prepared
is consistent with the group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
(cid:114)(cid:1) certain disclosures of directors’ remuneration specified by law are not made; or
(cid:114)(cid:1) we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
(cid:114)(cid:1) the directors’ statement, set out on page 74, in relation to going concern; and
(cid:114)(cid:1) the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
(cid:114)(cid:1) certain elements of the report to shareholders by the Board on directors’ remuneration.
Other matter
We have reported separately on the parent company financial statements of EVRAZ PLC for the period ended 31 December 2011 and
on the information in the Remuneration Report that is described as having been audited.
Ken Williamson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
24 April 2012
EVRAZ plc
Annual Report and Accounts 2011
83
Financial Statements
Contents
84 Consolidated Statement of Operations
85
Consolidated Statement
of Comprehensive Income
Consolidated Statement
of Financial Position
Consolidated Statement
of Cash Flows
Consolidated Statement
of Changes in Equity
Notes to the Consolidated
Financial Statements
86
87
89
91
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EVRAZ plc
Annual Report and Accounts 2011
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 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
Gain on bargain purchases
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
Notes
2011
2010*
2009
Year ended 31 December
3
3
7
7
7
5, 9, 10, 13
7
7
7
11
7
12
4
8
20
20
$16,077
323
16,400
(12,473)
$13,144
250
13,394
(10,319)
3,927
(1,154)
(921)
(61)
(50)
(104)
269
50
(96)
1,860
17
(708)
55
(355)
8
–
(4)
873
(420)
$453
$461
(8)
$453
3,075
(807)
(732)
(64)
(52)
(147)
104
63
(110)
1,330
13
(728)
21
8
(14)
4
(1)
633
(163)
$470
$486
(16)
$470
$9,505
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
$(292)
$(295)
3
$(292)
$0.36
$0.39
$(0.24)
$0.36
$0.39
$(0.24)
*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statement of Comprehensive Income
(in millions of US dollars)
Net profit/(loss)
Other comprehensive income
Effect of translation to presentation currency
Net gains/(losses) on available-for-sale financial assets
Net (gains)/losses on available-for-sale financial assets
reclassified to profit or loss
Income tax effect
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)
Total comprehensive income/(loss), net of tax
Attributable to:
Equity holders of the parent entity
Non-controlling interests
Notes
13
7, 13
9
8
11
2011
$453
(620)
(20)
20
–
–
(1)
–
(1)
(35)
(35)
(656)
$(203)
$(177)
(26)
$(203)
EVRAZ plc
Annual Report and Accounts 2011
85
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$(292)
108
12
(8)
–
4
(8)
1
(7)
(10)
(10)
95
Year ended 31 December
2010*
$470
64
(8)
4
–
(4)
(7)
1
(6)
(9)
(9)
45
$515
$(197)
$522
(7)
$515
$(228)
31
$(197)
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*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
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EVRAZ plc
Annual Report and Accounts 2011
Consolidated Statement of Financial Position
(in millions of US dollars)
The Financial Statements on pages 83-151 were approved by the Board of Directors on 24 April 2012 and signed on its behalf
by Alexander Frolov, Chief Executive Officer.
Notes
2011
2010*
2009
31 December
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 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
Liabilities directly associated with disposal groups classified as held for sale
12
$8,306
838
2,180
663
79
53
107
12,226
2,188
971
176
44
8
83
412
57
801
4,740
9
4,749
$16,975
$1,338
(8)
2,289
171
–
–
3,606
(1,851)
5,545
236
5,781
6,593
1,020
26
296
285
285
8,505
1,460
154
613
98
92
188
13
53
9
9
2,689
–
2,689
$8,607
1,004
2,219
688
100
118
103
12,839
2,070
1,213
192
1
80
54
353
52
683
4,698
2
4,700
$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
$17,539
$16,952
$375
–
1,742
180
36
–
4,570
(1,214)
5,689
247
5,936
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
$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
Total equity and liabilities
$16,975
$17,539
$16,952
*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
EVRAZ plc
Annual Report and Accounts 2011
87
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t
a
n
a
b
i
i
l
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y
i
F
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c
i
a
l
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
Gain on bargain purchases
Other non-operating (gains)/losses, net
Bad debt expense
Changes in provisions, employee benefits and other long-term assets and liabilities
Expense arising from 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 liabilities
Net cash flows from operating activities
Year ended 31 December
2011
2010*
2009
$453
$470
$(292)
12
1,153
50
104
(269)
(17)
708
(55)
355
(8)
–
4
49
(29)
23
(1)
(4)
2,528
(204)
167
(2)
(61)
(123)
(3)
367
(44)
44
(22)
(186)
925
52
147
(104)
(13)
728
(21)
(8)
14
(4)
1
48
(15)
2
(3)
(3)
(231)
979
39
180
(156)
(40)
677
(2)
(97)
5
(6)
(4)
41
(16)
6
(35)
(3)
2,030
1,045
(191)
(239)
(44)
(34)
(91)
38
107
80
5
1
680
438
(52)
(162)
239
(56)
(353)
1
(73)
(9)
2,647
1,662
1,698
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
Purchases of subsidiaries, net of cash acquired (Note 4)
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
(3)
46
(4)
4
–
(36)
–
–
–
(1)
5
(1,281)
23
5
54
–
(46)
5
(1)
2
–
(27)
(9)
–
–
17
29
(832)
21
42
1
54
Net cash flows from/(used in) investing activities
(1,188)
(744)
*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
Continued on the next page.
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e
v
e
w
i
G
o
v
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r
n
a
n
c
e
(28)
40
(3)
114
506
(20)
(42)
(25)
48
(16)
20
(441)
6
28
1
(1)
187
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EVRAZ plc
Annual Report and Accounts 2011
Consolidated Statement of Cash Flows (continued)
(in millions of US dollars)
Cash flows from financing activities
Issue of shares, net of transaction costs of $Nil, $Nil and $5 million, respectively (Note 20)
Payments relating to conversion of bonds into shares (Note 21)
Proceeds from issue of shares by a consolidated subsidiary to non-controlling shareholders
Repurchase of vested share-based awards (Note 20)
Purchase of treasury shares (Note 20)
Sale of treasury shares (Note 20)
Purchases of non-controlling interests (Note 6)
Contribution from/(distribution to) a shareholder (Note 4)
Dividends paid by the parent entity to its shareholders (Note 20)
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
Net proceeds from/(repayment of) bank overdrafts and credit lines, including interest
Payments under covenants reset (Note 21)
Gain on derivatives not designated as hedging instruments (Note 26)
Collateral under swap contracts (Note 18)
Restricted deposits at banks in respect of financing activities
Payments under finance leases, including interest
Proceeds from sale-leaseback
Net cash flows 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
Year ended 31 December
2011
2010*
2009
$–
(161)
1
–
(22)
3
(51)
–
(491)
(1)
3,507
(3,815)
(283)
–
66
(10)
(1)
(24)
–
(1,282)
(59)
118
683
$801
$–
–
–
–
–
–
(13)
–
–
(1)
3,172
(4,142)
106
(29)
31
–
–
(23)
–
(899)
(7)
12
671
$683
$(586)
8
(443)
$(594)
11
(341)
$310
–
–
(3)
(5)
7
(8)
65
(90)
(2)
3,427
(4,987)
(794)
(85)
–
–
1
(31)
38
(2,157)
13
(259)
930
$671
$(586)
29
(141)
*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
EVRAZ plc
Annual Report and Accounts 2011
89
Consolidated Statement of Changes in Equity
(in millions of US dollars)
Attributable to equity holders of the parent entity
Issued
capital
Treasury
shares
paid-in Revaluation
surplus
capital
Legal
reserve
gains and Accumulated
profits
losses
Translation
difference
Additional
Unrealised
Non-
controlling
interests
Total
Total
equity
At 31 December 2010 (as previously reported)
Adjustments to provisional values (Note 2)
At 31 December 2010 (as restated)
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
Conversion of bonds (Notes 20 and 21)
Appropriation of net profit to legal reserve
Group’s reorganisation (Notes 1 and 20)
Reduction in par value of shares of EVRAZ plc (Note 20)
Acquisition of non-controlling interests in subsidiaries
$375
–
375
–
–
–
–
29
–
2,247
(1,313)
(Note 6)
Sale of non-controlling interests in subsidiaries
Non-controlling interests arising on establishment
of subsidiaries (Note 4)
Purchase of treasury shares (Note 20)
Transfer of treasury shares to participants of the
Incentive Plan (Notes 20 and 24)
Sale of treasury shares (Note 20)
Share-based payments (Note 24)
Dividends declared by the parent entity to its
shareholders (Note 20)
Dividends declared by the Group’s subsidiaries to
non-controlling shareholders (Note 20)
–
–
–
–
–
–
–
–
–
$–
–
$1,742
–
–
–
–
–
–
–
–
–
–
–
–
–
(22)
11
3
–
–
–
1,742
–
–
–
–
524
–
–
–
–
–
–
–
–
–
23
–
–
$180
–
180
–
(1)
(8)
(9)
–
–
–
–
–
–
–
–
–
–
–
–
–
$36
–
36
–
–
–
–
–
3
(39)
–
–
–
–
–
–
–
–
–
–
$–
–
$4,632
(62)
$(1,214)
–
$5,751
(62)
$247
–
$5,998
(62)
–
–
–
4,570
461
–
(1,214)
–
(637)
5,689
461
(638)
247
(8)
(18)
5,936
453
(656)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8
469
–
(3)
(2,219)
1,313
–
(637)
–
–
–
–
(18)
–
(4)
–
(11)
–
–
(491)
–
–
–
–
–
–
–
–
–
–
–
(177)
553
–
(11)
–
(18)
–
(4)
(22)
–
3
23
(491)
–
(26)
–
–
11
–
(33)
34
4
–
–
–
–
–
–
(203)
553
–
–
–
(51)
34
–
(22)
–
3
23
(491)
–
(1)
(1)
At 31 December 2011
$1,338
$(8) $2,289
$171
$–
$–
$3,606 $(1,851) $5,545
$236
$5,781
At 31 December 2009
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
paid-in Revaluation
surplus
capital
Legal
reserve
gains and Accumulated
profits
losses
Translation
difference
Additional
Unrealised
Non-
controlling
interests
Total
Total
equity
$375
–
–
$–
–
–
$1,739
–
–
$208
–
(6)
$36
–
–
$4
–
(4)
$4,065
486
–
$(1,260)
–
46
$5,167
486
36
$275
(16)
9
$5,442
470
45
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
2
–
(22)
(28)
–
–
–
–
–
–
–
–
–
–
–
(4)
–
–
–
–
22
508
(3)
–
–
–
–
46
–
–
–
–
–
522
–
(7)
–
515
(2)
(14)
(16)
–
2
–
(6)
–
(1)
(6)
2
(1)
At 31 December 2010*
$375
$–
$1,742
$180
$36
$–
$4,570
$(1,214)
$5,689
$247
$5,936
*
The amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made in connection with the completion of initial
accounting (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
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90
EVRAZ plc
Annual Report and Accounts 2011
Consolidated Statement of Changes in Equity (continued)
(in millions of US dollars)
Attributable to equity holders of the parent entity
Issued
capital
Treasury
shares
paid-in Revaluation
surplus
capital
Legal
reserve
gains and Accumulated
profits
losses
Translation
difference
Additional
Unrealised
Non-
controlling
interests
Total
Total
equity
At 31 December 2008
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)
$332
–
–
$(9)
–
–
$1,054
–
–
$218
–
(7)
$30
–
–
$–
–
4
–
–
43
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
12
2
–
–
–
–
492
(5)
133
–
65
–
–
–
–
–
(3)
(10)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
–
–
4
–
–
–
–
–
–
–
–
–
–
$4,377
(295)
–
3
(292)
–
–
–
(5)
–
–
(6)
(3)
(6)
–
$(1,330)
–
70
$4,672
(295)
67
$245
3
28
$4,917
(292)
95
–
70
–
–
–
–
–
–
–
–
–
–
–
(228)
535
(5)
133
(5)
65
(5)
6
(1)
–
–
31
–
–
–
–
–
–
–
–
–
–
(1)
–
(197)
535
(5)
133
(5)
65
(5)
6
(1)
–
(1)
At 31 December 2009
$375
$–
$1,739
$208
$36
$4
$4,065
$(1,260)
$5,167
$275
$5,442
The accompanying notes form an integral part of these consolidated financial statements.
EVRAZ plc
Annual Report and Accounts 2011
91
Notes to the Consolidated Financial Statements
year ended 31 December 2011
1. Corporate Information
These consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 24 April 2012.
EVRAZ plc (“EVRAZ plc” or “the Company”) was incorporated on 23 September 2011 as a public company under the laws of the United Kingdom
with the registered number 7784342. The Company’s registered office is at 5th Floor, 6 St. Andrew Street, London, EC4A 3AE, United Kingdom.
As a result of the reorganisation implemented by way of the share exchange offer made by the Company for the shares of Evraz Group S.A.
(Note 20), on 7 November 2011, the Company became a new parent entity of Evraz Group S.A., a joint stock company registered in Luxembourg
in 2004. Evraz Group S.A. is a holding company which owns steel production, mining and trading companies. At 31 December 2011, the
Company held 99.82% in Evraz Group S.A. Lanebrook Limited (Cyprus) is the ultimate controlling party of the Group.
The Company, together with its subsidiaries (the “Group”), is involved in the production and distribution of steel and related products and coal
and iron ore mining. In addition, the Group produces vanadium products. The Group is one of the largest steel producers globally.
The major subsidiaries included in the consolidated financial statements of the Group were as follows at 31 December:
Subsidiary
EVRAZ Nizhny Tagil Iron & Steel Plant
EVRAZ United West-Siberian Iron & Steel Plant
Novokuznetsk Iron & Steel Plant
Effective
ownership interest, %
2011
2010
Business
2009 activity
Location
100.00
100.00
100.00
100.00
100.00 Steel production Russia
100.00 Steel production Russia
(in 2011 merged with West-Siberian Iron & Steel Plant)
–
100.00
100.00 Steel production Russia
Czech
EVRAZ Vitkovice Steel a.s.
100.00
100.00
100.00 Steel production Republic
EVRAZ Highveld Steel and Vanadium Limited
EVRAZ Dnepropetrovsk Iron and Steel Works
EVRAZ Inc. NA
EVRAZ Inc. NA Canada
Yuzhkuzbassugol
85.12
96.77
100.00
100.00
100.00
EVRAZ Kachkanarsky Mining-and-Processing Integrated Works 100.00
100.00
Evrazruda
99.42
EVRAZ Sukha Balka
85.12
96.04
100.00
100.00
100.00
100.00
100.00
99.42
85.12 Steel production
96.03 Steel production Ukraine
South
Africa
100.00 Steel mill
100.00 Steel mill
100.00 Coal mining
Ore mining and
100.00 processing
100.00 Ore mining
99.42 Ore mining
USA
Canada
Russia
Russia
Russia
Ukraine
At 31 December 2011, the Group employed approximately 112,000 employees, excluding joint venture’s and associates’ employees.
Going Concern
These consolidated financial statements have been prepared on a going concern basis.
The Group’s activities in all of its operating segments continue to be affected by the uncertainty and instability of the current economic
environment. In the event that the financial results of the Group deteriorate further and are below the management’s current forecasts, the Group
may not be in compliance with financial covenants under certain bank loans, which, if not resolved, may trigger a cross default under other debt
instruments. Such an event would permit the Group’s lenders to demand immediate payment of the outstanding borrowings under the relevant
debt instruments.
Directors and management have considered a number of alternatives to proactively address this situation in the event that the Group fails to
be in compliance with its financial covenants, including, if and when necessary, a repayment of certain borrowings, a financial covenant reset,
a waiver from its lenders and a refinancing of certain borrowings. The Group may incur additional costs related to these alternatives.
Based on the analysis of available alternatives, management’s track record of resolving similar matters and the probabilities of their successful
implementation, directors and management concluded that there is no material uncertainty that may cast significant doubt on the Group’s ability
to continue as a going concern. Consequently, directors and management have a reasonable expectation that the Group has adequate resources
to continue in operational existence for the foreseeable future.
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92
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies
Basis of Preparation
These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards
(“IFRS”), as adopted by the European Union.
International Financial Reporting Standards are issued by the International Accounting Standard Board (“IASB”). IFRSs that are mandatory for
application as of 31 December 2011, but not adopted by the European Union, do not have any impact on the Group’s consolidated financial
statements.
These consolidated financial statements have been prepared on a going concern basis as the directors believe there are no material
uncertainties that lead to significant doubt that the entity can continue as a going concern in the foreseeable future.
The consolidated financial statements have been prepared under the 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.
Group Reorganisation
As the Group has been formed through a reorganisation in which EVRAZ plc became a new parent entity of the Group (Note 20), these consolidated
financial statements have been prepared as a continuation of the existing group using the pooling of interests method. The difference in share
capital and legal reserve in the amount of $895 million was recorded as an adjustment to accumulated profits. At 31 December 2011, there were
shareholders which did not accept the share exchange offer. Accordingly, the Group recognised non-controlling interests of $11 million representing
these shareholders.
Completion of Initial Accounting
In 2011, the purchase price allocation for the acquisition of ZAO Koksovaya by the Group’s joint venture has been completed (Note 11). As a
result, the Group recognised adjustments to the provisional values of identifiable assets, liabilities and contingent liabilities of the entity and
restated the consolidated financial statements as of 31 December 2010 and for the year then ended. Consequently, the 2010 comparative
information differs from the previously published financial statements.
The effects of the completion of purchase price allocation are summarised below.
US$ million
ASSETS
Investments in joint ventures and associates
Non-current assets
Total assets
EQUITY AND LIABILITIES
Accumulated profits
Equity
Total equity and liabilities
US$ million
Share of profits/(losses) of joint ventures and associates
Gain/(loss) on disposal groups classified as held for sale, net
Profit/(loss) before tax
Net profit/(loss)
Attributable to:
Equity holders of the parent entity
Non-controlling interests
31 December 2010
Restated
As previously
reported
Adjustment
$688
12,839
$750
12,901
$17,539
$17,601
$4,570
5,689
$4,632
5,751
$17,539
$17,601
$(62)
(62)
$(62)
$(62)
(62)
$(62)
Year ended 31 December 2010
Restated
As previously
reported
Adjustment
$21
(14)
633
$470
$486
(16)
$470
$73
(4)
695
$532
$548
(16)
$532
$(52)
(10)
(62)
$(62)
$(62)
–
$(62)
EVRAZ plc
Annual Report and Accounts 2011
93
2. Significant Accounting Policies (continued)
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 adoption of new standards and interpretations and revision of the existing
standards as of 1 January 2011.
New/Revised Standards and Interpretations Adopted in 2011
(cid:114)(cid:1) IAS 24 (revised) “Related Party Disclosures”
The amendment clarifies the definition of a related party. The amendment introduces an exemption from the general related party disclosure
requirements for transactions with a government and entities that are controlled, jointly controlled or significantly influenced by the same
government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group.
(cid:114)(cid:1) Amendment to IAS 32 “Financial Instruments: Presentation”
The amendment alters the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain options or warrants as
equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-
derivative equity instruments, to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. The amendment
had no effect on the financial position or performance of the Group.
(cid:114)(cid:1) IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”
The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity
instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value
of the liability extinguished. Gains and losses are recognised immediately in profit or loss. The adoption of this interpretation had no effect on the
financial statements of the Group.
(cid:114)(cid:1) Amendments to IFRIC 14/IAS 19 “Prepayments of a Minimum Funding Requirement”
The amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment
of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as
pension asset. The amendment to the interpretation had no effect on the financial position or performance of the Group.
(cid:114)(cid:1) Amendments to standards following the May 2010 “improvements to IFRS” project
The third omnibus of amendments to IFRS was issued primarily with a view to removing inconsistencies and clarifying wording. The adoption of
these amendments did not have significant impact on the financial statements of the Group.
Standards Issued But Not Yet Effective
Standards not yet effective for the financial statements for the year ended 31 December 2011
(cid:114)(cid:1) Amendments to IFRS 7 “Financial Instruments: Disclosures” – Transfers of Financial Assets
(cid:114)(cid:1) Amendments to IAS 1 “Presentation of Financial Statements” – Changes to the Presentation of
Other Comprehensive Income
(cid:114)(cid:1) Amendments to IAS 12 “Income Taxes” – Deferred Taxes: Recovery of Underlying Asset
(cid:114)(cid:1) IFRS 10 “Consolidated Financial Statements”
(cid:114)(cid:1) IFRS 11 “Joint Arrangements”
(cid:114)(cid:1) IFRS 12 “Disclosure of Interests in Other Entities”
(cid:114)(cid:1) IFRS 13 “Fair Value Measurement”
(cid:114)(cid:1) Amendments to IAS 19 “Employee Benefits”
(cid:114)(cid:1) Amendments to IFRS 7 “Financial Instruments: Disclosures” – Offsetting Financial Assets and Financial Liabilities
(cid:114)(cid:1) IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”
(cid:114)(cid:1) Amendments to IAS 32 “Financial Instruments: Presentation” – Offsetting Financial Assets and Financial Liabilities
(cid:114)(cid:1) IFRS 9 “Financial Instruments”
Effective for annual
periods beginning
on or after
1 July 2011
1 July 2012
1 January 2012
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2014
1 January 2015
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.
Amended IAS 19 “Employee Benefits” introduced recognition of actuarial gains and losses in other comprehensive income in the period they
occur. This amendment is required to be applied retrospectively. At 31 December 2011, the Group had $261 million actuarial losses (Note 23),
they will increase the Group’s liabilities under defined benefit plans.
Significant Accounting Judgements and Estimates
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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies (continued)
Significant Accounting Judgements and Estimates (continued)
Estimation Uncertainty (continued)
Impairment of Property, Plant and Equipment
The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the
Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s
fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that
are largely independent of those from other assets or groups 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 2011, 2010 and 2009, the Group recognised an impairment loss of $105 million, $109 million and $23 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 that 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 2011 and 2009, the Group changed its estimation of useful lives of property, plant and equipment, which resulted in a $16 million 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 2010, the change in estimates of useful lives of property, plant and equipment resulted in an additional depreciation expense of
approximately $10 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 31 December 2011, 2010 and 2009 was $2,180 million, $2,219 million and $2,186 million, respectively.
In 2011, 2010 and 2009, the Group recognised an impairment loss in respect of goodwill in the amount of $Nil, $16 million and $160 million,
respectively. More details of the assumptions used in estimating the value in use of the cash-generating units to which goodwill is allocated are
provided in 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 the JORC Code involves some degree of uncertainty. The uncertainty depends mainly on the
amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires
use of subjective judgement and development of assumptions.
Site Restoration Provisions
The Group reviews site restoration provisions at each 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 2011 and 2010, the independent experts made a re-assessment of site restoration provisions (Note 25).
EVRAZ plc
Annual Report and Accounts 2011
95
2. Significant Accounting Policies (continued)
Significant Accounting Judgements and Estimates (continued)
Estimation Uncertainty (continued)
Post-Employment Benefits
The Group uses an actuarial valuation method for the 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 31 December 2011, 2010 and 2009, allowances for doubtful accounts in
respect of trade and other receivables have been made in the amount of $108 million, $117 million and $92 million respectively (Note 29).
The Group makes an allowance for obsolete and slow-moving raw materials and spare parts. 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 judgement 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 quantif y 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 occur 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 for 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 judgements 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 plans, 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.
Foreign Currency Transactions
The presentation currency of the Group is the US dollar because 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 functional currencies 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 a 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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies (continued)
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 the equity in a subsidiary not attributable, directly or indirectly, to a 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 1 January 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.
Acquisition of Subsidiaries prior to 1 January 2010
The previous accounting policies relating to business combinations include the following differences as compared with the policies applied
starting from 1 January 2010:
(cid:114)(cid:1) Transaction costs directly attributable to the acquisition formed part of the acquisition costs.
(cid:114)(cid:1) The non-controlling interest (formerly known as minority interest) could be measured only at the proportionate share of the acquiree’s
identifiable net assets.
(cid:114)(cid:1) Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect
previously recognised goodwill.
(cid:114)(cid:1) 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.
EVRAZ plc
Annual Report and Accounts 2011
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2. Significant Accounting Policies (continued)
Basis of Consolidation (continued)
Purchases of Controlling Interests in Subsidiaries from Entities under Common Control (continued)
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.
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.
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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.
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Buildings and constructions
Machinery and equipment
Transport and motor vehicles
Other assets
Weighted average
remaining
useful life
(years)
Useful lives
(years)
15–60
4–45
7–20
3–15
19
11
12
6
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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
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 as
to 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 associate 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.
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.
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Annual Report and Accounts 2011
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2. Significant Accounting Policies (continued)
Intangible Assets Other Than Goodwill (continued)
The table below presents the useful lives of intangible assets.
Customer relationships
Trade names and trademarks
Water rights and environmental permits with definite lives
Patented and unpatented technology
Contract terms
Other
Weighted average
remaining
useful life
(years)
Useful lives
(years)
1–15
5
5
18
1–49
5–10
11
–
1
13
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 the 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.
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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies (continued)
Financial Assets (continued)
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.
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.
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.
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 the 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 if 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, an 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 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 1 January 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 only if they are declared before or 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.
EVRAZ plc
Annual Report and Accounts 2011
101
2. Significant Accounting Policies (continued)
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.
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 36%), 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.
Defined Benefit Plans
The Group companies provide pensions and other benefits to their employees (Note 23). 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 independent qualified actuaries in the measurement of employee benefit 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 the 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
The Group has management compensation schemes, under which certain directors, senior executives and employees of the Group receive
remuneration in the form of share-based payment transactions, whereby they render services as consideration for equity instruments
(“equity-settled transactions”).
The cost of equity-settled transactions with non-executive directors and employees is measured by reference to the fair value of 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.
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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.
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102
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
2. Significant Accounting Policies (continued)
Share-based Payments (continued)
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.
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 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.
EVRAZ plc
Annual Report and Accounts 2011
103
2. Significant Accounting Policies (continued)
Deferred Income Tax (continued)
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.
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:
(cid:114)(cid:1) Steel production segment includes production of steel and related products at eleven steel mills.
(cid:114)(cid:1) Mining segment includes iron ore and coal mining and enrichment.
(cid:114)(cid:1) Vanadium products segment includes extraction of vanadium ore and production of vanadium products. Vanadium slag arising in the steel-
making process is also allocated to the vanadium segment.
(cid:114)(cid:1) Other operations include energy-generating companies, seaports, shipping and railway transportation companies.
Management and investment companies are 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 results of the operating segments 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, depreciation and amortisation
(“EBITDA”).
Segment EBITDA is determined as a 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.
The following tables present measures of segment profit or loss based on management accounts.
Year ended 31 December 2011
US$ million
Revenue
Sales to external customers
Inter-segment sales
Total revenue
Segment result – EBITDA
Steel
production
Mining
Vanadium
products
Other
operations
Eliminations
Total
$15,622
422
16,044
$1,120
$420
3,092
3,512
$1,529
$269
364
633
$111
$166
656
822
$176
$–
(4,534)
(4,534)
$17
$16,477
–
16,477
$2,953
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
3. Segment Information (continued)
Year ended 31 December 2010
US$ million
Revenue
Sales to external customers
Inter-segment sales
Total revenue
Segment result – EBITDA
Year ended 31 December 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
Steel
production
$9,292
129
9,421
$950
Mining
$322
2,056
2,378
$898
Mining
$188
1,160
1,348
$179
Vanadium
products
Other
operations
Eliminations
Total
$280
257
537
$90
$140
536
676
$122
$–
(3,208)
(3,208)
$(155)
$13,334
–
13,334
$2,400
Vanadium
products
Other
operations
Eliminations
Total
$226
36
262
$12
$117
439
556
$110
$–
(1,764)
(1,764)
$–
$9,823
–
9,823
$1,251
The following table shows a reconciliation of revenue and EBITDA used by management for decision making and revenue and profit or loss before
tax per the consolidated financial statements prepared under IFRS.
Year ended 31 December 2011
US$ million
Revenue
Forecasted vs. actual revenue
Reclassifications and other adjustments
Steel
production
$16,044
134
(1,461)
Revenue per IFRS financial statements
$14,717
EBITDA
Forecasted vs. actual EBITDA
Exclusion of management services
from segment result
Unrealised profits adjustment
Reclassifications and other adjustments
$1,120
(63)
91
(5)
119
142
Mining
$3,512
(1)
273
$3,784
$1,529
(10)
43
–
66
99
EBITDA based on IFRS financial statements
Unallocated subsidiaries
$1,262
$1,628
Depreciation, depletion and
amortisation expense
Impairment of assets
Gain/(loss) on disposal of property, plant
and equipment and intangible assets
Foreign exchange gains/(losses), net
(546)
(78)
(29)
(29)
(530)
(31)
(20)
103
Vanadium
products
Other
operations
Eliminations
Total
$(4,534)
–
802
$16,477
124
(201)
$(3,732)
$16,400
$633
(5)
37
$665
$111
(5)
3
(3)
(84)
(89)
$22
(34)
–
–
(1)
$822
(4)
148
$966
$176
(1)
2
–
20
21
$197
(40)
5
(1)
1
$17
–
–
15
–
15
$32
–
–
–
–
$580
$1,150
$(13)
$162
$32
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
Other non-operating gains/(losses), net
Profit/(loss) before tax
$2,953
(79)
139
7
121
188
$3,141
(243)
$2,898
(1,150)
(104)
(50)
74
$1,668
192
$1,860
$(691)
55
(355)
8
(4)
$873
EVRAZ plc
Annual Report and Accounts 2011
105
3. Segment Information (continued)
Year ended 31 December 2010
US$ 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
$12,951
112
(940)
$12,123
$1,445
(24)
62
(33)
35
40
Mining
$2,378
(7)
136
$2,507
$898
(14)
32
–
19
37
EBITDA based on IFRS financial statements
Unallocated subsidiaries
$1,485
$935
(558)
–
(81)
(33)
65
$878
(282)
–
(20)
(18)
(2)
$613
Depreciation, depletion and
amortisation expense
Impairment of goodwill
Impairment of 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
Gain on bargain purchases
Other non-operating gains/(losses), net
Profit/(loss) before tax
Vanadium
products
Other
operations
Eliminations
Total
$537
(4)
33
$566
$90
(1)
2
3
(41)
(37)
$53
(47)
(16)
–
–
–
$(10)
$(3,208)
–
583
$13,334
100
(40)
$(2,625)
$13,394
$(155)
–
$2,400
(39)
$676
(1)
148
$823
$122
–
2
–
20
22
–
45
–
45
$144
$(110)
(37)
–
(30)
(1)
1
$77
–
–
–
–
–
$(110)
98
15
33
107
$2,507
(157)
$2,350
(924)
(16)
(131)
(52)
64
$1,291
39
$1,330
(715)
21
8
(14)
4
(1)
$633
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
Steel
production
$9,421
(54)
(389)
$8,978
$950
(27)
53
(15)
(34)
(23)
$927
(624)
(160)
(24)
(25)
54
$148
Mining
$1,348
(2)
110
$1,456
$179
–
30
–
70
100
$279
(281)
–
4
(12)
1
$(9)
3. Segment Information (continued)
Year ended 31 December 2009
US$ 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
EBITDA based on IFRS financial statements
Unallocated subsidiaries
Depreciation, depletion and
amortisation expense
Impairment of goodwill
Impairment of 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
Gain on bargain purchases
Other non-operating gains/(losses), net
Profit/(loss) before tax
Vanadium
products
Other
operations
Eliminations
Total
$262
3
98
$363
$12
–
–
–
(24)
(24)
$556
–
209
$765
$110
–
4
–
53
57
$(1,764)
–
(26)
$(1,790)
$–
–
–
12
–
12
$(12)
$167
$12
(38)
–
–
–
–
(35)
–
–
(2)
–
$(50)
$130
$12
$9,823
(53)
2
$9,772
$1,251
(27)
87
(3)
65
122
$1,373
(136)
$1,237
(978)
(160)
(20)
(39)
55
$95
100
$195
(637)
2
97
(5)
6
4
$(338)
EVRAZ plc
Annual Report and Accounts 2011
107
3. Segment Information (continued)
The revenues from external customers for each group of similar products and services are presented in the following table:
US$ 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
2011
2010
2009
$4,423
2,760
1,964
1,321
2,235
554
1,165
101
14,523
586
392
39
20
1,037
76
558
4
3
641
199
199
$3,331
2,005
1,466
1,309
2,340
383
1,064
77
11,975
330
355
26
25
736
39
493
3
2
537
146
146
$2,184
1,448
1,113
1,008
2,018
236
729
119
8,855
175
219
22
19
435
60
290
3
1
354
128
128
$16,400
$13,394
$9,772
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
3. Segment Information (continued)
Distribution of the Group’s revenues by geographical area based on the location of customers for the years ended 31 December was as follows:
US$ million
CIS
Russia
Ukraine
Kazakhstan
Others
America
USA
Canada
Others
Asia
Thailand
Taiwan
United Arab Emirates
China
Indonesia
Korea
Philippines
Japan
Syria
Vietnam
Jordan
Others
Europe
Germany
Italy
Czech Republic
Austria
Poland
Turkey
Slovakia
Others
Africa
South Africa
Others
Other countries
None of the Group’s customers amounts to 10% or more of the consolidated revenues.
2011
2010
2009
$6,632
623
401
163
7,819
2,172
1,478
91
3,741
708
360
315
252
212
111
84
81
51
33
6
137
$4,692
471
342
147
5,652
1,674
1,451
37
3,162
550
459
410
367
113
126
285
71
65
93
29
103
$2,950
233
210
100
3,493
1,543
861
25
2,429
285
228
415
528
74
174
250
21
62
226
101
59
2,350
2,671
2,423
368
267
205
224
221
145
94
417
219
205
189
188
139
118
64
300
116
140
120
148
93
130
51
230
1,941
1,422
1,028
472
72
544
5
407
78
485
2
298
83
381
18
$16,400
$13,394
$9,772
3. Segment Information (continued)
Non-current assets other than financial instruments, deferred tax assets and post-employment benefit assets were located in the following
countries at 31 December:
US$ million
Russia
USA
Canada
Ukraine
South Africa
Czech Republic
Italy
Other countries
2011
2010
2009
$6,153
2,047
2,069
759
567
213
206
52
$6,200
2,119
2,166
892
723
241
221
40
$5,915
2,222
2,154
1,020
767
216
234
88
$12,066
$12,602
$12,616
4. Business Combinations
Vanady-Tula
On 20 December, 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 2 November 2009, the date of the business combination). The options were extended to 31 December 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). 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 2 November 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 2 November 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 ($95 million at the exchange rate as of the
date of the transaction, which was completed on 15 December 2009).
The table below sets forth the fair values of Vanady-Tula’s consolidated identifiable assets, liabilities and contingent liabilities at the date
of business combination:
US$ 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
EVRAZ plc
Annual Report and Accounts 2011
109
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9
31
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$44
41
$110
$69
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
4. Business Combinations (continued)
Vanady-Tula (continued)
At 31 December 2009, the Group’s accounts receivable include $12 million due from the seller.
For the period from 2 November 2009 to 31 December 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 15 December, 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 15 October 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 $11 million.
The financial position and the results of operations of this holding were included in the Group’s consolidated financial statements beginning
15 October 2009.
The table below sets forth the fair values of consolidated identifiable assets, liabilities and contingent liabilities of the acquiree at the date
of business combination:
US$ 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
Gain on bargain purchase
In 2009, cash flow on acquisition was as follows:
US$ million
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
15 October
2009
$7
7
73
45
4
136
119
119
$17
$11
$6
$4
(9)
$(5)
In 2010, the Group paid $1 million of purchase consideration. In 2011, the Group made a final payment of $1 million for this acquisition.
For the period from 15 October to 31 December 2009, steel dealers reported net loss amounting to $5 million.
EVRAZ plc
Annual Report and Accounts 2011
111
4. Business Combinations (continued)
Inprom Group
On 22 December 2010, the Group acquired 100% in a holding entity owning steel dealers throughout Russia (known as Inprom Group).
The purchase consideration consisted of cash amounting to $19 million plus the fair value of a deferred consideration of $21 million.
The financial position and the results of operations of Inprom were included in the Group’s consolidated financial statements beginning
22 December 2010.
The table below sets forth the fair values of consolidated identifiable assets, liabilities and contingent liabilities of the acquiree at the date
of business combination:
US$ 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
Gain on bargain purchase
In 2010, cash flow on acquisition was as follows:
US$ million
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
22 December
2010
$123
26
31
24
8
212
8
161
169
(1)
$44
$40
$4
$8
(18)
$(10)
In 2011, the Group made a final payment of $1 million for the acquisition of Inprom Group.
For the period from 22 December to 31 December 2010, Inprom Group reported net loss amounting to $1 million.
Other Payments for Acquisition of Subsidiaries
In 2009, the Group and Lanebrook Limited signed an amendment agreement under which the purchase price for the Ukrainian subsidiaries
acquired in 2008 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.
In 2010, the Group fully settled a $16 million liability under earn-out payments for the acquisition of Stratcor in 2006. In 2011, the Group paid
$3 million of synergy payments related to the same acquisition (Note 26).
In 2011, the Group paid $20 million for the acquisition of Kachkakanar Heat and Power Plant. Under the terms of the purchase agreement,
the control over operating activities of the entity is transferred to the Group on 1 January 2012. As such, this payment was included in other
non-current assets as of 31 December 2011 (Note 13).
In 2011, the Group purchased a 100% ownership interest in an entity whose assets comprise only land to be used for construction of a rolling
mill in Russia. The cash consideration amounted to $11 million. This purchase did not qualify for a business combination, as the acquired
company does not constitute a business.
Disclosure of Other Information in Respect of Business Combinations
As the acquired subsidiaries either did not prepare financial statements in accordance with IFRS before the business combinations or applied
accounting policies that are significantly different from the Group’s accounting policies, it is impracticable to determine revenues and net profit
of the combined entity for each year presented on the assumption that all business combinations effected during each year had occurred at the
beginning of the respective year.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
5. Goodwill
The table below presents movements in the carrying amount of goodwill.
US$ million
At 31 December 2008
Goodwill recognised on acquisitions of subsidiaries (Note 4)
Adjustment to contingent consideration
Impairment
Palmrose
Claymont Steel
General Scrap
EVRAZ Inc. NA Canada (Surrey)
Translation difference
At 31 December 2009
Adjustment to contingent consideration
Impairment
Stratcor, Inc.
Translation difference
At 31 December 2010
Adjustment to contingent consideration
Translation difference
At 31 December 2011
Gross
amount
Impairment
losses
$2,923
69
(5)
–
–
–
–
–
94
3,081
8
–
–
43
3,132
(6)
(35)
$(756)
–
–
(160)
(100)
(49)
(4)
(7)
21
(895)
–
(16)
(16)
(2)
(913)
–
2
Carrying
amount
$2,167
69
(5)
(160)
(100)
(49)
(4)
(7)
115
2,186
8
(16)
(16)
41
2,219
(6)
(33)
$3,091
$(911)
$2,180
Goodwill relates to the assembled workforce and synergy from integration of the acquired subsidiaries into the Group. The carrying amount of
goodwill was allocated among cash-generating units as follows at 31 December:
US$ million
EVRAZ Inc. NA
Oregon Steel Portland Mill
Rocky Mountain Steel Mills
OSM Tubular – Camrose Mills
Claymont Steel
General Scrap
EVRAZ Inc. NA Canada
Calgary
Red Deer
Regina Steel
Regina Tubular
Others
EVRAZ Palini e Bertoli
EVRAZ Vanady-Tula
Strategic Minerals Corporation
Nikom, a.s.
EVRAZ Highveld Steel and Vanadium Limited
Evro-Aziatskaya Energy Company
2011
2010
2009
$1,130
412
410
157
135
16
827
227
55
389
134
22
74
63
25
37
24
–
$2,180
$1,130
412
410
157
135
16
845
232
57
397
137
22
78
66
31
40
29
–
$2,219
$1,130
412
410
157
135
16
801
220
54
376
130
21
82
66
39
40
27
1
$2,186
The cash-generating units within EVRAZ Inc. NA and EVRAZ Inc. NA Canada represent the smallest identifiable groups of assets, primarily
individual mills, which generate cash flows that are largely independent from other assets or groups of assets.
Goodwill was tested for impairment as of 31 December 2011. 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 a
value-in-use calculation using cash flow 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.
EVRAZ plc
Annual Report and Accounts 2011
113
5. Goodwill (continued)
The key assumptions used by management in the value-in-use calculations are presented in the table below.
EVRAZ Inc. NA
EVRAZ Inc. NA Canada
EVRAZ Palini e Bertoli
EVRAZ Vanady-Tula
Strategic Minerals Corporation
Nikom, a.s.
EVRAZ Highveld Steel and Vanadium Limited
Period of
forecast,
years
5
5
5
5
5
5
5
Pre-tax
discount
rate, %
9.11-14.47
13.32
12.47
14.42
14.47
13.60
14.92
Commodity
steel products
steel products
steel plates
vanadium products
ferrovanadium products
ferrovanadium products
ferrovanadium products
steel products
Average
price of the
commodity
per tonne
in 2012
$966
$1,175
€754
$22,583
$29,917
$24,460
$27,462
$986
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 discount rates could lead to an additional impairment
at EVRAZ Palini e Bertoli, Strategic Minerals Corporation and General Scrap Inc. cash-generating units. If discount rates were 10% higher, this
would lead to an additional impairment of $9 million. The recoverable amount of these cash-generating units based on the discount rates applied
exceeds their carrying amount by $38 million.
Sales Prices
The prices of the products sold by the Group were estimated using industry research. The Group expects that the nominal prices will grow with a
compound annual gross rate of 4% in 2012–2016, 3.0% in 2017 and thereafter. If the prices assumed for 2012 and 2013 in the impairment test
were 10% lower, this would not lead to any additional impairment.
Sales Volumes
Management assumed that the sales volumes of steel products would increase on average by 5% during 2012 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 General Scrap Inc. cash-generating unit. If the sales volumes were 10% lower than those assumed for 2012 and 2013 in the impairment
test, this would lead to an additional impairment of $2 million. The recoverable amount of this cash-generating unit based on the sales volumes
applied exceeds its carrying amount by $2 million.
Cost Control Measures
The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonable deviation of
cost from these plans could lead to an additional impairment at EVRAZ Vanady-Tula and EVRAZ Palini e Bertoli cash-generating units. If the
actual costs were 10% higher than those assumed for 2012 and 2013 in the impairment test, this would lead to an additional impairment
of $36 million. The recoverable amount of these cash-generating units based on the cost control measures applied exceeds their carrying
amount by $50 million.
6. Acquisitions of Non-controlling Interests in Subsidiaries
Evraztrans
In 2011, the Group acquired an additional non-controlling interest of 24% in Evraztrans, a subsidiary, which renders railway transportation
services. The cash consideration amounted to $51 million. The excess of the amounts of consideration over the carrying values of non-controlling
interests acquired amounting to $18 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.
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 $1 million
was recorded in additional paid-in capital.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
7. Income and Expenses
Cost of revenues, selling and distribution costs, general and administrative expenses include the following for the years ended 31 December:
US$ million
Cost of inventories recognised as expense
Staff costs, including social security taxes
Depreciation, depletion and amortisation
2011
2010
2009
$(7,106)
(2,228)
(1,153)
$(5,241)
(1,743)
(925)
$(3,849)
(1,524)
(979)
In 2011, 2010 and 2009, the Group made a reversal of the allowance for net realisable value in the amount of $14 million, $35 million and
$177 million, respectively.
Staff costs include the following:
US$ million
Wages and salaries
Social security costs
Post-employment benefit expense
Share-based awards
Other compensations
The average number of staff employed under contracts of service was as follows:
Steel production
Mining
Vanadium products
Other operations
Unallocated
2011
2010
2009
$1,648
404
59
23
94
$2,228
$1,347
257
59
2
78
$1,743
$1,165
217
49
6
87
$1,524
2011
2010
2009
63,414
37,490
1,212
3,583
3,362
61,858
38,336
1,178
3,855
3,279
65,471
43,127
1,158
4,986
2,592
109,061
108,506
117,334
The major components of other operating expenses were as follows:
US$ million
Idling, reduction and stoppage of production, including termination benefits
Restoration works and casualty compensations in connection with accidents
Site restoration provision accrued with respect to Kazankovskaya (Note 11)
Other
Interest expense consisted of the following for the years ended 31 December:
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 (Note 23)
Discount adjustment on provisions
Interest on contingent consideration
Other
2011
$(40)
(4)
(6)
(46)
$(96)
2011
$(154)
(495)
(5)
(28)
(19)
(1)
(6)
$(708)
Interest income consisted of the following for the years ended 31 December:
US$ million
2011
2010
Interest on bank accounts and deposits
Interest on loans receivable
Interest on loans receivable from related parties
Interest on accounts receivable
Other
$6
4
3
–
4
$17
$9
1
2
1
–
$13
2010
$(45)
(17)
–
(48)
2009
$(70)
(1)
–
(50)
$(110)
$(121)
2010
$(241)
(423)
(6)
(32)
(15)
(1)
(10)
$(728)
2009
$(346)
(268)
(7)
(28)
(12)
(2)
(14)
$(677)
2009
$17
10
6
7
–
$40
EVRAZ plc
Annual Report and Accounts 2011
115
7. Income and Expenses (continued)
Gain/(loss) on financial assets and liabilities included the following for the years ended 31 December:
US$ million
Impairment of available-for-sale financial assets (Note 13)
Gain/(loss) on extinguishment of debts (Note 21)
Loss on conversion of bonds (Note 21)
Change in the fair value of derivatives (Note 26)
Other
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
2011
$(20)
(71)
(161)
(110)
7
$(355)
2010
2009
$(2)
–
–
4
6
$8
$–
103
–
1
(7)
$97
2011
2010
2009
20.00%
26.50%
10.00%
19.00%
31.40%
28.00%
10.09%
23.00%
and 25.00%
37.95%
20.00%
28.00%
10.00%
19.00%
31.40%
28.00%
10.09%
25.00%
38.32%
20.00%
29.00%
10.00%
20.00%
31.40%
28.00%
12.10%
25.00%
38.51%
In 2010, a new Tax Code has been adopted in Ukraine, which introduced a gradual reduction in income tax rates from 25% in 2010 to 16% in
2014. In addition, in accordance with the new Tax Code the carrying values of property, plant and equipment per statutory books as of 1 April 2011
will become a new tax base of these assets for income tax calculations. The Group’s subsidiaries measured the respective deferred tax assets and
liabilities at 31 December 2010 based on the new tax bases using the announced tax rates and a forecast of temporary differences reversal.
Major components of income tax expense for the years ended 31 December were as follows:
US$ million
2011
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
$(537)
129
(12)
Income tax benefit/(expense) reported in the consolidated statement of operations
$(420)
2010
$(415)
(8)
260
$(163)
2009
$(179)
(6)
231
$46
The major part of income taxes is paid in the Russian Federation. A reconciliation of income tax expense applicable to profit before income tax
using the Russian statutory tax rate to income tax expense as reported in the Group’s consolidated financial statements for the years ended
31 December is as follows:
US$ million
Profit/(loss) before income tax
At the Russian statutory income tax rate of 20%
Adjustment in respect of income tax of previous years
Deferred income tax expense arising on the adjustment to current income tax of prior periods
and the change in tax base of underlying assets
Deferred income tax benefit resulting from reduction in tax rate
Deferred income tax benefit relating to changes in tax regulations other than tax rates
Effect of non-deductible expenses and other non-temporary differences
Unrecognised temporary differences recognition/reversal
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
2011
$873
(175)
129
(116)
–
–
(282)
(52)
–
65
–
11
–
2010
$633
(127)
(8)
–
17
125
(261)
5
–
82
–
4
–
Income tax expense reported in the consolidated statement of operations
$(420)
$(163)
2009
$(338)
68
(6)
–
13
–
(135)
23
(1)
68
11
–
5
$46
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116
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
8. Income Taxes (continued)
Deferred income tax assets and liabilities and their movements for the years ended 31 December were as follows:
Net deferred income tax liability
$1,020
Year ended 31 December 2011
US$ million
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
Net deferred income tax asset
Year ended 31 December 2010
US$ million
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
Net deferred income tax asset
Change
recognised
in statement
of operations
2011
Change
recognised
in other
comprehensive
income
Received
from tax
authorities
Change due
to business
combinations
Change due to
disposal of
subsidiaries
Translation
difference
2010
$1,021
221
93
1,335
151
123
33
87
394
79
(1)
(38)
11
(28)
14
(17)
3
(40)
(40)
(17)
(5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(52)
(15)
(7)
(74)
(13)
(13)
(3)
(2)
(31)
(4)
$1,074
274
89
1,437
150
153
33
129
465
100
(47)
$1,072
Change
recognised
in statement
of operations
2010
Change
recognised
in other
comprehensive
income
Received
from tax
authorities
Change due
to business
combinations
Change due to
disposal of
subsidiaries
Translation
difference
2009
$1,074
274
89
1,437
150
153
33
129
465
100
(184)
(38)
(7)
(229)
5
23
6
(3)
31
24
–
–
–
–
(74)
–
–
–
(74)
–
74
(1)
–
–
(1)
–
–
–
–
–
–
5
–
–
5
11
–
5
1
17
10
(13)
–
–
(13)
–
–
–
–
–
–
10
15
4
29
5
2
–
(1)
6
(4)
$1,257
297
92
1,646
203
128
22
132
485
70
(1)
(2)
(13)
19
$1,231
Net deferred income tax liability
$1,072
(236)
EVRAZ plc
Annual Report and Accounts 2011
117
8. Income Taxes (continued)
Year ended 31 December 2009
US$ million
Deferred income tax liabilities:
Valuation and depreciation of property,
plant and equipment
Valuation and amortisation of intangible assets
Undistributed earnings of subsidiaries
Other
Deferred income tax assets:
Tax losses available for offset
Accrued liabilities
Impairment of accounts receivable
Other
Net deferred income tax asset
Change
recognised
in statement
of operations
2009
Change
recognised
in other
comprehensive
income
Received
from tax
authorities
Change due
to business
combinations
Change due to
disposal of
subsidiaries
Translation
difference
2008
$1,257
297
–
92
1,646
203
128
22
132
485
70
(42)
(49)
(11)
31
(71)
154
(20)
(3)
29
160
20
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
(1)
–
–
–
–
–
9
–
–
–
9
4
–
2
1
7
8
(1)
10
–
–
–
–
–
–
–
–
–
–
–
–
17
36
–
3
56
2
1
(1)
8
10
(2)
44
$1,274
310
11
58
1,653
43
147
24
94
308
44
$1,389
Net deferred income tax liability
$1,231
(211)
As of 31 December 2011, 2010 and 2009, deferred income taxes in respect of undistributed earnings of the Group’s subsidiaries have not been
provided for, as management does not intend to distribute accumulated earnings in the foreseeable future. The current tax rate on intra-group
dividend income varies from 0% to 10%.
At 31 December 2011, the Group has not recognised a deferred tax liability and deferred tax asset in respect of temporary differences of
$5,686 million and $3,478 million, respectively (2010: $5,764 million and $2,831 million, 2009: $4,270 million and $2,713 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
31 December 2011, the unused tax losses carry forward approximated $3,481 million (2010: $3,365 million, 2009: $2,757 million). The Group
recognised deferred tax asset of $151 million (2010: $150 million, 2009: $203 million) in respect of unused tax losses. Deferred tax asset in the
amount of $694 million (2010: $655 million, 2009: $463 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 $2,568 million (2010: $2,555 million, 2009: $1,873 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 $2,479 million (2010: $2,535 million, 2009: $1,870 million) are available indefinitely for offset against future taxable profits of the companies
in which the losses arose and $89 million will expire during 2012–2022 (2010: $20 million, 2009: $3 million).
B
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118
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
9. Property, Plant and Equipment
Property, plant and equipment consisted of the following as of 31 December:
US$ million
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
2011
2010
2009
$187
2,594
5,798
508
2,631
75
1,027
$177
2,536
5,734
483
2,656
84
702
$164
2,456
5,337
445
2,617
77
539
12,820
12,372
11,635
(954)
(2,358)
(227)
(923)
(52)
(4,514)
(854)
(2,046)
(203)
(607)
(55)
(3,765)
(711)
(1,631)
(173)
(485)
(50)
(3,050)
$8,306
$8,607
$8,585
The movement in property, plant and equipment for the year ended 31 December 2011 was as follows:
US$ million
Buildings
Land
constructions
and Machinery and
equipment
Transport and
motor vehicles
At 31 December 2010, cost, net of accumulated depreciation $177
–
Reclassifications between categories
12
Additions
4
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
–
–
–
(6)
$1,682
16
7
193
(17)
(151)
(14)
6
–
(4)
(3)
(75)
$3,688
(25)
5
522
(44)
(485)
(47)
3
(1)
–
4
(180)
$280
(1)
–
66
(4)
(43)
(3)
–
–
–
–
(14)
Mining
assets
$2,049
–
28
101
(3)
(379)
(29)
–
–
–
16
(75)
Other
assets
Assets under
construction
$29
(5)
3
7
(1)
(6)
–
–
–
–
–
(4)
$702
15
1,297
(893)
(3)
–
(21)
1
–
(5)
–
(66)
Total
$8,607
–
1,352
–
(72)
(1,064)
(114)
10
(1)
(9)
17
(420)
At 31 December 2011, cost, net of accumulated depreciation $187
$1,640
$3,440
$281
$1,708
$23
$1,027
$8,306
The movement in property, plant and equipment for the year ended 31 December 2010 was as follows:
US$ million
Buildings
Land
constructions
and Machinery and
equipment
Transport and
motor vehicles
At 31 December 2009, cost, net of accumulated depreciation $164
–
Reclassifications between categories
–
Additions
11
Assets acquired in business combination
1
Assets put into operation
(1)
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
–
–
–
2
$1,745
1
2
47
54
(9)
(149)
(4)
3
(4)
(6)
2
–
$3,706
(4)
4
55
423
(39)
(453)
(40)
8
(1)
(9)
–
38
$272
1
6
2
45
(3)
(40)
–
–
–
–
–
(3)
Mining
assets
$2,132
3
25
–
70
(12)
(151)
(8)
1
(2)
(75)
71
(5)
Other
assets
Assets under
construction
$27
(1)
–
3
11
(2)
(10)
–
–
–
–
–
1
$539
–
840
5
(604)
(10)
–
(65)
3
–
–
–
(6)
Total
$8,585
–
877
123
–
(76)
(803)
(117)
15
(7)
(90)
73
27
At 31 December 2010, cost, net of accumulated depreciation $177
$1,682
$3,688
$280
$2,049
$29
$702
$8,607
EVRAZ plc
Annual Report and Accounts 2011
119
9. Property, Plant and Equipment (continued)
The movement in property, plant and equipment for the year ended 31 December 2009 was as follows:
US$ million
Buildings
Land
constructions
and Machinery and
equipment
Transport and
motor vehicles
At 31 December 2008, cost, net of accumulated depreciation $157
5
Reclassifications
–
Additions
–
Assets acquired in business combination
3
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
(4)
–
–
–
3
$1,813
35
–
31
56
(11)
(151)
(28)
15
(3)
(1)
(3)
5
(13)
$3,747
(12)
10
26
346
(26)
(445)
(33)
20
(1)
–
–
6
68
$297
(1)
1
2
24
(4)
(43)
–
–
–
–
–
–
(4)
Mining
assets
$2,244
5
11
–
72
(1)
(147)
(4)
22
–
(10)
–
3
(63)
Other
assets
Assets under
construction
$63
(34)
–
–
15
(1)
(17)
–
–
–
–
(2)
–
3
$691
2
371
2
(516)
(6)
–
(7)
–
–
–
–
–
2
Total
$9,012
–
393
61
–
(49)
(803)
(72)
57
(8)
(11)
(5)
14
(4)
At 31 December 2009, cost, net of accumulated depreciation $164
$1,745
$3,706
$272
$2,132
$27
$539
$8,585
Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $287 million,
$250 million and $121 million as of 31 December 2011, 2010 and 2009, 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 31 December 2011 was $13 million (2010: $5 million, 2009: $7 million).
In 2011, the rate used to determine the amount of borrowing costs eligible for capitalisation was 4.6% (2010: 6.3%, 2009: 7%), which is the
effective interest rate of borrowings that were outstanding during the period, other than borrowings made specifically for the purpose of obtaining
qualifying assets.
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120
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
10. Intangible Assets Other Than Goodwill
Intangible assets consisted of the following as of 31 December:
US$ 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
2011
2010
2009
$1,230
31
64
9
16
55
1,405
(480)
(31)
(7)
(8)
(4)
(37)
(567)
$1,353
31
64
10
11
53
1,522
(441)
(25)
(6)
(8)
(3)
(35)
(518)
$1,276
31
64
9
42
46
1,468
(307)
(19)
(5)
(6)
(2)
(31)
(370)
$838
$1,004
$1,098
As of 31 December 2011, 2010 and 2009, water rights and environmental permits with a carrying value of $56 million had an indefinite useful life.
The movement in intangible assets for the year ended 31 December 2011 was as follows:
US$ million
At 31 December 2010, 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 31 December 2011, cost,
net of accumulated
amortisation
Customer
relationships
Trade names
and
trademarks
Water
rights and
environmental
permits
Patented and
unpatented
technology
Contract
terms
Other
Total
$912
–
(111)
–
–
–
6
(57)
$6
–
(6)
–
–
–
–
–
$58
–
(1)
–
–
–
–
–
$2
–
–
–
–
–
–
(1)
$8
–
–
–
–
–
5
(1)
$18
4
(5)
7
$1,004
4
(123)
7
(4)
(2)
–
–
(4)
(2)
11
(59)
$750
$–
$57
$1
$12
$18
$838
EVRAZ plc
Annual Report and Accounts 2011
121
10. Intangible Assets Other Than Goodwill (continued)
The movement in intangible assets for the year ended 31 December 2010 was as follows:
US$ million
At 31 December 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 31 December 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
–
(113)
–
–
–
1
55
$12
–
(6)
–
–
–
–
–
$59
–
(1)
–
–
–
–
–
$3
–
(2)
–
–
–
–
1
$40
–
(1)
–
–
(30)
–
(1)
$15
7
(4)
6
(5)
–
–
(1)
$1,098
7
(127)
6
(5)
(30)
1
54
$912
$6
$58
$2
$8
$18
$1,004
The movement in intangible assets for the year ended 31 December 2009 was as follows:
US$ million
At 31 December 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 31 December 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
–
(104)
–
–
(15)
8
134
$16
–
(5)
–
–
–
2
(1)
$60
–
(1)
–
–
–
–
–
$5
–
(2)
–
–
–
–
–
$58
–
(18)
–
–
–
–
–
$23
1
(4)
5
(11)
–
–
1
$1,108
1
(134)
5
(11)
(15)
10
134
$969
$12
$59
$3
$40
$15
$1,098
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122
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
11. Investments in Joint Ventures and Associates
The Group accounted for investments in joint ventures and associates under the equity method.
The movement in investments in joint ventures and associates was as follows:
US$ million
Corber
Streamcore Kazankovskaya
Investment at 31 December 2008
Additional investments
Share of profit/(loss)
Impairment of investments
Disposal of investments
Translation difference
Investment at 31 December 2009
Share of profit/(loss)
Impairment of investments
Translation difference
Investment at 31 December 2010
Additional investments
Share of profit/(loss)
Reversal of impairment of investments
Dividends paid
Translation difference
Investment at 31 December 2011
$541
–
40
–
–
(12)
569
95
–
(8)
656
–
50
–
(52)
(33)
$–
42
–
–
–
2
44
–
(23)
21
–
–
4
–
(1)
$–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Other
associates
$10
13
–
(1)
(1)
–
21
1
(10)
(1)
11
9
1
–
(2)
(1)
Total
$551
55
40
(1)
(1)
(10)
634
96
(33)
(9)
688
9
51
4
(54)
(35)
$621
$24
$–
$18
$663
Share of profit/(loss) of joint ventures and associates which is reported in the statement of operations comprised the following:
US$ million
Share of profit/(loss), net
Impairment of investments
Group’s share in excess of net assets of ZAO Koksovaya transferred to Raspadskaya
over consideration received (Note 12)
Losses recognised in excess of the Group’s investment in the associate
2011
$51
4
–
–
2010
$96
(33)
(42)
–
Share of profits/(losses) of joint ventures and associates recognised in the consolidated
statement of operations
$55
$21
2009
$40
(1)
–
(37)
$2
Corber Enterprises Limited
Corber Enterprises Limited (“Corber”) is a joint venture established in 2004 for the purpose of exercising joint control over economic activities
of Raspadskaya Mining Group. Corber is registered in Cyprus. The Group has 50% share in the joint venture, i.e. effectively owns 40% in OAO
Raspadskaya (Russia).
The table below sets forth Corber’s assets and liabilities as of 31 December:
US$ 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
Group’s share of net assets
Add: cost of guarantee
Less: unrealised profits in inventory balance
Investment
2011
$733
901
54
84
198
180
2,150
38
174
455
667
243
2010
$798
920
27
77
275
165
2,262
338
188
82
608
335
2009
$864
746
38
44
335
24
2,051
325
186
111
622
291
$1,240
$1,319
$1,138
620
2
(1)
$621
659
2
(5)
$656
569
2
(2)
$569
EVRAZ plc
Annual Report and Accounts 2011
123
11. Investments in Joint Ventures and Associates (continued)
Corber Enterprises Limited (continued)
The table below sets forth Corber’s income and expenses:
US$ 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
2011
$726
(361)
(246)
$119
$93
26
$119
4
$50
2010
$706
(323)
(139)
$244
$194
50
$244
(2)
$95
2009
$497
(252)
(141)
$104
$82
22
$104
(1)
$40
Kazankovskaya
ZAO Kazankovskaya (“Kazankovskaya”) is a Russian coal mining company that was acquired as part of the purchase of Yuzhkuzbassugol in 2007.
The Group owns 50% in Kazankovskaya.
The table below sets forth Kazankovskaya’s assets and liabilities as of 31 December:
US$ 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)
2011
2010
2009
$–
–
–
1
2
3
69
3
25
97
$–
–
1
1
1
3
65
4
24
93
$–
21
2
1
1
25
48
8
15
71
$(94)
$(90)
$(46)
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The accumulated unrecognised losses in respect of Kazankovskaya amounted to:
US$ million
Unrecognised losses
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
2011
$(27)
2011
$–
(1)
(10)
$(11)
$(6)
–
2010
$(21)
2010
$14
(32)
(23)
$(41)
$(21)
–
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2009
$–
2009
$15
(26)
(55)
$(66)
$(33)
(33)
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124
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
11. Investments in Joint Ventures and Associates (continued)
Streamcore
In 2009, the Group acquired a 50% interest in Streamcore (Cyprus), 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
The table below sets forth Streamcore’s assets and liabilities as of 31 December:
US$ million
Property, plant and equipment
Accounts receivable
Total assets
Non-current liabilities
Deferred income tax liabilities
Current liabilities
Total liabilities
Net assets
Group’s share of net assets
Group’s share in goodwill
Investment
4 September
2009
$59
1
11
71
5
5
10
$61
2009
$59
15
74
2
5
3
10
$64
32
12
$44
2011
$40
11
51
–
1
1
2
$49
24
–
$24
2010
$31
17
48
–
4
1
5
$43
21
–
$21
The table below sets forth Streamcore’s income and expenses from the date of acquisition of interest in the joint venture:
US$ million
Revenue
Cost of revenue
Other expenses, including income taxes
Net profit
Group’s share of profit of the joint venture
Period from
4 September to
31 December
2009
2010
$10
(9)
(1)
$–
$–
$5
(4)
(1)
$–
$–
2011
$9
(6)
(3)
$–
$–
12. Disposal Groups Held for Sale
The major classes of assets and liabilities of the disposal groups measured at the lower of carrying amount and fair value less costs to sell were
as follows as of 31 December:
US$ 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
2011
2010
2009
$–
9
9
–
$9
$–
2
2
–
$2
$1
6
7
1
$6
EVRAZ plc
Annual Report and Accounts 2011
125
12. Disposal Groups Held for Sale (continued)
The table below demonstrates the carrying values of assets and liabilities, at the dates of disposal, of the subsidiaries and other business units
disposed of during 2009–2011.
US$ million
Property, plant and equipment
Inventory
Accounts and notes receivable
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
2011
$1
–
–
1
–
–
–
–
$1
2011
$–
–
5
$5
2010
$90
–
22
112
13
1
–
14
$98
2010
$–
–
42
$42
2009
$16
3
7
26
–
14
14
$12
2009
$–
–
28
$28
At 31 December 2010 and 2009, the Group owed $5 million in respect of the disposed business units. In 2011, these payables were written off
and recorded as a gain on assets held for sale.
The disposal groups sold during 2009-2011 are described below.
Mine 12
On 1 June 2009, the Group entered into a contractual agreement to sell a 100% ownership interest in Mine 12, a 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
31 December 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 licence for the 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 certain
volumes of 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 $15 million and was included in loss on disposal groups classified as held for sale caption of the
consolidated statement of operations.
Other Disposal Groups Held for Sale
Other disposal groups held for sale included a few small subsidiaries involved in non-core activities (construction business, trading activity
and recreational services) and other non-current assets.
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126
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
13. Other Non-current Assets
Non-current Financial Assets
US$ million
Available-for-sale financial assets – investments in Delong Holdings Limited (Note 7)
Derivatives not designated as hedging instruments (Note 26)
Restricted deposits
Loans to related parties (Note 16)
Loans receivable
Trade and other receivables
Other
Other Non-current Assets
US$ million
Income tax receivable
Input VAT
Defined benefit plan asset (Note 23)
Fees for future purchases under a long-term contract
Prepayments for purchases of subsidiaries (Note 4)
Prepayment for purchases of associates and joint ventures
Prepayment for purchases of non-controlling interests
Deposit to secure put option for the shares of OAO Vanady-Tula (Note 4)
Other
2011
$17
–
15
–
18
3
–
$53
2011
$26
11
28
–
20
–
–
–
22
2010
$37
5
9
46
17
3
1
$118
2009
$43
–
18
–
4
1
–
$66
2010
2009
$24
11
19
11
–
9
–
–
29
$2
59
15
12
–
–
8
12
20
$107
$103
$128
Available-for-Sale Financial Assets
At 31 December 2011, the Group holds 82,853,998 shares of Delong Holdings Limited (“Delong”), which is approximately 15.5% of the entity’s
share capital. Delong is a flat steel producer headquartered in Beijing (China).
The investments in Delong are measured at fair value based on market quotations. The change in the fair value of these shares is initially
recorded in other comprehensive income.
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. In 2011, a $20 million loss relating to the decline in quotations of Delong shares was recognised in the
statement of operations.
In 2009, the Group sold its 13.65% ownership interest in Cape Lambert Iron Ore, an Australian mining company, acquired in 2008. The cash
consideration amounted to $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).
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 the other non-current assets caption of the consolidated statement of financial position as of 31 December 2010.
The acquisition was completed in 2011. At 31 December 2011, Mediaholding Provincia was accounted for under the equity method and included in
investments in joint ventures and associates.
Impairment of Long-Term Taxes
In 2011, the Group recognised an $9 million loss relating to unrecoverable VAT. This loss was included in the impairment of assets caption of the
consolidated statement of operations.
EVRAZ plc
Annual Report and Accounts 2011
127
14. Inventories
Inventories consisted of the following as of 31 December:
US$ million
Raw materials and spare parts
Work-in-progress
Finished goods
2011
$975
466
747
2010
$974
444
652
2009
$724
367
737
$2,188
$2,070
$1,828
As of 31 December 2011, 2010 and 2009, the net realisable value allowance was $90 million, $114 million and $145 million, respectively.
As of 31 December 2011, 2010 and 2009, certain items of inventory with an approximate carrying amount of $250 million, $203 million and
$81 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 21).
15. Trade and Other Receivables
Trade and other receivables consisted of the following as of 31 December:
US$ million
Trade accounts receivable
Other receivables
Allowance for doubtful accounts
2011
2010
$1,002
56
1,058
(87)
$971
$1,239
72
1,311
(98)
2009
$931
160
1,091
(90)
$1,213
$1,001
Ageing analysis and movement in allowance for doubtful accounts are provided in Note 29.
16. Related Party Disclosures
For the Group related parties include associates and joint venture partners, key management personnel and other entities that are under the
control or significant influence of the key management personnel, the Group’s ultimate parent or its shareholders. In considering each possible
related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties may not, and transactions between related parties may not be effected on
the same terms, conditions and amounts as transactions between unrelated parties.
Amounts owed by/to related parties at 31 December were as follows:
US$ million
Kazankovskaya
Lanebrook Limited
Raspadsky Ugol
Yuzhny GOK
Other entities
Less: allowance for doubtful accounts
Amounts due from
related parties
Amounts due to
related parties
2011
$21
–
2
5
9
37
(29)
$8
2010
$21
53
2
19
9
104
(24)
$80
2009
$14
53
1
22
19
109
(2)
$107
2011
$–
–
39
46
13
98
–
2010
$1
–
32
178
6
217
–
2009
$1
–
73
154
7
235
–
$98
$217
$235
Transactions with related parties were as follows for the years ended 31 December:
Sales to
related parties
Purchases from
related parties
US$ million
2011
2010
2009
Interlock Security Services
Kazankovskaya
Raspadsky Ugol
Yuzhny GOK
Other entities
$1
1
8
42
8
$60
$1
6
11
20
8
$1
5
11
6
8
2011
$43
5
207
165
27
2010
$37
14
192
67
20
$46
$31
$447
$330
2009
$27
15
107
34
18
$201
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
16. Related Party Disclosures (continued)
In addition to the disclosures presented in this note, the balances and transactions with related parties are disclosed in Notes 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. In 2011, the Group issued a $3 million loan to Kazankovskaya with a maturity date of 31 December 2011 and an interest rate
of 8% per annum. At the reporting date, the Group assessed the recoverability of this loan and recognised a loss, which was included in the other
non-operating expenses caption of the consolidated statement of operations.
Lanebrook Limited is a controlling shareholder of the Company. At 31 December 2010 and 2009, the amounts receivable from Lanebrook
Limited included overpayments for the acquired working capital of the Ukrainian subsidiaries and a $46 million loan. The loan bore interest
of 7.85% per annum and was due for repayment on 22 June 2012. At 31 December 2010, the loan was included in other non-current assets.
In 2011, Lanebrook early settled the loan and fully repaid its debts relating to the acquisition of the Ukrainian businesses.
In addition, in 2008 the Group acquired from Lanebrook 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 31 December 2012.
OOO Raspadsky Ugol (“Raspadsky Ugol”), a subsidiary of the Group’s joint venture, sells coal to the Group. Raspadsky Ugol represents
approximately 12% 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 sinter from the entity.
In addition to the purchase transactions disclosed above, in July 2011 the Group acquired an office building for its administrative staff in Moscow
from OOO Zapadnye Vorota, an entity under the control of the ultimate principal shareholders of the Group. The cash consideration (including VAT)
amounted to $102 million.
The transactions with related parties were based on market terms.
Compensation to Key Management Personnel
Key management personnel include the following positions within the Group:
(cid:114)(cid:1) directors of the Company,
(cid:114)(cid:1) vice presidents,
(cid:114)(cid:1) top managers of major subsidiaries.
In 2011, 2010 and 2009, key management personnel totalled 56, 55 and 58 persons, respectively. Total compensation to key management
personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following:
US$ million
Salary
Performance bonuses
Social security taxes
Share-based payments (Note 24)
Termination benefits
Other benefits
2011
$20
12
1
13
3
1
$50
2010
$21
14
1
1
4
3
$44
2009
$18
10
1
3
–
1
$33
Disclosures on directors’ remuneration required by the Companies Act 2006 and those specified for audit by the Directors’ Remuneration Report
Regulations 2002 are included in the Directors’ Remuneration Report.
EVRAZ plc
Annual Report and Accounts 2011
129
17. Other Taxes Recoverable
Taxes recoverable consisted of the following as of 31 December:
US$ million
Input VAT
Other taxes
2011
$287
125
$412
2010
$241
112
$353
2009
$173
85
$258
Input VAT, representing amounts payable or paid to suppliers, is recoverable from the tax authorities via offset against VAT payable to the tax
authorities on the Group’s revenue or direct cash receipts from the tax authorities. Management periodically reviews the recoverability of the
balance of input value added tax and believes it is fully recoverable within one year.
18. Other Current Financial Assets
Other current assets included the following as of 31 December:
US$ million
Investments in Yuzhny GOK (Note 16)
Bank deposits
Restricted deposits at banks
Collateral under swap agreements (Note 26)
Other short-term investments
2011
$38
2
7
10
–
$57
2010
$38
1
13
–
–
$52
2009
$38
22
59
–
1
$120
Financial Assets at Fair Value through Profit or Loss
In 2009, the Group recognised $7 million gain on swaps for the shares of Delong and Cape Lambert Iron Ore, which was included in gain/(loss)
on financial assets and liabilities caption of the consolidated statement of operations, within change in the fair value of derivatives.
19. Cash and Cash Equivalents
Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of 31 December:
US$ million
US dollar
Russian rouble
Euro
South African rand
Ukrainian hryvnia
Canadian dollar
Czech koruna
Other
2011
$314
262
89
80
25
21
6
4
$801
2010
$306
200
46
49
10
69
1
2
$683
2009
$300
170
75
110
1
14
1
–
$671
20. Equity
Share Capital
Prior to the reorganisation, in which the majority of shares of Evraz Group S.A. were exchanged into shares of EVRAZ plc, the share capital of the
Group comprised the share capital of Evraz Group S.A.
Share Capital of Evraz Group S.A.
Number of shares
Authorised
Ordinary shares of €2 each
Issued and fully paid
Ordinary shares of €2 each
2011
2010
2009
257,204,326 257,204,326 257,204,326
156,214,373 145,957,121 145,957,121
Scrip Dividends
On 30 January 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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
20. Equity (continued)
Share Capital of Evraz Group S.A. (continued)
Scrip Dividends (continued)
The voluntary partial scrip dividend alternative was voted for in respect of 97,553,473 shares, representing 79.62% of the share capital of
Evraz Group S.A., 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 major shareholder, Lanebrook Limited, subscribed to 9,193,477 shares.
Convertible Bonds and Equity Offerings
On 13 July 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 depositary 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 bore interest of 7.25% per annum payable on a quarterly basis and matured
on 13 July 2014.
The conversion could be exercised at the option of bondholders on any date during the period from 11 September 2009 till 6 July 2014. The
bonds would be convertible into GDRs at an initial conversion price of $21.20 per GDR. The conversion price represented a 28% premium to the
equity offering placement price of $16.50 per GDR, which was the reference price for the convertible bonds. Lanebrook, the Company’s parent,
and its affiliate, subscribed for $200 million of the bonds.
The Group could early redeem the bonds at their principal amount plus accrued interest if 15% or less of the bonds remained outstanding.
In the equity offering, on 13 July 2009, 6,060,608 new shares were issued as GDRs at an issue price of $16.50 per GDR.
Evraz Group S.A. 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 27 July 2009 and resulted in an increase in the
aggregate principal amount of the bonds to $650 million.
Evraz Group S.A. 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
27 July 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.
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 4 August 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 Evraz Group S.A. was
substituted for Lanebrook as a lender of the borrowed GDRs. As a result, on 12 August 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. At 31 December 2011, 2010 and 2009, Evraz Group S.A.
was the owner of these shares.
Conversion of Bonds into Shares
In July and August 2011, Evraz Group S.A. issued 30,771,756 GDRs representing 10,257,252 ordinary shares to bondholders which had
accepted the offer to convert 7.25% convertible bonds due 2014 (Note 21).
Share Capital of EVRAZ plc
On 17 October 2011, following the decision of the Board of directors, Evraz Group S.A. commenced the Group’s reorganisation and re-
domiciliation to the United Kingdom. This was implemented by means of the share exchange offer made by the Company to the shareholders
of Evraz Group S.A. which were entitled to receive 9 shares of EVRAZ plc for each share of Evraz Group S.A.
EVRAZ plc
Annual Report and Accounts 2011
131
20. Equity (continued)
Share Capital of EVRAZ plc (continued)
The first share exchange was performed on 7 November 2011: EVRAZ plc issued 1,313,258,883 ordinary shares with par value of $2 each
and exchanged them for approximately 98.01% interest in Evraz Group S.A. The new shares were admitted to the premium listing segment
of the Official List of the UK Listing Authority and to trading on the London Stock Exchange’s main market for listed securities.
On 24 November 2011, the par value of the shares was reduced to $1, and $1,313 million representing distributable reserves were transferred
to accumulated profits. All subsequent shares were issued with par value of $1 each. The exchange offer was finally closed on 7 February 2012.
Information about the share exchange is summarised below.
Date of exchange
7 November 2011
28 November 2011
16 December 2011
Total at 31 December 2011
30 January 2012
8 February 2012
Total at closing of the offer
Number of
shares issued
by EVRAZ plc
1,313,258,883
23,212,353
1,089,477
1,337,560,713
839,388
659,790
Number of
shares of
Evraz Group S.A.
exchanged
145,917,653.67
2,579,150.33
121,053.00
148,617,857.00
93,265.33
73,310.00
Ownership
interest
exchanged
98.01%
1.73%
0.08%
99.82%
0.06%
0.05%
1,339,059,891
148,784,432.33
99.93%
Upon the closure of the offer, the admission of the global depositary receipts of Evraz Group S.A. to trading on the London Stock Exchange
has been cancelled.
On 17 February 2012, the Group purchased the remaining GDRs, representing 96,607.67 shares of Evraz Group S.A., for $4 million and
exchanged them for the newly issued shares of EVRAZ plc. Since that date Evraz Group S.A. became a wholly-owned subsidiary of EVRAZ plc.
Treasury Shares
In 2011, the Group purchased 235,878 treasury shares for $22 million, sold 34,332 shares for $3 million and transferred 115,389 shares to
participants of the Incentive Plan (Note 24). The cost of treasury shares gifted under the Incentive Plan, amounting to $11 million, was charged
to accumulated profits. As of 31 December 2011, after the share exchange described above, the Group had 775,410 treasury shares.
In 2009, the Group purchased 67,569 treasury shares for $5 million and sold 135,000 treasury shares, including 27,902 shares 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, was charged to accumulated profits.
Repurchase of Vested Share-based Awards
In 2007, the Group made a decision to cease the issuance of new shares for the settlement of share-based awards. 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, 234,813 share options were repurchased after vesting. The cash spent on repurchase of vested options, amounting to $3 million,
was charged to accumulated profits.
Earnings per Share
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary
shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity
holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares
that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
2011
2010
2009
Weighted average number of ordinary shares for basic earnings per share
Effect of dilution: share-based awards
1,293,795,125 1,247,614,092 1,210,116,474
–
2,689,622
134,937
Weighted average number of ordinary shares adjusted for the effect of dilution
1,296,484,747 1,247,749,029 1,210,116,474
Profit/(loss) for the year attributable to equity holders of the parent, US$ million
Basic earnings/(losses) per share
Diluted earnings/(losses) per share
$461
$0.36
$0.36
$486
$0.39
$0.39
$(295)
$(0.24)
$(0.24)
The fair value of shares issued as a scrip alternative on 30 January 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 of
Evraz Group S.A. in the calculation of basic earnings per share from the beginning of the earliest period presented.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
20. Equity (continued)
Earnings per Share (continued)
The weighted average number of ordinary shares for basic earnings per share does not include 7,333,333 shares of Evraz Group S.A. 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 2011 and 2010, 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.
In 2011, the weighted average number of ordinary shares outstanding from 1 January 2011 to the date of the first share exchange (“the
reorganisation date”) was computed on the basis of the weighted average number of ordinary shares of Evraz Group S.A. outstanding during the
period multiplied by the share exchange ratio. The number of ordinary shares outstanding from the reorganisation date to the end of 2011 was
the actual number of ordinary shares of EVRAZ plc outstanding during that period. The weighted average number of ordinary shares outstanding
and earnings per share for each comparative period have been recalculated using the share exchange ratio.
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 2009–2011 were as follows:
Interim for 2011
10/10/2011 18/09/2011
491
In 2011, Evraz Group S.A. declared interim dividends of $3.30 per share, including special dividends of $2.70 per share.
The shareholders’ meetings held on 16 May 2011 and 17 May 2010 resolved not to declare dividends for 2010 and 2009.
Date of
declaration
To holders
registered at
Dividends
declared,
US$ million
US$ per
share
3.30
In addition, certain subsidiaries of the Group declared dividends. The share of non-controlling shareholders in those dividends was $1 million
in 2011, 2010 and 2009.
Legal Reserve
According to the Luxembourg Law, Evraz Group S.A. 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 2011 and 2010, the Group acquired non-controlling interests in certain subsidiaries (Note 6). The excess of consideration over the carrying
value of non-controlling interests amounting to $18 million and $3 million, respectively, was charged to accumulated profits and the excess
of acquired non-controlling interests over the consideration amounting to $Nil and $1 million, respectively, was recorded as additional paid-in
capital.
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 the construction of a commercial
seaport 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
As of 31 December 2011, 2010 and 2009, total interest-bearing loans and borrowings consisted of short-term loans and borrowings in the amount
of $339 million, $381 million and $411 million, respectively, and long-term loans and borrowings in the amount of $6,919 million, $7,636 million
and $7,747 million, respectively, including the current portion of long-term liabilities of $193 million, $244 million and $1,498 million, respectively.
EVRAZ plc
Annual Report and Accounts 2011
133
21. Loans and Borrowings (continued)
Short-term and long-term loans and borrowings were as follows as of 31 December:
US$ million
2011
2010
2009
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
6.75 per cent notes due 2018
13.5 per cent bonds due 2014
9.25 per cent bonds due 2013
9.95 per cent bonds due 2015
8.40 per cent bonds due 2016
Liabilities under bonds assumed in business combination
Unamortised debt issue costs
Difference between the nominal amount and liability component of
convertible bonds (Note 20)
Interest payable
$2,613
534
–
577
509
850
621
466
466
621
1
(133)
–
81
$3,472
1,156
650
577
509
–
656
492
492
–
13
(192)
(104)
90
$4,605
1,156
650
577
509
–
661
–
–
–
–
(196)
(126)
87
$7,206
$7,811
$7,923
The average effective annual interest rates were as follows at 31 December:
US dollar
Russian rouble
Euro
Czech koruna
Long-term borrowings
Short-term borrowings
2011
2010
2009
2011
2010
2009
6.96%
10.37%
4.66%
–
8.01%
11.17%
5.05%
–
7.30%
13.49%
5.11%
–
2.89%
10.83%
3.64%
3.38%
3.06%
12.50%
1.48%
–
4.18%
13.25%
1.46%
3.38%
The liabilities are denominated in the following currencies at 31 December:
US$ 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)
2011
2010
2009
$4,790
2,215
328
6
(133)
$6,079
1,699
322
7
(192)
–
(104)
$7,206
$7,811
$7,233
701
297
14
(196)
(126)
$7,923
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 31 December 2009 was $2,895 million.
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.
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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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
21. Loans and Borrowings (continued)
Pledged Assets (continued)
At 31 December 2011, 2010 and 2009, the Group had equipment with a carrying value of $Nil, $Nil and $11 million, respectively, pledged as
collateral under the loan agreements. In addition, the Group pledged inventory with a carrying value of $250 million, $203 million and $81 million
as of 31 December 2011, 2010 and 2009, respectively.
Issue of Notes and Bonds
In 2009, the Group issued convertible bonds in the amount of $650 million, which bore interest of 7.25% per annum and matured on 13 July
2014 (Note 20). These bonds were converted into shares in 2011 (Note 20).
In 2011, the Group issued notes for the amount of $850 million due in 2018. The notes bear semi-annual coupon at the annual rate of 6.75%
and must be redeemed at their principal amount on 27 April 2018. The proceeds from the issue of the notes were used for the partial repurchase
of 8.875% notes due 2013 and repayment of certain bank loans.
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 16 October 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 22 March 2013, and bonds amounting to 15,000 million Russian roubles which bear interest of 9.95% per annum and mature
on 26 October 2015. In 2011, the Group issued bonds in the total amount of 20,000 million Russian roubles, which bear interest of 8.40% per
annum and mature on 2 June 2016. The currency and interest rate risk exposures of these transactions were partially economically hedged
(Note 26).
Repurchase of Notes and Bonds
In 2009, the Group repurchased 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 31 December 2009.
In 2011, the Group repurchased $622 million of 8.875% notes due 2013 for a cash consideration of $693 million. As a result, the Group
recognised a loss on extinguishment of debts in the amount of $71 million within gain/(loss) on financial assets and liabilities caption of the
consolidated statement of operations for the year ended 31 December 2011 (Note 7).
On 22 June 2011, Evraz Group S.A. made an incentive offer to the holders of 7.25% convertible bonds due 2014 to convert these bonds into
GDRs at $21.12 per GDR. In addition, the holders were offered an incentive payment (“conversion premium”) of $24,443.89 per bond with
the principal amount of $100,000 each. The bondholders owning 6,478 bonds accepted the incentivised conversion. In July and August 2011,
Evraz Group S.A. additionally converted 21 bonds and settled 1 bond by cash. The conversion premium paid by Evraz Group S.A. in the amount
of $158 million together with $3 million of transaction costs were recognised as a loss (Note 7). Evraz Group S.A. issued 30,771,756 GDRs
representing 10,257,252 ordinary shares. As such, the carrying amount of liability amounting to $553 million was reclassified into equity.
Early Settlement
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
31 December 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 31 December 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 an $800 million loan from VEB and a 10,000 million rouble 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 31 December 2009. In 2010, the Group fully repaid its liabilities under a $1,007 million loan from VEB.
Unamortised Debt Issue Costs
Unamortised debt issue costs represent agent commission and transaction costs paid by the Group in relation to the arrangement and reset
of loans and notes.
Unutilised Borrowing Facilities
The Group had the following unutilised borrowing facilities as of 31 December:
US$ million
Unutilised borrowing facilities
2011
2010
2009
$1,322
$1,010
$1,345
EVRAZ plc
Annual Report and Accounts 2011
135
22. Finance Lease Liabilities
The Group has several lease agreements under which it has an option to acquire the leased assets at the end of lease terms ranging from 1 to
15 years. The estimated remaining useful life of leased assets varies from 2 to 29 years. The leases were accounted for as finance leases in the
consolidated financial statements. The carrying value of the leased assets was as follows as at 31 December:
US$ million
Buildings and constructions
Machinery and equipment
Transport and motor vehicles
Assets under construction
2011
2010
$2
22
83
–
$1
22
93
10
$107
$126
2009
$1
29
101
10
$141
The leased assets are included in property, plant and equipment in the consolidated statement of financial position (Note 9).
Future minimum lease payments were as follows at 31 December:
US$ 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
2011
2010
2009
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
$16
$13
$25
$19
$24
29
3
48
(9)
$39
24
2
39
–
$39
41
5
71
(14)
$57
33
5
57
–
$57
65
7
96
(21)
$75
$17
51
7
75
–
$75
In the years ended 31 December 2011, 2010 and 2009, the average interest rates under the finance lease liabilities were 9.8%, 9.9% and
10.0%.
23. Employee Benefits
Russian Plans
In 2009–2010, 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 addition, certain Russian subsidiaries have defined benefit plans under which contributions are made to a separately administered non-state
pension fund. 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 31 December 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.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
23. Employee Benefits (continued)
US 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 defined contribution plans and receive a contribution
funded by the Group’s subsidiaries equal to 2–7% of annual wages, including bonuses for certain employees. The defined contribution plans are
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.
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
2011
$404
2010
$257
2009
$217
Defined Benefit Plans
The Russian, Ukrainian and other defined benefit plans are mostly unfunded and the US and Canadian plans are partially funded.
The components of net benefit expense recognised in the consolidated statement of operations for the years ended 31 December 2011, 2010
and 2009 and amounts recognised in the consolidated statement of financial position as of 31 December 2011, 2010 and 2009 for the defined
benefit plans were as follows:
Net benefit expense (recognised in cost of sales and general and administrative expenses)
Year ended 31 December 2011
US$ 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
Net benefit expense
Year ended 31 December 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)
Year ended 31 December 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)
Russian
plans
Ukrainian
plans
US &
Canadian
plans
$(7)
(16)
–
(9)
1
$(31)
$(5)
(9)
–
–
12
$(2)
$(17)
(33)
32
(5)
(1)
$(24)
Russian
plans
Ukrainian
plans
US &
Canadian
plans
$(5)
(16)
–
(3)
6
–
–
$(5)
(8)
–
–
(2)
–
–
$(5)
(11)
–
–
1
–
1
$(6)
(7)
–
(1)
(2)
–
–
$(14)
(34)
28
(4)
1
1
(1)
$(23)
$(13)
(33)
25
(2)
(1)
7
(1)
$(18)
Russian
plans
Ukrainian
plans
US &
Canadian
plans
Other
plans
$–
(2)
–
–
–
$(2)
Other
plans
$(1)
(2)
–
–
–
–
–
$(3)
Other
plans
$(1)
(2)
–
(1)
–
–
–
$(4)
Total
$(29)
(60)
32
(14)
12
$(59)
Total
$(25)
(60)
28
(7)
5
1
(1)
$(59)
Total
$(25)
(53)
25
(4)
(2)
7
–
$(52)
Net benefit expense
$(18)
$(15)
Net benefit expense
$(14)
$(16)
EVRAZ plc
Annual Report and Accounts 2011
137
23. Employee Benefits (continued)
Actual return on plan assets was as follows:
US$ million
Actual return on plan assets including:
US & Canadian plans
Russian plans
Benefit liability
31 December 2011
US$ million
Benefit obligation
Plan assets
Unrecognised net actuarial gains/(losses)
Unrecognised past service cost
Benefit asset
Benefit liability
31 December 2010
US$ million
Benefit obligation
Plan assets
Unrecognised net actuarial gains/(losses)
Unrecognised past service cost
Benefit asset
Benefit liability
31 December 2009
US$ million
Benefit obligation
Plan assets
Unrecognised net actuarial gains/(losses)
Unrecognised past service cost
Benefit asset
Benefit liability
2011
$1
1
–
Russian
plans
Ukrainian
plans
US &
Canadian
plans
$203
(1)
202
(68)
10
–
$65
–
65
(8)
2
–
$144
$59
$700
(470)
230
(185)
(1)
28
$72
Russian
plans
Ukrainian
plans
US &
Canadian
plans
$192
(1)
191
(68)
12
–
$135
$77
–
77
(2)
(10)
–
$65
Russian
plans
Ukrainian
plans
$173
(1)
172
(55)
14
–
$131
$72
–
72
(4)
(12)
–
$56
$629
(463)
166
(95)
1
19
$91
US &
Canadian
plans
$562
(403)
159
(74)
–
15
2010
$44
44
–
Other
plans
$21
–
21
–
–
–
$21
Other
plans
$24
–
24
–
–
–
$24
Other
plans
$20
–
20
–
–
–
$100
$20
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2009
$66
65
1
Total
$989
(471)
518
(261)
11
28
$296
Total
$922
(464)
458
(165)
3
19
$315
Total
$827
(404)
423
(133)
2
15
$307
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
23. Employee Benefits (continued)
Movements in benefit obligation
US$ million
At 31 December 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 31 December 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 31 December 2010
Interest cost on benefit obligation
Current service cost
Past service cost
Benefits paid
Actuarial (gains)/losses on benefit obligation
Translation difference
Russian
plans
Ukrainian
plans
US &
Canadian
plans
$150
11
5
(12)
29
(5)
(2)
(3)
173
16
5
(4)
(13)
17
(1)
(1)
192
16
7
1
(15)
14
(12)
$72
7
6
(5)
(6)
–
–
(2)
72
8
5
–
(6)
(2)
–
–
77
9
5
(24)
(7)
5
–
$475
33
13
(43)
46
–
–
38
562
34
14
–
(37)
39
–
17
629
33
17
3
(39)
65
(8)
Other
plans
$20
2
1
(2)
(5)
–
–
4
20
2
1
–
(1)
–
–
2
24
2
–
–
(1)
–
(4)
Total
$717
53
25
(62)
64
(5)
(2)
37
827
60
25
(4)
(57)
54
(1)
18
922
60
29
(20)
(62)
84
(24)
At 31 December 2011
$203
$65
$700
$21
$989
The amount of contributions expected to be paid to the defined benefit plans during 2012 approximates $73 million.
Changes in the fair value of plan assets
US$ million
At 31 December 2008
Expected return on plan assets
Contributions of employer
Benefits paid
Actuarial gains/(losses) on plan assets
Minimum funding requirements
Translation difference
At 31 December 2009
Expected return on plan assets
Contributions of employer
Benefits paid
Actuarial gains/(losses) on plan assets
Minimum funding requirements
Translation difference
At 31 December 2010
Expected return on plan assets
Contributions of employer
Benefits paid
Actuarial gains/(losses) on plan assets
Translation difference
At 31 December 2011
Russian
plans
Ukrainian
plans
US &
Canadian
plans
Other
plans
$1
–
11
(12)
1
–
–
1
–
13
(13)
–
–
–
1
–
15
(15)
–
–
$1
$–
–
5
(5)
–
–
–
–
–
6
(6)
–
–
–
–
–
7
(7)
–
–
$316
25
24
(43)
40
7
34
403
28
37
(37)
16
1
15
463
32
52
(39)
(31)
(7)
$–
–
2
(2)
–
–
–
–
–
1
(1)
–
–
–
–
–
1
(1)
–
–
Total
$317
25
42
(62)
41
7
34
404
28
57
(57)
16
1
15
464
32
75
(62)
(31)
(7)
$–
$470
$–
$471
EVRAZ plc
Annual Report and Accounts 2011
139
23. Employee Benefits (continued)
The major categories of plan assets as a percentage of total plan assets were as follows at 31 December:
US & Canadian plans:
Equity funds and investment trusts
Corporate bonds and notes
Shares
Property
Cash
2011
2010
2009
81%
11%
0%
3%
5%
86%
11%
0%
0%
3%
86%
9%
0%
3%
2%
The following table is a summary of the present value of the benefit obligation, fair value of the plan assets and experience adjustments for the
current year and previous four annual periods.
US$ million
Defined benefit obligation
Plan assets
(Deficit)/surplus
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2011
$989
471
(518)
137
(12)
2010
$922
464
(458)
60
9
2009
$827
404
(423)
54
24
2008
$717
325
(392)
(38)
16
The principal assumptions used in determining pension obligations for the Group’s plans are shown below:
2011
2010
2009
US &
Russian Ukrainian Canadian
plans
plans
plans
Other
plans
US &
Russian Ukrainian Canadian
plans
plans
plans
Other
plans
US &
Russian Ukrainian Canadian
plans
plans
plans
2007
$535
201
(334)
(18)
5
Other
plans
Discount rate
Expected rate
of return
on assets
Future benefits
increases
Future salary
increase
Healthcare costs
increase rate
8%
14.0% 4.0-5.3% 4.0-8.8%
8%
12.6% 5.1-5.8% 3.9-8.3%
10%
12.4% 5.5-9.3% 4.2-9.5%
12%
– 0.9-7.1%
–
12%
– 0.9-7.3%
–
12%
– 1.3-8.5%
–
8%
8%
–
8%
– 3.0-6.3%
8% 3.0-3.1% 2.0-6.3%
–
6.5-7% 7.3-7.5%
8%
8%
–
8%
–
3%
8% 3.0-3.2% 2.0-6.5%
–
6.8-10%
6.5-7%
8%
8%
–
9%
3%
3-10%
9%
3-7.5% 6.3-7.5%
–
8-10%
8%
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.
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140
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
24. Share-based Payments
On 5 September 2006, 14 December 2010 and 13 October 2011, 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 Evraz Group S.A. Share options granted on
5 September 2006 under the Incentive Plan 2006 could be exercised at $65.37 per share. Shares under the Incentive Plans 2010 and 2011
are gifted to the participants upon vesting.
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:
Number of Shares of Evraz Group S.A.
11 May 2007
15 April 2008
15 May 2009
Incentive Plan
2006
99,282
148,904
248,183
496,369
According to the Plan 2010 and 2011, the vesting date for each tranche occurs within the 90-day period after announcement of the annual
results. The expected vesting dates of the awards outstanding at 31 December 2011 are presented below:
Number of Shares of EVRAZ plc
29 March 2012
29 March 2013
29 March 2014
Incentive Plan
2011
Incentive Plan
2010
851,068
894,399
1,235,903
739,686
739,491
–
2,981,370
1,479,177
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:
(cid:114)(cid:1) Plans 2010 and 2011: 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.
(cid:114)(cid:1) Plan 2006: all options granted to a participant, whether vested or not, expired on termination date.
There have been no modifications or cancellations to the plans during 2009–2011. In 2011, after the Group’s reorganisation (Notes 1 and 20),
the shares of Evraz Group S.A., which were granted to the participants, have been substituted by the shares of EVRAZ plc.
The Group accounted for share-based compensation at fair value pursuant to the requirements of IFRS 2 “Share-based Payment”. The weighted
average fair value of share-based awards granted in 2011, 2010 and 2006 was $48.26, $102.07 and $14.15 per share of Evraz Group S.A.,
respectively. 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 of Evraz Group S.A. at the grant dates
Incentive Plan
2011
Incentive Plan
2010
Incentive Plan
2006
3.6 – 4.8
n/a
n/a
0.5 – 2.5
$51.57
1.2 – 1.5
n/a
n/a
0.5 – 2.5
$103.83
4 – 6
45.37
5.42 – 5.47
0.7 – 2.7
$66.06
The historical volatility has been used for valuation of the share-based awards. The volatility reflects the assumption that it is indicative of future
trends which may not necessarily be the actual outcome.
EVRAZ plc
Annual Report and Accounts 2011
141
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 1 January
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
Exchange into shares of EVRAZ plc
Outstanding at 31 December
321,898
335,069
(45,960)
(115,389)
(115,389)
–
3,964,929
4,460,547
2011
No.
2011
WAEP
2010
No.
2010
WAEP
2009
No.
2009
WAEP
$50.71
–
48.30
51.70
$–
–
–
–
–
334,755
(12,857)
–
$–
–
–
–
–
–
–
370,340
–
(107,625)
(262,715)
(27,902)
(234,813)
–
$–
321,898
$–
–
$–
The weighted average share price at the dates of exercise was $97.46 and $67.29 in 2011 and 2009, respectively.
The weighted average remaining contractual life of the share-based awards outstanding as of 31 December 2011 and 2010 was 1.2 and
1.4 years, respectively.
In the years ended 31 December 2011, 2010 and 2009, expense arising from the share-based compensations was as follows:
US$ million
Expense arising from equity-settled share-based payment transactions
Expense arising from cash-settled share-based payment transactions
2011
$23
–
$23
2010
2009
$2
–
$2
$–
6
$6
In 2011, 2010 and 2009, the Group paid $1 million, $3 million and $35 million in respect of the cash-settled share-based compensations,
respectively.
25. Provisions
In the years ended 31 December 2011, 2010 and 2009, the movements in provisions was as follows:
US$ million
At 31 December 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 31 December 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 31 December 2010
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 31 December 2011
Site restoration
and
decommissioning
costs
Legal
claims
Other
provisions
$160
15
12
(1)
(6)
–
10
190
23
15
20
55
(5)
–
7
305
45
19
(8)
(9)
(12)
(2)
(28)
$4
7
–
–
(3)
(2)
–
6
18
–
–
–
(5)
(2)
–
17
20
–
–
(1)
(12)
(8)
(1)
$52
28
–
–
(59)
(6)
–
15
12
–
–
–
(15)
(1)
–
11
19
–
–
–
(14)
(2)
(1)
Total
$216
50
12
(1)
(68)
(8)
10
211
53
15
20
55
(25)
(3)
7
333
84
19
(8)
(10)
(38)
(12)
(30)
$310
$15
$13
$338
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
25. Provisions (continued)
At 31 December the provisions were as follows:
2011
2010
2009
US$ million
Non-current
Current
Non-current
Current
Non-current
Current
Site restoration and decommissioning costs
Legal claims
Other provisions
$283
–
2
$285
$27
15
11
$53
$277
–
2
$279
$28
17
9
$54
$172
–
4
$176
$18
6
11
$35
Site Restoration Costs
Under the legislation, mining companies and steel mills have obligations to restore mining sites and contaminated land. The respective liabilities
were measured based on estimates of restoration costs which are expected to be incurred in the future discounted at the annual rate ranging
from 3.7% to 14% (2010: 6.1% to 13%, 2009: from 8% to 13%).
26. Other Long-Term Liabilities
Other long-term liabilities consisted of the following as of 31 December:
US$ 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)
2011
$16
11
14
2
26
209
16
294
(9)
$285
2010
$24
21
14
3
33
38
24
157
(14)
$143
2009
$31
–
14
7
18
6
18
94
(26)
$68
Contingent Consideration Payable
Contingent consideration represents additional payments for the acquisition of Stratcor in 2006. This consideration could be paid each year up 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. In 2011, the Group paid $3 million in respect of this liability (2010: $16 million, 2009: $Nil).
Derivatives Not Designated as Hedging Instruments
In 2009–2011, the Group issued rouble-denominated bonds in the total amount of 70,000 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 4.45% to 8.90% per annum plus the notional amount totalling $2,177 million, in exchange for rouble-denominated interest payments
plus the notional amount totalling 63,790 million roubles ($1,981 million at the exchange rate as of 31 December 2011). The exchange is
exercised on approximately the same dates as the payments under the bonds.
The swap contracts are summarised in the table below.
13.5 per cent bonds due 2014
9.25 per cent bonds due 2013
9.95 per cent bonds due 2015
8.40 per cent bonds due 2016
Principal,
millions of
roubles
20,000
15,000
15,000
20,000
70,000
Hedged
amount,
millions of
roubles
14,019
14,778
14,997
19,996
63,790
Swap
amount,
US$ million
$475
500
491
711
$2,177
Interest rates on
the swap amount
7.50% – 8.90%
5.75% – 5.90%
5.65% – 5.88%
4.45% – 4.60%
These swap contracts were not designated as cash flow or fair value hedges. The Group accounted for these derivatives at fair value which was
determined using valuation techniques. In 2011, 2010 and 2009, the change in fair value of the derivatives of $(176) million, $(27) million and
$(6) million, respectively, together with a realised gain on the swap transactions, amounting to $66 million, $31 million and $Nil, respectively,
was recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations (Note 7).
EVRAZ plc
Annual Report and Accounts 2011
143
27. Trade and Other Payables
Trade and other payables consisted of the following as of 31 December:
US$ million
Trade accounts payable
Accrued payroll
Other long-term obligations with current maturities (Note 26)
Other payables
The maturity profile of the accounts payable is shown in Note 29.
28. Other Taxes Payable
Taxes payable were mainly denominated in roubles and consisted of the following as of 31 December:
US$ million
VAT
Social insurance taxes
Property tax
Land tax
Personal income tax
Other taxes, fines and penalties
2011
$1,147
254
9
50
$1,460
2010
$880
229
14
50
2009
$780
177
26
86
$1,173
$1,069
2011
$81
53
17
10
12
15
2010
$90
40
14
10
10
16
2009
$67
29
16
5
10
13
$188
$180
$140
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 (4.2% and 2.4% of total sales, respectively).
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 has 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.
At 31 December 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 (Notes 13 and 18)
Financial instruments included in other non-current and current assets (Notes 13 and 18)
Long-term and short-term investments (Notes 13 and 18)
Trade and other receivables (Notes 13 and 15)
Loans receivable
Receivables from related parties (Notes 13 and 16)
Cash and cash equivalents (Note 19)
2011
$22
10
57
974
62
8
801
2010
$22
6
76
1,216
18
124
683
2009
$77
–
104
1,002
5
107
671
$1,934
$2,145
$1,966
Receivables from related parties in the table above do not include prepayments in the amount of $Nil, $2 million and $Nil as of 31 December
2011, 2010 and 2009, respectively.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
29. Financial Risk Management Objectives and Policies (continued)
Credit Risk (continued)
The ageing analysis of trade and other receivables, loans receivable and receivables from related parties at 31 December is presented in the
table below.
US$ million
Not past due
Past due
less than six months
between six months and one year
over one year
2011
2010
2009
Gross
amount
$846
306
204
30
72
Impairment
$(5)
(103)
(24)
(16)
(63)
$1,152
$(108)
Gross
amount
$1,098
377
232
27
118
$1,475
Impairment
$(8)
(109)
(16)
(10)
(83)
Gross
amount
$842
364
187
28
149
Impairment
$(1)
(91)
(5)
(8)
(78)
$(117)
$1,206
$(92)
In the years ended 31 December 2011, 2010 and 2009, the movement in allowance for doubtful accounts was as follows:
US$ million
At 1 January
Charge for the year
Utilised
Translation difference
At 31 December
2011
$117
45
(47)
(7)
$108
2010
$92
45
(19)
(1)
$117
2009
$93
41
(41)
(1)
$92
Liquidity Risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing
liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group manages liquidity risk by maintaining adequate cash reserves and borrowing facilities, by continuously monitoring forecast and actual
cash flows and matching the maturity profiles of financial assets and liabilities.
The Group prepares a rolling 12-month financial plan which ensures that the Group has sufficient cash on demand to meet expected operational
expenses, financial obligations and investing activities as they arise. The Group exercises a daily monitoring of cash proceeds and payments.
The Group maintains credit lines and overdraft facilities that can be drawn down to meet short-term financing needs. The Group’s objective is to
refinance its short-term debt by long-term borrowings. The Group has developed standard payment periods in respect of trade accounts payable
and monitors the timeliness of payments to its suppliers and contractors.
EVRAZ plc
Annual Report and Accounts 2011
145
29. Financial Risk Management Objectives and Policies (continued)
Liquidity Risk (continued)
The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including
interest payments.
On
demand
Less than
3 months
3 to 12
months
1 to 2
years
2 to 5
years
After
5 years
Total
Total non-interest bearing debt
323
Year ended 31 December 2011
US$ 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
Year ended 31 December 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
$4
–
–
1
5
158
–
–
158
–
238
67
9
9
$7
–
–
1
8
235
–
–
235
–
104
177
6
13
$1
23
1
1
26
213
22
4
239
–
949
31
–
–
980
$27
420
3
6
456
129
68
8
205
–
10
–
–
–
10
$1,019
395
4
53
1,471
268
82
7
357
–
–
–
–
–
–
$2,338
741
10
178
3,267
1,671
148
8
1,827
–
–
–
11
–
11
$1,374
159
3
23
1,559
56
8
–
64
4
–
–
–
–
4
$4,763
1,738
21
262
6,784
2,495
328
27
2,850
4
1,197
98
20
9
1,328
$486
$1,245
$671
$1,828
$5,105
$1,627
$10,962
On
demand
Less than
3 months
3 to 12
months
1 to 2
years
2 to 5
years
After
5 years
Total
$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
955
7
60
6,061
1,487
89
19
1,595
–
–
–
21
–
21
$538
123
3
21
685
20
4
2
26
5
–
–
–
–
5
$5,753
2,104
16
103
7,976
2,264
230
55
2,549
5
930
216
27
13
1,191
Total non-interest bearing debt
300
$543
$1,158
$720
$902
$7,677
$716
$11,716
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146
EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
29. Financial Risk Management Objectives and Policies (continued)
Liquidity Risk (continued)
Year ended 31 December 2009
On
demand
Less than
3 months
3 to 12
months
1 to 2
years
2 to 5
years
After
5 years
Total
US$ 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
$5
–
–
17
22
242
–
–
242
5
196
112
17
13
Total non-interest bearing debt
343
$25
32
1
–
58
229
30
5
264
–
647
62
–
–
709
$273
384
2
1
660
1,135
103
16
1,254
–
23
14
–
–
37
$930
374
3
7
1,314
904
69
22
995
–
–
–
–
–
–
$2,488
841
7
28
3,364
795
42
32
869
–
–
–
–
–
–
$1,091
217
5
25
1,338
41
5
3
49
–
–
–
–
–
–
$4,812
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
Payables to related parties in the tables above do not include advances received in the amount of $Nil, $1 million and $47 million as of
31 December 2011, 2010 and 2009, respectively.
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 rates.
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.
EVRAZ plc
Annual Report and Accounts 2011
147
29. Financial Risk Management Objectives and Policies (continued)
Market Risk (continued)
Interest Rate Risk (continued)
Cash Flow Sensitivity Analysis for Variable Rate Instruments (continued)
In estimating reasonably possible changes the Group assessed the volatility of interest rates during the reporting periods.
Liabilities denominated in US dollars
Decrease in LIBOR
Increase in LIBOR
Liabilities denominated in euro
Decrease in EURIBOR
Increase in EURIBOR
2011
2010
2009
Basis
points
(6)
6
(15)
15
Effect on
PBT
US$
millions
$1
(1)
–
$–
Basis
points
(25)
100
(25)
100
Effect on
PBT
US$
millions
$4
(17)
1
$(2)
Basis
points
(25)
100
(25)
100
Effect on
PBT
US$
millions
$8
(30)
1
$(2)
Currency Risk
The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in currencies other than the functional
currencies of the respective Group’s subsidiaries. The currencies in which these transactions are denominated are primarily US dollars and euro.
The Group does not have formal arrangements to mitigate currency risks of the Group’s operations. However, management believes that the Group
is secured from currency risks as foreign currency denominated sales are used to cover repayment of foreign currency denominated borrowings.
The Group’s exposure to currency risk determined as the net monetary position in the respective currencies was as follows at 31 December:
US$ million
USD/RUB
EUR/RUB
EUR/USD
CAD/USD
EUR/CZK
USD/CZK
USD/ZAR
EUR/ZAR
USD/UAH
RUB/UAH
2011
2010
2009
$4,402
(321)
127
995
35
(229)
14
77
(156)
(1)
$3,419
(283)
137
1,180
38
(282)
66
41
(1)
(43)
$1,732
(297)
108
1,281
22
(154)
41
43
(88)
(15)
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
29. Financial Risk Management Objectives and Policies (continued)
Market Risk (continued)
Currency Risk (continued)
Sensitivity Analysis
The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held
constant, of the Group’s profit before tax. In estimating reasonably possible changes the Group assessed the volatility of foreign exchange
rates during the reporting periods.
USD/RUB
EUR/RUB
EUR/USD
CAD/USD
EUR/CZK
USD/CZK
USD/ZAR
EUR/ZAR
USD/UAH
RUB/UAH
2011
2010
2009
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
%
US$ millions
%
US$ millions
%
US$ millions
(11.36)
11.36
(8.27)
8.27
(11.37)
11.37
(9.75)
9.75
(5.87)
5.87
(13.96)
13.96
(17.34)
17.34
(13.14)
13.14
(0.33)
0.33
(11.33)
11.33
(500)
500
27
(27)
(15)
15
(97)
97
(2)
2
32
(32)
(2)
2
(10)
10
1
(1)
–
–
(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)
Except for the effects of changes in the exchange rates disclosed above, the Group is exposed to currency risk on derivatives not designated
as hedging instruments (Note 26). The impact of currency risk on the fair value of these derivatives is disclosed below.
USD/RUB
2011
2010
2009
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
%
US$ millions
%
US$ millions
%
US$ millions
(11.36)
11.36
252
(201)
(9.70)
9.70
167
(137)
(15.65)
15.65
83
(61)
Fair Value of Financial Instruments
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
(cid:114)(cid:1) Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
(cid:114)(cid:1) 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
(cid:114)(cid:1) 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.
EVRAZ plc
Annual Report and Accounts 2011
149
29. Financial Risk Management Objectives and Policies (continued)
Fair Value of Financial Instruments (continued)
At 31 December the Group held the following financial instruments measured at fair value:
US$ million
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
2011
2010
2009
Assets measured at fair value
Available-for-sale financial assets
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 (Note 26)
Deferred consideration payable for
the acquisition of Inprom (Note 4)
Contingent consideration payable
for the acquisition of Stratcor (Note 26)
Amounts payable under put options for
shares of subsidiaries
17
–
–
–
–
11
–
–
–
–
–
–
209
–
–
–
–
–
–
–
–
–
16
9
37
–
–
–
–
21
–
–
–
–
5
–
38
–
–
–
–
–
–
16
–
–
24
6
43
–
–
–
–
–
–
–
–
–
–
–
6
–
–
–
–
–
–
12
–
–
31
–
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 at 31 December.
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
6.75 per cent notes due 2018
13.5 per cent bonds due 2014
9.25 per cent bonds due 2013
9.95 per cent bonds due 2015
8.40 per cent bonds due 2016
Liabilities under 12.00 per cent rouble
bonds due 2011 and 2013 assumed
in business combination
2011
2010
2009
Carrying
amount
$104
2,109
535
–
560
501
853
635
476
472
623
Fair
value
$115
1,943
559
–
581
520
759
676
468
478
559
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
Carrying
amount
$1,234
2,894
1,132
528
551
497
–
674
–
–
Fair
value
$1,197
2,847
1,155
624
554
508
–
667
–
–
1
1
13
12
–
–
$6,869
$6,659
$7,440
$7,685
$7,510
$7,552
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
2011
2010
2009
USD
EUR
RUB
8.2 – 9.1%
3.2%
9.7%
7.7 – 8.3%
2.8%
12.0%
8.6 – 9.5%
7.0%
16.0%
Capital Management
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 2011.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Consolidated Financial Statements (continued)
year ended 31 December 2011
29. Financial Risk Management Objectives and Policies (continued)
Capital Management (continued)
The Group manages its capital structure and makes adjustments to it by the issue of new shares, dividend payments to shareholders, and the
purchase of treasury shares. In addition, the Group monitors distributable profits on a regular basis and determines the amounts and timing of
dividend payments.
The capital requirements imposed by certain loan agreements include a $2,000 million minimum representing consolidated equity less goodwill.
In 2009–2011, the Group was in compliance with this requirement.
30. Non-cash Transactions
Transactions that did not require the use of cash or cash equivalents were as follows in the years ended 31 December:
US$ million
Liabilities for purchases of property, plant and equipment
Purchases of property, plant and equipment settled by an offset with accounts receivable
Loan to a partner on Mezhegey coal field project
Carrying amount of convertible bonds transferred to equity upon debt conversion (Note 21)
Offset of income tax receivable/(payable) against other taxes
2011
$93
10
39
553
10
2010
$70
12
–
–
17
2009
$49
–
–
–
18
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, all countries continue to face an uneven economic recovery. Though stabilisation measures introduced
by governments had positive effects, nevertheless, in 2010 and 2011, there was no material uplift in the ship-building, pipe-making, railway
transportation, construction or oil and gas industries, which are the major customers of the Group. The global steel industry is highly competitive
and has historically been characterised by overcapacity. Steel consumption is affected by the cyclical nature of demand for steel products and the
sensitivity of that demand to worldwide general economic conditions. The global economic recession resulted in a significantly lower demand for
steel products and decreased profitability.
In 2011, the sovereign debt problems in Europe and the USA added extra volatility to commodity markets and led to an additional uncertainty
in the process of recovery of the global economy.
The global economic climate continues to be 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 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, the Group 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 financial statements could be up to approximately $46 million.
Contractual Commitments
At 31 December 2011, the Group had contractual commitments for the purchase of production equipment and construction works for an
approximate amount of $524 million.
In 2010, the Group concluded an agreement for the supply of oxygen, nitrogen and argon by a third party for a period of 20 years. The contractual
price comprises a fixed component and a variable component. The total amount of the fixed component approximates 252 million euro. The
agreement is within the scope of IFRIC 4 “Determining whether an Arrangement Contains a Lease”. At 31 December 2011, the lease had not
commenced.
Social Commitments
The Group is involved in a number of social programmes aimed to support education, healthcare and social infrastructure development in towns
where the Group’s assets are located. In 2012, the Group plans to spend approximately $160 million under these programmes.
EVRAZ plc
Annual Report and Accounts 2011
151
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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 2012 to 2017, the Group is committed to spend approximately $303 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 $3 million.
In February 2008, the South African Competition Commission (the “Competition Commission”) received a complaint from Petrel Engineering (Pty)
Ltd, alleging that EVRAZ Highveld (then Highveld Steel and Vanadium Corporation Limited) and ArcelorMittal South Africa Limited were involved,
whether directly or indirectly, in the fixing of the selling prices of their flat steel products. In April 2008, the Competition Commission initiated
a complaint against various steel manufacturers, including EVRAZ Highveld.
EVRAZ Highveld provided the Competition Commission with the documentation and information requested by the Competition Commission
and the Competition Commission conducted interviews with certain of EVRAZ Highveld employees in February 2009.
On 2 April 2012 EVRAZ Highveld has received a referral of complaint of the Competition Commission to the South African Competition Tribunal
(the “Competition Tribunal”), seeking an order inter alia: (i) declaring that the conduct of ArcelorMittal South Africa Limited and EVRAZ Highveld
contravened certain provisions of the South African Competition Act, Act 89 of 1998 (the “Competition Act”); and (ii) imposing administrative
penalties against both ArcelorMittal South Africa Limited and EVRAZ Highveld. EVRAZ Highveld has to answer the allegations contained in the
Referral of Complaint by the beginning of May, 2012. According to the Competition Act the maximum fine which could be imposed on EVRAZ
Highveld if it is considered guilty is equal to 10% of its annual revenue. EVRAZ Highveld’s revenue in 2011 was $764 million.
No decision has yet been announced by the Competition Tribunal as to whether it will decide to impose any penalty against EVRAZ Highveld or,
if imposed, the amount of any such fine. EVRAZ Highveld will have the right to appeal the decision of the Competition Tribunal.
Management believes that EVRAZ Highveld acted in compliance with applicable laws and regulations. Thus, no provision for this matter has been
accrued as of 31 December 2011. The Group has cooperated with the Competition Commission throughout the investigation and intends to
continue to do so. Currently, the Group is reviewing the Competition Commission’s complaint and preparing its response.
32. Auditor’s Remuneration
The remuneration of the Group’s auditor in respect of the services provided to the Group was as follows.
US$ million
Audit of the parent company of the Group
Audit of the subsidiaries
Total assurance services
Services in connection with capital market transactions
Other non-audit services
Total other services
2011
2010
2009
$4
7
11
3
2
5
$2
6
8
1
1
2
$16
$10
$2
5
7
–
–
–
$7
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The Group has early adopted the UK Companies Regulations 2011 (Statutory Instrument 2011/2198). Comparative amounts for 2010 and 2009
have been classified accordingly.
33. Subsequent Events
Final Dividends
On 26 March 2012, the Board of directors of EVRAZ plc proposed to declare final dividends for 2011 in the amount of $228 million, which
represents $0.17 per share.
Buyback of Shares by Raspadskaya
In November 2011, Raspadskaya, a subsidiary of Corber, the Group’s joint venture (Note 11), announced a buyback of up to 10% of its shares
from shareholders. At the end of February 2012 Corber sold 48,351,712 shares back to Raspadskaya for $248 million. At 31 December 2011,
the market value of these shares was $149 million.
Issue of Notes
In April 2012, Evraz Group S.A. issued notes amounting to $600 million. The notes bear interest of 7.40% per annum payable semi-annually and
mature on 24 April 2017. The cash proceeds will be primarily used for the partial re-financing of existing debt.
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EVRAZ plc
Annual Report and Accounts 2011
Independent Auditor’s Report to the Members of EVRAZ plc
We have audited the parent company financial statements of EVRAZ PLC for the period ended 31 December 2011 which comprise the
Separate Statement of Comprehensive Income, Separate Statement of Financial Position, Separate Statement of Cash Flows, Separate
Statement of Changes in Equity and the related notes 1 to 7. The financial reporting framework that has been applied in their preparation
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities set out on page 79, the directors are responsible for the
preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to
audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and
Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the parent company financial statements:
(cid:114)(cid:1) give a true and fair view of the state of the company’s affairs as at 31 December 2011 and of its loss for the period then ended;
(cid:114)(cid:1) have been properly prepared in accordance with IFRSs as adopted by the European Union; and
(cid:114)(cid:1) have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
(cid:114)(cid:1) the part of the Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
(cid:114)(cid:1) the information given in the Directors’ Report for the financial period for which the financial statements are prepared is consistent
with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our
opinion:
(cid:114)(cid:1) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
(cid:114)(cid:1) the parent company financial statements and the part of the Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
(cid:114)(cid:1) certain disclosures of directors’ remuneration specified by law are not made; or
(cid:114)(cid:1) we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the group financial statements of EVRAZ PLC for the year ended 31 December 2011.
Ken Williamson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
24 April 2012
EVRAZ plc
Annual Report and Accounts 2011
153
Separate Statements
Contents
154 Separate Statement of
Comprehensive Income
155 Separate Statement
of Financial Position
156 Separate Statement of Cash Flows
157 Separate Statement of Changes in Equity
158 Notes to the Separate
Financial Statements
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EVRAZ plc
Annual Report and Accounts 2011
Separate Statement of Comprehensive Income
(in millions of US dollars)
General and administrative expenses
Loss before taxation
Income tax benefit/(expense)
Net loss for the period
Share-based payments
Total comprehensive income for the period
The accompanying notes form an integral part of these separate financial statements.
Period from
23 September to
31 December
Note
2011
$(1)
(1)
–
(1)
4
$3
5
EVRAZ plc
Annual Report and Accounts 2011
155
Separate Statement of Financial Position
(in millions of US dollars)
The Financial Statements on pages 153-160 were approved by the Board of Directors on 24 April 2012 and signed on its behalf
by Alexander Frolov, Chief Executive Officer.
ASSETS
Non-current assets
Investments in subsidiaries
TOTAL ASSETS
EQUITY AND LIABILITIES
Capital and reserves
Issued capital
Reorganisation reserve
Share-based payments
Accumulated profits
Total equity
LIABILITIES
Current liabilities
Other payables
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
The accompanying notes form an integral part of these separate financial statements.
Note
31 December
2011
3
4
4
5
4
$2,073
2,073
1,338
(582)
4
1,312
2,072
1
1
$2,073
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EVRAZ plc
Annual Report and Accounts 2011
Separate Statement of Cash Flows
(in millions of US dollars)
Cash flows from operating activities
Net loss
Changes in working capital:
Trade and other payables
Net cash flow from/(used in) operating activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at end of year
The accompanying notes form an integral part of these separate financial statements.
Period from
23 September to
31 December
2011
$(1)
1
–
–
–
$–
EVRAZ plc
Annual Report and Accounts 2011
157
Separate Statement of Changes in Equity
(in millions of US dollars)
Note
Issued
capital
Reorganisation
reserve
Share-based
payments
Accumulated
profits
At 23 September 2011
Total comprehensive income/(expense) for the period 5
Issue of share capital in exchange for the shares
of Evraz Group S.A.
Reduction in par value of shares
At 31 December 2011
4
4
$–
–
2,651
(1,313)
$1,338
$–
–
(582)
–
$(582)
$–
4
–
$4
$–
(1)
–
1,313
$1,312
The accompanying notes form an integral part of these separate financial statements.
Total
$–
3
2,069
–
$2,072
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Separate Financial Statements
for the period from 23 September to 31 December 2011
1. Corporate Information
These separate financial statements of EVRAZ plc were authorised for issue in accordance with a resolution of the directors on 24 April 2012.
EVRAZ plc (“EVRAZ plc” or “the Company”) was incorporated on 23 September 2011 as a public company under the laws of the United Kingdom.
The company was incorporated under the Companies Act 2006 with the registered number 7784342 (originally called Project Savannah plc
which name was changed to EVRAZ plc by a resolution on 13 October 2011).The Company’s registered office is at 5th Floor, 6 St. Andrew Street,
London, EC4A 3AE, United Kingdom.
As a result of the reorganisation implemented by way of the share exchange offer made by the Company for the shares of Evraz Group S.A.
(Luxembourg), on 7 November 2011, the Company became a new parent entity of Evraz Group S.A., a joint stock company registered in
Luxembourg in 2004. Evraz Group S.A. is a holding company which owns steel production, mining and trading companies. At 31 December 2011,
the Company held 99.82% in Evraz Group S.A.
The Company, together with its subsidiaries (the “Group”), is involved in the production and distribution of steel and related products and coal
and iron ore mining. In addition, the Group produces vanadium products. The Group is one of the largest steel producers globally.
Lanebrook Limited (Cyprus) is the ultimate controlling party of the Group.
2. Significant Accounting Policies
Basis of Preparation
These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the
European Union and applicable requirements of the UK law.
International Financial Reporting Standards are issued by the International Accounting Standard Board (“IASB”). IFRSs that are mandatory for
application as of 31 December 2011, but not adopted by the European Union, do not have any impact on the Company’s financial statements.
The standards issued but not yet effective for the financial statements for the year ended 31 December 2011 are disclosed in the consolidated
financial statements.
These financial statements have been prepared on a going concern basis as the directors believe there are no material uncertainties that lead
to significant doubt the entity can continue as a going concern in the foreseeable future.
Foreign Currency Transactions
The presentation and functional currency of the Company is US dollar. Transactions in foreign currencies are initially recorded in US dollar at the
rate ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange
at the balance sheet date. Exchange gains and losses are recognised in profit or loss.
Investments in Subsidiaries
Participations in subsidiaries are initially stated at acquisition cost. Write-downs are recorded if, in the opinion of the management, there is any
permanent impairment in value.
The cost of investment in Evraz Group S.A. was measured at the carrying amount of the equity items of Evraz Group S.A. as a separate legal
entity at the date of the reorganisation.
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.
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.
EVRAZ plc
Annual Report and Accounts 2011
159
3. Investments in Subsidiaries
Investments in subsidiaries consisted of the following as of 31 December 2011:
Evraz Group S.A.
Ownership
interest
Cost,
US$ million
99.82%
2,073
On 17 October 2011, following the decision of the Board of directors, Evraz Group S.A. commenced the Group’s reorganisation and re-domiciliation
to the United Kingdom. This was implemented by means of the share exchange offer made by the Company to the shareholders of Evraz Group
S.A., which were entitled to receive 9 shares of EVRAZ plc for each share of Evraz Group S.A.
Information about the share exchange is summarised below.
Date of exchange
7 November 2011
28 November 2011
16 December 2011
Total at 31 December 2011
30 January 2012
8 February 2012
Total at closing of the offer
Number
of shares
issued by
EVRAZ plc
Number of
shares of
Evraz Group S.A.
exchanged
Ownership
interest
exchanged
1,313,258,883
23,212,353
1,089,477
1,337,560,713
145,917,653.67
2,579,150.33
121,053.00
148,617,857.00
98.01%
1.73%
0.08%
99.82%
839,388
659,790
93,265.33
73,310.00
0.06%
0.05%
1,339,059,891
148,784,432.33
99.93%
On 17 February 2012, Mastercroft Finance Limited, an indirect subsidiary of EVRAZ plc, purchased the remaining GDRs of Evraz Group S.A.
for $4 million and exchanged them for 869,469 newly issued shares of EVRAZ plc. Since that date Evraz Group S.A. became a wholly-owned
subsidiary of EVRAZ plc.
The cost of investments in Evraz Group S.A. was measured at the carrying amount of the equity items shown in the separate accounts of
Evraz Group S.A. at the dates of share exchange. In addition, the cost of investments in Evraz Group S.A. includes $4 million of share-based
compensations to participants of Incentive Plans which are employed by the Company’s indirect subsidiaries (Note 5).
4. Share Capital
Number of shares
Issued and fully paid
Ordinary shares of $1 each
31 December
2011
1,337,560,713
EVRAZ plc does not have an authorised limit on its share capital.
At 31 December 2011 and 22 April 2012, Mastercroft Finance Limited had 0.06% and 0.12% interest, respectively, in the Company’s issued
capital.
As described in Note 3, the shares of EVRAZ plc were issued in the course of the share exchange offer. The first share exchange was performed
on 7 November 2011: EVRAZ plc issued 1,313,258,883 ordinary shares with par value of $2 each and exchanged them for approximately
98.01% interest in Evraz Group S.A. The new shares were admitted to the premium listing segment of the Official List of the UK Listing Authority
and to trading on the London Stock Exchange’s main market for listed securities.
The Company recognised a reorganisation reserve of $(582) million being the difference between the net assets of Evraz Group S.A. at 7 November
2011 and the par value of the issued shares of EVRAZ plc. This charge to equity reduced the amount of distributable reserves.
On 24 November 2011, the par value of the shares was reduced to $1, and $1,313 million representing distributable reserves were transferred
to accumulated profits. All subsequent shares were issued with par value of $1 each.
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EVRAZ plc
Annual Report and Accounts 2011
Notes to the Separate Financial Statements (continued)
for the period from 23 September to 31 December 2011
5. Share-based Payments
As disclosed in Note 24 of the consolidated financial statements, in 2011 the Group had 2 Incentive Plans under which certain senior executives
and employees (“participants”) could be gifted shares of Evraz Group S.A.
After the Group’s reorganisation the shares of Evraz Group S.A. granted under Incentive Plans have been substituted by the shares of EVRAZ plc.
As such, EVRAZ plc recognised an expense arising from the share-based compensations from 7 November 2011 till the year end in the amount
of $4 million as a cost of investments in Evraz Group S.A. with a corresponding increase in equity.
The share-based awards which were not exercised at 31 December 2011 amounted to 4,460,547 shares of EVRAZ plc. More details are
provided in Note 24 of the consolidated financial statements.
6. Related Party Transactions
For the Company its direct and indirect subsidiaries, associates and joint venture partners, key management personnel and other entities that are
under the control or significant influence of the key management personnel, the Company’s parent or its shareholders represent related parties.
In 2011, there were no transactions with related parties, except for the share exchange with Mastercoft Finance Limited (“MFL”) in the course
of the reorganisation described in Note 3. MFL exchanged the global depositary receipts (“GDRs”) of Evraz Group S.A. into 775,410 shares of
EVRAZ plc.
7. Subsequent Events
On 26 March 2012, the Board of directors of EVRAZ plc proposed to declare final dividends for 2011 in the amount of $228 million, which
represent $0.17 per share.
EVRAZ plc
Annual Report and Accounts 2011
161
Glossary of Selected Terms
Term
6S
API-certified
Average cash cost
B-category rails
Beam
Billet
Blast furnace
Channel
Coke
Definition
A six-step system (sort, set in order, scrub, safety, standardise and sustain) used for improving the
organisation of a workplace.
American Petroleum Institute certified (API grade) products.
Cash cost represents the cost of revenues and SG&A expenses less depreciation, foreign exchange
(gains)/losses, impairment of assets and (gain)/loss on disposal of assets (i.e. all major non-cash
items) plus maintenance CAPEX, the result is divided by sales volumes. Raw materials from EVRAZ’s
mining segment are supplied at market prices.
Thermally hardened rails of premium quality.
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.
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.
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.
U-shaped section for construction.
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.
Coking coal
Concentrate
Highly volatile coal used to manufacture coke.
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.
Converter
Crude steel
Cut-to-length processing
A type of furnace that uses pure oxygen in the process of producing steel from cast iron or dry mix.
Steel in its solidified state directly after casting. This is then further processed by rolling or other
treatments, which can change its properties.
Cutting-to-length is a stage in the preparation of flat rolled steel where coils are cut to lengths as
required by customers.
Dividend payout ratio
The percentage of earnings paid to shareholders in dividends.
EBITDA
EBITDA represents profit from operations plus depreciation, depletion and amortisation,
impairment of assets, loss (gain) on disposal of property, plant and equipment, and foreign
exchange loss (gain).
Electrolyte (for vanadium redox batteries) A type of rechargeable flow battery that uses vanadium ions in differing states of oxidation to store
chemical potential energy.
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.
GDR
Greenfield
Hard coal
Head-hardened rails
Hot-rolled finished steel
HSE
Global Depositary Receipt, a bank certificate issued in more than one country for shares in
a foreign company.
The development or exploration of a new project not previously examined.
Alternative name for anthracite, the coal with the lowest levels of impurities and highest levels
of carbon. Steam/thermal coal and metallurgical coking coal are both forms of hard coal.
High strength rails with head hardened by heat treatment.
Steel which has been heated above recrystallisation temperature and passed through rollers.
Health, Safety and Environment.
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EVRAZ plc
Annual Report and Accounts 2011
Glossary of Selected Terms (continued)
Term
Indurating machine
Inventory turnover
Iron ore
ISO 14001
JORC Code
Ladle furnace
Lean
Long products
Longwall
LTIFR
Lumping iron ore
Maintenance CAPEX
Metallurgical coke
Net Debt
Definition
A machine used to harden pellets.
Inventory turnover is the average number of days required to manufacture and sell inventory.
The inventory turnover is determined as the average quarterly inventory balances for the reported
year divided by the cost of goods sold and multiplied by 365.
Chemical compounds of iron with other elements, mainly oxygen, silicon, sulphur or carbon.
Only extremely pure (rich) iron-oxygen compounds are used for steelmaking.
The International Standardisation Organisation’s standard for environmental management systems.
The Australasian Joint Ore Reserves Committee, which is widely accepted as a standard for
professional reporting of Mineral Resources and Ore Reserves.
The secondary metallurgy vessel used between steelmaking and casting operations to allow the
composition of molten steel to be brought to the required customer specification.
Lean is philosophy of managing the business that is based on a set of principles that define the
way to work.
Include bars, rods and structural products that are ‘long’ rather than ‘flat’ and are produced from
blooms or billets.
An underground mining process in which the coal face is dug out by a shearer and transported
above ground by conveyors.
Lost time injury frequency rate, which represents the number of lost time (1 day or more of
absence) divided by the total number of hours worked expressed in millions of hours.
Iron ore between 6mm and 30mm in size. Lump is preferred in the blast furnace as its particle size
allows oxygen to circulate around the raw materials and melt them efficiently.
Maintenance capex represents costs of replacement of items of property, plant and equipment
during their useful lives.
A carbon material manufactured by the “destructive distillation” of various blends of bituminous coal.
Net debt represents long-term and short-term loans and finance lease liabilities less cash and cash
equivalents and short-term bank deposits.
Net profit adjusted for non-recurring items Net profit represents net profit plus losses less gains on transactions that occur in very rare cases.
OCTG pipe
OHSAS 18001
Old order/New order mining rights
OSB technology
Oilfield Casing and Tubing Goods or Oil Country Tubular Goods – pipes used in the oil industry.
The internationally recognised assessment specification for occupational health and safety
management systems.
Reference terms for South African mining agreements. Old order mining rights are those licences
which were issued during the apartheid era, for New order mining rights to be awarded operators
must collaborate with the Black Economic Empowerment partners.
Open Slag Bath Furnace. An electric steelmaking furnace, where the electrodes are not submersed,
but are operated in a “brush” arc mode, where the electrode is just above the liquid slag.
Other steel products
Include rounds, grinding balls, mine uprights, strips etc.
Pellet
Pig iron
Pipe blanks
Plate
An enriched form of iron ore shaped into small balls or pellets. Pellets are used as raw material in
the steel making process.
The solidified iron produced from a blast furnace used for steel production. In liquid form, pig iron
is known as hot metal.
A flat sheet of metal, a semi-finished product, sold to pipemakers to manufacture pipes.
A long thin square shaped construction element made from slabs.
Polychlorinated biphenyl
Type of organochloride, historically used in dielectric and coolant fluids.
Premium listing
Pulverised coal injection (PCI)
Companies with a Premium Listing on the UK Main Market are required to meet the UK’s super-
equivalent rules and expected to meet the UK’s highest standards of regulation and corporate
governance.
A cost-reducing technique in iron-making, where cheaper coal is prepared to replace normal
coking coal in the blast furnace. The coal is pulverised into very small particles before injection
into the furnace.
EVRAZ plc
Annual Report and Accounts 2011
163
Term
Railway products
Raw steam coal
Rebar
Revenue
Definition
Include rails, rail fasteners, wheels, tyres and other goods for the railway sector.
Also known as thermal coal. Mainly used in energy generation.
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.
Revenue is the amount of money in US dollars received or receivable from sales of our goods and
services during the period.
Rolled steel products
Products finished in a rolling mill; these include bars, rods, plate, beams etc.
Rolling mill
Rotary kiln
Scrap
SAF technology
Semi-finished products
Shale gas
A machine which converts semi-finished steel into finished steel products by passing them through
sets of rotating cylinders which form the steel into finished products.
This device is used to raise materials to a high temperature so calcination can take place.
Iron containing recyclable materials (mainly industrial or household waste) that is generally remelted
and processed into new steel.
Submerged-arc furnace, a type of electrical steel making furnace technology.
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 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.
Single-Minute Exchange of Die (SMED)
A production method used to speed up the production process and reduce waste.
Sinter
Slab
Slag
Steel sales volumes
Tailings
Titaniferrous ores
Tubular products
Vanadium
Vanadium pentoxide
Vanadium converter slag
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
manufacture.
A common type of semi-finished steel product which can be further rolled into sheet and plate
products.
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.
Measured in millions of tonnes, combining all types of steel which was produce around the world
by EVRAZ.
Also called mine dumps, are the materials left over after the process of separating the valuable
content from the uneconomic remainder (gangue) of an ore. These materials can be reprocessed
using new methods to recover additional minerals.
Ore containing or yielding titanium. Titaniferous magnetite deposits are a significant source of
vanadium.
Include large diameter line pipes, ERW pipes and casings, seamless pipes and other tubular
products.
A grey metal that is normally used as an alloying agent for iron and steel. It is also used to
strengthen titanium based alloys.
The chemical compound with the formula V2O5: this orange solid is the most important compound
of vanadium. Upon heating, it reversibly loses oxygen.
Vanadium slag produced from pig iron in the converter shop and used as a raw material by
producers of ferroalloys and vanadium products.
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EVRAZ plc
Annual Report and Accounts 2011
Notes
Electronic Shareholder Communications
EVRAZ uses its website www.evraz.com as its primary means of
communication with its shareholders provided that the shareholder
has agreed or is deemed to have agreed that communications may
be sent or supplied in that manner in accordance with the Companies
Act 2006.
Electronic communications allows shareholders to access information
instantly as well as helping EVRAZ reduce its costs and its impact on the
environment. Shareholders can sign up for electronic communications via
Computershare’s Investor Centre website at www.investorcentre.co.uk
Shareholders that have consented or are deemed to have consented
to electronic communications can revoke their consent at any time by
contacting the Company’s registrar, Computershare.
Registered Name and Number
EVRAZ plc
(Company No. 07784342)
Registered Office
5th Floor, 6 St. Andrew Street, London EC4A 3AE
Directors
Alexander Abramov
Duncan Baxter
Alexander Frolov
Karl Gruber
Alexander Izosimov
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Secretary
TMF Corporate Administration Services Limited
Auditors
Ernst & Young LLP
Solicitors
Linklaters LLP
Registrars
For information about proxy voting, dividends and to report changes in
personal details, shareholders should contact the Company’s registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
United Kingdom
Tel: +44 (0) 870 873 5848
Fax +44 (0)870 703 6101
Email: webqueries@computershare.co.uk
Unsolicited Calls
Unsolicited telephone calls and correspondence
Shareholders are advised to be wary of any unsolicited advice, offers to
buy shares at a discount, or offers of free reports about the Company.
These are typically from overseas-based ‘brokers’ who target US or UK
shareholders, offering to sell them what often turns out to be worthless
or high risk shares. These operations are commonly known as ‘boiler
rooms’ and the ‘brokers’ can be very persistent and extremely persuasive.
If you receive any unsolicited investment advice:
(cid:114)(cid:1) Make sure you get the correct name of the person and organisation.
(cid:114)(cid:1) Check that they are properly authorised by the FSA before getting
involved by visiting www.fsa.gov.uk/fsaregister and contacting the
firm using the details on the register.
(cid:114)(cid:1) Report the matter to the FSA either by calling 0845 606 1234 or
visiting www.fsa.gov.uk/scams.
(cid:114)(cid:1) If the calls persist, hang up.
Details of any share dealing facilities that the company endorses will be
included in Company mailings.
Designed and produced by
Tel +44 (0)131 220 7990 www.emperordesign.co.uk
www.evraz.com