Making the world stronger
Annual Report and Accounts 2012
02–09
Overview
10–31
Strategy
32–51
Operating
Review
52–59
Corporate Social
Responsibility
60–67
Financial Review
68–97
Governance
98–177
Financial
Statements
02 Who We Are
02 2012 Key Developments
04
06 Performance Highlights
08 Chairman’s Statement
Geography of EVRAZ Operations
12 Chief Executive Officer’s Report
14 Market Review
15 Steel Industry in 2012
16
Iron Ore Market in 2012
17 Coking Coal Market in 2012
18 Vanadium Market in 2012
19 EVRAZ’s Business Model
20 EVRAZ’s Strategy
23 Delivering Growth in 2013 – Overview of Raspadskaya’s Business
24 EVRAZ Business System
26 Key Performance Indicators
28 Principal Risks and Uncertainties
34 Operating Performance Overview
35 Steel: Russia
38 Steel: North America
40 Steel: Europe
41 Steel: Ukraine
43
45
46 Coal: Russia
49 Vanadium
51 Other Businesses
Iron Ore: Russia
Iron Ore: Ukraine
54 Corporate Social Responsibility
59 CSR Case Studies
62 Financial Review
70 Board of Directors
72 Vice Presidents of EVRAZ plc
73 Corporate Governance Report
86 Remuneration Report
92 Directors’ Report
96 Directors’ Responsibility Statements
100 Independent Auditors’ Report to the Members of EVRAZ plc
102 Consolidated Statement of Operations
103 Consolidated Statement of Comprehensive Income
104 Consolidated Statement of Financial Position
105 Consolidated Statement of Cash Flows
107 Consolidated Statement of Changes in Equity
109 Notes to the Consolidated Financial Statements
168 Independent Auditors’ Report to the Members of EVRAZ plc
170 Separate Statement of Comprehensive Income
171 Separate Statement of Financial Position
172 Separate Statement of Cash Flows
173 Separate Statement of Changes in Equity
174 Notes to the Separate Financial Statements
178–182
Additional
Information
178 Group Structure
179 Glossary
Contact Details
EVRAZ plc
Annual Report and Accounts 2012
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.
15.9
million
tonnes
Consolidated crude steel
production
100%
Self-coverage in iron ore
142%
Self-coverage in coking coal
(including Raspadskaya)
Steel
Key steelmaking facilities of the Company are located
in Russia, North America, Europe and South Africa. The
Company is the leader in the Russian long steel product
market and plays a prominent role in the North American
long steel and tubular product markets. The majority
of the consolidated revenues and EBITDA are generated
by the Steel segment.
Mining
Mining segment plays an important role in securing
supply of raw steelmaking materials to major steel
plants of EVRAZ. EVRAZ enjoys a healthy pipeline
of low cost growth options in Mining.
Vanadium
EVRAZ is among the largest producers of vanadium
globally and the only large-scale producer of
vanadium-rich iron ore in Russia.
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02
EVRAZ plc
Annual Report and Accounts 2012
Who We Are
EVRAZ today
(cid:116)(cid:1) (cid:48)(cid:79)(cid:70)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:77)(cid:66)(cid:83)(cid:72)(cid:70)(cid:84)(cid:85)(cid:1)(cid:87)(cid:70)(cid:83)(cid:85)(cid:74)(cid:68)(cid:66)(cid:77)(cid:77)(cid:90)(cid:1)(cid:74)(cid:79)(cid:85)(cid:70)(cid:72)(cid:83)(cid:66)(cid:85)(cid:70)(cid:69)(cid:1)(cid:84)(cid:85)(cid:70)(cid:70)(cid:77)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:78)(cid:74)(cid:79)(cid:74)(cid:79)(cid:72)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:79)(cid:74)(cid:70)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:88)(cid:80)(cid:83)(cid:77)(cid:69)
(cid:116)(cid:1) (cid:34)(cid:1)(cid:72)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1)(cid:74)(cid:79)(cid:69)(cid:86)(cid:84)(cid:85)(cid:83)(cid:74)(cid:66)(cid:77)(cid:1)(cid:70)(cid:79)(cid:85)(cid:70)(cid:83)(cid:81)(cid:83)(cid:74)(cid:84)(cid:70)(cid:1)(cid:85)(cid:73)(cid:66)(cid:85)(cid:1)(cid:84)(cid:81)(cid:66)(cid:79)(cid:84)(cid:1)(cid:71)(cid:80)(cid:86)(cid:83)(cid:1)(cid:68)(cid:80)(cid:79)(cid:85)(cid:74)(cid:79)(cid:70)(cid:79)(cid:85)(cid:84)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:70)(cid:78)(cid:81)(cid:77)(cid:80)(cid:90)(cid:84)(cid:1)(cid:78)(cid:80)(cid:83)(cid:70)(cid:1)(cid:85)(cid:73)(cid:66)(cid:79)(cid:1)
110,000 people
(cid:116)(cid:1) (cid:53)(cid:73)(cid:70)(cid:1)(cid:78)(cid:66)(cid:83)(cid:76)(cid:70)(cid:85)(cid:1)(cid:77)(cid:70)(cid:66)(cid:69)(cid:70)(cid:83)(cid:1)(cid:74)(cid:79)(cid:1)(cid:51)(cid:86)(cid:84)(cid:84)(cid:74)(cid:66)(cid:79)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:36)(cid:42)(cid:52)(cid:1)(cid:68)(cid:80)(cid:79)(cid:84)(cid:85)(cid:83)(cid:86)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:83)(cid:66)(cid:74)(cid:77)(cid:88)(cid:66)(cid:90)(cid:1)(cid:81)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:85)(cid:84)
(cid:116)(cid:1) (cid:53)(cid:73)(cid:70)(cid:1)(cid:79)(cid:86)(cid:78)(cid:67)(cid:70)(cid:83)(cid:1)(cid:18)(cid:1)(cid:81)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1)(cid:83)(cid:66)(cid:74)(cid:77)(cid:84)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:77)(cid:66)(cid:83)(cid:72)(cid:70)(cid:1)(cid:69)(cid:74)(cid:66)(cid:78)(cid:70)(cid:85)(cid:70)(cid:83)(cid:1)(cid:81)(cid:74)(cid:81)(cid:70)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:47)(cid:80)(cid:83)(cid:85)(cid:73)(cid:1)(cid:34)(cid:78)(cid:70)(cid:83)(cid:74)(cid:68)(cid:66)
(cid:116)(cid:1) (cid:48)(cid:79)(cid:70)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:77)(cid:70)(cid:66)(cid:69)(cid:74)(cid:79)(cid:72)(cid:1)(cid:81)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:70)(cid:83)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:72)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1)(cid:87)(cid:66)(cid:79)(cid:66)(cid:69)(cid:74)(cid:86)(cid:78)(cid:1)(cid:78)(cid:66)(cid:83)(cid:76)(cid:70)(cid:85)
(cid:116)(cid:1) (cid:34)(cid:1)(cid:68)(cid:80)(cid:79)(cid:84)(cid:85)(cid:74)(cid:85)(cid:86)(cid:70)(cid:79)(cid:85)(cid:1)(cid:80)(cid:71)(cid:1)(cid:39)(cid:53)(cid:52)(cid:38)(cid:1)(cid:18)(cid:17)(cid:17)(cid:1)(cid:74)(cid:79)(cid:69)(cid:70)(cid:89)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:80)(cid:79)(cid:77)(cid:90)(cid:1)(cid:84)(cid:85)(cid:70)(cid:70)(cid:77)(cid:1)(cid:84)(cid:85)(cid:80)(cid:68)(cid:76)(cid:1)(cid:74)(cid:79)(cid:1)(cid:54)(cid:44)(cid:1)(cid:39)(cid:53)(cid:52)(cid:38)(cid:1)(cid:34)(cid:77)(cid:77)(cid:14)(cid:52)(cid:73)(cid:66)(cid:83)(cid:70)(cid:1)
(cid:74)(cid:79)(cid:69)(cid:70)(cid:89)(cid:28)(cid:1)(cid:81)(cid:66)(cid:83)(cid:85)(cid:1)(cid:80)(cid:71)(cid:1)(cid:46)(cid:52)(cid:36)(cid:42)(cid:1)(cid:54)(cid:44)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:46)(cid:52)(cid:36)(cid:42)(cid:1)(cid:56)(cid:80)(cid:83)(cid:77)(cid:69)(cid:1)(cid:42)(cid:79)(cid:69)(cid:74)(cid:68)(cid:70)(cid:84)
What We Do
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
(cid:19)(cid:17)(cid:18)(cid:19)(cid:1)(cid:44)(cid:70)(cid:90)(cid:1)(cid:37)(cid:70)(cid:87)(cid:70)(cid:77)(cid:80)(cid:81)(cid:78)(cid:70)(cid:79)(cid:85)(cid:84)
Operating results:
EVRAZ produced 15.9 million tonnes (-5%) of crude steel
and sold 15.3 million tonnes (-1%) of steel products.
Production of steel products (net of re-rolled volumes)
decreased to 14.3 million tonnes (-6%)
The decrease in steel output was driven by a variety of
both internal and macroeconomic factors including the
large scale modernisation programme underway at the
Russian operations
A largely stable performance from the iron ore mining
division with output totalling 20.8 million tonnes (-2%)
Raw coking coal production increased to 8.5 million
tonnes (+35%) as a result of operational efficiencies
whilst steam coal output declined to 2.3 million tonnes
(-23%)
The vanadium division produced 21,060 tonnes (+2%)
of vanadium slag and sold 21,100 tonnes (-21%)
of vanadium products
US$14.7
billion
Revenues in 2012
15.3
million tonnes
Sales of steel products to external
parties in 2012
Our Values
(cid:56)(cid:70)(cid:1)(cid:67)(cid:70)(cid:77)(cid:74)(cid:70)(cid:87)(cid:70)(cid:1)(cid:85)(cid:73)(cid:66)(cid:85)(cid:1)(cid:80)(cid:86)(cid:83)(cid:1)(cid:83)(cid:70)(cid:84)(cid:81)(cid:80)(cid:79)(cid:84)(cid:74)(cid:67)(cid:74)(cid:77)(cid:74)(cid:85)(cid:74)(cid:70)(cid:84)(cid:1)(cid:70)(cid:79)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:84)(cid:84)(cid:1)
all our stakeholders including shareholders,
customers, employees and communities in the
(cid:66)(cid:83)(cid:70)(cid:66)(cid:84)(cid:1)(cid:88)(cid:73)(cid:70)(cid:83)(cid:70)(cid:1)(cid:88)(cid:70)(cid:1)(cid:80)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:70)(cid:15)(cid:1)(cid:56)(cid:70)(cid:1)(cid:70)(cid:79)(cid:69)(cid:70)(cid:66)(cid:87)(cid:80)(cid:86)(cid:83)(cid:1)(cid:85)(cid:80)(cid:1)
deliver ongoing growth and value while, at the
same time, pursuing environmentally responsible
policies within a framework of sustainability.
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
03
03
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Financial results:
Corporate developments:
EVRAZ revenues were US$14,726 million (-10%)
(cid:1)(cid:1) (cid:1)(cid:53)(cid:73)(cid:70)(cid:1)(cid:40)(cid:83)(cid:80)(cid:86)(cid:81)(cid:1)(cid:66)(cid:68)(cid:73)(cid:74)(cid:70)(cid:87)(cid:70)(cid:69)(cid:1)(cid:68)(cid:80)(cid:79)(cid:84)(cid:80)(cid:77)(cid:74)(cid:69)(cid:66)(cid:85)(cid:70)(cid:69)(cid:1)(cid:38)(cid:35)(cid:42)(cid:53)(cid:37)(cid:34)(cid:1)(cid:80)(cid:71)(cid:1)(cid:54)(cid:52)(cid:5)(cid:19)(cid:13)(cid:17)(cid:18)(cid:19)(cid:1)
million (-31%)
(cid:1)(cid:1) (cid:1)(cid:47)(cid:70)(cid:85)(cid:1)(cid:77)(cid:80)(cid:84)(cid:84)(cid:1)(cid:88)(cid:66)(cid:84)(cid:1)(cid:54)(cid:52)(cid:5)(cid:20)(cid:20)(cid:22)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:83)(cid:70)(cid:69)(cid:1)(cid:85)(cid:80)(cid:1)(cid:54)(cid:52)(cid:5)(cid:21)(cid:22)(cid:20)(cid:1)
million net profit in 2011
Operating cash flow was US$2,143 million (-19%)
(cid:1)(cid:1) (cid:1)(cid:47)(cid:70)(cid:85)(cid:1)(cid:69)(cid:70)(cid:67)(cid:85)(cid:1)(cid:88)(cid:66)(cid:84)(cid:1)(cid:54)(cid:52)(cid:5)(cid:23)(cid:13)(cid:18)(cid:25)(cid:21)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:9)(cid:14)(cid:21)(cid:6)(cid:10)
EVRAZ’s1 issuer credit ratings (S&P B+, Stable; Moody’s
Ba3, Stable; Fitch’s BB-, Stable)
CAPEX of US$1,261 million (-2%)
EVRAZ paid out US$375 million in final and interim
(cid:69)(cid:74)(cid:87)(cid:74)(cid:69)(cid:70)(cid:79)(cid:69)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:68)(cid:80)(cid:86)(cid:83)(cid:84)(cid:70)(cid:1)(cid:80)(cid:71)(cid:1)(cid:19)(cid:17)(cid:18)(cid:19)(cid:15)(cid:1)(cid:47)(cid:80)(cid:1)(cid:109)(cid:79)(cid:66)(cid:77)(cid:1)(cid:69)(cid:74)(cid:87)(cid:74)(cid:69)(cid:70)(cid:79)(cid:69)(cid:1)(cid:71)(cid:80)(cid:83)(cid:1)
2012 to preserve the financial standing of the Company
and provide greater strategic flexibility
Adoption of a new Code of Business Conduct and the
Group’s anticorruption policies and initiatives to ensure
(cid:68)(cid:80)(cid:78)(cid:81)(cid:77)(cid:74)(cid:66)(cid:79)(cid:68)(cid:70)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:54)(cid:44)(cid:1)(cid:35)(cid:83)(cid:74)(cid:67)(cid:70)(cid:83)(cid:90)(cid:1)(cid:34)(cid:68)(cid:85)
(cid:1)(cid:1) (cid:1)(cid:34)(cid:77)(cid:70)(cid:89)(cid:66)(cid:79)(cid:69)(cid:70)(cid:83)(cid:1)(cid:42)(cid:91)(cid:80)(cid:84)(cid:74)(cid:78)(cid:80)(cid:87)(cid:1)(cid:66)(cid:81)(cid:81)(cid:80)(cid:74)(cid:79)(cid:85)(cid:70)(cid:69)(cid:1)(cid:66)(cid:84)(cid:1)(cid:42)(cid:79)(cid:69)(cid:70)(cid:81)(cid:70)(cid:79)(cid:69)(cid:70)(cid:79)(cid:85)(cid:1)(cid:47)(cid:80)(cid:79)(cid:14)
(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)(cid:1)(cid:37)(cid:74)(cid:83)(cid:70)(cid:68)(cid:85)(cid:80)(cid:83)
Enhanced composition of the Audit and Remuneration
Committee towards the goal of best corporate
governance practice
(cid:1) (cid:1)(cid:42)(cid:79)(cid:68)(cid:77)(cid:86)(cid:84)(cid:74)(cid:80)(cid:79)(cid:1)(cid:74)(cid:79)(cid:1)(cid:46)(cid:52)(cid:36)(cid:42)(cid:1)(cid:54)(cid:44)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:46)(cid:52)(cid:36)(cid:42)(cid:1)(cid:56)(cid:80)(cid:83)(cid:77)(cid:69)(cid:1)(cid:42)(cid:79)(cid:69)(cid:74)(cid:68)(cid:70)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:46)(cid:66)(cid:90)(cid:1)
2012
M&A developments:
Agreement to acquire controlling interest in Raspadskaya
coal mining company for equity and cash bringing
effective interest to 81.95%
Sale of EvrazTrans for US$306 million cash consideration
while securing long-term railway transportation needs of
Russian operations
1 All ratings refer to Evraz Group S.A., except for Fitch’s, which also refers to EVRAZ plc
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04
EVRAZ plc
Annual Report and Accounts 2012
Geography of EVRAZ Operations
EVRAZ Calgary
EVRAZ Red Deer
EVRAZ Surrey
EVRAZ Camrose
EVRAZ Portland
EVRAZ Regina
EVRAZ
North America
Headquarters
EVRAZ Pueblo
EVRAZ Stratcor
EVRAZ Claymont
Steel products’ output by EVRAZ*, Kt
Breakdown of finished products’ output
15,232
11,690
14,251
11,078
3,542
3,173
Finished products
Semi-finished products
* Steel products, net of re-rolled volumes
6%
8%
22%
47%
17%
Construction products
Railway products
Flat-rolled products
Tubular products
Other steel products
EVRAZ plc
Annual Report and Accounts 2012
05
(cid:114)(cid:1) The main vertically integrated steelmaking plants are located in Russia,
complemented by smaller steel mills and rolling facilities in North America,
Europe and South Africa
(cid:114)(cid:1) Coal mining assets are based in Russia
(cid:114)(cid:1) Iron ore mining operations are located in Russia, Ukraine and South Africa
(cid:114)(cid:1) Vanadium assets are scattered across the globe and include Russia, United
States, Europe and South Africa
(cid:114)(cid:1) EVRAZ employs more than 110,000 people
Type of business
Steel Production
Iron Ore Mining
Coal Mining
Coke Production
Vanadium Production
Logistics and Trading
Moscow
EVRAZ Vanady Tula
EVRAZ KGOK
EVRAZ Nikom
EVRAZ
Vitkovice Steel
EVRAZ Bagliykoks
EVRAZ DMZ Petrovskogo
East Metals
EVRAZ Palini e Bertoli
EVRAZ Sukha Balka
EVRAZ NTMK
EVRAZ VGOK
EVRAZ ZSMK
Evrazruda
Raspadskaya
Yuzhkuzbassugol Mezhegeyugol
EVRAZ NMTP
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EVRAZ Vametco
EVRAZ Highveld Steel and Vanadium
Mapochs Mine
Output of finished products by region
Revenues by region
4%
9%
24%
4%
59%
Russia
Ukraine
North America
Europe
South Africa
3%
7%
10%
14%
24%
42%
Russia
Americas
Asia
Europe
CIS
Africa and the
Rest of World
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06
EVRAZ plc
Annual Report and Accounts 2012
Performance Highlights
Output of steel products, Kt
5,257
5,207
3,542
3,173
2,707
2,466
2,055
1,837
Semi-finished
products
Construction
products
Railway
products
Flat-rolled
products
Tubular
products
Other steel
products
848
871
823
697
2011
2012
Iron ore production volumes, Kt
6,447
5,615
5,907
6,051
4,698
4,473
Coal production volumes, Kt
8,506
6,303
2,446
2,608
2,965
2,283
Concentrate
saleable (Russia)
Sinter
(Russia)
Pellets
(Russia)
Lumpy ore
(Ukraine)
Raw steam coal
(mined)
Raw coking coal
(mined)
2011
2012
2011
2012
Vanadium, t of V*
16,683
14,381
2,874
2,723
Ferrovanadium
Nitrovan*
1,277
1,330
Oxides, vanadium,
aluminium and
chemicals
2011
2012
*Calculated in pure vanadium equivalent
EVRAZ plc
Annual Report and Accounts 2012
07
EBITDA by region, US$ mln
1,952
340
Russia
North America
-2
Ukraine
-11
Europe
-67
South Africa
* Consolidated EVRAZ plc EBITDA also includes unallocated and other countries EBITDA of US$(200)m in 2012
Consolidated revenue by segment, US$ mln
Consolidated EBITDA by segment, US$ mln
16,400
14,726
13,394
2,898
2,350
2,012
2010
2011
2012
2010
2011
2012
Steel
Mining
Vanadium
Other operations
EBITDA margin, %
18
18
Steel
Mining
Vanadium
Other operations
Net debt, US$ mln
7,184
14
6,442
6,184
2010
2011
2012
2010
2011
2012
Capital expenditures, US$ mln
Steel sales volumes by product* – Total 15.3 mt
1,281
1,261
832
3%
6%
24%
18%
12%
37%
Semi-finished
Construction
Railway
Flat-rolled
Tubular
Other
2010
2011
2012
*External sales
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EVRAZ plc
Annual Report and Accounts 2012
Chairman’s Statement
Alexander Abramov
The Board’s priorities in the prevailing business climate
were to preserve the Company’s long-term competitive
advantages and protect shareholder value in the face
of diverse potential macroeconomic scenarios.
Dear Stakeholders,
It gives me much pleasure to present our
Annual Report for 2012.
The year 2012 proved to be another
challenging phase for the global steelmaking
industry which operated in a highly uncertain
and volatile environment. Despite this, EVRAZ
delivered creditable operational and financial
results which serve to illustrate the intrinsic
resilience of the Company.
Corporate governance
Since our admission to the FTSE 100 in
December 2011, we have undertaken a
number of initiatives to further strengthen
our corporate governance. These include the
adoption of a new Code of Business Conduct
which is currently being embedded across the
Group, together with specific anti-corruption
policies and initiatives designed to ensure
compliance with the UK Bribery Act, including
improved training and the implementation
of refined internal procedures for employees.
Furthermore, we have strengthened our
Board with the appointment of Alexander
Izosimov as an independent Non-Executive
Director in February 2012, thereby increasing
the ratio of independent Directors on the
Board to 50%. We have also introduced
changes to the composition of the Audit
and Remuneration Committees in order
to accommodate a better representation
of independent Non-Executive Directors.
I have every confidence that the professional
experience, leadership skills, integrity
and balance of interests reflected in the
membership of the current Board and
Committees represents the right blend to
promote the development of the Company and
set ambitious challenges for management.
As the Chairman of the Board I fully recognise
the importance of ensuring that my fellow
Directors understand and take into account
the views of our investors while deliberating
Board decisions. In order to facilitate and
strengthen the relations and communication
between shareholders and the Board,
Sir Michael Peat, our Senior Independent
Non-Executive Director, began a programme
of proactive communications with our major
investors. In particular, Sir Michael has held
a number of meetings with representatives
of large investment funds which have been
mandated to vote and/or engage in dialogue
on behalf of investment institutions on
matters related to corporate governance
and sustainability.
Health, Safety and Environment (“HSE”)
Regretfully, the number of fatalities increased
in the reporting year despite such focus and
our ongoing investment in safety programmes.
Sadly, there were some additional fatalities
since the beginning of 2013. This experience
reinforces my view that the Board still has
much to do to drive the all-important changes
to mindsets and safety culture within our
operations. We remain committed to further
improvements in the Company’s HSE policies
alongside increased training for employees
and a continuation of our zero-tolerance policy
with regard to non-compliance with safety
rules. Led by the Board’s HSE Committee,
we have already drawn up additional
programmes to mitigate the risk of such
accidents in the future and the Board will
continue to provide leadership in this area,
monitoring HSE performance and working
closely with management.
Furthermore we are fostering and overseeing
a programme which will result in a more
comprehensive level of non-financial reporting,
including the publication of greenhouse gas
emissions in anticipation of the introduction
of the new UK regulation. Our intention is to
create a sound platform designed to ensure
responsible and sustainable development
on the part of the Company.
Strategy
The Board’s priorities in the prevailing
business climate were to preserve the
Company’s long-term competitive advantages
and protect shareholder value in the face of
diverse potential macroeconomic scenarios.
Having reviewed and refined our strategic
development plan we chose to concentrate our
efforts on programmes designed to promote
operational excellence at existing facilities,
while adhering to strict capital disciplines
with regard to new projects.
We are approaching the conclusion of a major
modernisation programme at our Russian
steelmaking facilities and are currently
commissioning a number of mining projects.
One of the principal highlights related
to the purchase of a controlling interest in
the Raspadskaya coking coal company, a
transaction that establishes EVRAZ as the
largest producer of coking coal in Russia.
The approximately US$964 million acquisition,
which will yield major benefits through
enhanced vertical integration, was primarily
funded through equity, thereby avoiding a
commensurate cash outflow. The transaction
was successfully completed in mid-January
2013. A key objective for the Board during
2013 is to ensure the smooth integration of
Raspadskaya into EVRAZ’s operating model
and the maximisation of operational synergies.
We constantly monitor the progress of major
investment projects versus initial expectations
and external market factors, a process that
allows us to maintain flexibility in conjunction
with our long term approach of sustaining
a balance between financial stability, growth
and shareholder returns.
EVRAZ plc
Annual Report and Accounts 2012
09
EVRAZ’s 20th anniversary
Two decades ago my partners and I set
up a small trading house which has evolved
into one of the largest global steelmaking
companies in the world with operations
spanning four continents and seven countries.
The scale of growth and the success of the
Company would have been inconceivable had
it not been for the hard work and dedicated
support of our stakeholders – shareholders,
employees, clients and trading partners.
I would like to take this opportunity to
express the Board’s sincere appreciation
and congratulate you all on this shared
anniversary. I am confident that the Company
is well placed to continue to deliver value
to all stakeholders through the delivery
of operational excellence and sound
financial results.
Alexander Abramov
Chairman of the Board
EVRAZ plc
I have every
confidence that
the professional
experience, leadership
skills, integrity and
balance of interests
reflected in the
membership of the
current Board and
Committees represents
the right blend
to promote the
development of the
Company and set
ambitious challenges
for management.
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In addition, management continued to focus
on streamlining our business model and
assessing options designed to increase free
cash flow. In line with this, we disposed of
EvrazTrans, a transport subsidiary, to a third
party for cash consideration of approximately
US$306 million. This divestment enabled us
to exit from a non-core asset while securing
our transportation needs for the foreseeable
future on advantageous terms. The Board
intends to pursue further attractive
opportunities to improve return on capital
employed. We gave careful consideration
to the performance of our assets and the
strategic options available and decided to
classify certain underperforming assets as
assets-held-for-sale, namely EVRAZ Vitkovice
Steel and EVRAZ Highveld Steel and
Vanadium, thereby paving the way for ongoing
options. In March 2013 we made the next
step in this process by announcing the
execution of a non-binding term sheet on
the sale of our stake in EVRAZ Highveld
to a consortium of South African investors.
Dividends
In 2012, EVRAZ continued to make dividend
payments in line with the Company’s stated
dividend policy of targeting a long-term
average dividend payout ratio of at least
25% of consolidated net profit adjusted for
non-recurring items. In July 2012, following
shareholder approval at the AGM, EVRAZ
paid a final dividend in respect of 2011 in the
amount of 17 cents per share (US$228 million
in total). In addition, in August 2012, EVRAZ’s
Board declared an interim dividend of 11 cents
per share (US$147 million in total) based
on the results for the first half of 2012. The
Board, having reviewed the results in respect
of the financial year to 31 December 2012
and after taking into account the substantial
deterioration in the respective prices of steel
and steel raw materials towards the year-end,
has decided to forgo the recommendation
of a final dividend in respect of 2012 in order
to preserve the financial standing of the
Company and provide greater flexibility to
manage the current market environment.
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
11
11
Strategy
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EVRAZ plc
Annual Report and Accounts 2012
Chief Executive Officer’s Report
Alexander Frolov
While we expect 2013 to continue to provide challenging
short-term risks, we are committed to investing in our
future growth by increasing mining volumes, improving
our product mix and reducing costs.
Dear Stakeholders,
The year 2012 was characterised by challenging
trading conditions for the global steelmaking
industry. Although some recovery was seen
during the first half of the year, there was a
significant deterioration in sentiment towards
the year end. As a result, steel and raw material
markets remained highly volatile with global
steel industry capacity experiencing substantial
underutilisation.
The subdued steel and raw materials pricing
environment took its toll on EVRAZ’s financial
performance. Although the Company
demonstrated respectable operating results,
we experienced a 10% decline in revenues to
US$14,726 million against 2011, while EBITDA
was 31% lower at US$2,012 million.
Overview of Health, Safety
and Environmental performance
Throughout 2012 we brought a strong focus
to bear on safety and risk management but,
although we have made some progress in this
area over recent years, we still have a long way
to go.
In order to improve the accuracy of our statistics
in respect of lost time incidents we pursued a
rigorous policy of zero-tolerance with regard to
the concealment and/or misrepresentation of
health and safety incidents throughout the year.
Although the Lost Time Injury Frequency Rate
indicator showed an increase in 2012 compared
with 2011, we believe that this partly reflected
the consequent increase in reporting activity.
However, I am firmly of the opinion that the
efforts brought to bear by management on health
and safety issues, typified by an intensified focus
on the thorough investigation of all incidents prior
to the implementation of necessary corrective
actions across the Group, will ultimately lead
to sustainable improvement in this area.
2012 market environment
and business performance
During 2012 the global macro environment
remained highly imbalanced and uncertain
in both the emerging and developed markets.
Many countries faced deep financial issues,
encompassing the sovereign debt crisis and
economic difficulties in the Eurozone, uncertainty
in relation to the fiscal cliff in the US and a
slowdown in the Chinese economy, particularly
during the second half of the year, all of which
weighed on world markets. As a result, overall
world economic growth decelerated in the
reporting year.
The negative macro sentiment affected almost
all commodity markets, with the steel market
proving no exception. The demand outlook
for steel products deteriorated substantially
during the course of the year. Volatility in
steelmaking raw material prices promoted
caution and led to destocking on the part
of market participants.
As a result of these factors, a promising start
to 2012 gave way to a year characterised by
challenges and we are therefore cautious about
near-term prospects. However, EVRAZ’s strong
competitive cost base, superior operating
efficiency and flexible investment programme
enable me to view the Company’s long-term
outlook with confidence.
Steel segment
Global steel prices continued to soften
throughout much of 2012 with steel demand
subdued as a result of the uncertain
macroeconomic environment. Despite this,
we continued to run our Russian and North
American steelmaking facilities at high levels
of utilisation due to the cost efficient nature
of our operations and the resilience of some
of our niche products.
Tragically, we recorded 25 separate fatal
accidents at our operations in 2012 and 6 more
since the beginning of 2013. We continue to
implement additional training and improve our
HSE culture to ensure that relevant issues are
addressed in a timely and adequate manner.
The underlying causes of any accidents are
now evaluated and shortcomings addressed
on a more consistent basis, with the ultimate
objective of operating a zero harm environment.
Our current priority is to appreciably heighten
our employees’ awareness and understanding
of HSE issues at all levels.
EVRAZ derives significant benefits from
its ability to adjust production plans and
strategically adapt output to meet market
conditions. The location of key steelmaking
facilities allows the Company to efficiently
deliver steel products to Russia, CIS, Asia
and Middle East regions, thus taking full
advantage of a favourable situation in a
particular geographical market. In Russia
we decreased the ratio of export sales
during 2012 in order to take advantage
of the ongoing momentum in steel demand
from the domestic construction industry.
Good progress was made in terms of our
commercial objectives and management’s
focus on maintaining our position as a low
cost producer was reflected in the ongoing
implementation of pulverised coal injection (PCI).
We also undertook a large scale modernisation
programme in our railway product group which
necessitated the suspension of operations at the
EVRAZ ZSMK rail mill from April 2012 to January
2013. The rail mill is now fully operational and,
as a result, EVRAZ has increased its overall rail
capacity in Russia to 1.5 million tonnes per
annum and improved the quality and other
characteristics of the rails produced. In addition,
we established a separate division for railway
products in order to concentrate the operational
and sales effort, as well as to focus on product
development in this important market.
We also derive considerable benefits from
the favourable locations of our steel facilities
in the Western US and Canada which allow
us to offer customers shorter lead times than
competitors and save on transportation costs.
This proved particularly important during 2012
when demand in North America remained
strong, especially for rails, while regional prices
for tubular products also held firm. We have
successfully implemented our expansion into
high value added steel products (such as head
hardened rails, premium connection OCTG tubes
and heat treated seamless pipe) and we also
succeeded in increasing the internal supply
of steel slabs in Russia to serve our operations
in Europe and North America.
Poor end-user sentiment continued to dominate
European markets as the weak economic outlook
and financial uncertainty persisted amid attempts
to find a solution to the Eurozone debt crisis.
Our performance in South Africa during 2012
was negatively impacted by industrial action,
which interrupted production in mid-year before
giving way to a prolonged ramp up period. Overall
demand for steel in the African region proved
sluggish. As part of our continued effort to
improve allocation of capital, we decided to
dispose of our South African steel operation –
EVRAZ Highveld and signed a non-binding term
sheet in March 2013.
Mining segment
During the year we completed a number of
significant initiatives which, we believe, will
secure cost efficient long-term supplies of
iron ore and coking coal for our core Russian
steelmaking facilities.
We achieved a solid performance in iron ore,
reflected in relatively flat production year-on-year,
together with the continuation of a high
self-coverage ratio. The principal highlight was
the successful ramp up of EVRAZ KGOK to 56
million tonnes of iron ore per annum (9.7 million
tonnes of saleable products) – the lowest cost
asset in the Company’s iron ore mining portfolio.
This was accompanied by a number of initiatives
designed to reduce costs and optimise iron ore
mining operations. For more detailed information
please refer to pages 43 to 44.
Coking coal production increased with our
Yuzhkuzbassugol coal mining subsidiary
producing 8.5 million tonnes of raw coking coal in
2012 compared with 6.3 million tonnes in 2011.
This is the result of continued management focus
on operational improvements at all of our coal
mining operations. For more detailed information
please refer to pages 46 to 48.
Construction of the new Yerunakovskaya VIII
coking coal mine, which enjoys a nameplate
capacity of 2.5 million tonnes of raw coal per
annum, was completed in 2012. We expect
the mine, which was commissioned in February
2013, to ramp up to full production in 2014.
We have also secured project financing for the
development of Phase I of the Mezhegey coal
deposit which will serve to increase EVRAZ’s
production of hard coking coal by a further
1.5 million tonnes per annum. Mezhegey will
produce hard coking coal which is in short
supply in the Kuzbass region of Russia.
In addition, Mezhegey benefits from a relatively
low methane content resulting in improved
safety and cost performance.
One of the major developments of 2012
was the agreement to purchase a controlling
interest in Raspadskaya, one of Russia’s
largest independent coking coal companies,
a transaction which closed in January 2013.
The consideration largely comprised EVRAZ
equity, a factor that served to lower cash outflow.
I have every confidence that the purchase of
Raspadskaya will secure the long-run low cost
position of EVRAZ’s coking coal business while,
at the same time, providing us with a strategic
option to increase volumes with relative ease.
Consequent to the acquisition of Raspadskya,
EVRAZ’s self-coverage in coking coal surpassed
100% and our intention is to deliver excess
coking coal production to the market, while
securing those grades of coal which are in
deficit for our operations.
Vanadium segment
In 2012 we continued to be the only major
producer of vanadium in Russia with an important
share of the global market. Overall, EVRAZ’s
vanadium business experienced a mixed year,
with labour issues in South Africa and shortages
of third party feedstock in the United States
impacting negatively, while Russian operations
ran at full utilisation rates to meet demand.
Embedding a new culture throughout EVRAZ
We began the critical process of changing the
Company’s culture through the introduction of
the EVRAZ Business System (“EBS”) in 2011.
EBS represents a radical transformation of
the way EVRAZ conducts its business and I am
delighted to report that we made good progress
in embedding this new methodology across our
operations in 2012.
By way of example, I would like to cite two
pilot areas at EVRAZ ZSMK which were chosen
for the implementation of a new maintenance
system – a section in both the long product
rolling mill and the blooming mill – where more
efficient organisation of work processes resulted
in enhanced productivity and savings on spare
parts and the optimisation of stocks which
amounted, in total, to more than RUB121 million
(US$4 million).
Another successful example is EVRAZ KGOK,
where the repair times in certain shops were
drastically reduced and productivity improvement
projects have led to savings of approximately
RUB37 million (US$1.2 million). For more detailed
information on the results achieved through the
utilisation of EBS please refer to pages 24 to 25.
Capital expenditure, debt position and liquidity
In 2012, capital expenditure totalled US$1.3
billion with development capex mainly channelled
to the development of the Yerunakovskaya VIII
mine (US$135 million), PCI projects at Russian
steelmaking facilities (US$109 million), the major
rail mill modernisation programme at EVRAZ
ZSMK (US$143 million) and the construction
of mini-mills in the south of Russia and in
Kazakhstan (US$72 million).
As at the year end, our total debt amounted
to US$8.2 billion with cash of US$2.1 billion
(including short-term financial assets). This allows
us to comfortably fulfil scheduled redemptions
of US$1.1 billion in 2013. The current liquidity
position underpins the manageable debt
structure of the Company with the next major
debt maturities scheduled for Q4 2014.
Nevertheless, we continued to consider new
funding options during the year, including the
US$195 million project finance loan obtained for
the development of the Mezhegey coal project
Phase I. The structure of this loan provides for
proper risk mitigation in respect of the enterprise,
while enhancing the overall investment profile of
the Company.
During the year we also continued to streamline
the structure of our public debt covenants
through the removal of a net leverage ratio
maintenance covenant under a Eurobond issue,
which served to align this issue with other
Eurobond issues.
EVRAZ plc
Annual Report and Accounts 2012
13
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2013 Outlook
Despite a positive start to 2013 in certain
international steel markets we remain
cautious with regard to the outlook for steel.
Notwithstanding some recent signs of
stabilisation, global prospects remain fragile,
with strong downside risks and volatility likely
to persist throughout the year. As a result,
both producers and customers are waiting for
clearer indications of sustainable trends.
Due to our attractive position on the global
cost curve, we anticipate that our steelmaking
facilities will continue to operate at high
utilisation rates and, as a result, we expect our
steel production volumes in 2013 to be broadly
in line with the 2012 performance. Steel prices
have been volatile since the beginning of the year
while iron ore price has grown moderately, coking
coal price stagnated. We are anticipating an
uptick in the demand of steel construction
products in the Russian market as the new
construction season approaches.
Stock levels are well managed across our
business. Export sales volumes are currently
booked for over one month’s production and
inventories at traders and at our mills and ports
remain low.
In 2013, we expect to reduce capex spending
by ca. 10% vs. 2012, as we approach the
completion of key investment projects.
The Company maintains sufficient flexibility
in its investment plans to be able to respond
adequately to a potential worsening of the macro
environment.
While we expect 2013 to continue to provide
challenging short-term risks, we are committed
to investing in our future growth by increasing
mining volumes, improving our product mix and
reducing costs. Although the full benefit of these
investments will be realised in the medium to
long-term, we anticipate some positive impact
in 2013.
EVRAZ’s leaders were ambitious in their plans
for the Company when they founded the
enterprise 20 years ago. Although the scale
of the Company’s operations has grown
considerably since then, we retain the same
ambitions to develop EVRAZ into one of the most
prominent steel producers in the world. EVRAZ
enjoys a strong array of inter-aligned assets
which leaves us well positioned to achieve our
long-term objective of maximising shareholder
value through a balance of investment, financial
stability and dividend distributions. I would
like to congratulate all our stakeholders on
this anniversary and thank each of you for
your ongoing support for management’s efforts
and development plans.
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Alexander Frolov
Chief Executive Officer
EVRAZ plc
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EVRAZ plc
Annual Report and Accounts 2012
Market Review
Global economic growth of 3.3%
in 2012 was primarily driven by the
BRICs countries, and in particular
China and India, which grew by 7.6%
and 5.1% respectively. In contrast,
macroeconomic conditions in
developed countries remained
challenging with the EU-27 economy
contracting 0.5% while the US economy
demonstrated a modest improvement
with growth of 2%.
During 2012, global industrial output mirrored
the overall strong GDP growth within emerging
markets, while in developed markets industrial
production levels were weaker.
The contrasting economic conditions between
the developed world and emerging markets
have resulted in the latter becoming the main
driver of demand for commodities including
iron ore, coal and steel. This trend has been
especially pronounced in China and Asia in
general, where a number of significant
infrastructure development projects are
underway, and is expected to continue during
2013.
Economic growth in developed countries is
expected to rebound in 2013, driven by the
continuing recovery in the USA, where markets
for housing, vehicles and consumer products
are starting to show positive momentum.
Industrial production growth
%
16
12
8
4
0
(4)
Jan-11
Apr-11
Jul-11
Oct-11
Feb-12
May-12
Aug-12
Dec-12
— China — Russia — EU-27 — US
Source: Global Insight
GDP growth
%
9
6
3
0
(3)
9.8
9.5
9.1
8.9
5.0
4.8
7.5
7.4
7.8
8.1
4.9
4.0
2.4
1.8
3.4
1.7
1.9
1.5
1.6
2.0
0.8
2.4
0.1
4.0
2.1
2.9
2.6
2.7
1.8
0.3
-
0.4
-
0.3
-
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
China
Russia
EU-27
US
Source: Global Insight
+3.3%
Global economic growth in 2012
EVRAZ plc
Annual Report and Accounts 2012
15
Steel Industry in 2012
The global steel industry in 2012
remained structurally oversupplied, with
average global utilisation rates below
80%. As a result steel prices significantly
softened during 2012, especially in the
second half of the year.
Steel producers were heavily exposed to the
European Union, where the continuing debt
crisis impacted heavily on industrial activity and
apparent steel consumption. More broadly, the
market developments in numerous segments of
the global steel industry were uneven and varied
greatly between different geographical markets.
While emerging markets were enjoying healthier
demand growth, steelmakers in the developed
world were focusing on differentiation through
the production of more niche products.
According to Metall Expert consumption of long
products in Russia increased in 2012 by 8.8%,
including increases in rebar and beam
consumption by 19%. The main drivers of the
growth in consumption were construction (+13%
y-o-y), fabrication of metal structures (+13%) and
seamless pipes (+8%). The Russian construction
sector is expected to grow by 4% in 2013, which
will continue supporting Russian steel demand,
with overall apparent consumption of steel
anticipated to exceed 22 million tonnes based
on estimates from CRU (+5%).
In the United States consumption of long
products, one of EVRAZ’s key product groups,
grew by over 10% compared to 2011. Restocking
efforts throughout the supply chain and
heightened end-user demand contributed to a
sharp increase in US long product consumption
during the first part of 2012. However these gains
were partially offset by intensified US market
uncertainty, towards the middle and end of the
year, due to ongoing concerns surrounding the
Eurozone debt crisis and economic deceleration in
China. In 2013, US steel consumption growth is
expected to exceed the rest of developed world,
including the EU and Japan.
Growth in the large diameter gas pipeline market
in North America remained constrained as low
natural gas prices have led to a reduction in
natural gas drilling activity, with a 44% decrease in
active gas rigs compared to 2011, according to
data from Baker Hughes. Should the US
Government approve legislation to allow liquefied
natural gas (LNG) exports, demand for natural gas
pipelines over the next 3-5 years should be
spurred.
Imports of oil country tubular goods (OCTG) to the
US were up 25% in 2012 from 2,608 thousand
tonnes to 3,258 thousand tonnes, and accounted
for approximately 55% of the US OCTG
consumption according to Pipelogix. The reliance
by the USA on OCTG imports provides the potential
for substitution with locally made products, as
produced by EVRAZ in North America.
Global crude steel production and finished steel consumption growth
9.4
9.3
5.8
5.8
10.5
9.5
%
12
9
6
3
0
5.0
2.7
3.6
1.2
4.2
0.9
5.4
4.0
1.2
0.2
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
— Crude Steel Production — Finished Steel Consumption
Source: CRU
Steel products price developments
US$/t
800
720
640
560
480
400
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
— Slab FOB Black Sea — Billet FOB Black Sea — Rebar FOB Turkey — HRC FOB Black Sea
Source: CRU, Bloomberg, Datastream
1.5bt
(cid:56)(cid:80)(cid:83)(cid:77)(cid:69)(cid:1)(cid:68)(cid:83)(cid:86)(cid:69)(cid:70)(cid:1)(cid:84)(cid:85)(cid:70)(cid:70)(cid:77)(cid:1)(cid:81)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)
in 2012
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EVRAZ plc
Annual Report and Accounts 2012
Iron Ore Market in 2012
While iron ore market volumes
remained largely flat in 2012, prices
deteriorated throughout the year as a
result of the subdued demand from the
steel industry. Destocking of both steel
and raw materials throughout the
majority of 2012 also put further
downward pressure on prices.
The seaborne market is the largest constituent
of global trade in iron ore, with an overall
volume of 1.1 billion tonnes in 2012. China
dominates seaborne demand with imports of
720 million tonnes in 2012, while Australia
and Brazil are the largest exporters of iron ore.
During 2012, Chinese imports grew more
rapidly than consumption, as the lower pricing
environment resulted in the displacement of
some higher cost domestic tonnage.
On the supply side, the Australian producers
continued to ramp-up production volumes,
with an increase of 8% compared to 2011,
which offset the respective 9% and 27% falls
in Chinese and Indian production.
On the supply side, the Australian producers
continued to ramp-up production volumes,
with an increase of 8% compared to 2011,
which offset the respective 9% and 27% fall
in Chinese and Indian production.
The benchmark price for China CFR iron ore
fines fell by 23% in 2012 as global steel
production growth stalled and major
steelmakers continued to rely on inventories
to sustain near term production volumes. Iron
ore prices reached a low of under US$90/t
in September 2012, although had recovered
to above US$140/t by December 2012,
following an improved near term pricing
outlook as a result of increased restocking
and a further slump in Indian iron ore
export levels.
1.8bt
Iron ore production in 2012
Share of iron ore seaborne: supply and demand
Total Supply: 1,131 mt
Total Demand: 1,131 mt
15%
1%
3%
3%
5%
29%
44%
8%
6%
10%
12%
64%
Australia
Brazil
South Africa
North America
India
EU-27
Rest of the World
Source: Credit Suisse Research
China
Japan
EU-27
South Korea
Rest of the World
Spot vs. contract prices for iron ore fines prices
US$/t
200
180
160
140
120
100
80
Jan-11
Apr-11
Jul-11
Oct-11
Feb-12
May-12
Aug-12
Dec-12
China CFR
(spot, 63.5% Fe)
Australian CFR
(monthly contract)
Brazilian CFR
(monthly contract)
Source: CRU
Iron ore production
mt
2,000
1,500
1,000
500
0
1,422
1,314
1,074
1,184
302
92
99
246
123
212
314
97
121
271
146
235
326
97
143
292
198
258
350
104
151
268
276
273
1,555
1,642
1,543
358
105
174
291
332
295
352
99
188
296
366
341
302
100
203
264
273
401
1,730
1,828
1,818
358
107
196
308
320
441
389
111
172
335
336
422
109
125
329
307
485
526
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Australia
China
Brazil
India
Russia
Rest of the World
Source: CRU
EVRAZ plc
Annual Report and Accounts 2012
17
Coking Coal Market in 2012
Share of coking coal exports in 2012
Share of coking coal imports in 2012
Total export: 294 mt
Total import: 278 mt
5%
6%
8%
32%
49%
22%
29%
4%
13%
18%
14%
Australia
North America
Mongolia
Russia
Rest of the World
Japan, S.Korea
& Taiwan
China
EU-27
India
Brazil
Rest of the World
Source: CRU and Credit Suisse Research
Spot vs. contract hard coking coal prices
US$/t FOB Australia
400
300
200
100
Jan-11
Apr-11
Jul-11
Oct-11
Feb-12
May-12
Aug-12
Dec-12
— Australian quarterly contract HCC — Australian spot HCC
Source: CRU and Credit Suisse Research
In 2012 the global coking coal market
remained in oversupply, as price
settlements above US$300/t in prior
years had created more incremental
supply than the market has been able
to absorb. In addition to increased
supply, the environment of high prices
caused a structural shift in the
steelmaking industry with steelmakers
researching new technologies to limit
consumption of coking coal by
replacing it with cheaper coal grades,
such as PCI coal.
All major coking coal exporting countries
added capacity in 2012, with Australia, which
represents nearly half of total global exports,
up 8% to 144 million tonnes, North America up
5% to 95 million tonnes and Russia up 13% to
16 million tonnes. In addition to increased
supply from the established producers, 2012
also saw the emergence of two new frontier
coking coal suppliers – Mongolia and
Mozambique, which jointly added 5 million
tonnes of incremental supply. Overall global
coking coal exports increased by 8% in 2012
to 294 million tonnes.
Coking coal import growth was relatively
subdued during 2012, with volumes up just
3%, to 278 million tonnes, and largely flat
compared to 2010 levels. China and India
accounted for 31% of global coal imports in
2012 and remained the key drivers of demand
growth, with import levels increasing by 15%
(51 million tonnes) and 8% (36 million tonnes)
respectively during the year. In other regions,
imports of coking coal either remained flat or
decreased compared to 2011 levels.
Market imbalance and excess supply of coking
coal continued to put downward pressure on
prices in 2012, with the benchmark price of
contract and spot FOB Australian HCC falling
by nearly 30% over the course of the year to
US$170/t.
294mt
Total coking coal exports in 2012
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EVRAZ plc
Annual Report and Accounts 2012
Vanadium Market in 2012
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
demand is heavily aligned with levels of
steel production, particularly high-
strength steel grades.
Global vanadium demand in 2012 was
estimated at 81,000 tonnes with 92%
consumed in the steel industry.
Vanadium production in 2012 was estimated
at 70,000 tonnes with China supplying nearly
half of global production.
Market imbalances drawing on the large
volumes of inventories continued to provide
pricing support throughout 2012.
Ferrovanadium prices recorded an average
20% increase in 2012 and reached a high of
US$28/kg at the end of December (European
Fe-V price).
Vanadium demand by application
Vanadium supply by country
Total Demand: 81 kt
Total Production: 70 kt
4% 3% 1%
92%
6% 5%
9%
11%
20%
49%
Steel alloys
Titanium alloys
Chemicals
Batteries
China
South Africa
Russia
Europe
North America
Rest of the World
Source: Metal Bulletin estimates, Bloomberg for price data.
Note: (1) Supply defined as production of vanadium oxides or downstream products.
81kt
Vanadium demand in 2012
EVRAZ plc
Annual Report and Accounts 2012
19
EVRAZ’s Business Model
SStSS eeelmaking
RRoolling
SSSSaleeees
MMiiningg:
IIrorron Orrerr
MMiiningg:
CCooking Coal
VVaVVanadaa iium
Connvevv rsrr ion
EVRAZ creates value by processing its proprietary mineral resources
into high-end steel products for its large scale global infrastructure
clients. Efficient operations, continued pursuit of economically attractive
asset development and search for value-enhancing M&A transactions
are the fundamental features of EVRAZ’s approach.
The health and safety of its employees is the
primary focus of all decision making at EVRAZ.
The Company also places great emphasis
on the recruitment and development of its
workforce, as this provides the backbone
for all of EVRAZ’s operations.
EVRAZ’s value chain
1. Iron ore
EVRAZ’s iron ore supplies are fully vertically
integrated for its key steelmaking facilities.
The Company mines and processes iron ore to
produce high quality marketable concentrate.
EVRAZ’s iron ore assets are located close to
the Company’s steelmaking facilities which
minimises associated transportation costs.
EVRAZ is currently 100% self-covered in
iron ore.
2. Coking coal
EVRAZ is a leading coking coal producer in
Russia. The Company operates underground
mines and processing plants in Kuzbass, the
primary coking coal region of Russia. EVRAZ
consumes a proportion of the coking coal
produced at its core steelmaking plants in CIS
and the remainder is sold domestically or
exported to Asia and Europe. As part of the
Company’s drive for increased coking coal self-
coverage, EVRAZ acquired a controlling stake
in the Raspadskaya coal mining company. On
a pro forma basis, coking coal self-coverage of
the combined entity would have been about
142% in 2012.
3. Steelmaking
Steelmaking is the core of EVRAZ’s business.
The Company produces steel from proprietary
iron ore and coking coal, as well as collected
scrap. Due to the close proximity of its raw
materials base and efficient operation of its
steelmaking plants, EVRAZ produces high
quality steel at a low cost. Semi-finished steel
products can be further rolled into finished
products at EVRAZ’s worldwide processing
facilities or sold to third parties in Europe,
Asia and Middle East.
4. Rolling
EVRAZ specialises in production of
construction (long) steel products in CIS.
These products, including rebar and H-beams
are used for construction of bridges, stadiums,
offices and residential buildings. EVRAZ is
also a world leader in railway products both
in terms of quality and volume produced.
5. Sales
The Company strives to market its products
directly at local and international markets.
This gives EVRAZ an in-depth understanding of
its customers’ needs and the opportunity to
rapidly adjust production volumes to market
trends.
6. Vanadium
Vanadium is a valuable ferroalloy which is
added to steel in order to make it stronger.
Due to the unique geological characteristics of
EVRAZ’s iron ore reserves in Russia and South
Africa the Company is able to extract
vanadium from by-products at its steelmaking
plants at very low cost.
Distinctive capabilities and sources
of competitive advantages
Proprietary mineral resource base
Historically EVRAZ’s operations were designed
as a single production chain consisting of
a proprietary mineral resource base and
a steelmaking facility. EVRAZ’s steelmaking
plants are the most natural consumers of
the Company’s own iron ore and coking coal
as they are have been designed to process
unique components of the raw materials
and are located in close proximity to the
resource base.
Unique product mix
& presence in key markets
EVRAZ produces a superior portfolio of
products, and is the leading producer of
construction steel products in the CIS,
a global player in railway products and a major
constituent of the North American tubular
product market. The Company creates value
by applying its technical expertise to the
production of high quality steel products, for
sophisticated applications, and to secure
market leading positions. The Company’s
production facilities are located close to key
markets, reducing transportation costs,
decreasing working capital requirements and
allowing EVRAZ to react flexibly and swiftly to
changes in customers’ requirements.
Geographical diversification
EVRAZ’s operations are spread over 7
countries in 4 continents. The Company’s
global presence provides it with the ability
to monitor market developments both along
the production chain and geographically.
This ability has become especially important
following the divergence of economic growth
and steel consumption between developed
and emerging markets over recent years.
Low cost & efficient operations
The major steelmaking facilities of EVRAZ are
located in CIS, which is structurally a low cost
region for steel production due to low prices
on key inputs such as gas and labour. This
provides EVRAZ an opportunity to create value
when exporting steel produced in CIS to either
proprietary rolling facilities in Europe and USA
or to customers globally. EVRAZ also creates
value by maximising efficiently at its
operations, using the EVRAZ Business
System, which minimises processing costs
and the production cycle.
Leading global vanadium producer
EVRAZ delivers value in its vanadium business
as a result of its unique low cost position on
the global cost curve. This position is secured
by the historical combination of iron ore and
steelmaking facilities in Russia and South
Africa as well as by the fact that vanadium is
produced efficiently as a by-product of its main
steelmaking operations.
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ’s Strategy
The Strategic Objective of EVRAZ is to create long term value for
shareholders by maintaining a balance between investment, financial
stability and dividend payment.
Strategic
Objective
Commercial
Objectives
Development
Principles
To create long term value for
shareholders by maintaining a
balance between investment,
financial stability and dividend
payment
(cid:114)(cid:1) Further vertical integration and
development of the raw materials base
(cid:114)(cid:1) Strengthening of competitive positions
in key markets
(cid:114)(cid:1) Development of the product portfolio
(cid:114)(cid:1) Enhancement of cost leadership
positions in steelmaking
(cid:114)(cid:1) Health, Safety and Environment
(cid:114)(cid:1) Human Capital
(cid:114)(cid:1) Customer Focus
(cid:114)(cid:1) EVRAZ Business System
(cid:114)(cid:1) Growth
Corporate Social Responsibility
CSR report can be found at page 54 of the report.
Risk Management
The Group’s business and operations are exposed to various
business risks. The principal risks of EVRAZ can be found at
page 28 of the report.
Key Performance Indicators
EVRAZ’s financial and non-financial KPIs to measure and
manage its performance can be found at page 26 of the report.
Given the context of the global steel industry
in which EVRAZ operates, achieving this core
aim depends upon delivering a number of
Commercial Objectives:
(cid:114)(cid:1) Further vertical integration and
development of the raw materials base
(cid:114)(cid:1) Strengthening of competitive positions
in key markets
(cid:114)(cid:1) Development of the product portfolio
(cid:114)(cid:1) Enhancement of cost leadership positions
in steelmaking
In view of the scale of ongoing improvement in
a business as large as EVRAZ, which spans
four continents and employs more than
110,000 people, it is important to establish
and adopt a clear set of Development
Principles. These principles, which demonstrate
the Company’s commitment to change,
consist of five elements which, together,
provide a solid foundation for long term
sustainable development.
The Development Principles cover:
1. Health, Safety and Environment
2. Human Capital
3. Customer Focus
4. EVRAZ Business System
5. Growth
By delivering on the first four principles EVRAZ
will achieve growth. Well managed growth will
ultimately lead to EVRAZ delivering on the
commitment to create long term value for
shareholders.
Commercial objectives
Further vertical integration and development
of raw materials base
2012 was a highly volatile year for
commodities including coking coal and iron
ore. However, EVRAZ believes that these
fluctuations and subdued pricing were
short-term and of a temporary nature. At the
same time, all fundamentals remain intact:
China, being the largest consumer of
commodities, continues to experience a
structural lack of resources; and iron ore and
coking coal markets are still concentrated on
the supply side, which allows the major
players to react swiftly to changes in demand.
These factors should continue to support
prices of iron ore and coking coal for the next
5 to 10 years.
Given the market outlook and competitive
advantages of EVRAZ, arising from the
geographical proximity of the proprietary
mineral resource base and key steelmaking
facilities, the Company has set long term
targets of 120% self-coverage in iron ore and
130% in coking coal excluding production
volumes of Raspadskaya. This implies total
production of 22 million tonnes of saleable
iron ore products per annum and 15 million
tonnes of raw coking coal per annum from
2016. The Company intends to maximise the
intragroup consumption of proprietary key raw
materials and sell the excess in the open
market.
Coking coal
EVRAZ continues to develop the coking coal
business both organically and through the
transformational acquisition of Raspadskaya,
which was completed in January 2013. The
pipeline of organic development projects
includes the construction of the
Yerunakovskaya VIII mine with a production
capacity of 2.5 million tonnes of raw coking
coal per annum and the Mezhegey project
with a projected production capacity of 6.5
million tonnes of hard coking coal per annum.
In 2012, the Company completed the
construction of the Yerunakovskaya VIII mine
in the Kuzbass region for the production of
semi-hard coking coal. The first coal was
mined in February 2013, with total annual
production projected to reach 1.2 million
tonnes in 2013. The ramp-up to full capacity
of 2.5 million tonnes per annum will take
place in 2013 with the mine reaching
nameplate capacity by 2014. Coal washing
EVRAZ plc
Annual Report and Accounts 2012
21
Strengthening of competitive positions in
key markets and development of product
portfolio
EVRAZ expects that global steel consumption
will grow at a moderate rate over the next two
years due to uncertain economic conditions
across the globe. Nevertheless, this provides
the Company with an opportunity to increase
its focus on specific niche products in key
markets, i.e. enhance the leading global
market position in railway products and in
the CIS construction steel products’ market.
In 2012, EVRAZ completed the modernisation
programme at the rail and beam mill at
EVRAZ ZSMK, which is now capable of
producing high quality rails, including 100
metre rails suitable for high-speed railways.
As a result of this project, EVRAZ is targeting
growth in production capacity from the rail mill
at EVRAZ ZSMK from 750 thousand tonnes to
950 thousand tonnes per annum with total
available railway capacity at EVRAZ’s Russian
assets of 1.5 million tonnes. The full ramp-up
of the rail mill at EVRAZ ZSMK is expected by
mid-2013.
In 2013, EVRAZ plans to commission a new
rolling mill, Vostochniy, in Kazakhstan, with a
total annual capacity of 450 thousand tonnes
of rebar thus strengthening our position in
this growing market. EVRAZ is looking to
expand its sales in Kazakhstan from the
current level of 210 Ktpa to 300 Ktpa by
2015. The feedstock (square billet) for the
mill will be delivered from EVRAZ ZSMK
allowing the Company to manage sales of
semi-finished products between domestic and
export market with greater flexibility. The
launch of the second rolling mill, in Russia,
– Yuzhniy – with a total capacity of 450
thousand tonnes of rebar and sections per
annum, is targeted for 2014.
At the beginning of 2013 EVRAZ North
America embarked on a project to expand
heat-treatment capacity at the Calgary mill in
Western Canada from 80 thousand tonnes to
200 thousand tonnes per annum in order to
strengthen margins. Mill modernisation will
also provide for a 65 thousand tonne increase
in mill welding capacity. The project is
expected to be completed by 2014.
EVRAZ’s business strengthens EVRAZ’s
market positions in Russia and Ukraine,
significantly increases intragroup coal
consumption and consolidates Asian export
sales through the logistics infrastructure of
Nakhodka Sea Port. For more information
on Raspadskaya please refer to page 23.
Iron ore
EVRAZ’s major iron ore projects include
the brownfield development of the
Sobstvenno-Kachkanarskoye deposit and
the Timir greenfield project located in the
Yakutia region.
In 2012 the Company finalised the feasibility
study of the Sobstvenno-Kachkanarskoye
deposit and received government approvals in
February 2013. The 6.9 billion tonnes of iron
ore confirmed by the Russian State
Commission on Mineral Reserves provide
140 years of stable output at EVRAZ KGOK.
Development of the deposit will enable EVRAZ
to sustain the level of annual iron ore
production at EVRAZ KGOK at 56 million
tonnes. Total capex to realise the first stage
of the project until 2016 is in excess of
US$240 million. EVRAZ KGOK plans to
commence production of iron ore at
Sobstvenno-Kachkanarskoye in 2015. The
iron ore mined will be sufficient to cover the
needs of EVRAZ NTMK’s production facilities
in the foreseeable future.
In April 2013 EVRAZ signed an agreement to
acquire the stake in the Timir company which
holds licences for four iron ore deposits in
Southern Yakutia with total reserves under
the Russian classification of 3.5 billion tonnes
of iron ore (Russian geological categories of
A+B+C1). Among these deposits, the
Tayozhnoye deposit is considered to be the
most attractive with 341 million tonnes of
fully explored reserves for open pit mining,
with ore grades of 38-40% Fe and near to
the existing infrastructure (located 4 km
from railway, 6 km from power grid). In 2012,
EVRAZ finalised a scoping study for the
project with current estimates indicating a
capital budget of US$1.8 billion. The mining
capacity of the Tayozhnoye open pit is
estimated at 15 million tonnes of iron ore per
annum with first ore scheduled to be mined in
2018. Convenient geographical location of
the Tayozhnoye deposit on a railway
connected to the TransSiberian railroad
provides for competitive delivery of iron ore
products to EVRAZ ZSMK and Southeast
Asian countries through the Far East of
Russia.
will take place at the existing facilities and the
coal concentrate will be utilised by EVRAZ’s
steelmaking plants in Russia. Proven and
probable reserves of Yerunakovskaya VIII
mine under JORC classification amount to 85
million tonnes of semi-hard coking coal. Total
capital spending under the project amounted
to US$310 million, which is almost 20% below
the budget target. The estimated cash cost of
raw coal production is US$40 per tonne,
which places Yerunakovskaya VIII mine in
the lowest quartile of CIS producers in
terms of the cash cost curve. Coal from the
Yerunakovskaya VIII mine will be utilised
intragroup and sold in the market.
EVRAZ continues to work on the Mezhegey
Phase I project, a world class coking coal
deposit located in the largest undeveloped
coal province in Russia. Total reserves of
deposits covered by EVRAZ’s licences amount
to 763 million tonnes of hard coking coal
based on exploration works of prior periods.
During the first stage EVRAZ envisages
mining 1.5 million tonnes of raw coking coal
using room-and-pillar technology, thereafter
utilising road haulage to the railway station
and subsequently transporting the coal to
proprietary coal washing plants in the
Kuzbass region of Russia. The total capital
budget for the first stage is US$195 million,
funded principally through project finance
from Gazprombank with limited recourse to
EVRAZ plc. Cash costs of production of raw
coking coal, including transportation to the
coal washing plant, is estimated at US$70
per tonne, which is comparatively low for the
production of hard coking coal in Russia. The
first coal is expected to be mined in October
2013, with ramp-up to full capacity scheduled
for 2014. The majority of production will be
utilised by EVRAZ ZSMK.
The Mezhegey Phase II project involves both
mining and coal washing facilities at the mine
site. The main trigger for execution of the
second stage will be the completion of the
construction of a 400 km railway connecting
the area with the Trans-Siberian railroad. The
construction of the rail link is expected to be
financed by the Russian government.
In 2012, EVRAZ made a major commitment
to non-organic investment in coking coal
assets via the agreement in respect of the
acquisition of the Raspadskaya coal company.
The Company has been a JV partner with the
management of Raspadskaya since 2005
and has been actively involved in the strategic
decision making process. Hence, the
acquisition of Raspadskaya not only
complements the Company’s strategy to
expand the mining business, but also
captures operational synergies based on the
aforementioned knowledge of Raspadskaya’s
assets. The integration of Raspadskaya into
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ’s Strategy (Continued)
Enhancement of cost leadership positions in
steelmaking
EVRAZ has maintained its key competitive
advantage of being a low cost steel producer
through operational and strategic initiatives.
The management believes that CIS 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 global competitors, i.e. EVRAZ benefits
through both sales of low-cost Russian slabs
to global markets and through synergies
created by being able to supply feedstock to
certain of its non-Russian subsidiaries.
In 2012 EVRAZ completed construction of the
pulverised coal injection (PCI) project at
EVRAZ NTMK. The consumption of natural
gas is estimated to reduce by 50%, coke by
20% and the increase in capacity for pig iron
production should amount to 100 thousand
tonnes per annum. The project is expected to
reach designated parameters during the first
half of 2013. A similar PCI project is underway
at EVRAZ ZSMK which is expected to be
completed by mid-2014 with a similar 20%
decrease in coke consumption, full
elimination of natural gas consumption and
additional pig iron capacity of 260 thousand
tonnes per annum.
In 2012 EVRAZ approved a plan to enhance
the effectiveness of EVRAZ DMZ Petrovskogo.
The Company intends to adopt the standard
upgrades that have been successfully
implemented at the Russian steelmaking
facilities. These include: PCI technology
aimed at fully eliminating natural gas
consumption, improvements to blast furnace
productivity through a new air separation unit,
and debottlenecking of processes at the
sinter screening and structural mill stages.
The implementation of PCI projects and
improvements at the blast furnace will
contribute to the growth of pig iron production
from 860 thousand tonnes to 1.35 million
tonnes per annum by 2014 and to a reduction
of ca. 20% in the cash costs of billet
production.
Development principles
1. Health, Safety and Environment. During
the last two years EVRAZ has significantly
increased its focus on health, safety and
environment (HSE) performance. The
long-term target of HSE policy is to prevent
all fatal accidents and to comply with
environmental standards. To achieve
these targets EVRAZ has implemented
programmes which ensure compliance
with rigorous safety standards in every
EVRAZ workplace and which provide all
employees with relevant safety training.
The Company has established a dedicated
corporate HSE function at management
level and has linked the remuneration of
senior executives to the achievement of
safety performance targets. In addition,
the Board HSE Committee reviews the
Company’s performance in this area and
recommends improvements where
appropriate.
2. Human capital. EVRAZ perceives the
attraction and retention of high calibre
employees as an integral element of the
Company’s sustainable success. As well
as providing competitive levels of
remuneration by industry standards,
EVRAZ provides significant professional
development support for its employees.
For instance, the Company cooperates
with the leading Russian Skolkovo
Business School annually through the
EVRAZ New Leader programme which
provides management learning
opportunities based on global best
practice. This initiative is a part of
EVRAZ’s human capital strategy with an
ultimate goal of comprehensively
supporting the development of middle
management to create a pool of qualified
successors to fulfil the management
challenges of the future and adopt senior
roles within the Company.
3. Customer focus. Given the versatile
industry landscape, EVRAZ takes into full
account the importance of customer
loyalty. The Company’s long-term target is
to minimise customer claims, late delivery
and incomplete orders. The results of
2012 provide evidence that the Company
is on track in meeting its long-term
targets, with a quadrupled decrease in
late delivery and incomplete orders
compared to 2011, and visibly improved
customer satisfaction with the quality of
claim processing. EVRAZ’s strategic effort
includes the development of new products
designed to match evolving customer
requirements and generate additional
value from tailored solutions. The goal is
to expand the proportion of new products
to 5% of the total product mix. Priority
niche segments are identified based on
rigorous research and selection. As a first
step in this programme, EVRAZ has
launched a new product development pilot
project at the railway shop of EVRAZ
NTMK. Similar projects will be initiated
at other operations during the course
of 2013.
4. EVRAZ Business System. As a part of
EVRAZ’s comprehensive efforts to reduce
costs at key industrial facilities, the
Company continues to implement the
EVRAZ Business System. The core of this
programme is comprised of a set of Lean
production practices affecting various
areas including safety, work flow and
maintenance optimisation, and warehouse
management. The key objective is the
elimination of production losses due to
unplanned machine downtime with the
aim of decreasing cash costs on a
sustainable basis. A detailed breakdown
of the elements which make up the
EVRAZ Business System can be found
on page 24.
5. Growth. The pursuit of growth options
is confined to the key areas of EVRAZ’s
expertise, such as development of the raw
materials base, the promotion of further
vertical integration, strengthening of the
competitive positions in key markets,
development of the product portfolio and
the enhancement of cost leadership
positions in steelmaking.
Research and development
EVRAZ constantly seeks to improve
operations at its facilities, principally through
enhancing operating efficiency, reliability and
capacity. The majority of these measures
constitute incremental improvements to
current activities and, as a result, are
undertaken in conjunction with regular
operational maintenance and monitoring.
Where appropriate, EVRAZ seeks to register
any rights to intellectual property that may
result from these efforts.
Delivering Growth in 2013
Overview of Raspadskaya’s Business
Following completion of the acquisition
of Raspadskaya, EVRAZ has become
the largest producer of coking coal in
Russia and is expected to generate
substantial operational synergies
including the optimisation of different
coal grades in the combined coal
products’ portfolio. The acquisition
increases EVRAZ’s coking coal
self-coverage, which is consistent with
the Company’s strategy of increasing
its resource base of raw materials
needed for steelmaking.
The Raspadskaya’s coking coal washing plant
is the largest in Russia, with a production
capacity of 15 million tonnes per annum and
includes technology which allows for the coal
blend to be adjusted and an integrated quality
control laboratory.
In 2012, Raspadskaya mined 7 million tonnes
of raw coal, with sales volumes of coal
products (semi-hard coking coal concentrate
and hard raw coking coal) totalling
approximately 5 million tonnes.
Raspadskaya is located in the Kemerovo
region of Russia and consists of three
underground mines and an open-pit mine,
a coal washing plant, a coal transportation
network and a number of integrated
infrastructure companies.
As at 31 December 2011, the Raspadskaya
had over 1.3 billion tonnes of high quality
coking coal reserves, which is sufficient to
sustain production for over 90 years.
Additionally, Raspadskaya has a proven track
record of reserve base expansion, with ca.
533 million tonnes of high quality coking coal
reserves added since 2006.
EVRAZ plc
Annual Report and Accounts 2012
23
Raspadskaya has a diversified customer
base, supplying coking coal to the majority of
the Russian steel majors, such as EVRAZ,
MMK, NLMK, Koks, Mechel, etc., as well as
customers in the Asia-Pacific region and
Eastern Europe (Ukraine).
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ Business System
The EVRAZ Business System (“EBS”) is the
practical expression of EVRAZ’s vision which
aims to reduce costs, improve quality and
safety and eliminate waste*. EBS
incorporates the business principles and
tools of the Lean management philosophy to
manage change and create a culture of
continuous improvement within the Company.
It consists of a set of principles that define
the way the Company operates and the way
people think and act. EBS applies in every
part of the business and every process in the
organisation.
The main objectives of EBS are to design out
overburden and inconsistency and to
eliminate waste. The most significant effects
on process value delivery are achieved by
designing a process capable of delivering
personal customer requirements and
business results smoothly.
EBS objectives
(cid:114)(cid:1) Grow leaders who thoroughly understand
the work, live the philosophy, and teach it
to others.
(cid:114)(cid:1) Develop exceptional people and teams who
follow Company’s philosophy.
(cid:114)(cid:1) Respect the extended network of partners
and suppliers by challenging them and
helping them improve.
(cid:114)(cid:1) EVRAZ understands customer value and
focuses its key processes to continuously
increase it. The ultimate goal is to provide
perfect value to the customers through a
perfect value creation process that has
zero waste.
The Company uses the following tools in order
to apply the Lean philosophy throughout
EVRAZ and involve the workforce in improving
their business:
(cid:114)(cid:1) Strategy Development and Deployment
Matrix – a form used to show relationships
between 3-5 year objectives, improvement
priorities, targets, resources required and
benefits to the organisation;
(cid:114)(cid:1) Value Stream Analysis to analyse and
design the flow of materials and
information required to bring a product or
service to a consumer;
(cid:114)(cid:1) A3 Thinking provides for a systematic
method to identify opportunities for
improvements in the workplace, realise
them daily as well as make the
transformation planning and problem
solving;
(cid:114)(cid:1) Cell Development is the area where work is
performed and improvement is made. This
area includes such items as 6S, Flow,
Standard Work, Pull and Visual
Management, which ensure a safe and
effective work environment.
EBS in action
In two years since the introduction of the
EVRAZ Business System the Company has
achieved significant results in the
improvement of its processes and
procedures.
While in 2011 the Company mostly
concentrated on introducing the principles of
Lean philosophy and deploying some of the
basic Lean tools and instruments, 2012 was
focused on expanding that knowledge and
consolidating it in so-called lean “pilots” with
the aim of increasing the efficiency of various
work areas at sites and offices. This allowed
the Company not only to develop specific
areas but also provided key examples of how
to implement the EVRAZ Business System in
practical terms.
A large part of that effort was concentrated
on building cells, especially those dedicated
to maintenance and repairs. The first pilot
area was the continuous caster #4 at EVRAZ
NTMK, one of the most critical pieces of
equipment of the plant. The result was an
increase in the speed and quality of repairs
of bender rolls for the shop.
Cells also laid the ground for changing the
Company’s current function-oriented
approach to management to team based
problem solving that allows the cross
functional members to determine the root
cause to problems and develop concrete
countermeasure plans to resolve them.
In 2012, EVRAZ initiated a study into aligning
the organisation along product lines to create
a system where marketing, sales, finance,
product development and operations can
work across the Company tackling various
processes with the goal of making them less
wasteful and more cost-effective.
(cid:73)(cid:79)(cid:82)(cid:90)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)
6S
(cid:135)(cid:3)(cid:54)(cid:82)(cid:85)(cid:87)(cid:3)(cid:178)(cid:3)(cid:42)(cid:72)(cid:87)(cid:3)(cid:85)(cid:76)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:3)
(cid:3) (cid:92)(cid:82)(cid:88)(cid:3)(cid:71)(cid:82)(cid:81)(cid:183)(cid:87)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)
(cid:135)(cid:3)(cid:54)(cid:87)(cid:85)(cid:68)(cid:76)(cid:74)(cid:75)(cid:87)(cid:72)(cid:81)(cid:3)(cid:178)(cid:3)(cid:38)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:3)
(cid:3)
(cid:135)(cid:3)(cid:54)(cid:70)(cid:85)(cid:88)(cid:69)(cid:3)(cid:178)(cid:3)(cid:38)(cid:79)(cid:72)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:3)
(cid:3) (cid:83)(cid:85)(cid:82)(cid:69)(cid:79)(cid:72)(cid:80)(cid:86)(cid:3)(cid:89)(cid:76)(cid:86)(cid:88)(cid:68)(cid:79)
(cid:135)(cid:3)(cid:54)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3)(cid:178)(cid:3)(cid:54)(cid:87)(cid:68)(cid:85)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:82)(cid:81)(cid:79)(cid:92)(cid:3)(cid:3)
(cid:3)
(cid:76)(cid:73)(cid:3)(cid:76)(cid:87)(cid:183)(cid:86)(cid:3)(cid:86)(cid:68)(cid:73)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:82)(cid:3)(cid:86)(cid:82)
(cid:135)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:76)(cid:86)(cid:72)(cid:3)(cid:178)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:3)
(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:68)(cid:69)(cid:72)(cid:79)
(cid:135)(cid:3)(cid:36)(cid:3)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:72)(cid:89)(cid:72)(cid:85)(cid:92)(cid:87)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3)
(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:89)(cid:72)(cid:85)(cid:92)(cid:87)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)
(cid:3)
(cid:135)(cid:3)(cid:54)(cid:88)(cid:86)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:178)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:17)(cid:3)
(cid:3) (cid:55)(cid:85)(cid:68)(cid:70)(cid:78)(cid:17)(cid:3)(cid:44)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)
(cid:76)(cid:87)(cid:86)(cid:3)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)
Flow
(cid:135)(cid:3)(cid:54)(cid:72)(cid:87)(cid:16)(cid:88)(cid:83)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:68)(cid:3)(cid:90)(cid:68)(cid:92)(cid:3)(cid:3)
(cid:3) (cid:68)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:3)
(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:77)(cid:88)(cid:86)(cid:87)(cid:16)(cid:3)(cid:3)
(cid:3)
(cid:3) (cid:90)(cid:68)(cid:86)(cid:87)(cid:72)
(cid:135)(cid:3)(cid:36)(cid:76)(cid:80)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:20)(cid:16)(cid:69)(cid:92)(cid:16)(cid:20)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:3)
(cid:3) (cid:82)(cid:85)(cid:3)(cid:56)(cid:16)(cid:86)(cid:75)(cid:68)(cid:83)(cid:72)(cid:71)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)
(cid:76)(cid:81)(cid:16)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:68)(cid:79)(cid:3)(cid:3)
Visual
Management
(cid:135)(cid:3)(cid:43)(cid:82)(cid:79)(cid:71)(cid:3)(cid:84)(cid:88)(cid:76)(cid:70)(cid:78)(cid:15)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:16)(cid:88)(cid:83)(cid:3)(cid:3)
(cid:3) (cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:79)(cid:82)(cid:82)(cid:85)
(cid:135)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:69)(cid:81)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:3)(cid:3)
(cid:3) (cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:24)(cid:3)(cid:3)
(cid:3) (cid:86)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)
(cid:135)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:135)(cid:3)(cid:55)(cid:68)(cid:78)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:3)
(cid:3)
(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)
Standard work
(cid:135)(cid:3)(cid:39)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3)(cid:3)
(cid:3)
(cid:135)(cid:3)(cid:39)(cid:82)(cid:70)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:87)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:76)(cid:86)(cid:88)(cid:68)(cid:79)(cid:3)(cid:3)
(cid:3) (cid:68)(cid:76)(cid:71)(cid:86)(cid:3)(cid:11)(cid:83)(cid:76)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:15)(cid:3)(cid:74)(cid:85)(cid:68)(cid:83)(cid:75)(cid:86)(cid:15)(cid:3)(cid:3)
(cid:3) (cid:83)(cid:75)(cid:82)(cid:87)(cid:82)(cid:86)(cid:17)(cid:17)(cid:17)(cid:12)
(cid:135)(cid:3)(cid:40)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:3)(cid:68)(cid:3)(cid:83)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:3)
(cid:3)
(cid:135)(cid:3)(cid:53)(cid:72)(cid:89)(cid:76)(cid:86)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:3)(cid:3)
(cid:3)
(cid:85)(cid:72)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:68)(cid:86)(cid:78)(cid:86)
(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:85)(cid:79)(cid:92)
Pull
(cid:3)
(cid:135)(cid:3)(cid:37)(cid:68)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:3)
(cid:3) (cid:38)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:71)(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)
(cid:135)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:16)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:3)
(cid:3) (cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:71)(cid:82)(cid:90)(cid:81)(cid:86)(cid:87)(cid:85)(cid:72)(cid:68)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
(cid:135)(cid:3)(cid:55)(cid:76)(cid:72)(cid:3)(cid:47)(cid:72)(cid:68)(cid:81)(cid:3)(cid:70)(cid:72)(cid:79)(cid:79)(cid:86)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)
* Here, waste refers to anything that does not advance the process or
increase added value
EVRAZ plc
Annual Report and Accounts 2012
25
Risk register within EBS
With risk being a critical element in the ability
to achieve business strategies EVRAZ is
incorporating the risk register as a key
element in the Company Mission Control
Rooms. This process allows the management
to assess the risks and develop counter
measures thus to align the organisation and
maintain the trajectory of improvement toward
the Company’s True North Goals. This is a
significant step for EVRAZ as the Lean
principles are deployed within the EVRAZ
Business System.
EVRAZ will take a measured approach to risk
management that enables:
(cid:114)(cid:1) an understanding of the level of risk
exposure that can be tolerated
(cid:114)(cid:1) an understanding of the type of risks faced
and how to measure them
(cid:114)(cid:1) where the level of risk exposure is too high
that a suitable level of mitigation exists
(cid:114)(cid:1) the ongoing assessment of the
effectiveness of mitigation
(cid:114)(cid:1) prompt action where existing arrangements
are found to be inadequate or ineffective
EBS risk register flow chart
(cid:114)(cid:1) an awareness of risk at all levels within
EVRAZ to ensure that risks can be
escalated to a level of management
that can effectively respond to them
Key targets for 2013
As EVRAZ strives to enhance quality and
efficiency, the Company has set a goal for
2013 to develop a Lean maintenance and
procurement system for 20% of critical
equipment at all sites. While efforts in 2012
were concentrated on the deployment of 6S,
in 2013 the focus will be shifted to increasing
the 6S score of the Company to a minimum of
50%. Management also plan to increase the
amount of training and recognition for
improvements by employees (one EBS target
is 100% recognition of all improvement efforts
in the Company). Finally, the management of
EVRAZ intends to set up a model Lean facility
for each of the divisions which will give each
business unit an example of what a Lean
production site should look like. This initial
enterprise will lead the way for other EVRAZ
sites to follow suit in due course.
Risks and actions deployed
Top level mission control room
Production level control board
Shop level control board
(cid:114)(cid:1) Risk register will be developed
(cid:114)(cid:1) Each division will deploy
(cid:114)(cid:1) Deploy the risks to product
at Group Level
its risks to the sites
(cid:114)(cid:1) Should be a part of the
(cid:114)(cid:1) Sites will assess overall Risks
line/shop/functional
responsibilities
strategic plan
(cid:114)(cid:1) Initiatives should be in line
with the risks
(cid:114)(cid:1) Risk register will live in the CEO
and division MCRs
– A3s will be developed for top
risks
– Action plans developed
– Tracked using A3 and MCR
and risks from division
(cid:114)(cid:1) Should be a part of the
transformation plan
(cid:114)(cid:1) This should be in the form of
actions required to mitigate
the risks
(cid:114)(cid:1) Actions and status should live
in the shop level production
control boards
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EVRAZ plc
Annual Report and Accounts 2012
Key Performance Indicators
EVRAZ uses a range of financial and
(cid:79)(cid:80)(cid:79)(cid:14)(cid:109)(cid:79)(cid:66)(cid:79)(cid:68)(cid:74)(cid:66)(cid:77)(cid:1)(cid:44)(cid:49)(cid:42)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:78)(cid:70)(cid:66)(cid:84)(cid:86)(cid:83)(cid:70)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)
manage its performance.
LTIFR (per million hours)
Lost Time Injury Frequency Rate (LTIFR)
represents the number of Lost Time Injuries
(LTI’s) that occurred over a period time per
1,000,000 hours worked in that period.
EVRAZ is committed to the highest
standards of health and safety and
measuring performance enables the
Company to identify and manage issues.
Steel Sales Volumes
(million tonnes)
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)
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, repay the
principal, finance capital expenditures and
dividends.
Inventory Turnover (days)
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.
Inventory turnover indicates the efficiency
of our production planning process and our
sales and marketing management.
2012
2011
2010
2012
2011
2010
2012
2011
2010
2012
2011
2010
1.86
2.23
2.40
15.30
15.50
15.50
2,012
2,898
2,350
68
63
70
EVRAZ plc
Annual Report and Accounts 2012
27
Billets
2012
2011
2010
Slabs
2012
2011
2010
2012
2011
2010
2012
2011
2010
416
446
359
375
411
335
78
71
58
73
79
55
2012
2011
2010
N/A
10.2
6.2
Average Cash Cost (including
maintenance Capex) of Russian
Steel Facilities for Slabs and
Billets (US$/tonne)
Cash cost is defined as the production cost
less depreciation, the result is divided by
production volumes of saleable steel
semi-products. Raw materials from EVRAZ’s
mining segment are accounted for on
at-cost-basis of the Mining segment.
We use cash cost as a measure, because
EVRAZ considers cost leadership as key to
its competitive advantage.
Average Cash Cost of Russian
Iron Ore Products (Fe 58%)
(US$/tonne)
Cash cost is defined as the cost of
revenues and SG&A expenses less
depreciation and other non-cash items,
the result is divided by sales volumes.
Adjustments are made for iron ore products
containing various grades of Fe (pellets,
sinter, iron ore concentrate) to reflect
average Fe content 58%. Cash costs are
on an EXW basis.
We use cash cost as a measure, because
EVRAZ considers cost leadership as key to
its competitive advantage.
Average Cash Cost of Washed
Coking Coal (US$/tonne)
Cash cost is defined as the production cost
less depreciation, the result is divided by
production volumes. Adjustments are made
for part of volumes of raw coking coal
processed at coal washing plants of other
companies (not Yuzhkuzbassugol).
We use cash cost as a measure, because
EVRAZ considers cost leadership as key to
its competitive advantage.
Environmental Fines (US$ million)
We record all environmental incidents at our
operations to measure compliance with
environmental standards covering: water
discharges; air emissions; waste; and
general work activity. This KPI measures
environmental performance in the broadest
possible way and sets out the total sum of
fines imposed on EVRAZ in the year.
EVRAZ is committed to minimising its
impacts upon the environment and have a
target of achieving zero incidents.
Note: In 2012, revenue was excluded from reported KPIs due to a renewed focus by management on efficiency rather than gross metrics of operating and financial performance.
KPIs on average cash cost for slabs and billets at Russian operations have replaced average cash cost of Russian rolled steel products as a better metric for comparison
of the cost performance of the Group with the peer group. Cash costs of washed coking coal and cash cost of Russian iron ore products (rebased to 58% Fe content) were
added to reflect the performance of the Mining segment of the Group.
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EVRAZ plc
Annual Report and Accounts 2012
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.
Strategic Risks
Risk Type
Risk
Mitigation
Impact of Global
Macroeconomics and
Industry Cyclicality
EVRAZ’s sales, profits, balance sheet and potentially the
economic viability of projects and investments could be
adversely impacted by macroeconomic factors such as:
(cid:114)(cid:1)The cyclical nature of the steel, mining and vanadium
industries with prices strongly influenced by economic
conditions;
(cid:114)(cid:1)Potential disparities between global steel and raw
material production capacity which could influence
pricing; and
(cid:114)(cid:1)Adverse fluctuations in RUB/USD exchange rates and
other foreign currencies.
Safety
Safety risks are inherent to the Company’s principal
business activities of steelmaking and mining.
EVRAZ employees face a range of risks including the
potential dangers of fire, explosions and electrocution.
Additional risks, specific to individual mines, include
methane levels, rock falls caused by geological
conditions, and accidents involving equipment and/or
vehicles. EVRAZ faces risks including regulatory fines,
penalties and adverse impacts on reputation and, in the
extreme, the withdrawal of mining or plant environmental
licences thereby curtailing operations for an indefinite
period.
EVRAZ’s operations are diversified across a number of
geographic markets thereby providing some protection
from adverse economic conditions. Production is
focused primarily on the infrastructure segment of the
steel markets where the Company commands leading
market shares and benefits from high barriers to entry.
EVRAZ’s vertically integrated business model serves
to protect the Company from higher raw material input
prices and various pricing formulas are utilised in
respect of contracts. In addition, products are sold
under a range of contracts, some of which are linked
to raw material prices. A proportion of products are
supplied on long-term contracts.
EVRAZ’s operations are generally low cost in comparison
with much of the Company’s peer group, a factor which
provides some mitigation against economic fluctuations.
EVRAZ’s main foreign exchange risk is the potential
impact on the asset value of the Group’s Russian
operations; this risk is mitigated in that all products are
priced in US dollars or on a USD related price.
EVRAZ has instigated a programme to improve the
management of safety risks across all business
units and embed a new culture at all levels within
the Company, supported by operational manuals and
detailed procedures. This system is subject to oversight
at Group and site level in order to ensure all HSE
systems are aligned and that response to safety risks is
co-ordinated, consistent and complete.
EVRAZ has reviewed the Group’s training activities in
order to ensure that all employees can provide strong
and professional leadership with regard to safety issues.
EVRAZ reviews the performance of all contractors
against Group policies and contractual safety
requirements. In the event of non-compliance by
contractors the Group takes appropriate action,
including contract termination.
An operational safety assessment represents a primary
aspect of all new projects, particularly new mines where
measures to contain methane levels are a priority.
EVRAZ plc
Annual Report and Accounts 2012
29
EVRAZ Risk management framework
A u d i t Committee
I n t e r nal Audit
Board
Executive
Regional
Floor
Strategic Risks
Risk Type
Risk
Mitigation
Capital Projects
and Expenditures
The advancement of EVRAZ’s strategic objectives
is, in large part, dependent upon the completion of a
number of important projects designed to enhance
the Company’s key product delivery, reduce production
costs and increase the vertical production of our raw
material inputs.
The economic viability of capital projects could be
impacted by increases in capital costs due to delays and
other factors, unforeseen changes to future metal and
metallic coal prices and the acquisition and retention of
relevant operating licences. In addition, the profitability
of new projects could be impacted by higher than
expected operating and Life of Mine (LOM) costs due to
variables such as lower than expected coal and iron ore
quality, coal seam economics and technical processing
and engineering factors.
In addition, the cost to EVRAZ of maintaining current
mines is subject to various factors which are outside the
Company’s control, including the price of consumables.
EVRAZ reviews all proposed capital projects on a risk
return basis. The Group sets expected internal rates of
return (IRR) for each project as thresholds for approving
the allocation of capital based on the net present value
(NPV) of expected cash flows from invested capital. The
IRR and NPV are also reviewed based on sensitised
cash flows using variables for commodity prices, inputs
and sales, and volumes (mines).
Before undertaking the development of a mine, EVRAZ
takes into account a range of considerations and
utilises independent experts to review various factors
such as: resource estimates; studies of ore quality in
relation to market demand and value; mine development
costs; mining techniques (open pit or underground)
and associated investments; logistic options, including
transport and power; environmental impacts; and labour
availability. Cash costs and full sustainable cash costs
over LOM are also reviewed compared to local and open
market metrics.
Each project is presented for approval against the
Group’s risk matrix to assess the downside in respect
of each project and any potential mitigating actions.
Project delivery is closely monitored against project
plans to ensure that investments are on time and on
budget and to assess any changes in project and capital
expenditure against the approved NPV.
Environmental
Incidents
Mining and steel production carry an inherent risk
of environmental impacts and incidents, relating to
issues as diverse as water usage and quality of water
discharged, air emissions, metallurgical waste recycling,
tailings management and community discontent.
EVRAZ has put strong environmental systems,
procedures and controls into place. Environmental risks
are the responsibility of the regional business units with
oversight from the Group’s HSE team, HSE Committee
and, ultimately, EVRAZ’s Board.
Consequentially, EVRAZ faces risks including regulatory
fines, penalties and adverse impacts on reputation
and, in the extreme, the withdrawal of mining or plant
environmental licences thereby curtailing operations for
an indefinite period.
The majority of EVRAZ’s operations are certified under
ISO 14001 and the Company continues to work towards
bringing the remaining plants to certification. EVRAZ is
currently compliant with REACH requirements.
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EVRAZ plc
Annual Report and Accounts 2012
Principal Risks and Uncertainties (Continued)
Strategic Risks
Risk Type
Risk
Mitigation
Human Resources
EVRAZ’s employees represent a key resource and are
critical to the delivery of the Company’s objectives.
Principal risks involve the selection, recruitment, training
and retention of employees, together with securing
appropriately qualified executives with regard to current
and new operations. Succession planning in respect of
EVRAZ’s senior management is under constant review
although this does not preclude issues in relation to key
roles.
EVRAZ continually assesses its human resources
requirements and seeks to meet its leadership and
skills needs through the retention of employees and
internal promotion. EVRAZ maintains structured
and professional internal mentoring and external
development programmes including EVRAZ’s New
Leaders programme, focused on high potential
employees, and Talent management supervision
conducted by the Company’s Talent Committee.
Whereas the aforementioned issues are applicable
throughout the Group’s global operations, the ongoing
expansion of mining operations in Russia has led to a
particular shortage of experienced and skilled mining
professionals. This risk is exacerbated by the climatic
conditions and/or remote locations pertaining to
certain of the Company’s current and potential mines.
Certain regulatory and cultural factors can also prove
disincentives in terms of recruitment from outside
Russia.
There is a risk of employee union action, as witnessed
at the Group’s South African operations during 2012,
although such action is not indicative of the overall
state of labour relations at EVRAZ which are largely
favourable. However, this cannot preclude the risk of
future industrial disputes.
Steel making and mining operations are subject to a
number of operational risks which have the potential to
cause prolonged production delays or shut-downs.
These include equipment failure, regulatory
requirements in respect of safety concerns, geological
and technical challenges, climatic conditions,
interruptions to power supplies and disruptions to
transportation services.
Additionally, long-term business interruption may result
in loss of customers and damage to the Company’s
reputation.
Business Interruption
Potential Actions by
Governments
EVRAZ operates in a number of countries and there is
a risk that governments or government agencies could
adopt new laws, regulations or other requirements which
could have an adverse impact on the Group’s operations
and business. Such developments could also have the
effect of limiting the Group’s ability to obtain financing in
international markets.
The Company has instigated clearly assigned
responsibilities and programmes designed to maintain
close relationships with employee unions throughout its
operations. EVRAZ seeks to be proactive and timely in
response to the needs and concerns of trade unions.
EVRAZ has established protocols and procedures
across all of its activities to mitigate the effects of
business interruption. The Company has initiated
planned maintenance programmes at the majority of its
plants and records of minor interruptions are reviewed
for the purpose of identifying prospective problems
of greater magnitude. KPIs are utilised at each of the
Group’s plants, units and mines, encompassing all
significant interruptions.
All of the Company’s operations possess disaster
recovery plans which are reviewed regularly by Internal
Audit. The Group also carries business interruption
insurance, excluding mining operations.
EVRAZ and its executive teams are members of various
national industry bodies and, as a result, contribute
to the thinking of such bodies and, when appropriate,
participate in relevant discussions with political and
regulatory authorities.
EVRAZ also has programmes in place across the
Group’s operations to support the Company’s “good
corporate citizen” credentials.
EVRAZ plc
Annual Report and Accounts 2012
31
Strategic Risks
Risk Type
Risk
Mitigation
Treasury Risk
As with many other large multinational companies,
EVRAZ faces various treasury risks including liquidity,
credit, and interest rate risks.
Adverse events in global financial markets could affect
the Group’s ability to raise new debt, refinance existing
debt and/or lead to higher debt service costs.
The Group’s current debt facilities include certain
covenants in relation to equity, net debt and interest
expense. A breach of these covenants could result in
certain of the Group’s borrowing facilities becoming
repayable immediately.
EVRAZ is subject to significant counter-party risk via
receivables from commercial and financial institutions.
Cost Competitiveness Most product groups in the steel industry are highly
cost competitive and this is particularly relevant to the
Groups’ key markets in Russia and North America.
Although EVRAZ is active in the manufacture and sale
of niche products, the Group is able to focus on specific
geographic regions and enjoys certain cost advantages
linked to customer proximity, volume and quality, the
majority of the Group’s steel production remains cost
and price sensitive.
Steel making is a high capital cost industry and the
impact of lower plant utilisation increases the underlying
cost per tonne of crude and rolled steel, reducing any
profit margin.
At the Group’s Russian plants, employees tend to
represent the majority of the local community’s active
workforce. Changing production requirements can,
therefore, lead to local political and social challenges.
EVRAZ manages liquidity risk by maintaining adequate
cash and borrowing facilities, as well as through cash
management procedures that continually monitor
forecast and actual cash flows and by matching
funding with the Group’s cash needs and re-financing
obligations.
Covenant compliance is managed by close monitoring
of the overall Group’s business performance and, again,
with the continual review of forecast and actual cash
flow. Free cash flow, net of capital expenditure, total
funding, maturity profile and covenants are considered
at each EVRAZ Board meeting.
With regard to risk management of funding cost, the
majority of the Company’s funding has been secured on
a fixed interest basis.
The Group manages counter-party risk with commercial
customers through a combination of letters of credit
and, where creditworthiness is uncertain, by pre-
payments. In the event that credit terms are longer
than the Group’s standard payment terms, collateral is
sought. There is no significant concentration of credit
risk within EVRAZ’s customer base.
The credit worthiness of all financial institutions with
which EVRAZ has cash balances or places deposits is
kept under regular review.
The majority of the Group’s funding is denominated in
US dollars. Major funding in other currencies, primarily
the Russian rouble, is substantially dollar hedged with
financial institutions.
The majority of the Group’s recent investments have
been designed to significantly reduce costs, as
illustrated by the Company’s utilisation of PCI technology
within its steelmaking operations in order to reduce
energy costs and enable the use of cheaper, lower
quality carbon (coal/coke) inputs; the focus on the
development of the Group’s key cost competitive rail and
beam production for both domestic and export markets;
investment in the production of high quality slab which
can be further processed by the Group’s international
plants, particularly for the North American market; and
the expansion and control of the Company’s Russian
domestic steel distribution network.
The Group continues to develop a number of new
greenfield and brownfield mining operations which will
produce higher quality coal and iron ore at a lower cash
cost, thereby benefiting the Company’s overall steel
making cost per tonne.
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
33
33
Operating
Review
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EVRAZ plc
Annual Report and Accounts 2012
Operating Performance Overview
EVRAZ groups its operations into four
principal operating segments: Steel,
Mining, Vanadium and Other. Within
each of these operating segments
there are dedicated management
teams which focus on particular
geographies and/or product lines.
The steel operating segment represents the
core of EVRAZ’s business with operations
spread over 4 continents. The Company is a
prominent participant in multiple steel product
markets with a specialised focus on the
infrastructure sector. In 2012, consolidated
output of crude steel totalled 15.9 million
tonnes, a 5% decrease compared to 2011,
while gross production of steel products fell by
4% to 15.7 million tonnes. These decreases in
steel output were the result of a variety of both
internal and macroeconomic factors.
The most important of these internal factors
was the large scale modernisation programme
implemented at the Company’s Russian
assets, which included an upgrade of the rail
mills at EVRAZ NTMK and EVRAZ ZSMK, an
overhaul of the electric arc furnace at EVRAZ
ZSMK and the implementation of PCI projects
at both EVRAZ NTMK and EVRAZ ZSMK. The
completion of this ambitious investment
programme will allow EVRAZ to benefit from
superior prices, an increased volume of high
value added products in the product mix
and improved efficiency and safeguard the
competitiveness of the Company’s long run
cost position.
EVRAZ’s North American steelmaking facilities
enjoyed a healthy demand for all product
groups in 2012, which led to a strong
performance, particularly in tubular and long
products. Meanwhile, EVRAZ’s European
operations suffered from temporary
Total output of key products by EVRAZ*
suspensions and the Company’s South
African operations were adversely impacted by
labour strikes and the subdued macro outlook
in the region. EVRAZ mining operations cover a
substantial portion of Company’s consumption
of iron ore and coking coal, with major mining
facilities located in Russia, Ukraine and South
Africa. In 2012 EVRAZ’s self-coverage in iron
ore was almost 100% and 73% (excluding
Raspadskaya) in coking coal. Following the
completion of acquisition of Raspadskaya, the
Company’s self-coverage in coking coal
increased to 142% (based on 2012 results).
In 2012, EVRAZ’s total iron ore products’
output decreased by 2% to 20.8 million
tonnes, predominately due to a lower output
of saleable concentrate in Russia, where
processing of third party raw iron ore was
terminated due to unfavourable economic
conditions, and the suspension of
Evrazruda’s Irba mine. The Company’s
Ukrainian iron ore operations demonstrated
a strong performance in 2012, recording a
7% growth in output of lump iron ore
following improvements to the mine’s
processing facilities. Raw coking coal
production at Yuzhkuzbassugol increased by
35% to 8.5 million tonnes in 2012 and
Raspadskaya also demonstrated strong
growth with production increasing by 12% to
7.0 million tonnes (on 100% basis).
The agreement on acquisition of a controlling
interest in Raspadskaya was a significant
milestone for EVRAZ’s coal mining business in
2012, and following completion of the
transaction in January 2013 the effective
interest of EVRAZ increased to 82%. The
Raspadskaya’s coal mining business
complements the Company’s existing coal
operations, enhances EVRAZ’s self-coverage
in raw materials for steelmaking and
progresses the Company’s strategy
of growing its mining presence.
Product, ‘000 tonnes
Coke (saleable)
Pig iron
Pig iron (saleable)
Crude steel
Steel products, gross**
Steel products, net of re-rolled volumes
Semi-finished products
Finished products
Construction products
Railway products
Flat-rolled products
Tubular products
Other steel products
2011
1,468
11,858
131
16,773
16,349
15,232
3,542
11,690
5,257
2,055
2,707
848
823
EVRAZ’s vanadium business experienced a
mixed 2012, with labour issues in South Africa
and shortages of third party feedstock in the
United States negatively affecting operations,
while Russian operations ran at full utilisation
rates to meet demand. Total production of
vanadium slag increased by 2% and exceeded
21,000 tonnes in 2012, while total
ferrovanadium produced at EVRAZ’s own
facilities reached 7,259 tonnes.
Operational highlights at EVRAZ’s other
businesses during 2012 included the
expansion of cargo handling capacity at EVRAZ
NMTP (Nakhodka Trade Sea Port) in the Far
East of Russia, which is the main route for
exports of EVRAZ’s steel products and coking
coal to Asian markets. In 2012 the trading
and distribution arms of EVRAZ focused on
improvements to the customer experience
across the whole product range and in all
key local markets. A further highlight during
the year was the sale of EvrazTrans as part of
the continued effort by EVRAZ’s management
to streamline the business and optimise
capital allocation.
In November 2012, following the careful review
of the Company’s strategic priorities the Board
decided to consider options with respect to
EVRAZ Highveld and EVRAZ Vitkovice Steel.
As of 31 December 2012, these subsidiaries
were classified as assets held for sale. In
March 2013 the Company announced the
execution of a non-binding term sheet in
respect of the sale of its 85% stake in EVRAZ
Highveld to a consortium of South African
investors for an indicative cash consideration
of approximately US$320 million. The
consolidated operating results of EVRAZ for
2012 include 454,000 tonnes of crude steel
and 638,000 tonnes of steel products
produced by EVRAZ Vitkovice Steel. In addition
to this, in 2012 EVRAZ Highveld’s output
totalled 572,000 tonnes of crude steel and
461,000 tonnes of steel products.
2012
2012/2011, change
1,446
12,031
263
15,932
15,701
14,251
3,173
11,078
5,207
1,837
2,466
871
697
(1.5)%
1.5%
101.0%
(5.0)%
(4.0)%
(6.4)%
(10.4)%
(5.2)%
(1.0)%
(10.6)%
(8.9)%
2.7%
(15.4)%
* Numbers in this table and the tables below may not add to totals due to rounding. Per cent changes are based on numbers prior to rounding.
** Gross volume of steel products in the tables includes those re-rolled at other EVRAZ’s mills. However, such volumes are eliminated as intercompany sales for purposes of
EVRAZ’s consolidated operating results.
EVRAZ plc
Annual Report and Accounts 2012
35
Steel: Russia
EVRAZ NTMK
EVRAZ ZSMK
Key steelmaking assets of EVRAZ in Russia
Name
Operations
Products
EVRAZ ZSMK
Capacity:
(cid:114)(cid:1) Crude steel: 8.9 mtpa
(cid:114)(cid:1) Construction products: 3.4 mtpa
(cid:114)(cid:1) Rails: 950 ktpa
Employees: 22,848
Ownership: 100% interest
EVRAZ NTMK
Capacity:
(cid:114)(cid:1) Crude steel: 4.5 mtpa
(cid:114)(cid:1) Construction products: 1.3 mtpa
(cid:114)(cid:1) Rails: 510 ktpa
Employees: 17,145
Ownership: 100% interest
Two fully integrated steelmaking plants
EVRAZ NTMK and EVRAZ ZSMK including:
(cid:114)(cid:1) coke and chemical processing facilities
(cid:114)(cid:1) sinter plant
(cid:114)(cid:1) blast furnaces (BFs)
(cid:114)(cid:1) basic oxygen furnaces (BOFs)
(cid:114)(cid:1) blooming plant, slab and billet continuous
casting machines
(cid:114)(cid:1) Metallurgical products: coke, pig iron
(cid:114)(cid:1) Semi-finished products: slabs, billets,
pipe blanks
(cid:114)(cid:1) Long products: rebars, rod, structural
products
(cid:114)(cid:1) Railway products: heavy-haul rails,
low-temperature and high speed rails,
100 meter rails, wheels, etc.
(cid:114)(cid:1) electric arc furnaces, ladle furnaces and
(cid:114)(cid:1) Industrial steel: grinding balls, arch rock
vacuum vessel
support, etc.
(cid:114)(cid:1) rolling mills: medium section mill «450»,
light section mills «250-1» and «250-2»,
wire mill, rail and structural mills, rail
fastening mill, plate rolling mill, broad-
flange beam mill, heavy section mill,
wheel rolling mill, ball rolling mill
Steel production by EVRAZ in Russia
Product, ‘000 tonnes
Crude steel
Steel products, net of re-rolled volumes*
Semi-finished products
Finished products
Construction products
Flat-rolled products
Railway products
Other steel products
2011
12,125
10,942
4,202
6,739
4,220
356
1,564
600
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2012/2011, change
11,675
10,592
4,091
6,502
4,281
334
1,346
540
(4)%
(3)%
(3)%
(4)%
2%
(6)%
(14)%
(10)%
* Net of re-rolled volumes in Russia. Results of semi-finished products include volumes re-rolled at European and North American rolling mills of EVRAZ
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EVRAZ plc
Annual Report and Accounts 2012
Steel: Russia (Continued)
Steel products: Russia
Operational Highlights:
(cid:114)(cid:1) completion of the PCI project at EVRAZ
NTMK which will result in a reduction of
coke consumption by 20% and natural gas
by 50% through the use of an additional
150 kg of PCI coal per tonne of pig iron.
Design and construction works on PCI
project at EVRAZ ZSMK continued;
(cid:114)(cid:1) ramp-up of steel production capacity at
EVRAZ NTMK to 4.5 million tonnes per
annum;
(cid:114)(cid:1) a further step towards the long-term target
of product mix expansion to high value
added products, with the start of production
of new beams from continuously cast
billets;
(cid:114)(cid:1) improved recovery rates of vanadium from
slag at EVRAZ NTMK – 83.5% vs. budgeted
75.8%;
(cid:114)(cid:1) increase electricity generation capacity of
the EVRAZ ZSMK power plant by almost
10% or 350,000 kWh compared to 2011.
2012 Production
In 2012 EVRAZ ZSMK (EVRAZ Consolidated
West Siberian Metallurgical Plant) produced
5.7 million tonnes of pig iron, 7.3 million
tonnes of crude steel and 6.5 million tonnes of
steel products.
EVRAZ NTMK (EVRAZ Nizhny Tagil
Metallurgical Plant) processes unique
vanadium rich iron ore which serves as an
alloying component of steel and allows for
production of steel and finished goods with
improved physical characteristics. Vanadium
slag extracted from pig iron at the converter
stage is also used as a raw material by
producers of ferroalloys and vanadium
products. In 2012, EVRAZ NTMK produced 4.8
million tonnes of pig iron, 4.3 million tonnes of
crude steel and more than 4.3 million tonnes
of steel products.
Overall, in 2012 crude steel output at EVRAZ’s
Russian operations decreased by 4%
compared to 2011 to 11.7 million tonnes due
to the major modernisation of an electric arc
furnace and upgrade of the rail mill at EVRAZ
ZSMK. EVRAZ’s other Russian steel plant,
EVRAZ NTMK, operated at utilisation rates of
almost 100% throughout the year.
Efforts to reduce operating costs at EVRAZ
NTMK and EVRAZ ZSMK during 2012 were
focused on improvements to regular
maintenance works and streamlining of
dealings with third party service providers,
which allowed for cost savings amounting to
almost US$83 million (RUB 2.5 billion) during
the reporting year. The 2013 cost saving
initiatives will be targeted towards an overhaul
of the Company’s procurement system to
increase inventory turnaround, lower storage
costs and improve productivity.
Pursuant to the long-term contract for supply
of industrial gases to EVRAZ NTMK signed two
years ago with Praxair Rus, the latter is building
new modern air separation plants at the
EVRAZ NTMK site. Upon completion, Praxair
will supply EVRAZ NTMK with more than 3,000
tonnes of oxygen, nitrogen and argon daily. As
a result, the Company will also increase its
energy efficiency by more than 30%. By the
end of 2012 most construction works have
been completed, more than 90% of the
equipment has been delivered, major large-
size units are being installed. The new plants
are scheduled to commence operation at the
end of 2013. The project is financed by Praxair.
In 2012, EVRAZ continued the implementation
of its customer focus strategy. A number of
measures have been developed in order to
promote customer loyalty, provide better
service and ensure a timely response to
changing market conditions. These include,
but are not limited, to introduction of an
enhanced technical support system, a more
flexible approach to pricing, an extension of
truck deliveries and closer cooperation with
project institutes and end-users. In order to
improve customer knowledge of EVRAZ and its
products, customers will also have an
opportunity to visit the Company’s steel mills
and participate in product seminars.
EVRAZ continued to dominate the Russian
long products market during 2012, with its
market share in beams totalling 80%,
structural shapes (angles and channels) 45%
and rebars 19%. Generally the Russian long
products market demonstrated healthy
demand dynamics in 2012, with rebars and
beams recording a growth of 19% compared to
2011. This demand was mostly driven by
increased infrastructure and industrial
construction activity. In contrast, the Russian
market for hot-rolled sections ended 2012
with a minor reduction in demand with
historically low flat steel prices causing an
increase in hollow section use in applications,
where substitution is possible.
During 2012, prices for all long products,
except railway products, were suppressed by
weak underlying pricing for billets in
international markets.
2013 Targets:
(cid:114)(cid:1) ramp-up of PCI project at EVRAZ NTMK to
achieve nameplate capacity;
(cid:114)(cid:1) completion of construction works on PCI
project at EVRAZ ZSMK;
(cid:114)(cid:1) increased customer focus and enhanced
delivery flexibility and options;
(cid:114)(cid:1) review of investment projects for the
construction of an additional converter shop
at EVRAZ NTMK in addition to the
installation of a ball rolling mill and
modernisation of a wire rolling mill at the plant.
Average steel and steel products selling prices by EVRAZ in Russia
USD/tonne (ex works)
Coke
Pig iron
Steel products
Semi-finished products
Construction products
Flat-rolled products
Other steel products
2011
231
466
529
732
706
790
2012
191
353
457
677
607
729
EVRAZ plc
Annual Report and Accounts 2012
37
Railway products: Russia
Operational Highlights:
(cid:114)(cid:1) completion of the major modernisation of
the rail mill at EVRAZ ZSMK boosting
capacity and allowing for the production of
100 meter rails;
(cid:114)(cid:1) the upgrade of the rail mill at EVRAZ NTMK
and subsequent increased capacity of
510,000 tonnes per annum and start of
production of rails with extended life cycles
and enhanced warranties;
(cid:114)(cid:1) an increase in the EVRAZ NTMK wheel
shop’s capacity to 540,000 wheels per
annum, as part of the expansion of the
mill’s mechanical treatment area.
2012 Production
In 2012, EVRAZ established a new Railway
products business unit to enhance the
management structure and marketing
capability for one of the Company’s key
product groups.
EVRAZ accounts for over 90% of production of
rails and 35% of rail wheels in Russia, and
supplies a wide range of related products for
railway infrastructure, a number of which are
produced in Russia by EVRAZ only.
expand the railway product mix with new 100
meter rails, which it will be the first Russian
mill to produce, and enhance the rail mill’s
capacity to 950,000 tonnes per annum.
Following the completion of modernisation
project in January 2013 EVRAZ has started
hot tests of the equipment and the
certification of new railway products.
Due to the closure of the EVRAZ ZSMK rail mill
in 2012, the Russian rail market moved into a
significant supply deficit and Russian Railways,
one of EVRAZ’s largest customers, was forced
to place some orders internationally. However
the Company expects to supply over 80% of
Russian Railways orders in 2013 following the
ramp up at EVRAZ ZSMK rail mill. Rails
remained a key product for EVRAZ in 2012,
accounting for approximately 10% of total
Russian steel product output.
In 2012 EVRAZ signed a memorandum of
understanding with Russian Railways outlining
key provisions of a 5-year supply contract that
becomes valid from 2013. The supply contract
commits EVRAZ to supplying major volumes of
rail products to Russian Railways, including
rails up to 100 meters long.
In 2012, output of railway products by EVRAZ
ZSMK and EVRAZ NTMK decreased by 14% to
1.3 million tonnes, following the closure of the
rail mill at EVRAZ ZSMK for modernisation
from April 2012 until the end of the year. The
mill’s modernisation will allow the Company to
EVRAZ continues to enjoy a geographical
advantage for its railway wheels output, has
benefitted from high product quality following
the production facilities upgrade and has
long-term relationships with customers. In
2012, the share of EVRAZ wheel shipments to
CIS countries increased by 12% with a slight
increase in the high margin segment of wheels
for maintenance needs. In addition, EVRAZ
signed a 5-year contract with Uralvagonzavod,
Russia’s biggest railcar manufacturer, for the
supply of railway wheels and steel sections for
railcars.
During 2012, EVRAZ continued the expansion
of its product range and started deliveries of
wheels to the United States and Europe.
EVRAZ’s long-term memorandum with
GHH-Valdunes, one of the leading European
wheel manufacturers, aimed at supporting
EVRAZ’s expansion into the European wheel
market was one of the segment’s milestones
of the year. Additionally, EVRAZ received
approval from AAR (Association of American
Railroads) to supply a trial batch of railway
wheels to the North American market with first
shipments effected in Q4 2012.
In 2012 average prices for railway products
enjoyed positive developments due to EVRAZ’s
improved product mix following the rail mill
upgrade at EVRAZ NTMK.
2013 Targets:
(cid:114)(cid:1) ramp-up of the rail mill at EVRAZ ZSMK with
a target output of 720,000 tonnes for
2013;
(cid:114)(cid:1) commencement of production of 100 meter
and head-hardened rails at EVRAZ ZSMK;
(cid:114)(cid:1) increase of railway wheel production
volumes by 10% compared to 2012.
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Railway products
2011
882
2012
891
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EVRAZ plc
Annual Report and Accounts 2012
Steel: North America
EVRAZ Calgary
EVRAZ Red Deer
EVRAZ Surrey
EVRAZ Camrose
EVRAZ Portland
EVRAZ Regina
EVRAZ
North America
Headquarters
EVRAZ Pueblo
EVRAZ Claymont
Key steelmaking assets of EVRAZ in North America
Name
Operations
Products
EVRAZ North America
Capacity:
(cid:114)(cid:1) Crude steel: 3.0 mtpa
(cid:114)(cid:1) Flat-rolled products: 2.7 mtpa
(cid:114)(cid:1) Tubular products: 2.2 mtpa
(cid:114)(cid:1) Long products: 840 ktpa
Employees: 4,324
Ownership: 100% interest
Flat-rolled product group:
(cid:114)(cid:1) Portland, Oregon
(cid:114)(cid:1) Claymont, Delaware
(cid:114)(cid:1) Regina, Saskatchewan
(cid:114)(cid:1) Surrey, British Columbia
Tubular product group:
(cid:114)(cid:1) Portland, Oregon
(cid:114)(cid:1) Calgary, Alberta
(cid:114)(cid:1) Red Deer and Camrose, Alberta
(cid:114)(cid:1) Regina, Saskatchewan
(cid:114)(cid:1) Pueblo, Colorado
Long product group:
(cid:114)(cid:1) Pueblo, Colorado
Steel production by EVRAZ in North America
Product, ‘000 tonnes
Crude steel
Steel products, net of re-rolled volumes
Flat products group
Tubular products group
Long products group
Construction products
Railway products
(cid:114)(cid:1) Flat-rolled products: steel plate, coil and
structural tubing used in the construction
of liquid storage tanks, vessels, bridges,
rail cars, armour; coil and plate used in
manufacturing of goods by the tubular
products group
(cid:114)(cid:1) Tubular products: steel pipes including
large-diameter American Petroleum
Institute (API) grade pipes used for oil and
gas pipelines and small-diameter API
grade welded and seamless pipes for use
in down-hole drilling and in the collection
of oil and gas application
(cid:114)(cid:1) Long products: railroad rail and rod & bar
used to make wire products; round billets
used in the production of other long
products and goods by the tubular
products group
2011
2,332
2,646
1,007
848
302
490
2012
2012/2011, change
2,411
2,662
969
872
331
491
3%
1%
(4)%
3%
10%
0%
EVRAZ plc
Annual Report and Accounts 2012
39
EVRAZ North America is a leading steel
manufacturer in the United States and
Canada. The business of EVRAZ North
America is organised into three primary
divisions: flat products, tubular products and
long products.
Operational Highlights:
(cid:114)(cid:1) Flat product group – completion of
investments in air permits and the reheat
furnace upgrades at EVRAZ Claymont to
ensure its compliance with environmental
standards;
(cid:114)(cid:1) Tubular product group – significant
improvements in productivity with Camrose
electric resistance weld mill improving its
first pass yield by 16% compared to 2011.
Regina Spiral weld line improved by 14%
and Red Deer weld line improved by 8%.
Additionally, Regina and Portland spiral mills
were restarted and a premium thread line at
the Red Deer facility was launched;
(cid:114)(cid:1) Long product group – commencement of
improvements to the rail mill in Pueblo,
Colorado. Engineering and design works
were successfully carried out and the
project is on track for completion in 2013.
EVRAZ also acquired scrap yards in
Colorado to secure scrap needs of Pueblo
rail mill.
Production 2012
In 2012, EVRAZ’s North American steel mills
demonstrated strong performance in all
product segments with total output of flat,
tubular and long steel products exceeding 2.6
million tonnes, with utilisation rates high
throughout the reporting year.
In 2012, EVRAZ North America identified and
evaluated a number of major capital projects
that will be instrumental to the long-term
growth of the North American business of
EVRAZ, including construction of spiral double
joiner in Portland, an increase in incremental
capacity of premium thread line at Red Deer
and an upgrade of rail mill and steelmaking
capacity at Pueblo.
In markets for Flat product group, EVRAZ
North America enjoys a 20% share of the
North American plate market by physical
volumes and has a significant competitive
advantage in the Western US and Canada due
Average selling prices of EVRAZ North America
USD/tonne (ex works)
Construction products
Railway products
Flat-rolled products
Tubular products
to the favourable location of the Portland
facility. This enables EVRAZ to offer the
market shorter lead times than competitors.
On the East coast of US, the flexibility and
domestic origin of Claymont’s products
allow EVRAZ to serve bridge and other
non-residential construction markets,
while niche products distinguish EVRAZ
from competitors in the railcar industry.
Demand from railcar manufactures has
increased due to continued urbanisation and
increased construction in western Canada
and USA. At the same time overall plate price
levels remained weak and showed steady
decline throughout the year, with EVRAZ
North America being no exception to this.
In Tubular product group, 2012 was a difficult
year with many American large diameter
product mills either idled or on reduced crews.
However, EVRAZ North America’s large
diameter mills have been operating at close to
maximum capacity. Moreover, due to high
demand for large diameter products, EVRAZ
restarted the Portland Spiral mill during the
first half of 2013.
EVRAZ has maintained a leading position in
OCTG in Western Canada, with an approximate
40% market share and an estimated 12%
market share for heat treated (alloy) OCTG
pipe. EVRAZ’s proximity of production
compared to its major Western Canadian
competitors continued to be a differentiating
factor, both in terms of lead time advantages
and responsiveness to local customers’
demands. EVRAZ has announced an
expansion of heat treating and threading at
the Calgary facility, to increase the heat treat
capacity by 150% and threading capacity by
40%.
In 2012, EVRAZ recorded growth in high-
quality heat treated (alloy) pipe and premium
connections. Horizontal/directional wells,
which require more high-quality, high-strength
alloy products and premium connections,
increased to 73% of the total U.S. rig activity
(up from 69% in 2011). The increase in
horizontal/directional wells is expected to lead
to a 6% increase in 2013 OCTG consumption,
according to OCTG Situation Report. Overall
average annual prices for the Tubular product
group remained largely flat in 2012.
In the Long product group, EVRAZ Pueblo rail
mill set record volumes of 490,000 tonnes in
2012. EVRAZ market share continued to
increase, despite growing imports and intense
domestic competition, due to the Company’s
advanced head hardening technology and
overall quality improvements. The rail market
continues to be strong, as the Class One
railroads continue to invest in infrastructure to
support growth in the oil and gas industry.
In the reporting year, EVRAZ’s rod and bar
business grew in spite of significant increases
in imports from China and Brazil. Continued
quality improvements, the addition of a third
crew at the rod and bar mill and record
steelmaking production ensured an
improvement of EVRAZ’s market position. Rod
and bar prices softened slightly during 2012.
In 2012, EVRAZ North America continued to
focus on its customers with significant
improvements in on-time in-full performance
as well as the introduction of new products.
EVRAZ North America’s long products enjoyed
on-time performance of over 90% through the
year.
2013 Targets:
(cid:114)(cid:1) Increase in steelmaking capacity and quality
improvements at Pueblo. Billet production
capacity will be expanded by 52,000 tonnes
upon completion of the project in 2013.
The project is also expected to improve
conversion costs and the steel produced is
to be re-rolled by the Tubular and Long
product groups;
(cid:114)(cid:1) Flat product group – growth of capacity,
lowering cost position and improvement of
operational stability;
(cid:114)(cid:1) Tubular product group – further focus on
areas critical for profitability (productivity,
first pass yield, working capital
management) and the start of major capital
projects in heat treating and threading;
(cid:114)(cid:1) Long product group – improvements in rail
quality (strengthening of surface, etc.) and
ramp-up of capacity to 580,000 tonnes per
annum.
2011
897
1,023
1,134
1,486
2012
843
987
1,019
1,497
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EVRAZ plc
Annual Report and Accounts 2012
Steel: Europe
EVRAZ Vitkovice Steel
EVRAZ Palini e Bertoli
Key steelmaking assets of EVRAZ in Europe
Name
EVRAZ Palini e Bertoli
Capacity: 450 ktpa of steel products
Employees: 140
Ownership: 100% interest
Steel production by EVRAZ in Europe*
Product, ‘000 tonnes
Crude steel
Steel products
Construction products
Flat-rolled products
Other steel products
Operations
Rolling mill
Products
(cid:114)(cid:1) Plate
2011
776
1,267
131
1,057
79
2012
2012/2011, change
454
1,028
69
920
39
(42)%
(19)%
(48)%
(13)%
(51)%
*including volumes produced by EVRAZ Vitkovice Steel classified as held for sale
2012 Production
In 2012 EVRAZ Palini e Bertoli mill was
running at rates close to full capacity with
production totaling 417,000 tonnes.
In 2012, EVRAZ streamlined and consolidated
management functions of EVRAZ Palini e
Bertoli and EVRAZ Vitkovice Steel. The sales
function was also restructured, targeting more
efficient geographic coverage and increased
support for customers in the domestic
markets and Germany.
The extensive cost cutting programme
undertaken by management delivered
significant improvements to yields, lowered
Average selling prices of EVRAZ in Europe
USD/tonne (ex works)
Flat-rolled products
fixed and transportation costs, with overall
savings of almost US$10 million in 2012.
In 2012 EVRAZ Palini e Bertoli continued to
operate in an extremely challenging
macroeconomic environment. The production
of steel fell by 4.7% in the European Union in
2012, while the world steel output rose by
1.2%. European steelmakers were impacted
by subdued demand as a result of the
Eurozone debt crisis and an uncompetitive
cost position compared to the rest of the
world. Meanwhile, EVRAZ Palini e Bertoli
maintained a strong competitive position in
core product groups during 2012, due to
rigorous quality commitments, efficient and
flexible production process and strong
relationships with customers. The facility also
benefits from its ability to serve a wide range
of customers in Europe, Middle East and North
Africa. In 2012, prices for EVRAZ Europe’s
products decreased due to deteriorating
market conditions in Europe and a shorter
spread between plate and slab prices.
2013 Targets:
(cid:114)(cid:1) increased focus on timely and proper
deliveries, meeting demand for high value
added products and improved customer
experience in core Italian and German
markets.
2011
907
2012
743
EVRAZ plc
Annual Report and Accounts 2012
41
Steel: Ukraine
EVRAZ Bagliykoks
EVRAZ DMZ Petrovskogo
Key steelmaking assets of EVRAZ in Ukraine
Name
Operations
Products
EVRAZ DMZ Petrovskogo
Capacity: 1.2 mtpa of crude steel
Employees: 6,347
Ownership: 96.78% interest
Steel plant:
(cid:114)(cid:1) Blast furnaces (BFs)
(cid:114)(cid:1) Basic oxygen furnaces (BOFs)
(cid:114)(cid:1) Rolling and blooming mills
(cid:114)(cid:1) Billet
(cid:114)(cid:1) Specialty construction products
(cid:114)(cid:1) Specialty flat products
(cid:114)(cid:1) Coke
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EVRAZ Bagliykoks
Capacity: 747 ktpa
Employees: 1,572
Ownership: 94.37% interest
Steel production by EVRAZ in Ukraine
Coke plants
Product, ‘000 tonnes
Crude steel
Steel products
Semi-finished products
Finished products
Construction products
Other steel products
Coke (saleable)
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213
524
426
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936
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2012/2011, change
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702
244
458
357
101
942
(5)%
(5)%
15%
(13)%
(16)%
3%
1%
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Production 2012
In 2012 the output of EVRAZ DMZ
Petrovskogo totalled 820,000 tonnes of crude
steel and 702,000 tonnes of steel products.
This was a 5% reduction compared to 2011
and was a result of planned maintenance
works at blast furnaces, the oxygen generation
unit and the basic oxygen furnace shop.
In 2012, EVRAZ’s management enacted a
two-stage investment programme for the
modernisation of the steel plant, which
includes an upgrade of steelmaking facilities
and the introduction of PCI technology. An
additional programme, focused on cost
reduction through the decentralisation of the
compressed air supply, was launched and a
water recycling system was commissioned for
crude steel casting machines.
In 2012, EVRAZ Bagliykoks disposed of the
DKHZ coke plant as part of the Company’s
optimisation programme allowing EVRAZ
Bagliykoks to secure higher coke batteries’
usage (82% in 2012 vs. 66% in 2011).
One of the highlights of the reporting year at
EVRAZ Bagliykoks was the launch of a key
ecological project aimed at lowering volumes
of water discharged. Furthermore, a project to
implement an automated system for
environmental monitoring by EVRAZ Bagliykoks
was developed and agreed with state
authorities during 2012.
In terms of customer focus, in 2012 EVRAZ
DMZ Petrovskogo implemented numerous new
products, several of which were designed
specifically for European market. The facility
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EVRAZ plc
Annual Report and Accounts 2012
Steel: Ukraine (Continued)
also obtained a quality management
certificate under ISO 9001:2008, which opens
new sales destinations for EVRAZ DMZ
Petrovskogo’s steel products.
In 2012, new consumers of coke nuts were
secured following alteration of crushing
process, and overall customer base widened
in Ukraine and Russia.
Additionally, EVRAZ Bagliykoks tailored its coal
mix for specific customers in order to secure
attractive prices.
Average selling prices for steel products in
2012 declined due to the European sovereign
debt crisis.
2013 Targets:
(cid:114)(cid:1) EVRAZ DMZ Petrovskogo – commencement
of the approved investment programme and
continuing efforts towards higher volumes
of water recycling;
(cid:114)(cid:1) EVRAZ Bagliykoks – the completion of the
plant’s ecological project, further
operational improvements and installation
of a pilot automated system for
environmental monitoring.
Average selling prices of EVRAZ Ukraine
USD/tonne (ex works)
Coke
Pig iron
Steel products
Semi-finished products
Construction products
Other steel products
2011
308
491
569
691
989
2012
214
339
523
645
885
EVRAZ plc
Annual Report and Accounts 2012
43
Iron Ore: Russia
EVRAZ KGOK
EVRAZ VGOK
Evrazruda
Key iron ore mining assets of EVRAZ in Russia
Name
Operations
EVRAZ KGOK
Mining capacity: 56 mtpa
Proven & Probable (P&P) reserves: 1.1 mt*
Employees: 6,515
Ownership: 100% interest
(cid:114)(cid:1) 3 open pits at Gusevogorskoye deposit
(cid:114)(cid:1) Crushing, enrichment, sintering and
pelletising workshops
(cid:114)(cid:1) Licence for development of Sobstvenno-
Kachkanarskoye deposit
Products
(cid:114)(cid:1) Sinter
(cid:114)(cid:1) Pellets
(cid:114)(cid:1) Crushed stone
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Evrazruda
Mining capacity: 11 mtpa
P&P reserves: 249 mt*
Employees: 8,389
Ownership: 100% interest
EVRAZ VGOK
Mining capacity: 5 mtpa
P&P reserves: 110 mt*
Employees: 4,325
Ownership: 100% interest
* As of 1 July 2011 under the JORC Code
Iron ore production by EVRAZ in Russia
Product, ‘000 tonnes
Concentrate, saleable
Sinter
Pellets
(cid:114)(cid:1) Iron ore concentrate
(cid:114)(cid:1) Crushed stone
(cid:114)(cid:1) Limestone
(cid:114)(cid:1) Iron ore concentrate
(cid:114)(cid:1) Sinter
(cid:114)(cid:1) Limestone
(cid:114)(cid:1) Crushed stone
(cid:114)(cid:1) Iron flux
(cid:114)(cid:1) 6 iron ore mines:
(cid:114)(cid:1) Tashtagol, Kaz, Sheregesh
(Kemerovo region)
(cid:114)(cid:1) Abakan and Tyoya (Khakassia region)
(cid:114)(cid:1) Irba (Krasnoyarsk region)
(cid:114)(cid:1) 2 processing plants:
(cid:114)(cid:1) Abagursky and Mundebashsky
(Kemerovo region)
(cid:114)(cid:1) 1 limestone mine – Gurevsky
(Kemerovo region)
(cid:114)(cid:1) Vysokogorskoye deposit
(Magnetitovaya mine)
(cid:114)(cid:1) Lebyazhinskoye deposit
(Zapadny open pit)
(cid:114)(cid:1) Yestyuninskoye deposit
(Estuninskaya mine)
(cid:114)(cid:1) Goroblagodatskoye deposit
(Yuzhnaya mine)
(cid:114)(cid:1) Sintering workshop, wet separation
factory, two ore crushing and dry
magnetic separation factories
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6,447
4,473
5,907
2012
2012/2011, change
5,615
4,698
6,051
(13)%
5%
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2013 Targets:
(cid:114)(cid:1) implementation of operational improvement
and productivity enhancement programmes
at EVRAZ KGOK;
(cid:114)(cid:1) finalisation of technical project
documentation on the development of the
Sobstvenno-Kachkanarskoye deposit and
commencement of work on EVRAZ KGOK’s
tailing dump; and
(cid:114)(cid:1) restructuring of Evrazruda’s operations to
optimise production costs by, amongst
other things, increasing iron ore mining
volumes at the most efficient mining
operations (Sheregesh and Abakan) and the
suspension of production at higher cost
operations.
44
EVRAZ plc
Annual Report and Accounts 2012
Iron Ore: Russia (Continued)
Operational Highlights:
EVRAZ’s iron ore mining unit made good
progress on a number of projects to maintain
existing operations, develop new sources of
production and improve operating efficiencies
during 2012. Examples of these projects
include:
(cid:114)(cid:1) completion of the EVRAZ KGOK expansion
which increased production capacity by
approximately 10% to 55 million tonnes of
iron ore per annum;
(cid:114)(cid:1) confirmation by the Russian State
Commission on Mineral Reserves of a 6.9
billion tonnes iron ore reserve with an Fe
grade of 16% at the Sobstvenno-
Kachkanarskoye iron ore deposit at EVRAZ
KGOK, followed by receipt of approvals from
government agencies in early 2013 to begin
its development;
(cid:114)(cid:1) appointment of key contractors for the
construction of a new tailings dump and
thickening facilities at EVRAZ KGOK
following a project optimisation process and
detailed feasibility study;
(cid:114)(cid:1) integration of the Kachkanar Heat and
Power Station into EVRAZ KGOK’s
operations and the completion of a
pre-feasibility study on its modernisation;
(cid:114)(cid:1) successful ramp-up of backfilling facilities
at Evrazruda’s Tashtagol mining operation
allowing access to pockets of rich iron ore;
(cid:114)(cid:1) completion of a debottlenecking programme
at the Abagur beneficiation plant at
Evrazruda resulting in the elimination of
losses at the beneficiation stage and a
substantial growth in iron ore concentrate
output during winter periods;
(cid:114)(cid:1) ongoing production ramp-up at the highly
promising Sheregesh mining operation from
the current 1.9 million tonnes of iron ore per
annum to 4.8 million tonnes per annum by
2017. The implementation of modern mining
and iron ore transportation methods at
Sheregesh, which is part of Evrazruda, will
ensure a long-term cost of production of
saleable iron ore concentrate at USD 70 per
tonne; and
(cid:114)(cid:1) finalisation of a feasibility study on the
modernisation of Evrazruda’s Abakan mining
operation to upgrade mining and iron ore
transportation methods with the aim of
achieving long-term production costs for
saleable iron ore concentrate of USD 70 per
tonne.
2012 Production
In 2012, EVRAZ KGOK mined 56 million
tonnes of ore with a total output of saleable
products of 9.7 million tonnes, including 6.1
million tonnes of pellets and 3.6 million tonnes
of sinter. The key customer of EVRAZ KGOK is
EVRAZ NTMK. In 2012, the share of external
sales was approximately 9%.
As at 1 July 2011, total proven and probable
iron ore reserves of the Gusevogorskoye
deposit under the JORC Code were
approximately 1,136 million tonnes with an
average Fe grade of 16%. In addition EVRAZ
KGOK holds a licence to develop the
contiguous Sobstvenno-Kachkanarskoye
titanium magnetite deposit which has a
mineral resource base of 8.2 billion tonnes of
iron ore. The licence for development of this
deposit is valid till 2026.
In 2012, Evrazruda mined 11.0 million tonnes
of iron ore resulting in production of 4.4 million
tonnes of iron ore concentrate, all of which
was delivered to EVRAZ ZSMK. As of 1 July
2011, total proven and probable iron ore
reserves of Evrazruda under the JORC Code
were estimated at approximately 249 million
tonnes grading 31.8% Fe.
In November-December 2012 the Irba mining
operation of Evrazruda was suspended due to
unfavourable market conditions.
As a result of an impairment test in the new
pricing environment, the Company has
recognised an impairment loss of US$356
million related to the current operations of
Evrazruda as of 31 December 2012. For more
details please refer to note 6 of the Financial
Statements. At the same time, the Company
continues to evaluate options to increase the
efficiency of this operation and implement
development plans.
In 2012, EVRAZ VGOK mined 4.6 million
tonnes of iron ore resulting in production of
1.2 million tonnes of iron ore concentrate and
1.1 million tonnes of sinter. EVRAZ VGOK
supplies finished products to EVRAZ’s steel
plants, primarily to EVRAZ ZSMK and EVRAZ
NTMK and insignificant volumes to third
parties.
As of 1 July 2011, total proven and probable
iron ore reserves of EVRAZ VGOK under the
JORC Code were estimated at approximately
110 million tonnes with an average grade of
27.8% Fe.
Iron Ore: Ukraine
EVRAZ plc
Annual Report and Accounts 2012
45
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Operations/deposits
2 underground mines:
(cid:114)(cid:1) Yubileynaya
(cid:114)(cid:1) Frunze
Products
(cid:114)(cid:1) Lump ore
Key iron ore mining assets of EVRAZ in Ukraine
Name
EVRAZ Sukha Balka
Mining capacity: 3.5 mtpa
P&P reserves: 86 mt*
Employees: 3,384
Ownership: 99.42% interest
* As of 1 July 2011 under the JORC Code
Iron ore production by EVRAZ in Ukraine
Product, ‘000 tonnes
Lump ore
Operational Highlights:
Key operational highlights at EVRAZ Sukha
Balka during 2012 include:
(cid:114)(cid:1) successful implementation of an
operational debottlenecking programme
which is expected to improve efficiency and
productivity at both underground mines;
(cid:114)(cid:1) the progression of a number of investment
projects which will extend the life of the
mine and increase mining capacity;
(cid:114)(cid:1) construction of a new shaft which will
enable the exploitation of deeper deposits
at 1,340 meters and 1,420 meters which
contain iron ore reserves of 10 and 12
million tonnes respectively; and
(cid:114)(cid:1) implementation of the major part of a new
electrical safety programme to reduce the
risk of electrical hazards.
2011
2,446
2012
2012/2011, change
2,608
7%
2012 Production
EVRAZ Sukha Balka’s total lump ore
production in 2012 was 2.6 million tonnes, a
7% increase on 2011 levels as a result of the
repositioning of a skip conveyor.
2013 Targets:
In 2013, EVRAZ Sukha Balka intends to
finalise the implementation of its electrical
safety programme.
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EVRAZ Sukha Balka’s domestic sales
amounts to 53% of production, including
deliveries of 37% to Yuzhny Mining and
Enrichment Plant and Dnepropetrovsk
Integrated Iron and Steel Works. There are
also shipments to customers outside of
Ukraine by rail and sea (47% of total output).
As of 1 July 2011 total proven and probable
reserves under the JORC Code were estimated
at 86 million tonnes with an Fe grade of 57%.
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Coal: Russia
Raspadskaya
Yuzhkuzbassugol
Mezhegeyugol
Key coal mining assets of EVRAZ in Russia
Name
Operations
Products
Yuzhkuzbassugol
Proven & Probable (P&P) reserves:
624 mt*
Employees: 11,432
Ownership: 100% interest
Raspadskaya
P&P reserves: 1,314 mt**
Employees: 8,231
Ownership: 82% interest
Mezhegeyugol
Reserves: 763 mt***
Employees: 23
Ownership: 60.02% interest
6 coking coal mines
• Abashevskaya (Zh)
• Alardinskaya (KS)
• Yesaulskaya (Zh)
• Osinnikovskaya (Zh)
• Uskovskaya (GZh)
• Yerunakovskaya VIII (Zh/GZh)
2 steam coal mines
• Gramoteinskaya (D/PCI coals)
• Kusheyakovskaya (G/PCI coals)
3 coal washing plants
• Abashevskaya
• Kuznetskaya
• ZSMK preparation plant
3 underground mines:
• Raspadskaya (GZh, Zh, GZhO)
• Raspadskaya-Koksovaya (K, KO)
• MUK-96 (GZhO)
1 open-pit mine:
• Razrez Raspadsky (GZh, GZhO, Zh)
1 coal washing plant
2 deposits
• Mezhegey coal deposit
• Eastern field of the Western part of the
Ulug-Khemsky coking coal deposit
• Hard and semi-hard coking coal (grades
Zh, GZh and KS under Russian
classification)
• Semi-soft coking coal (grade G under
Russian classification)
• Steam coal (grades D, G under Russian
classification)
• PCI coal****
• Hard coking coal (grade K under Russian
classification)
• Semi-hard coking coal (grades GZh, KO
under Russian classification)
• Semi-soft coking coal (grade GZhO under
Russian classification)
• Hard coking coal (grade Zh under Russian
classification)
* As of 1 April 2012 under the JORC Code
** As of 31 December 2011 according to IMC
*** Category A+B+C1 reserves under the Russian geological classification based on exploration works of prior periods
**** A wide range of coals can be used in PCI, including steam coal which has lower carbon content than coking coal
EVRAZ plcAnnual Report and Accounts 2012
EVRAZ plc
Annual Report and Accounts 2012
47
Coal production
Product, ‘000 tonnes
Yuzhkuzbassugol
Raw coking coal (mined)
Raw steam coal (mined)
Coking coal concentrate (production)
Produced from own raw coal
Produced from third party coal
Steam coal concentrate (production)
Raspadskaya*
Coking coal (mined)
* Reported numbers are for 100% production.
Operational Highlights:
Following a strategic review significant
progress was made at Yuzhkuzbassugol to
support the long-term viability of operations
during 2012, including the approval of
investment projects to maintain long-term
mining volumes at the Osinnikovskaya,
Uskovskaya and Alardinskaya mines:
(cid:114)(cid:1) two sets of longwall equipment were
acquired and brought into operation at the
Uskovskaya and Alardinskaya mines ahead
of schedule;
(cid:114)(cid:1) Osinnikovskaya mine successfully
shortened the period for longwall
repositioning to 60 actual days vs planned
80 days;
(cid:114)(cid:1) a debottlenecking programme at
Osinnikovskaya and Abashevskaya mines
resulted in improved mine performance;
(cid:114)(cid:1) construction of the Yerunakovskava VIII
mine was completed ahead of schedule
with operations commencing in February
2013;
(cid:114)(cid:1) completion of construction and installation
of equipment at the Raspadskaya mine
aboveground facilities; and
(cid:114)(cid:1) signing by Raspadskaya of the
memorandum of understanding with
Hyundai Steel.
In addition, significant work to modernise
and enhance operations at Yuzhkuzbassugol
continued with a focus on improving gas
drain-out, ventilation, speed of penetration,
longwall repositioning and the mechanisation
of roof-bolting. It is expected that this work
will result in improved safety and reliability,
increased productivity and improved mining
volumes as a result of reduced operating
costs.
At the Mezhegeyugol joint venture (EVRAZ’s
interest 60%), which is developing two
2011
2012
2012/2011, change
6,303
2,965
6,501
4,374
2,127
859
6,251
8,506
2,283
6,477
4,968
1,510
421
7,002
35%
(23)%
(0)%
14%
(29%)
(51)%
12%
significant greenfield hard coking coal deposits
in Tyva in the south of Siberian region, EVRAZ
completed planned geological exploration,
design works and began construction of power
infrastructure at the site. EVRAZ also secured
project financing for continued development
works with limited recourse to the parent
company.
2012 Production
Yuzhkuzbassugol
Yuzhkuzbassugol mined 8.5 million tonnes of
coking coal in 2012 (100% of the planned
volumes), 35% more than in 2011. This
increase was due to improved mine
performance following the successful
implementation of operational improvement
programmes, with key activities described
above. In total, 2.3 million tonnes of steam
coal were mined, or 91% of the production
plan, with the shortfall primarily due to the
suspension of mining at the Gramoteinskaya
mine in Q4 2012 following a methane gas
burst.
Key customers of Yuzhkuzbassugol comprise
EVRAZ ZSMK, EVRAZ NTMK and EVRAZ DMZ
Petrovskogo.
Estimated proven and probable reserves at
Yuzhkuzbassugol under the JORC Code were
equal to approximately 624 million tonnes of
coking coal as at 1 April 2012.
Raspadskaya
As at 31 December 2012 EVRAZ held a 41%
effective interest in Raspadskaya. On 16
January 2013 EVRAZ increased its interest in
Raspadskaya to 82%.
In 2012, raw coking coal output by
Raspadskaya increased by 12% to 7 million
tonnes in spite of a challenging market
environment. This included 2.7 million tonnes
of raw coal mined at faces 4-9-23 and 4-7-25
of the Raspadskaya mine.
Raspadskaya’s 2012 total sales volume for
coal products was approximately 5.0 million
tonnes, a 8% increase compared to 2011.
An increase in Russian sales and the delivery
of additional volumes under contract options,
combined with increased export shipments
resulted in Q4 2012 sales volumes growing
by 40% compared to Q3 2012.
In October 2011, Raspadskaya began to
sell coal to Ukraine, and in mid-April 2012
it resumed sales to Asia. During 2012,
Raspadskaya also worked to resume export
sales and begin selling its products into new
markets. Raspadskaya’s export shipments
increased significantly in the second half of
2012 and the Raspadskaya brand was
promoted through direct contacts, coking coal
testing and shipping to numerous Asian
countries. In 2012 the share of exports in total
sales volumes totalled 15%, while the share of
sales to Asia-Pacific reached one third of all
export volumes.
On 8 October 2012 Raspadskaya signed a
memorandum of understanding with Hyundai
Steel to supply up to 300,000 tonnes of coal
products per year, from April 2013. In March
2013, the respective contract was executed
by Raspadskaya and Hyundai Steel.
As of 31 December 2011, Raspadskaya had
proven and probable coking coal reserves of
1,314 million tonnes, measured and indicated
resources of 1,809 million tonnes and inferred
resources of 262 million tonnes, according to
a report from IMC.
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EVRAZ plc
Annual Report and Accounts 2012
Coal: Russia (Continued)
Performance of coal washing plants of EVRAZ in 2012
Max raw coking
coal throughput
(capacity)
Total raw coal
processed, 2012
Capacity
utilisation,
2012
Raw coking coal
processed,
2012
Output of
coking coal
concentrate
Preparation
yield for coking
coal
‘000 tonnes
Abashevskaya
Kuznetskaya
ZSMK coal washing
plant
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5,400
5,000
1,960
4,830
3,650
Total
13,200
10,440
70%
89%
73%
79%
1,489
4,775
3,650
9,914
937
3,162
2,375
6,474
63%
66%
65%
65%
Raspadskaya mine’s Rehabilitation
The underground fire at the Raspadskaya mine
following the May 2010 explosions has been
completely sealed by blast-resistant walls. To
control the content of air in the mine, reduce
dangerous gas levels in the sealed area and
extinguish fires from the surface, Raspadskaya
drilled new shafts and injected a large volume
of nitrogen and inert foam into the areas of the
mine affected by the fires. Drilling of shafts to
the sealed area of the mine and the periodic
injections of nitrogen and inert foam into this
area are continuing. By the end of 2012, the
following initiatives had been undertaken to
contain and eliminate the fire:
(cid:114)(cid:1) pumping in 12,000 cubic meters of sludge
material;
(cid:114)(cid:1) pumping in 1.9 million cubic meters of
nitrogen gas; and
(cid:114)(cid:1) pumping in over 260 million cubic meters of
inert foam.
Further work on the reconstruction of the mine
targets principal objectives to eliminate all
dangers relating to the accident: reducing the
size of the mine’s sealed area where fires
continue through the construction of new
blast-resistant walls and extinguishing the fires
in the sealed area of the mine, through
continued drilling of new shafts to the sealed
area and further injections of nitrogen and
inert foam.
Independent technical consultant IMC has had
extensive discussions with senior managers
and Directors of Raspadskaya about the
explosion, its aftermath and the progressive
rehabilitation programme and considers that a
very responsible and detailed approach has
been adopted. All initiatives and suggestions
have been considered utilising all the national
and international expertise available.
Coal washing plants
The operating performance of EVRAZ’s coal
washing plants during the year tracked raw
coking coal production of Yuzhkuzbassugol.
Additional processed volumes of coking coal
were purchased from third parties, including
deliveries from Raspadskaya in the amount of
667,000 tonnes, of which 428,000 tonnes
were shipped to Ukrainian operations.
Internal consumption of coking coal
concentrate by EVRAZ’s plants amounted to
2.3 million tonnes. Intragroup sales of coking
coal concentrate totalled 3.3 million tonnes in
2012. External sales comprised 668,000
tonnes of coking concentrate shipped to
domestic consumers and 34,000 tonnes sold
in international markets.
2013 Targets:
(cid:114)(cid:1) The key targets for EVRAZ’s Russian coal
mining operations in 2013 include:
(cid:114)(cid:1) The gradual ramp-up of the Yerunakovskaya
VIII mine to reach an estimated output of
1 million tonnes of semi-hard coking coal
by the end of 2013;
(cid:114)(cid:1) Realisation of Mezhegey Project Phase I,
including the completion of design
documentation, completion of the power
infrastructure and work camp as well as
construction of the main industrial facilities
with first coal expected by the end of 2013;
(cid:114)(cid:1) Implementation of ongoing projects aimed
at maintaining and developing the mining
capacity of major coking coal mines –
Osinnikovskaya, Uskovskaya and
Alardinskaya;
(cid:114)(cid:1) Execution of a pilot project on draining-out
of gases with long directional boreholes at
Alardinskaya mine;
(cid:114)(cid:1) Integration of the Raspadskaya business in
the operational model of EVRAZ;
(cid:114)(cid:1) Continuation of the Raspadskaya mine
reconstruction programme;
(cid:114)(cid:1) Increase of coal production at Raspadskaya
by approximately 40% compared to 2012;
and
(cid:114)(cid:1) Increase of Raspadskaya’s export coal
concentrate sales to 35% of total sales.
EVRAZ plc
Annual Report and Accounts 2012
49
Vanadium
EVRAZ
Vanady Tula
EVRAZ Nikom
EVRAZ
Stratcor
EVRAZ Vametco
EVRAZ Highveld Steel and Vanadium
Key vanadium assets of EVRAZ in the world
Name
Operations/facilities
Products
EVRAZ Vanady Tula (Russia)
Capacity:
(cid:114)(cid:1) 7,200 mtV of V2O5:
(cid:114)(cid:1) 5,000 mtV of FeV
Employees: 670
Ownership: 100% interest
EVRAZ Nikom (Czech Republic)
Capacity: 4,455 mtV of FeV
Employees: 48
Ownership: 100% interest
EVRAZ Stratcor (USA)
Employees: 95
Ownership: 78.76% interest
EVRAZ Vametco (South Africa)
Capacity:
(cid:114)(cid:1) 3,600 mtV of V2O3
(cid:114)(cid:1) 2,900 mtV of Nitrovan®
Employees: 446
Ownership: 66.95% effective interest
(cid:114)(cid:1) Hydrometallurgical shop (V2O5 production);
(cid:114)(cid:1) Electrometallurgical shop (FeV production)
(cid:114)(cid:1) Vanadium pentoxide (V2O5)
(cid:114)(cid:1) Ferrovanadium (FeV)
(cid:114)(cid:1) Oxide vanadium product
(cid:114)(cid:1) Metallurgical shop (FeV production)
(cid:114)(cid:1) Ferrovanadium (FeV)
(cid:114)(cid:1) Chemicals production
(cid:114)(cid:1) Oxides
(cid:114)(cid:1) Specialty vanadium chemicals
(cid:114)(cid:1) Vanadium alloys
(cid:114)(cid:1) Vanadium halide
(cid:114)(cid:1) Modified vanadium oxide production
(cid:114)(cid:1) Nitrovan®production
(cid:114)(cid:1) Modified vanadium oxide (V2O3)
(cid:114)(cid:1) Nitrovan®
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EVRAZ plc
Annual Report and Accounts 2012
Vanadium (Continued)
Vanadium production by EVRAZ
Product, tonnes of V*
Vanadium in slag (gross production)
Russia
South Africa
Vanadium in final products (saleable)
Ferrovanadium
Produced at own facilities
EVRAZ Vanady Tula
EVRAZ Nikom
Processed at 3rd parties’ facilities
Nitrovan®
Oxides, vanadium-aluminum and chemicals
2011
20,741
12,860
7,881
16,683
6,321
2,562
3,759
10,362
2,874
1,277
2012
2012/2011, change
21,060
14,856
6,205
14,381
7,259
2,715
4,544
722
2,723
1,330
2%
16%
(21)%
(14)%
15%
(31)%
(5)%
4%
* Calculated in pure vanadium equivalent (the same applies to the below description)
Operational Highlights:
In 2012, a programme of operational
improvements was undertaken at
EVRAZ Vanady Tula, which focused on
debottlenecking and increasing vanadium
pentoxide production capacity. Additional
works on EVRAZ Vanady Tula’s pulp filtration
plant continued, with the aim of improving
working conditions, increasing mechanisation,
cutting operational losses and increasing
pentoxide production volumes in 2013. EVRAZ
Vanady Tula also continued to increase tailing
utilisation levels, and during the year the
volume of tailings recycled exceeded annual
production levels.
In 2012, the key challenge of EVRAZ Stratcor
was to secure additional sources of feedstock
following significant disruptions to supplies as
a result of a major explosion at a third party’s
operation. To mitigate the adverse impact of
disruptions, a project to enable the processing
of vanadium slag from EVRAZ NTMK was
approved in the second half of 2012 with
construction works scheduled to start in
2013.
Additionally, in 2012 EVRAZ worked with US
Federal authorities to successfully revoke
a 17 year old anti-dumping duty on imports of
Russian ferrovanadium and nitrided vanadium.
In 2012, EVRAZ Vametco produced 3
thousand tonnes of modified vanadium oxide
and 2 thousand tonnes of its proprietary
Nitrovan® product.
In 2012, production at EVRAZ Vametco was
impacted by stoppages resulting from the
breakages of key equipment at the beginning
of the year and a lack of slag supply in the
middle of the year.
2012 Production
In 2012, EVRAZ Vanady Tula produced 7,117
tonnes of vanadium pentoxide and 2,715
tonnes of ferrovanadium. EVRAZ Vanady Tula’s
domestic sales of FeV amounted to 47% of
production, including intragroup deliveries of
12% to EVRAZ ZSMK, EVRAZ NTMK, and
EVRAZ DMZ Petrovskogo.
In 2012, EVRAZ Nikom produced 4,544
tonnes of ferrovanadium. EVRAZ Nikom
delivers most of its products to North America
(approximately 58%), Europe (20%), Asia,
South America and CIS.
2013 Targets:
The key targets of EVRAZ’s vanadium
operations in 2013 include:
(cid:114)(cid:1) increasing vanadium output at all EVRAZ
plants;
(cid:114)(cid:1) completing the pulp filtration project and the
implementation of a new enhanced
maintenance system at EVRAZ Vanady Tula;
(cid:114)(cid:1) increasing production capacity at EVRAZ
Nikom through the modernisation of the
current production line; and
(cid:114)(cid:1) completion of the project to use slag from
EVRAZ NTMK to alleviate feedstock
shortages at EVRAZ Stratcor and increase
the output of specialty high value added
vanadium chemicals.
Average selling prices for vanadium products of EVRAZ
USD/tonne of V (ex works)
Vanadium in final products
Ferrovanadium
Nitrovan®
Oxides, vanadium aluminium and chemicals
2011
2012
27,653
29,506
36,194
24,062
27,900
32,579
EVRAZ plc
Annual Report and Accounts 2012
51
Other Businesses
Key assets of EVRAZ in trading, logistics and other auxiliary services
Name
EVRAZ NMTP
Sinano
Trading Company EvrazHolding
EVRAZ Metall Inprom
East Metals AG
ZapSib Power Plant (part of EVRAZ ZSMK)
Power Plant at EVRAZ NTMK (part of EVRAZ NTMK)
Kachkanar Power Plant (part of EVRAZ KGOK)
Metallenergofinance
EvrazEnergoTrans
Location
Russia
Europe
Russia
Russia
Europe
Russia
Russia
Russia
Russia
Russia
Services provided
Logistics
Logistics
Trading
Trading
Trading
Electricity and heat generation
Electricity and heat generation
Electricity and heat generation
Electricity supplies
Power grid
EVRAZ ships most of its exports to Asia
through EVRAZ NMTP, Nakhodka Trade Sea
Port, which is one of the largest ports in the
Russian Far East.
82%. A key achievement in 2012 was a
fourfold decrease in the number of late
deliveries and incomplete orders as compared
to 2011.
In 2012, cargo turnover at the port increased
by 10% vs. 2011 and totalled 6.9 million
tonnes. EVRAZ plans to further increase cargo
turnover to over 8 million tonnes in 2013.
Trading Company EvrazHolding plans to
continue improving customer loyalty by
enhancing the flexibility of pricing, improving
stock availability, reducing customer delivery
claims and improving product quality.
Coal port handling facilities are being
modernised and upgraded with a target annual
coal capacity of 5 million tonnes per annum by
2015, however capacity is expected to
increase incrementally from 2013.
Sinano provides sea freight services and
delivers up to 4 million tonnes of EVRAZ
products to clients every year. EVRAZ owns
and operates four vessels with a total
deadweight capacity of 95,465 tonnes, which
covered approximately 25% of 2012 shipping
requirements for EVRAZ’s Russian and
Ukrainian subsidiaries on a CIF/CFR basis.
EVRAZ’s fleet transports semi-finished and
long steel products, coal, vanadium slag and
other materials. In 2012, Sinano launched a
project to implement SAP in order to enhance
its operational efficiency and offer a higher
level of customer service. The system will
become operational in 2013.
Trading Company EvrazHolding is EVRAZ’s
trading arm for Russian & CIS markets
covering the whole range of the Group’s
products. In 2012, sales of steel products
totalled 6.8 million tonnes and Trading
Company EvrazHolding strengthened its
position in key product segments in Siberia
and the Urals.
In 2012, Trading Company EvrazHolding
conducted customer research which
demonstrated very high levels of customer
satisfaction, with a customer loyalty score of
EVRAZ Metall Inprom is one of the leading
Russian steel trading companies which
finishes and distributes steel products (rebar,
structural shapes, sheet, pipe) produced
mostly by EVRAZ (EVRAZ ZSMK and EVRAZ
NTMK in Russia and EVRAZ DMZ Petrovskogo
in Ukraine). In 2012 EVRAZ Metall Inprom sold
almost 2 million tonnes of steel products
compared to 1.7 million tonnes in 2011.
EVRAZ Metall Inprom has delivered steel
products for the construction of sports
facilities including for the Olympic Games (for
example, the reconstruction of the railway
station and the construction of the new
Central Olympic Stadium as well as the main
media centre), a football stadium in Kazan for
Universiada, and a stadium in Saransk for the
Football World Cup. Among other significant
projects are the construction of the Vostochny
space base and works for the Moscow and
Samara subways.
As part of EVRAZ’s strategy of focusing on
customers, a quality monitoring bureau was
established to manage a centralised process
for processing customer claims and
complaints.
East Metals AG (EMAG), located in
Switzerland, trades EVRAZ’s Russian,
Ukrainian and South African steel products on
international markets. In 2012, a new core IT
system was implemented at East Metals AG,
which is based on SAP functionality and
represents one of the best in class solutions
for trading companies. Implementation of the
new system allowed EMAG to further integrate
all major areas of its operations including
sales, procurement, logistics and finance and
make all management processes leaner and
more efficient.
During 2012, EMAG increased sales to MENA
markets (mainly Iraq and Turkey), by 300
thousand tonnes and completed its maiden
shipments of steel slabs to India. A further
significant achievement was an increase in
sales to end users.
EVRAZ’s major energy assets are located in
Russia and in 2012 supplied 42% of the
Company’s electricity needs. The ZapSib
Power Plant supplies electricity and heat to
EVRAZ ZSMK and external customers whilst a
second power plant is in operation at EVRAZ
NTMK.
During 2012 the Kachkanar Power Plant
was integrated into EVRAZ KGOK’s operations,
generating operating efficiencies of several
million US dollars. In addition, the initial stage
of a project to increase generating capacity at
the ZapSib Power Plant by 17% compared to
2011 levels was approved.
In 2013, EVRAZ plans to continue with
programmes on operational improvements
at key power generating facilities.
Metallenergofinance supplies electricity to
EVRAZ’s steel and mining segments and to
third parties. Total volume of realised energy in
2012 amounted to 6.5 billion kW/h including
5.7 billion kW/h of intragroup deliveries.
EvrazEnergoTrans is a power grid operator,
which transmitted 4.9 billion kW/h in 2012
including 4.6 billion kW/h intragroup deliveries.
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
53
53
Corporate
Social
Responsibility
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EVRAZ plc
Annual Report and Accounts 2012
Corporate Social Responsibility
EVRAZ air emissions
The below graph illustrates the reduction in the total amount of the key air emissions
nitrogen oxides (NOx), sulphur oxides (SOx), dust and volatile organic compounds rebased
to 2009.
90.1%
76.7%
75.2%
100
100%
75
50
25
0
2009
2010
2011
2012
Lost time injury frequency rate (per 1 million hours worked)
Fatalities
3
2
1
0
2.69
2.4
26
2009
23
2010
Fatalities
LTIFR
30
20
10
0
2.23
25
2012
1.86
13
2011
In the period from 2012 to 2017,
the Group is committed to spending
approximately US$303 million
on environmental programmes
across its operations.
EVRAZ approach
The Company takes its social responsibilities
seriously, addressing and monitoring all
aspects of corporate social responsibility
(CSR) that are relevant to the business.
This section of the report provides an overview
of EVRAZ policies and performance in the
relevant areas of CSR including human rights,
health and safety, environmental performance,
human capital management and community
engagement in 2012 as well as an outline of
how the Company intends to improve its
performance in the years ahead.
Additional relevant disclosures are contained
in the Principal Risks and Uncertainties
section on page 28 and the Corporate
Governance Report on page 73.
Strategy and governance
Strategic direction in the areas of health,
safety and environment comes from the
Board of Directors, which has established a
dedicated Health, Safety and Environment
(HSE) Committee to lead the Board’s thinking
on health and safety issues, as well as taking
responsibility for environmental, safety and
local community matters. Details of the terms
of reference and activities of the Committee
are set out in the Corporate Governance
Report on page 81.
The Company is committed to improving HSE
performance through the implementation of
enhanced business processes, as well as new
management and control systems. The HSE
function at the corporate and site level is
coordinated by the Vice President of HSE
Michael Schuble who regularly reports to the
Board Committee on material HSE issues.
At site level, each plant manager takes overall
responsibility for HSE compliance, reporting to
both the site management and corporate-level
HSE management.
The safety, health and environmental policy
implemented at the Group-wide level aims at
meeting or exceeding all applicable national
legislation and increasing the level of industrial
safety and labour protection as well as
reducing the Group’s environmental footprint
across the operations.
In addition to internal codes and principles,
EVRAZ implements the OECD Guidelines for
Multinational Enterprises to ensure a uniform
approach to business standards across the
Company’s global operations. EVRAZ fully
endorses the provisions of the Universal
Declaration of Human Rights and strives
at all times to uphold them.
EVRAZ plc
Annual Report and Accounts 2012
55
Key challenges
Upon review of the business, EVRAZ has
identified the four most significant ongoing
CSR challenges as:
(cid:114)(cid:1) Health and safety – the health and safety
of Company’s employees are of paramount
importance. The steel and mining industries
have inherent risk that needs to be
managed effectively to ensure a safe
working environment. EVRAZ constantly
strives to improve the performance by
avoiding or mitigating these risks.
(cid:114)(cid:1) Environmental footprint – the Company’s
(cid:114)(cid:1) Community relations – EVRAZ is a
long-term investor in its areas of operation
and is committed to ensuring that local
communities benefit from Company’s
presence.
operations can have a significant impact on
the environment. EVRAZ is committed to
meeting or exceeding legal requirements in
order to reduce its environmental footprint,
thus making the world a cleaner place.
(cid:114)(cid:1) Human capital management – retaining the
best talent requires investment in the
development of the Company’s employees
in order to secure long-term stability of the
business and drive technological
development.
Targets
After determining the key challenges and focus areas, EVRAZ has set the following 5 year targets for its sustainability performance.
Area of focus
Health and Safety
Environment 1
Human Capital
Community Relations
Challenges
5 year targets
Impact of operations on the health and
physical condition of EVRAZ employees
Impact of operations on the environment
(air, water, waste)
Development of employees to secure the
long-term stability of the business
(cid:114)(cid:1) consistent reduction in lost time injury
frequency rate
(cid:114)(cid:1) avoidance of any fatal incidents across
the Group
(cid:114)(cid:1) 5% reduction in air emissions1
(cid:114)(cid:1) 15% decrease in fresh water consumption
(cid:114)(cid:1) 100% of non-mining waste recycled or used2
(cid:114)(cid:1) 100% of middle management covered by
development programme
(cid:114)(cid:1) creation of a pool of successors for
middle and top management
Effective management of relations with
local communities, which affect the
Company’s reputation and ability to operate
at existing operations
(cid:114)(cid:1) contribution to the local development of
communities in which EVRAZ operates,
through education, training and
employment of the local population
Review of 2012 performance
Health and Safety Performance
In 2012, the Company adopted a number of
new Group-wide policies and requirements in
order to standardise and improve HSE
management system:
(cid:114)(cid:1) alcohol, drugs and smoking policy;
(cid:114)(cid:1) work at heights requirements;
(cid:114)(cid:1) personal protective equipment requirements;
(cid:114)(cid:1) contractors’ management requirements;
(cid:114)(cid:1) occupational risk assessment requirement;
(cid:114)(cid:1) induction training on labour protection,
industrial safety, fire safety and the
environment;
(cid:114)(cid:1) fundamental environmental requirements;
(cid:114)(cid:1) corporate environmental reporting
guidelines.
Developed in 2011, the EVRAZ HSE reporting
system has led to improved incident reporting
and a full year of consistent data in 2012. HSE
performance data is now submitted by
subsidiaries to the corporate HSE directorate
on a monthly basis to ensure permanent
monitoring. Information on any significant
incidents is immediately escalated to
management in order to enable appropriate
investigations to take place, with further
development of preventative and corrective
actions.
As a result, statistics on lost time incidents for
2012 are more comprehensive and accurate
than in previous years. This has partially
contributed to the 20% reported increase in
LTIFR (lost time injury frequency rate
calculated as number of lost working hours
due to injuries per 1 million hours worked)
seen in 2012. EVRAZ remains committed to
achieving a long-term downward trend in LTIFR.
Regrettably in 2012 the Company recorded 25
separate fatal accidents at EVRAZ operations
during the year. The key hazardous factor
leading to 40% of EVRAZ fatalities in 2012
was the influence of mobile equipment or
parts thereof. Another 40% is composed of
rock falls in coal and ore, falling objects and
falling from heights taken together. At the
same time, the analysis of lost time injuries
(LTI’s) demonstrates that two categories of
LTI’s – fall-overs and equipment related
injuries – contribute to 42.5% of all LTI’s
recorded in 2012.
Based on thorough analysis the Company
has identified opportunities to reduce safety
incidents. To tackle these key problems,
two company wide programmes are being
launched in 2013. EVRAZ will take reasonable
measures to ensure the walkways at all
facilities are safe and do not create risks for
employees using them on a daily basis. The
facility managers will analyse all walkways
from the point of view of hazardous factors
and will make sure that all hazards – including
moving machinery, high-voltage electricity,
steam and gas pipelines, etc. – are effectively
fenced off from the pathways employees are
using on a regular basis. Secondly, the Group
will focus on working at heights’ safety
measures for employees and contractors.
2013 Targets
In 2013 the Company aims to reduce LTIFR by
20% in comparison with 2012 and has a clear
target to reduce fatalities in the ongoing
journey to achieve zero fatalities and serious
injuries.
Environmental performance
Steelmaking and mining sites use substantial
amounts of energy and water and can affect
water quality, air quality, waste and land use.
EVRAZ’s environmental strategy is to minimise
the negative impact of its operations and use
natural resources efficiently, seeking optimal
solutions for industrial waste management.
1 Environmental targets are based on 2011 performance levels. Including nitrogen oxides (NOx), sulphur oxides (SOx), dust and volatile organic compounds only.
2 The rate between amount of waste recycled or used vs. annual waste generation, not including mining waste. It can exceed 100% due to recycling of prior periods’ waste.
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EVRAZ plc
Annual Report and Accounts 2012
Corporate Social Responsibility (Continued)
In 2012 EVRAZ spent approximately US$35
million on measures to ensure environmental
compliance (including US$18 million on
water management projects) and more
than US$30 million on projects to improve
its environmental performance. In the period
from 2013 to 2017, the Group is committed
to spending more than US$300 million on
environmental programmes across its
operations.
In the course of 2012, the Company reviewed
the environmental strategy using risk
assessment tools, and set the following
five-year targets:
(cid:114)(cid:1) 5% reduction in air emissions;
(cid:114)(cid:1) 15% decrease in fresh water consumption;
(cid:114)(cid:1) 100% of non-mining waste recycled or used.
Although environmental fines across the Group
increased in 2012, no significant
environmental incidents were recorded. EVRAZ
is committed to continuing strengthening the
environmental management system and
increasing the number of operations compliant
with ISO 14001. Now EVRAZ has 13 ISO
14001 certified sites, including the largest
facilities: EVRAZ NTMK, EVRAZ ZSMK, EVRAZ
DMZ Petrovskogo, EVRAZ Highveld, EVRAZ
Vítkovice and EVRAZ Palini e Bertoli.
EVRAZ supports the human health and the
environment goals of REACH Regulation1,
and EVRAZ entities completed the registration
procedure for all of the products which fall
within the scope of the law (within the
registration deadlines) and gained all
necessary registration numbers at the end
of 2010. In compliance with the requirements
of the regulation and its amendments, all
necessary safety data sheets for EVRAZ
entities’ products were developed according to
the new EU format on languages of countries
of supply and sent to our customers. EVRAZ is
currently preparing for the next key stage being
the registration of 2013 substances in close
cooperation with customers, associations,
consortia and respective SEIF members.
Air emissions
Reduction of air emissions is one of EVRAZ’s
main environmental objectives. Emissions
primarily comprise nitrogen oxides (NOx),
sulphur oxides (SOx), dust and volatile organic
compounds. The Company has made
significant progress in reducing air emissions
through investments in modern technologies
and withdrawal of obsolete equipment. As a
result air emissions from steelmaking
operations have declined by 25% since 2009
and by 1.5% in 2012.
In 2012, EVRAZ completed a number of
upgrades of existing operations and developed
a new programme for reducing air emissions
at EVRAZ ZSMK. Another key project finalised
in 2012 was the upgrade of air pollution
control equipment at EVRAZ Claymont Steel
in the United States. The site installed
additional equipment to capture and control air
contaminants and reduce air emissions from
the melt shop. The project was implemented
over the course of the last three years and
required investment of US$17 million.
In 2012, the Group undertook a project to
reduce its carbon dioxide emissions within the
framework of the Joint Implementation (JI)
mechanism of the Kyoto Protocol. The project
specifies reconstruction of EVRAZ NTMK
plant’s blast furnaces #5 and #6 with the
introduction of efficient resource saving
technologies for pig iron production to reduce
fuel consumption. This also resulted in CO2
emission reductions. Projects which are
eligible to participate in JI must comply with
certain monitoring and measurement
requirements, to generate a volume of
Emissions Reduction Units (ERUs), equivalent
to the volume of emissions reductions
achieved, which can be sold in the
international market. EVRAZ NTMK generated
1.9 million ERUs generating revenues of
US$6 million that will be re-invested into
environmental improvement projects.
The main emissions issue associated
with the Company’s coal mining operations
is the release of methane gas after mine
degasification. The concentration of methane
is low and therefore there is no available and
economically viable technology to capture
and utilise this gas at present. However,
EVRAZ continues to investigate solutions for
minimising the quantity of methane emitted
from the coal mining operations.
Water consumption and wastewater
discharge
The objective of the Company is to use
water resources efficiently and to prevent
any negative impacts on water quality
through environmental incidents.
In 2012 almost 87% of all water intakes were
from surface sources, such as rivers, lakes
and reservoirs. The total fresh water intake in
2012 was 422.3 million cubic metres. This is
6.5% less than in 2011 (451.6 million cubic
metres).
The water pumped from mines (mine
dewatering process) is not included in the
fresh water intake target, although pumped
water is in part used for technology needs.
In 2012, 46.7 million cubic metres of mine
water were pumped out in comparison with
44.0 million cubic metres in 2011.
In 2012 EVRAZ adopted a new water
management strategy for EVRAZ ZSMK
and Yuzhkuzbassugol which is expected to
significantly improve the water management
performance of these operations.
Waste management
Mining and steelmaking operations produce
significant amounts of waste including waste
rock, spent ore and tailings (waste from
processing ore and concentrates). EVRAZ
aims to reduce the amount of waste it
produces, to reuse natural resources where
possible and to dispose of waste in a manner
that minimises the environmental impact
whilst maximising operational and financial
efficiency. Until recently much of the waste
EVRAZ produced was simply stored in landfills,
however the Company is developing a strategy
to reduce waste storage volumes and enhance
waste disposal.
In total, in 2012 EVRAZ recycled or reused
104% 2 of waste and by-products from its
non-mining assets compared to 109.6%
in 2011.
EVRAZ’s strategy for dealing with non-
hazardous mining wastes, such as depleted
rock, tailings and overburden is to use them
where possible for land rehabilitation and
the construction of dams or roads. In 2012,
27.8% or 27 million tonnes of such waste
material were reused compared to 46.7%
or 45.6 million tonnes in 2011.
All non-recyclable waste is stored in facilities
which are designed to prevent any harmful
substances contained in the waste escaping
into the environment.
In 2012 EVRAZ ZSMK and Yuzhkuzbassugol
were recognised by the administration of
Kemerovo region and Kuzbass Waste
Processors Association for their contribution
to environmental protection, secondary
resources disposal, and cooperation in the
establishment of the waste processing
industry in the Kuzbass region.
1 REACH – Regulation (EC) No. 1907/2006 of the European Parliament and of the Council according to which as of June 1, 2007 all chemical substances, mixtures and substances in
articles (in some cases) produced in or imported to European Economic Area (EEA) territory above 1 tonne per year are subject to mandatory procedures such as registration,
evaluation, authorization and restriction of chemicals. If chemicals are not registered in accordance with REACH the products are not allowed to be manufactured in or imported into
the EEA.
2 The rate between amount of waste recycled or used vs. annual waste generation, not including mining waste.
Human capital
EVRAZ recognises the importance of working
with people and for people. Therefore one of
the key pillars of the Company’s long-term
development plan is the development of its
human capital. EVRAZ remains committed
to providing equal rights to its employees
regardless of their race, nationality, gender
or sexual orientation, and the Company
recognises the importance of diversity
when recruiting talented employees.
Employees by region
1% 3% 4%
92%
Russia & CIS
Europe
Africa
North America
Employees by business
Steel
Vanadium
Mining
Other
Performance
As of 31 December 2012 EVRAZ employed
more than 110,000 people across Europe,
Africa and North America, with the majority
located in Russia and the Commonwealth of
Independent States.
In 2012 EVRAZ focused on the following
HR activities:
(cid:114)(cid:1) Becoming an industry leader in terms of
labour conditions. EVRAZ is focused on
ensuring a high level of working conditions
for all employees, regardless of their
location. Favourable and safe working
conditions are one of the most important
factors that motivate staff. The Company
provides health insurance, transport and
food for its employees.
(cid:114)(cid:1) Youth outreach. Youth outreach is one of
the key pillars in developing EVRAZ’s human
capital. EVRAZ strives to engage the young
generation in the Company’s enterprises.
The Company arranges visits to schools to
present professional orientation
programmes, invites pupils to the plants,
and works with young employees to offer
them various opportunities for professional
growth. EVRAZ has developed a number of
initiatives to attract highly talented students
and graduates, such as paid internships,
relocation compensation for interns and
graduates, scholarships for students after
successful training subject to subsequent
employment; and corporate grants for the
higher professional education of young
employees.
EVRAZ offers young employees various
opportunities for both professional and
personal development by implementing
individual plans for career development,
education and training; organising professional
contests such as: “Best young employee”,
“Best in profession” and “Best young leader”;
and youth scientific and technological
conferences. The EVRAZ’s Youth organisation
runs sporting and entertainment events.
(cid:114)(cid:1) Identify and develop high potential
employees (HiPo). In 2012 a lot of
attention was paid to the development of
high potential employees. EVRAZ has two
closely related schemes in place, known
as HiPo development and the New Leaders
Programme. One focuses on the
development of selected high potential
employees in preparation for future
leadership roles in Russia, while the other
develops talented employees worldwide to
become future operational and technical
leaders. 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.
1% 4%
37%
58%
In September 2012 Nizhny Tagil hosted the
First Youth Forum of EVRAZ [Case 1]
EVRAZ plc
Annual Report and Accounts 2012
57
For HiPo, the Company’s goal is to select and
prepare a set of suitable candidates for future
roles as Russian business leaders.
Additionally, in 2012, 59 EVRAZ employees
from the USA, Canada, South Africa, Czech
Republic, Switzerland, Ukraine and Russia,
all of whom possess diplomas of higher
engineering training and actual production
experience, participated in the EVRAZ New
Leaders Programme. The programme’s
objectives are to shape a future international
management team who could potentially hold
leading positions at the Company’s
enterprises, to encourage the development of
general management skills and engineering
competency, and to establish projects directed
at the improvement of EVRAZ’s production
system.
(cid:114)(cid:1) The preservation and development of
engineering and technical expertise.
EVRAZ capitalises on its technical
employees’ expertise by involving them in
the development of educational materials
and training courses. Thus EVRAZ ensures
experts and trainees are prepared for
handling business issues. [The preservation
and development of engineering and
technical expertise [Case 2]
(cid:114)(cid:1) Standard educational programmes. In
2012 the Company introduced integrated
corporate competence, adapted for all
levels of management, from operational
supervisors to executive management.
Training programmes were developed in
accordance with the corporate model and
are now implemented across EVRAZ’s
educational centres. The programme’s goal
is to increase management efficiency.
Graduates of the programme include: the
leading specialists of the businesses,
heads of technical areas, and subdivision
heads. In 2012 100% of leaders and 40%
of senior masters successfully completed
the programme. In the second half of 2012,
the training programmes were
supplemented with a course on corporate
standards of HSE, including modern tools of
safety management.
Plans for 2013 include the continuing
implementation of the majority of the 2012
programmes, as well as further enhancements
and implementation of new HR programmes.
Key targets for 2013 include: 100%
of employees engaged in development
programmes, and new vacancies offered
first to internal candidates.
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EVRAZ plc
Annual Report and Accounts 2012
Corporate Social Responsibility (Continued)
Cooperation with labour unions
EVRAZ respects its employees’ rights and
aims to build a constructive and positive
relationship with the labour unions which
represent them. All EVRAZ sites operate
through the collective bargaining agreement
model. The Company has generally high levels
of unionisation at operations, although this
can vary significantly across operations and
countries.
Regular discussions and formal and informal
meetings of the management and the unions
are conducted at all EVRAZ facilities in Russia
and globally.
Internal communications
EVRAZ is committed to keeping its employees
informed of major corporate developments to
the highest possible extent, and ensuring they
understand and are aligned with the business
strategy. EVRAZ has a well-developed internal
communications system including an
anonymous whistle-blowing system that allows
employees to confidentially raise questions
about any possible issue they face. The
whistle-blowing system uses a number of
tools, including internal surveys, suggestion
boxes and a special anonymous hotline. In
2012 the hotline received more than 2,200
inquiries, which were addressed by the
Company’s management in a timely manner.
Social and community programmes
EVRAZ contributes to local economies by
providing jobs, paying taxes and looking after
the communities where it operates. The
Company takes its social responsibilities
seriously, addressing and monitoring all
aspects of corporate social responsibility
(CSR) that are relevant to the business.
EVRAZ supports various community initiatives
in the countries and regions where present.
EVRAZ’s social expenses worldwide were
US$51 million in 2012.
Most assistance is channelled through
charitable foundations set up by the Company
and managed by local supervisory boards.
EVRAZ’s charity funds operate in Russia
(Siberia and the Urals) and the Czech Republic.
The projects in Russia are divided into three
categories: children, local communities and
sports. Projects for children include providing
assistance for children with special needs
(especially those with cerebral palsy), such
as no-cost treatment, purchasing special
equipment for local hospitals, organising
workshops for parents and doctors, providing
essential equipment for day care centres, and
career development. Besides in 2012 special
projects aimed at bettering living conditions
were further rolled out in the regions where the
Company’s plants, facilities and offices are
located. Thus EVRAZ funded the
reconstruction of a railway crossing in the
north of the city of Nizhniy Tagil (Ural) and
funded construction of a paved road along the
river Aba in Novokuznetsk (Siberia), as well as
further expanded its programme of
neighbourhood beautification by placing more
courtyards in selected neighbourhoods, and
installing children playgrounds, benches and
sandboxes in some of them.
Social investments in Ukraine included
support for Vasilkovsky neurological hospital,
Gorky Theater and instalment of a sun dial.
The EVRAZ Charity Fund in the Czech Republic
supports the long-term development of the
Moravian-Silesian region with funds directed
towards medical, educational and
psychological support for children suffering
from various disabilities of the central nervous
system, in particular those suffering from
cerebral palsy. EVRAZ also supports Vitkovice
hockey club.
EVRAZ’s social investments in South Africa
aim to empower communities through
education, health, housing, community,
infrastructure and supply chain initiatives.
EVRAZ North America launched a new
community programme in 2012. The
Reading Sparks™ children’s literacy
programme included employee engagement
activities, book distributions to school children
in Claymont, funding for public school reading
programmes such as the “Battle of the
Books” in Regina, Saskatchewan, Canada,
as well as donations to community centres
in Regina and in Camrose, Alberta, Canada,
for books and reading rooms.
Additional non-profit organisations and
charitable causes supported by EVRAZ North
America in 2012 include the United Way, Boys
& Girls Clubs, American Cancer Society, Boy
Scouts of America, YMCA Centres, and
numerous food drives, youth sports teams,
and hospitals.
Besides EVRAZ supports Dinamo sport club,
Uralochka, a professional women volleyball
team, hockey club Metallurg in Novokuznetsk
and several children sports clubs, including
the award-winning Federation of Sambo and
Judo in the city of Kachnkanar in the Urals
region. The Company also sponsored the
Russian Geographical Society as well as
the Volleyball Federation of Russia.
Transformation in South Africa
EVRAZ Highveld’s transformation and social
responsibility activities support B-BBEE
(Broad-Based Black Economic Empowerment)
to create a better South Africa for all. The
Company’s transformation policy (including
the B-BBEE Act and the Broad-Based
Socio-Economic Charter for the South African
Mining Industry) is aligned with legislative and
prescriptive measures aimed at achieving
accurate demographic reflection within the
organisation.
The policy formalises the Company’s respect
for diversity and its contribution to advance
transformation in areas such as preferential
procurement and socio-economic
development, employment equity, skills
development and the development of local
entrepreneurs.
The Company retained its Level 5 B-BBEE
scorecard with a score of 56.20, showing
progress towards our target of 59.48 and an
improvement on the score of 55.48 in 2011.
The scorecard measures three core elements
of BEE: direct empowerment through
ownership and control of enterprises and
assets, human resource development and
employment equity, indirect empowerment
through preferential procurement and
enterprise development.
The main instrument in attracting skills to
achieve the targeted demographic mix remains
the Company’s benefits and remuneration
packages, which are regularly benchmarked
against others in the mining and industrial
sectors.
EVRAZ plc
Annual Report and Accounts 2012
59
CSR Case Studies
Case 1:
The First Youth Forum of EVRAZ
EVRAZ pays great attention to the development of the potential
of young employees. The Company believes that young people
are the future and youth organisations take an active part in the
life of the Company. To attract and retain young employees in
each enterprise EVRAZ operates a programme, “The Youth”,
which involves training young employees, testing their
professional skills, and organising cultural and sporting events.
About 150 young miners and metal-makers from EVRAZ’s
Russian operations took part in the Company’s First Youth
Forum. The event took place in September 14th 2012 in Nizhny
Tagil and lasted for three days. During this time the young
employees of EVRAZ operations in Siberia, the Urals and the Far
East took part in various training activities, had direct contact
with the senior management of EVRAZ and socialized with their
colleagues from other regions.
The goal of the event was to unite the young employees
of EVRAZ and use their knowledge and energy in the
implementation of EVRAZ’s policies.
Case 2: Preserving and developing engineering
and technical expertise at our operations
The participants of the project are experts from the plants and
engineering technicians of the same profession potentially
capable of taking the expert’s place.
The programme consists of two courses: the School of Senior
Experts, in which top-level technical employees pass their
knowledge onto future experts, and the School of Progressive
Experience, which allows the experts to share knowledge with
a view to improving business processes.
The work of the School of Senior Experts is based on the following
approaches:
1. LEARN: Participants are trained and examined on the areas of
focus at their enterprise.
2. ACT: The participants put their new knowledge into practice as
they work on individual projects to solve business issues with
the help of LEAN technologies.
3. TEACH: The programmes are individual for every enterprise
implementing them, and are run by the chief technical
professionals. Experts are educated to work as lecturers.
Graduates of the school use their experience to prepare
materials for educational books that EVRAZ is developing.
In 2012 about 145 experts and 300 potential successors took
part in the programme.
The second course, the School of Progressive Experience, aims to
promote the exchange of experience and sharing of knowledge
within the Company. This involves practical activities, involving
experts in the process of operational improvements, allowing
them to discuss and resolve engineering and technological
issues, and planning progress for the year 2013. As a result The
School of Progressive Experience helps the employees to form a
fresh view on everyday business processes and offer ideas to
improve them.
In 2012 almost 160 employees participated in the programme.
In 2013 EVRAZ aims to expand both courses, establishing 10
Schools of Senior Experts and 4 Schools of Progressive
Experience.
The scope of the course will grow as external experts from Research
Institutes, client companies, and suppliers are invited to participate.
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
61
61
Financial
Review
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EVRAZ plc
Annual Report and Accounts 2012
Financial Review
Giacomo Baizini
“ The financial results for 2012 reflect the subdued
steel pricing environment, however we have managed
to retain balance sheet flexibility and preserve our solid
liquidity position. While the business outlook for 2013
remains challenging we continue to focus on efficiency
improvements and the optimisation of our asset portfolio.”
Basis of preparation
The consolidated financial statements of the Group on pages 102 to 167 have been prepared in accordance with International Financial
Reporting Standards (“IFRS”), as adopted by the European Union and the presentation currency is US dollars.
Overview
As a result of a general weakness in the market for steel and steelmaking raw materials, the Company recorded a net loss of US$335 million for
2012, compared to a net profit of US$453 million in 2011. Gross profit deteriorated as falling prices affected revenue and we were also impacted
by an impairment of US$413 million. Our EBITDA decreased 31% to US$2,012 million in 2012.
Cash flow generation was utilised in the continuing investment to upgrade and maintain our operations, as well as to declare a final dividend for
2011 and an interim dividend for the first half of 2012. Free cash flow for the year was positive, and we increased borrowings to prepare for the
repayment of Rouble bonds and Eurobonds due in 2013. As of 31 December 2012, the Company held cash and short-term deposits for a total of
US$2,064 million, compared to short-term debt of US$1,862 million1.
As part of a strategic alignment of our asset base at the end of 2012, the Group decided to dispose of EVRAZ Highveld Steel and Vanadium
and EVRAZ Vitkovice Steel operations. Accordingly these assets are accounted for as assets held for sale as at the year-end. In March 2013
we announced the execution of a non-binding term sheet on sale of EVRAZ Highveld.
In January 2013 we completed the acquisition of a controlling interest in Raspadskaya coal company, which was mostly financed by equity, and
via a US$202 million cash component payable in equal quarterly instalments ending on 15 January 2014.
In addition, in April 2013 we announced the acquisition of a 51% stake in Timir, a joint-venture with Alrosa, created for the development of large
iron ore deposits in Yakutia, Russia for RUB4,950 million (ca. US$160 million).
Revenues (US$ million)
Segment
Steel
Mining
Vanadium
Other operations
Eliminations
Total
Revenue 2012
Revenue 2011
13,543
2,650
520
1,046
(3,033)
14,726
14,717
3,784
665
966
(3,732)
16,400
Change
(1,174)
(1,134)
(145)
80
699
(1,674)
Relative change
(8.0)%
(30.0)%
(21.8)%
8.3%
(18.7)%
(10.2)%
Group revenues for 2012 decreased by 10.2% to US$14,726 million of which steel products’ revenues (excluding intersegment sales) amounted
to US$12,137 million or 82%. Steel sales volumes decreased only marginally from 15.5 million tonnes in 2011 to 15.3 million tonnes. The
reduction in revenues was due largely to a decrease in sales prices, in line with the general trend in steel pricing.
EVRAZ was also impacted by a poorer product mix during the year as steel from EVRAZ ZSMK was used for the production of lower margin billets
because the rail mill modernisation programme halted rail production in April 2012. As the EVRAZ ZSMK rail mill has been operational from
12 January 2013, and the ramp-up will be completed in the fourth quarter of 2013, we expect an improved product mix during 2013. In addition
adverse market conditions impacted sales volumes of the Group’s flat-rolled products in Europe.
1 Hereinafter debt and cash balances include the amounts held at operations that were classified as assets/liabilities held for sale, which were separately presented in the statement
of financial position as of 31 December 2012, and include US$70 million of cash and cash equivalents and US$79 million of debt.
EVRAZ plc
Annual Report and Accounts 2012
63
EBITDA (US$ million)
Segment
Steel
Mining
Vanadium
Other operations
Unallocated
Eliminations
Total
EBITDA 2012
EBITDA 2011
1,326
622
(19)
189
(199)
93
2,012
1,262
1,628
22
197
(243)
32
2,898
Change
64
(1,006)
(41)
(8)
44
61
(886)
Relative change
5.1%
(61.8)%
(186.4)%
(4.1)%
(18.1)%
190.6%
(30.6)%
EBITDA for 2012 was US$2,012 million, compared to US$2,898 million in 2011, largely reflecting the fall in revenues. The fall in prices and
volumes of iron ore and coking coal had an adverse impact on EBITDA of the Mining segment.
Cost of revenues, expenses and results (US$ million)
Item
Cost of revenue
Gross profit
Selling and distribution costs
General and administrative expenses
Impairment of assets
Foreign exchange gains/(losses), net
Other operating income and expenses
Profit from operations
Interest expense
Gain/(loss) on financial assets and liabilities, net
Gain on disposal group classified as held for sale, net
Other non-operating gains/(losses), net
Profit/(loss) before tax
Income tax benefit/(expense)
Net profit/(loss)
2012
2011
Change
(11,797)
(12,473)
2,929
(1,211)
(860)
(413)
(41)
(161)
243
(645)
164
114
18
(106)
(229)
(335)
3,927
(1,154)
(921)
(104)
269
(157)
676
(998)
(57)
61
(309)
(310)
(4)
1,860
(1,617)
(708)
(355)
8
68
873
(420)
453
63
519
106
(50)
(979)
191
(788)
Relative
change %
(5.4)
(25.4)
4.9
(6.6)
297.1
(115.2)
2.5
(86.9)
(8.9)
146.2
1,325.0
(73.5)
(112.1)
(45.5)
(174.0)
Cost of revenue decreased by 5.4% to US$11,797 million in 2012 compared to 2011 as a result of a number of factors. Raw material costs
decreased by 20% largely due to lower purchase prices for iron ore, coking coal and scrap. The costs for semi-finished products fell by 39%,
as more slabs were procured internally, for further re-rolling, as opposed to being purchased from third parties. Expenditure on services
decreased by US$9 million, as inflationary pressure was balanced by a 5% devaluation of the Rouble and through cost savings at many of
our operations. Goods for resale increased by 55% as EVRAZ Metal Inprom increased the purchase of third party products to satisfy customer
demand. Transportation costs increased by 7% following an increase in Russian railway tariffs and higher volumes of intragroup shipments of
semi-products. The 2012 labour cost increase is partially attributed to carryover effects of 2011 salary increases that were negotiated based
on more favourable 2011 market conditions, however these were somewhat offset, at least in Russia, by the Rouble devaluation.
Total depreciation, depletion and amortisation amounted to US$1,259 million for 2012, compared to US$1,153 million for 2011. The increase
is due mainly to a larger depletion expense at Yuzhkuzbassugol following a revaluation of reserves in July 2011. While higher reserves were
recognised, the future development costs per tonne of coal are higher than previously estimated. In 2012, management revised its mining
plans to exclude some reserves that are not expected to be developed earlier than 2040-2070 and updated the reserves valuation accordingly.
This led to a minor reduction of reserve base and a significant decline in estimated future development costs used in the calculation of the
depletion charge. The amount of depreciation in cost of revenue was US$1,100 million for 2012.
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EVRAZ plc
Annual Report and Accounts 2012
Financial Review (Continued)
We achieved a reduction in electricity costs of US$49 million through increased proprietary generation at EVRAZ ZSMK and lower consumption at
our European operations due to reduced activity. Natural gas expenditure was also slightly reduced as increases in prices were offset by
devaluation of the local currencies, and reduced consumption volume as a result of lower level activity in Europe.
The large increase in other costs is mostly due to changes in finished goods inventory and work in progress, which increased by US$192 million
in 2011, but decreased by US$53 million in 2012 due to destocking at the end of the year.
Breakdown of cost of revenue (US$ million)
Item
Cost of revenue
Raw materials, incl.
Iron ore
Coking coal
Scrap
Other raw materials
Semi-finished products
Auxiliary materials
Services
Goods for resale
Transportation
Staff costs
Depreciation
Electricity
Natural gas
Other costs
2012
2011
Change
Relative
change %
(11,797)
(12,473)
(4,091)
(681)
(1,050)
(1,570)
(790)
(483)
(1,006)
(665)
(632)
(740)
(1,765)
(1,100)
(551)
(416)
(348)
(5,137)
(873)
(1,389)
(1,943)
(932)
(788)
(947)
(674)
(407)
(694)
(1,628)
(1,015)
(600)
(427)
(156)
676
1,046
192
339
373
142
305
(59)
9
(225)
(46)
(137)
(85)
49
11
(5)%
(20)%
(22)%
(24)%
(19)%
(15)%
(39)%
6%
(1)%
55%
7%
8%
8%
(8)%
(3)%
(192)
123%
Selling and distribution expenses were 4.9% higher than in 2011 mainly due to the carryover effect of a change to CPT sales terms in Russia, which
was introduced in the first half of 2011, and a minor increase in volumes shipped. This was slightly offset by a reduction in bad debt expense due
to better cash collection from municipalities that are using heat and electricity produced by the Group’s subsidiaries at respective locations.
General and administrative expenses declined in 2012 by 6.6% mainly due to a lower staff bonuses accrual, the one off effect of expenses
related to the premium listing that were incurred in 2011 and significant cost saving initiatives implemented at EVRAZ Highveld Steel and
Vanadium during the year.
In 2012, we had a significantly higher impairment charge of US$413 million than in the previous year. US$356 million of this is attributed to the
non-current assets of Evrazruda. For more details please refer to Note 6 of the Financial Statements.
Foreign exchange gains/(losses) moved from a US$269 million gain in 2011 to a US$41 million loss in 2012. This is in large part due to
currency fluctuations on intragroup debt where the entities involved have different functional currencies. IFRS does not have a notion of a Group’s
functional currency, therefore gains/(losses) of one subsidiary do not have corresponding counterparts in another subsidiary and thus cannot be
eliminated on consolidation. For example this is the case between Russian subsidiaries with rouble functional currency and our non-Russian
entities with other respective functional currencies.
Interest expense incurred by the Group has fallen steadily over the last two years as we have refinanced debt at lower interest rates.
Interest expense was US$645 million for 2012, compared to US$708 million for 2011.
EVRAZ plc
Annual Report and Accounts 2012
65
Gains on financial assets and liabilities for 2012 were US$164 million, and dominated by a gain of US$177 million on the change in fair value
of derivatives – currency and interest rate swaps for rouble bonds. This is a significant reversal of the position in 2011 where a loss of US$110
million was incurred on the swaps alone. In 2011 the loss on financial assets and liabilities also included the effect of a loss on early settlement
of debt (US$71 million) and incentivised conversion of convertible bonds (US$161 million), as described in more details in Notes 7 and 21 of the
financial statements.
The Group recognised a US$83 million loss on reclassification of EVRAZ Highveld Steel and Vanadium and EVRAZ Vitkovice Steel to assets held
for sale. This was more than offset by a gain realised by the sale of EvrazTrans, and together with the effect of other minor disposals, led to a
US$114 million gain on assets classified as held for sale.
In 2012, the Company accrued an income tax expense of US$229 million, notwithstanding a loss before tax of US$106 million. This was mostly
due to losses at certain subsidiaries that could not be offset against profits of other subsidiaries, as well as the fact that some expenses are not
deductible for tax purposes.
In 2012, the Company reported a US$335 million net loss, compared to a net profit of US$453 million in 2011.
Cash flow (US$ million)
Item
Cash flows from operating activities before change in working capital
Changes in working capital
Net cash flows from operating activities
Short-term deposits at banks, including interest
Purchases of property, plant and equipment and intangible assets
Proceeds from sale of disposal groups
Dividends received and return of capital by joint venture
Other investing activities
2012
1,733
410
2,143
(656)
(1,261)
311
126
(64)
2011
2,528
119
2,647
5
(1,281)
5
54
29
Net cash flows used in investing activities
(1,544)
(1,188)
Dividends paid by the parent entity to its shareholders
Net proceeds from/(repayment of) bank loans and notes,
overdrafts and credit lines, including interest
Gain on derivatives not designated as hedging instruments
Other financing activities
Net cash flows used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
(375)
282
81
(30)
(42)
32
589
(491)
(591)
66
(266)
(1,282)
1,240
(59)
118
91
471
Change
Relative
change %
(795)
291
(504)
(661)
20
306
72
(93)
(356)
116
873
15
236
(31.4)
244.5
(19.0)
(13,220.0)
(1.6)
6,120
133.3
(320.7)
(30.0)
(23.6)
(147.7)
22.7
(88.7)
(96.7)
(154.2)
399.2
Cash flows from operating activities before changes in working capital fell by 31% in 2012 to US$1,733 million reflecting the lower prices for our
products in 2012 compared to 2011.
In 2012, US$410 million of working capital was released as a result of lower average prices, but also as part of the continued focus on managing
the Group’s working capital. In order to pre-finance the 2013 maturities of the put options on our 2013 rouble bonds, and of other bonds and
notes, we deposited US$674 million at large Russian banks.
Capital expenditure was sustained at virtually the same level as in the previous year (US$1,261 million in 2012 compared to US$1,281 million in
2011). In 2012 made significant progress on many of the priority projects that we launched in 2010/2011, including the modernisation of the two
rail mills in Russia, construction of Yerunakovskaya VIII coking coal mine, PCI for our Russian blast furnaces and construction of rolling mills at the
south of Russia and in Kazakhstan. Whilst many projects neared completion during the year investment started on new projects such as Mezhegey
Phase I.
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EVRAZ plc
Annual Report and Accounts 2012
Financial Review (Continued)
Summary of capital expenditure for 2012 (in millions of USD) is as follows
EVRAZ ZSMK rail
mill modernisation
Construction of
Yerunakovskaya VIII mine
PCI at EVRAZ NTMK
PCI at EVRAZ ZSMK
Vostochniy mill (Kazakhstan)
Yuzhniy mill (South Russia)
Mezhegey (Phase I)
Other investment projects
Maintenance
Total
143
135
58
51
41
31
15
130
657
1,261
Launched after modernisation programme in January 2013, ramp-up to be completed
by Q1 2014
Production of 2.5 million tonnes of raw coking coal per annum. Ramp-up to be completed
by Q1 2014
Reduction of coke and natural gas consumption in blast furnaces. Construction
completed in 2012, commissioned in Q1 2013
Reduction of coke and natural gas consumption in blast furnaces. To be commissioned
in Q1 2014
Long products’ capacity addition. Hot tests to start in Q3 2013
Long products’ capacity addition. Hot tests to start in H2 2014
Additional 1.5 million, ramp-up to be completed in H2 2014
In December 2012 we completed the sale of EvrazTrans for a consideration of US$306 million. This, in addition to smaller disposals, resulted in a
net positive contribution to our cash flow of US$311 million.
During the course of 2012 we also received US$88 million of dividends and US$38 million of capital returned by Corber, the Group’s joint venture,
and in turn paid US$375 million to our shareholders in dividends.
We also continued to benefit from realised gains on the swaps for the rouble bonds that generated another US$81 million of cash. We do not
have any other significant hedging instruments.
The free cash flow for the Group was US$780 million in 2012.
Financing and liquidity
Debt maturities schedule*, US$ million
2,000
1,600
1,200
800
400
0
1,769
1,904
1,448
1,384
1,039
642
Q4
Q3
Q2
Q1
2013
2014
2015
2016
2017
2018
2019-2023
72
*excluding interest and lease payments and
including debt maturities of disposal groups
held for sale
We started 2012 with a total debt of US$7,245 million. Due to the favourable situation in capital markets in the first half of 2012, we decided
to pre-finance our large bond maturities coming due in March and April 2013, in order to pro-actively manage the liquidity risk. To this end,
in April 2012 we issued US$600 million of 5-year Eurobonds, and in December 2012 we issued US$250 million of ECP. As a result of these
actions, our total debt increased to US$8,248 million as at 31 December 2012, while net debt decreased by US$258 million from US$6,442
million at 31 December 2011 to US$6,184 million at 31 December 2012. Interest expense accrued in respect of loans, bonds and notes was
US$588 million for 2012, compared to US$649 million for 2011.
Given the uncertainty in our key ratios in the near term, we decided to approach our bank lenders to adjust some of our covenants. In June
2012 we agreed with the lenders to amend the levels on the two key maintenance covenants in most of our bank debt, namely the covenants
to maintain (i) maximum net leverage ratio (ratio of net debt to 12-month consolidated EBITDA) and (ii) minimum EBITDA interest cover ratio
(ratio of 12-month consolidated EBITDA to 12-month consolidated interest expense). Both ratios are based on Evraz Group S. A.’s, and not the
whole Group’s, consolidated financial statements. The new levels were set at 3.5x and 3.0x respectively, at the same time the definition of
interest expense was adjusted to take account of cash gains on hedging arrangements related to rouble bond issues. On 31 December 2012,
the net leverage ratio was 3.1x, and the EBITDA interest cover ratio was 4.0x. In December 2012, we also successfully obtained the consent
of the holders of our 2015 Eurobonds to remove the maintenance covenant from these bonds. As a result, we do not have any maintenance
test on any of our public debt, giving us added flexibility in case of market downturns negatively affecting our leverage.
EVRAZ plc
Annual Report and Accounts 2012
67
Our Eurobond covenants currently limit our ability to incur new debt at Evraz Group S.A. and its subsidiaries, but do not limit our ability to
refinance the debt of Evraz Group S.A. or to raise new debt at EVRAZ plc. In order to increase our financial flexibility, we have set up project
financing in relation to the Mezhegey project Phase I. The project entity is a subsidiary of EVRAZ plc, but not a subsidiary of Evraz Group S.A.,
so any utilisation of this financing is not subject to the restriction of the incurrence covenants of the Evraz Group S.A. Eurobonds. As of
31 December 2012, we had US$5 million drawn under this facility.
Part of our bank loans continue to include covenants to maintain certain financial metrics related to profitability and leverage. As of 31 December
2012 the outstanding amount of such loans was US$1,424 million. Given the high volatility in the global steelmaking industry, we continue to closely
monitor and proactively address any potential issues of future compliance with covenants associated with Company’s financial indebtedness.
Our cash and deposits on 31 December 2012 of US$2,064 million compared to a short-term debt of US$1,862 million gives us confidence
in our financial position.
Dividends
Based on the results of the first half of 2012 we declared an interim dividend of 11 cents per share. Due to the deterioration in the market
environment, and consequently our performance, in the second half of 2012, the Directors have recommended to pay no final dividend for 2012.
Giacomo Baizini
Chief Financial Officer
EVRAZ plc
10 April 2013
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
69
69
Governance
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EVRAZ plc
Annual Report and Accounts 2012
Board of Directors
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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)
Founded EvrazMetall, a
predecessor of the Group, in
1992. CEO of EVRAZ Group
S. A. until 1 January 2006,
Chairman of EVRAZ Group
S.A.’s 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.
Appointed CEO of EVRAZ plc
on 14 October 2011.
Has been a 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.
Alexander Abramov served
as a Non-Executive Director
from May 2006 until his
re-appointment as Chairman
of the Board on 1 December
2008. A Director of OJSC
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),
and a 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 Highland
Gold Mining Ltd. He is also on
the board of Directors of AFC
Energy plc. 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
Ltd. He served as Head of
Corporate Finance for Sibneft
in Moscow from 1998 to 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.
Member of the Nominations
Committee
Member of the Health, Safety
and Environment Committee
Member of the Audit
Committee and of the Health,
Safety and Environment
Committee
Member of the
Nominations Committee
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EVRAZ plc
Annual Report and Accounts 2012
71
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)
Appointed to the Board of
EVRAZ plc on 14 October
2011.
Member of the Board of
Directors of Evraz Group S.A.
since 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.
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.
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 an Independent
Non-executive on the Board
of Deloitte LLP, Senior Adviser
to CQS (UK) LLP, a member
of the Barclays Wealth and
Investment Management
Advisory Committee, Senior
Adviser to Mr Wafic Said and a
Non-Executive Director of Tamar
Energy Limited. 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 a Non-
Executive Director 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.
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 10 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.
Terry Robinson has been
nominated for election to the
Board of OJSC Raspadskaya,
a subsidiary of EVRAZ, at the
AGM of OJSC Raspadskaya
that is to take place by the
end of June 2013 at the latest.
The Board is satisfied that this
nomination has no impact on
Mr Robinson’s independence.
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.
Mr. Izosimov is on the boards
of Directors of LM Ericsson AB
and Transcom SA, as well as
on the executive board of ICC
(International Chamber
of Commerce).
Chairman of the Nominations
Committee and a member of
the Audit Committee
Chairman of the Remuneration
Committee and a member of
the Audit Committee
Chairman of the Health, Safety
and Environment Committee
and a member of the
Remuneration Committee
Member of the Remuneration
Committee and the
Nominations Committee
Chairman of the Audit
Committee and a member of
the Nominations Committee
and of the Health, Safety
and Environment Committee.
He also chairs the Group’s
Risk Committee, which is an
Executive Committee
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EVRAZ plc
Annual Report and Accounts 2012
Vice Presidents
Leonid Kachur
Senior Vice President,
Business Support and
Interregional Relations
Pavel Tatyanin
Senior Vice President,
Head of International Business
Marat Atnashev1
Vice President,
Iron Ore Division and
Major Projects
Giacomo Baizini
Vice President,
Corporate Affairs and CFO
Scott Baus
Vice President,
EVRAZ Business System
Grigory Botvinovskiy
Vice President,
Vanadium Assets
Natalia Ionova
Vice President,
Human Resources
Aleksey Ivanov
Vice President,
Steel Division
Michael Shuble2
Vice President,
Health, Safety and Environment
Oleg Kuzmin
Vice President,
Corporate Communications
Alexander Kuznetsov
Vice President,
Strategic Development and
Operational Planning
Artem Natrusov
Vice President,
Information Technologies
Yury Pavlov
Vice President,
Procurement
Ilya Shirokobrod
Vice President,
Railway Products Division
Sergey Stepanov3
Vice President,
Coal Division
Timur Yanbukhtin
Vice President,
Business Development,
International Business
Elena Zhavoronkova
Vice President,
Legal Affairs
1 On 13 December 2012 Marat Atnashev was appointed Vice President of the Iron Ore Division.
2 On 28 January 2013 Michael Shuble was appointed Vice President of Health, Safety and Environment
3 On 13 December 2012 Sergey Stepanov was appointed Vice President of the Coal Division.
EVRAZ plc
Annual Report and Accounts 2012
73
Corporate Governance Report
Introduction
EVRAZ plc is a public company limited by shares incorporated in the United Kingdom. The Company is committed to high standards of corporate
governance and control.
Further information on the Company’s Corporate Governance policies and principles are available on the Company’s website: www.evraz.com.
The UK Corporate Governance Code is available at www.frc.org.uk.
Compliance with corporate governance standards
EVRAZ’s approach to corporate governance is primarily based on the UK Corporate Governance Code published by the Financial Reporting
Council (FRC) and the Listing Rules of the UK Listing Authority. The Company complies with the UK Corporate Governance Code or, if it does not
comply, explains the reasons for non-compliance.
As of 31 December 2012 EVRAZ complied with all the principles and provisions of the UK Corporate Governance Code (2010 version) with the
following exceptions:
(cid:114)(cid:1) Contrary to provision C.3.1 of the UK Corporate Governance Code, 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 qualification, 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.
At the beginning of 2012 EVRAZ was non-compliant with the following principles and provisions of the UK Corporate Governance Code (2010
version), however these deficiencies had been rectified by the end of the year:
(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 prior to 28 February 2012. On 28 February 2012 Sir Michael Peat, senior Independent Non-Executive Director, was
appointed to the Audit Committee.
(cid:114)(cid:1) Contrary to provision D.2.1 of the UK Corporate Governance Code, the Remuneration Committee did not solely comprise Independent
Non-Executive Directors prior to 19 November 2012. On this date the Board decided that the membership of the Remuneration Committee
should comprise only Independent Non-Executive Directors in line with the UK Corporate Governance Code and, consequently, Mr Abramov and
Mr Tenenbaum stood down from the Remuneration Committee. Since 19 November 2012 the Remuneration Committee has consisted of three
independent members: Duncan Baxter, Karl Gruber and Alexander Izosimov. The Company has therefore been compliant with provision D.2.1 of
the UK Corporate Governance Code since that date.
Board of Directors
The members of the Board of EVRAZ plc as at 31 December 2012 were: Alexander Abramov (Chairman), Alexander Frolov (CEO), Olga
Pokrovskaya, Eugene Shvidler, Eugene Tenenbaum, Duncan Baxter, Karl Gruber, Terry Robinson, Sir Michael Peat (senior Independent Non-
Executive Director) and Alexander Izosimov.
Alexander Izosimov was appointed to the Board of EVRAZ plc on 28 February 2012 as an Independent Non-Executive Director.
EVRAZ plc held 11 scheduled Board meetings and 8 extraordinary meetings held in the form of conference calls and exchange of emails
during 2012.
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EVRAZ plc
Annual Report and Accounts 2012
Corporate Governance Report (Continued)
The following table sets out the attendance of each Director at scheduled EVRAZ plc Board and Board Committee meetings.
Board meetings and Committees attendance during 2012
Board meetings
Remuneration1
HSE
Audit2
Nominations3
Total meetings in 2013
Total meetings in 2012
Directors’ participation:
Alexander Abramov
Duncan Baxter
Alexander Frolov
Karl Gruber
Alexander Izosimov4
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
4
11
10 of 11
11 of 11
11 of 11
11 of 11
9 of 9
11 of 11
11 of 11
10 of 11
11 of 11
11 of 11
1
4
4 of 4
4 of 4
–
3 of 4
3 of 3
1 of 1
–
–
–
4 of 4
1
2
–
–
2 of 2
2 of 2
–
–
–
2 of 2
–
–
4
10
–
12 of 14
–
–
–
13 of 14
13 of 14
14 of 14
–
–
0
2
2 of 2
–
–
–
1 of 1
2 of 2
–
2 of 2
1 of 1
–
1 Sir Michael Peat was replaced by Alexander Izosimov from 1 March 2012. On 19 November 2012 Mr Abramov and Mr Tenenbaum stood down from the Remuneration
2 The Audit Committee met 10 times in 2012 and 4 times since the beginning of 2013 until the publication date of this annual report.
3 Alexander Izosimov and Eugene Shvidler were appointed to the Nominations Committee on 28 February 2012.
4 Appointed to the Board on 28 February 2012
Board balance and independence
As at 31 December 2012, the Board of EVRAZ plc consisted of ten members, comprising nine Non-Executive Directors and one executive
Director. Half of the members of the Board were Independent Non-Executive Directors in compliance with the UK Corporate Governance Code.
The Company regards this as an appropriate board structure.
Following the appointment of Alexander Izosimov on 28 February 2012 five members of the Board (those other than Alexander Frolov, Alexander
Abramov, Olga Pokrovskaya, Eugene Shvidler and Eugene Tenenbaum) 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 to
help develop proposals on strategy. The Board concluded that there were no relationships or circumstances likely to affect, or which might appear
to affect, the judgement of any of its independent Non-Executive Directors.
For completeness, the Board considered an arm’s length business arrangement between one of the Non-independent Non-Executive 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.
In addition, the Board noted the nomination of Terry Robinson, an Independent Non-Executive Director, to the Board of OJSC Raspadskaya, which
became a subsidiary of the Company in January 2013, and was satisfied that this nomination had no impact on Mr. Robinson’s independence.
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’s 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;
(cid:114)(cid:1) Overall risk management;
(cid:114)(cid:1) Capital expenditures 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) Reviewing 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) Approving/reviewing changes relating to the Group’s management and control structure, capital structure and major changes to corporate
structure;
EVRAZ plc
Annual Report and Accounts 2012
75
(cid:114)(cid:1) Approving the Group’s 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) Approving the dividend policy and any significant changes in accounting policies or practices;
(cid:114)(cid:1) Approving 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) Reviewing/approving 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.
Certain aspects of the Board’s responsibilities have been delegated to appropriate committees to ensure compliance with the UK Companies
Act, FSA Listing Rules and the UK Takeover Code.
The Board has delegated authority to the following committees to facilitate the routine business of the Company:
(cid:114)(cid:1) Audit Committee;
(cid:114)(cid:1) Health, Safety and Environment Committee;
(cid:114)(cid:1) Nominations Committee; and
(cid:114)(cid:1) Remuneration Committee.
The terms of reference for all committees of EVRAZ plc are available on the Company’s website: www.evraz.com. Further detail on these
committees and their activities are provided on pages 76 to 82.
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 general meetings of the shareholders and the Board and being the guardian of the Board’s decision-making processes;
(cid:114)(cid:1) Leading the Board, including ensuring delegation of authority to executive Directors and management;
(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) Setting Board agendas and 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) 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) Proposing to the Board and committee Chairmen:
(cid:114)(cid:1) a Schedule of Reserved Matters for the Board for its decision;
(cid:114)(cid:1) Terms of Reference for each Board committee; and
(cid:114)(cid:1) Other Board policies and procedures;
(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 identifying and executing 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
agenda items to the Chairman which reflect these;
(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) 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 2012
Corporate Governance Report (Continued)
Board expertise
The Board has determined that as a whole it 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 the
skills and experience of the Board members are provided in the Board of Directors section above on pages 70 to 71.
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.
Performance evaluation
An internal performance evaluation of the Board was undertaken in December 2012 with the initiative and participation of the Nominations
Committee of the Company. A questionnaire was distributed to all Board Directors for their response and comment. The results were discussed
at the Board meeting in December and Board performance was deemed to be satisfactory.
The Company intends to conduct regular internal and external performance evaluation of the Board going forward in line with the UK Corporate
Governance Code. Evaluation of the Board will be externally facilitated within three years following the Company’s listing in 2011.
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.
Audit Committee
The members of the Audit Committee at 31 December 2012 were Terry Robinson (Chairman of the Committee), Olga Pokrovskaya, Sir Michael
Peat and Duncan Baxter. Sir Michael Peat was appointed to the Audit Committee on 28 February 2012. Terry Robinson and Sir Michael Peat are
both Fellows of the Institute of Chartered Accountants in England and Wales, Olga Pokrovskaya is a past senior audit manager at Arthur Anderson
and subsequently head of Corporate Finance at Millhouse LLC and Duncan Baxter is a member of the Institute of Bankers. All members of the
Committee are considered to have recent and relevant financial experience.
Role of the Audit Committee
The Audit Committee has responsibility for monitoring the integrity of EVRAZ plc’s Group financial statements. It oversees the Group’s relationship
with the external auditors and reviews the effectiveness of the external audit process. The Audit Committee also monitors the activity of the
Internal Audit Department and reviews the effectiveness of the Group’s Internal Controls and Business Risk Management Systems. The terms
of reference of the Audit Committee are available on the Company’s website www.evraz.com, and its duties are categorised under the following
headings:
(cid:114)(cid:1) Financial Reporting;
(cid:114)(cid:1) Internal Controls and Business Risk Management Systems;
(cid:114)(cid:1) Whistleblowing Procedures;
(cid:114)(cid:1) Internal Audit/External Audit.
The Audit Committee met 10 times in 2012 and four times since the beginning of 2013 until the publication date of this Annual Report.
Committee members were present in person at the majority of the meetings, while 4 meetings were conducted by conference call and one
meeting was by e-mail exchange. The external auditor was present at all except three meetings: those when the Group’s 3 and 9 months interim
management statement and 12 months production reports were discussed, and the part of a meeting when the external auditors’ performance
was discussed. Such presence provided the auditors with the opportunity to gain direct information relevant to the external audit process; as well
as assisting the Audit Committee with guidance on technical issues and factors relevant to the auditors when exercising their professional
judgment.
The following sections summarise how the Audit Committee has fulfilled its duties in 2012, including the Committee’s review of the 2012 Annual
Report and Financial Statements.
Financial reporting
At its meeting in June 2012, the Audit Committee reviewed the 2011 Management Letter from the auditors together with management’s
responses to the matters raised. Following this review the Audit Committee requested that management create an Internal Control Manual and
instigate a regular reporting process to the Audit Committee of all actual and potential legal actions and the progress of such actions. Certain
potential legal actions were identified as requiring immediate notification to the Audit Committee, as part of the Group’s risk management
process, and Board oversight.
At the August 2012 meetings, the Audit Committee reviewed the Interim Unaudited Condensed Consolidated Financial Statements, the Interim
Financial Results Announcement and the Draft Interim Analysts’ Presentation. Particular areas of focus for the Audit Committee were:
(cid:114)(cid:1) Operations classified as Assets held for Sale; EvrazTrans and DKHZ, the latter asset, a coking plant in Ukraine, representing a sale to a related
party;
(cid:114)(cid:1) Valuation of Mineral Reserves held by Yuzhkuzbassugol, the coal mining subsidiary, and the consequent impact of the change in depletion
charges;
(cid:114)(cid:1) Impairment of assets, the impairment models, the relative WACC used as discount rates, raw material and product prices, and independently
supported assumptions;
(cid:114)(cid:1) The buy-back of shares by the equity accounted entity, Raspadskaya;
(cid:114)(cid:1) The acquisition of an additional 10 per cent ownership interest by the subsidiary entity that holds and operates the Mezhegey coal field project;
(cid:114)(cid:1) The management’s presentation of the Group’s Accounting Judgements and Management Estimates;
(cid:114)(cid:1) The Group’s statement in the Interim Report as to the principal risks and uncertainties;
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(cid:114)(cid:1) Environmental commitments, and
(cid:114)(cid:1) The Going Concern basis for preparing the accounts; considering both a base case and a pessimistic scenario. The Group signed covenant
amendments in June 2012 and, as a consequence of these amendments, the Audit Committee reviewed the Going Concern note in the
Group’s Financial Statements.
Following the above consideration, the Audit Committee recommended the Going Concern statement, the Interim Unaudited Condensed
Consolidated Financial Statements, the Interim Financial Results Announcement and the Draft Interim Analysts’ Presentation for approval by the
Directors.
At its March and April 2013 meetings, the Audit Committee reviewed the EVRAZ’s Annual Report, including the Group’s Financial Statements, the
Group’s audited Announcement for the year ended 31 December 2012 and the draft Analysts’ Presentation. Particular areas of focus for the
Committee’s consideration were:
(cid:114)(cid:1) The Group’s Going Concern statement: specifically the committee considered the forward estimates of EBITDA, Total debt, Consolidated Net
Debt, Interest expense and Consolidated Net debt for the period to June 2014. These projections were prepared on a base case and
pessimistic case scenarios. As the Group’s funding covenants are fixed on the operational performance and balance sheet of the previous
holding company Evraz Group S.A., the key operational and balance sheet assumptions were considered at the Evraz Group S.A. consolidated
level. In both the base case and the pessimistic case estimates, projections for certain of the Group’s covenants suggested that in forward
periods the Group might not be in compliance. The committee considered management’s strategy and options to manage the Group’s funding
and liquidity needs so as to remain compliant with all covenant requirements, including testing the forward EBITDA and funding estimates, the
probabilities of and the sourcing and terms for refinancing. Based on management’s track record for resolving similar matters and the reviewed
probabilities for the successful implementation of the management’s funding and refinancing strategy and options, the Audit Committee
concluded that there was no material uncertainty on the Group’s ability to continue as a going concern and accordingly the Committee was able
to recommend the going concern basis to the Directors.
(cid:114)(cid:1) Impairment: resulting primarily from weakness of iron ore, coal and steel prices impairment tests were considered for the relevant Group Cash
Generating Units (CGU) as well as all CGUs with goodwill allocated that are required to be tested annually regardless of impairment indications.
The main impairment recognised was made for Evrazruda, a business unit involved with primarily mining iron ore. The parameters for testing
the Group’s CGU’s are detailed in the Group Consolidated Financial Statements.
(cid:114)(cid:1) Also the Committee considered potential impairment arising on the reclassification to assets held for sale of EVRAZ Vitkovice Steel, located in
the Czech Republic and EVRAZ Highveld Steel and Vanadium, located in South Africa.
(cid:114)(cid:1) The Committee considered the Accounting Policies detailed in note 2 following the company’s proposal to capitalise the development works at
the Mezhegy coal field following the final approval of its feasibility study. Hitherto, any such capitalisations relating to new mines have been
relatively insignificant, however, whilst this is not a new Group accounting policy, the Committee advised that the policy be described in note 2
to the Financial Statements
(cid:114)(cid:1) New and amended accounting standards: the Audit Committee considered the standards not effective for the Financial Statements as at
December 2012. The one with material effect on Group financial statements is the amended IAS 19 “Employee Benefits” that removes
“corridor approach” and introduces immediate recognition of actuarial gains and losses of long-term employee benefits in other comprehensive
income. The revised standard will be implemented by the Group from 1 January 2013. If the revised standard was implemented from 1 January
2012, Group’s equity as of 31 December 2012 would be US$322 million lower.
(cid:114)(cid:1) The Audit Committee considered other significant accounting judgments and management estimates, including depreciation of assets and
depletion of mining assets; site restoration provisions; allowance for doubtful debts; NRV allowance for inventories; gains or losses on
derivatives not designated as hedging instruments and commitments and contingencies, the disposal of the EvrazTrans operation and in
respect of the annual accounts the statement of Principal Risks and Uncertainties
(cid:114)(cid:1) Further the Audit Committee considered Ernst and Young’s report on their audit results for the year ended 31 December 2012, their statement
and confirmation as to their continuing independence, the review of the audit and non-audit fees and the letter of representation required by
the external auditor from EVRAZ management.
Internal controls and risk management
As part of the Group’s Primary Listing requirements in October 2011, a comprehensive financial procedures report was prepared detailing the
Group’s Internal Controls and risk management systems and activity. As noted above, at the June 2012 Audit Committee it was requested that
following this report, a Group Internal Control Manual be created. The final draft of this manual was reviewed by the Audit Committee at its
meeting in November 2012. Following this it was subject only to final review and confirmation by certain Business Unit senior managers. The
Group has in place internal controls and risk management systems in relation to the processes for both financial reporting and the preparation of
consolidated statements. These systems include policies and procedures to ensure that adequate accounting records are maintained and
transactions are recorded accurately and fairly to permit the preparation of financial statements in accordance with IFRS.
The Board has overall responsibility for the Group’s systems of Internal Control, which includes Risk Management, and for reviewing the
effectiveness of these systems. The system of internal control is designed to identify, evaluate and manage significant risks associated with the
achievement of the Group’s objectives. Because of the limitations inherent in any system of internal control, the Company’s system is designed
to meet its particular needs and the risks to which it is exposed. It is designed to manage risk rather than to eliminate risk altogether.
Consequently, it can only provide reasonable and not absolute assurance against material misstatement or loss.
The Group’s risk management is primarily the responsibility of the executive management and a twice yearly review of the Group’s risk profile is
undertaken by the Group’s Risk Committee, the members of which are the Group’s senior management team, headed by the Group CEO. The
Board has delegated to the Audit Committee the oversight of this committee’s deliberations and the chair of the Audit Committee is the chair of
the Group’s Risk Committee.
The Group’s Risk Committee reviews the Group’s operations and determining the Group’s principal risks and uncertainties according to an impact
and probability score, nominating the appropriate risk owner and reviewing the actions necessary to mitigate such risks. Given the breadth of the
Group’s operations it was agreed that a system of regional and local risk committees should be established with specific accountability within the
EVRAZ Business System, for the purpose of identifying, evaluating and establishing management actions for risk mitigation.
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EVRAZ plc
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An important part of the risk management process is the determination of appropriate risk appetite at operational, local, and Group management
levels, thereby identifying particular risks and uncertainties which require specific Board oversight.
The Audit Committee reviews the Group’s major risks and uncertainties prior to the publication of the Annual Report and interim management
statements and presents the major risk register and risk matrix for the Board’s consideration, together with a review and recommendations in
respect of the Group’s risk appetite.
On the basis of this review, the Board considers whether the measures that have been implemented to create an appropriate risk management
framework are appropriate to the Group’s business plans, strategies and operations.
The Audit Committee and the Board have kept under review the action taken by the Group to be compliant with the UK Bribery Act. Meetings of
the Audit Committee and the Risk Committee have been held with the interim EVRAZ Compliance Officer, the EVRAZ Legal department and the
EVRAZ communication team. A risk review has been compiled, training modules developed and key and relevant employees have been
determined with key employees having taken either in-house or e-training.
At its June meeting the Audit Committee reviewed the Group’s IT strategy including plans to replace the majority of the legacy IT platforms arising
from the Group’s various acquisitions with a common platform through a phased programme across the Group’s operations. Subsequently, at its
March 2013 meeting, following the Risk Committee review in November 2012, the Audit Committee reviewed the IT function’s disaster recovery
effectiveness and an audit of critical operational systems, together with the presented plans for immediate mitigation and medium term
investment to ensure greater security of such critical systems.
The Audit Committee and the Board have reviewed the effectiveness of the project management processes and various initiatives have been
agreed to improve project delivery.
Whistleblowing arrangements
EVRAZ has established whistleblowing hotlines within its operations encompassing a multi-lingual hotline in respect of its European operations.
The facilities utilise a mixture of in-house and independent external third party arrangements.
The results are reported to the Audit Committee on a monthly basis, analysed by external and in-house facilities, and by HR, HSE, fraud and
security. Internal Audit has specific responsibility for the overall oversight of whistleblowing activity and follow-up actions.
The Audit Committee reviews the effectiveness of the whistleblowing facilities as part of the Internal Audit’s quarterly report to the Audit
Committee. As a result of this review at the Audit Committee meeting in November 2012, the Committee requested management to revisit and
revise the whistleblowing procedures in the Russian Federation in the light of two instances whereby the identity of the recorder had been
prejudiced by the historic follow-up procedures. New and robust procedures have now been introduced to protect recorders’ identities. The Audit
Committee is satisfied that whistleblowing facilities remain adequate in all other operations and locations.
Internal audit
The Audit Committee receives quarterly reports and monthly updates from the Group’s Internal Audit Department throughout the year. The
monthly report summarises current business risks and issues, progress as to the completion of internal audit plans, including any significant
issues identified in completed audits and Hot Line/whistleblowing statistics. The quarterly reports encompass the results of audits and any
consequential agreed management action with regard to significant audit findings, an overview of the major risks as detailed in the Group’s risk
register, a security report, a progress report on the implementation of agreed management action and any modification to the agreed internal
audit plan and a report in respect of the Internal Audit Department’s KPIs.
The Group Internal Audit function’s annual audit programme, across all operations, is structured to complete annual audits of the key financial
and operational cycles with emphasis and audit time allocation where the Audit Committee or management perceives a higher level of risk. The
key business cycles include processes and activities in production, operational and capital expenditure, inventory management, marketing and
sales, finance and reporting, treasury, fixed assets, human resources, HSE, IT, corporate governance and secretarial, risk management,
corporate and social responsibility expenditure, capital project management and support services.
The internal audit plans for 2012 were reviewed at the November 2011 Audit Committee meeting. The 2012 programme, in addition to audits of
key business and financial processes and controls, provided specific audit time for the audit of capital projects and IT procedures and controls. At
the same time the Audit Committee endorsed the Internal Audit Department’s proposal to develop a process of internal control self-assessment
by accountable management, thereby emphasising that ownership of internal control lies with management and is not a purely administrative or
internal audit function. The Internal Audit Department carries out spot checks on the integrity of the management’s self-assessment processes
and reports to the Audit Committee on their findings.
The audit plan by separate audit is analysed in terms of man-days. Upon reviewing the audit plan the Audit Committee considers the Group’s
Internal Audit function’s resource both in terms of total available man-days and in terms of the Internal Audit function’s skill sets.
The Internal Audit Department takes part in a quality improvement programme which includes quality reviews of internal ongoing audit projects,
periodic peer reviews, co-ordination with the external auditors and an external quality assessment review.
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Annual Report and Accounts 2012
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External auditor
The Audit Committee oversees the relationship with the external auditors. Ernst & Young has provided audit services to the Company prior and
subsequent to its listing, first to EVRAZ Group S.A. on the secondary GDR market and subsequently to EVRAZ plc listed on the Main Market
of the London Stock Exchange in 2011. A London audit partner was proposed and appointed subsequent to the Primary Listing. The current
engagement of the external auditor was subject to a tender process in respect of the 2009 audit. In June 2012, prior to the Company’s Annual
General Meeting of shareholders, the Audit Committee considered and recommended to the Board the re-appointment of Ernst & Young. This
review took into account the results of the auditor assessment process, including the quality of the work and communication undertaken by the
external auditor and the level of audit fees. The Audit Committee discusses the requirements for partner rotation with the external auditor to
ensure appropriate independence and objectivity are maintained. In November 2012, upon presentation of the 2012 external audit plan, the
Audit Committee reviewed the quality and independence of service and also reviewed the FRC’s Audit Inspection Unit’s 2011/12 report
concerning Ernst & Young. Details of the fees paid to Ernst & Young during the year are shown in note 32 to the Financial Statements.
The Group’s External Auditors Selection Policy requires tendering external audit work at least once in five years.
In November 2012 the Audit Committee also reviewed the external auditor’s terms of engagement in respect of the financial statements for the
year ended 31 December 2012, including audit plans, the scope of the audit and timescales. The Audit Committee approved the audit plans and
timescales and tabled the audit plans at the November Board meeting.
As part of its review of the financial statements prepared by the Company, the Audit Committee reviewed the findings of the external auditor in
respect of the financial statements for the year ended 31 December 2012 at its 21 March and 8 April 2013 meetings and in respect of the
financial statements for the six month period ending on 30 June 2012 at its August 2012 meeting. As part of each of these reviews, the Audit
Committee met with representatives from Ernst & Young without management present, to ensure that there were no issues concerning the
relationship between management and the external auditor which should be addressed. There were none. At each of these meetings, the Audit
Committee also reviewed and approved the respective representation letters given to Ernst & Young by management.
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In June 2012, the Audit Committee reviewed the letter to management detailing recommendations made by the external auditor in the course of
the 2011 audit. In its review of the engagement of the external auditor, the Audit Committee had expressed some concern at the level of
non-audit fees in 2011. As a result, in June 2012, the Audit Committee considered and approved a policy for the approval of services to be
provided by EVRAZ’s external auditor (a copy can be found on the Company’s website). This policy is compliant with the requirements of the UK
Corporate Governance Code published by the Financial Reporting Council (the “FRC”), FRC Guidance on Audit Committees and Auditing Practice
Board (the “APB”) Ethical Standard 5 “Non-audit services provided to audited entities”. In addition, this policy details a general limit for fees
relating to non-audit services other than further assurance services at 40% of the Group’s audit services fees based on the latest approved
annual audit service fees.
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The non-audit fees in 2012 were US$842,000, 11% of the Group’s audit service fees.
Evaluation
In November 2012, the Audit Committee conducted its annual self-assessment of performance. This assessment included a review of the
Committee’s membership, procedures and resources, its roles and responsibilities and its relationship with the Board. Concern was raised as to
the appropriateness of the induction material. The Company Secretary has therefore been requested to provide suitable and detailed material for
future new members of the Audit Committee. Aside from this observation, the Audit Committee concluded that its mandate and oversight
performance was appropriate.
The Audit Committee also undertook an evaluation of the Internal Audit Department in combination with reviews from management and the
external auditors. In general the Internal Audit function was held in high regard and in addition to providing a satisfactory internal control and risk
management assurance service, the Internal Audit Department was believed to add value to the Group’s systems and control functions. The Audit
Committee discussed with the external auditors whether there were any additional complementary audit services which might be fulfilled by the
Internal Audit Department and Ernst & Young said that, where appropriate, they continue to rely on the results of the Internal Audit Department’s
audits when scoping their audit plan. This evaluation was in addition to the independent evaluation, referred to above.
Remuneration Committee
On 19 November 2012 the Board, on the recommendation of the Nominations Committee, decided to ensure that the membership of the
Remuneration Committee solely comprised Independent Non-Executive Directors in compliance with the UK Corporate Governance Code.
Consequently, two members, Mr Abramov and Mr Tenenbaum stood down from the Committee. Therefore, as of 31 December 2012 the
Remuneration Committee consisted of three independent members: Duncan Baxter (Chairman), Karl Gruber, and Alexander Izosimov. Alexander
Izosimov replaced Sir Michael Peat on the Committee on 1 March 2012.
Role of the Remuneration Committee
The Remuneration Committee is a formal committee of the Board and can operate with a quorum of two Committee members.
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Responsibilities
The main 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 Board Secretary and key senior management, taking into account all factors which it deems necessary including
relevant legal and regulatory requirements, the provisions and recommendations of the UK Corporate Governance Code and associated
guidance;
(cid:114)(cid:1) Reviewing and having regard to 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 Board 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 employees’ benefits structures throughout the Group.
During 2012, the EVRAZ’s Remuneration Committee met four times. The purpose of the meetings was to consider and to make recommendations
to the Board on management compensation and approval of the 2012 LTIP (Long-term incentive programme) awards and list of participants,
as well as the remuneration packages of the Chairman, Non-Executive Directors, the Executive Director and key senior managers. For the
Remuneration Report please refer to page 86.
Nominations Committee
The members of the Nominations Committee at 31 December 2012 were Sir Michael Peat (Chairman), Alexander Abramov, Terry Robinson,
Alexander Izosimov and Eugene Shvidler. Mr Izosimov and Mr Shvidler were appointed on 28th February 2012.
Role of the Nominations Committee
The role of the Nominations Committee is to advise the Board on its composition, making recommendations to the Board with respect to the
addition and replacement of Directors.
Responsibilities
The 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 Officer, 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 Environment Committees;
and
(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.
The Committee met on two occasions during 2012, on 27 February and 19 November. All members were present for both meetings, with the
Chief Executive Officer also in attendance:
(cid:114)(cid:1) At its first meeting the Committee considered the appointment of a fifth Independent Non-Executive Director, to enhance the range of the
Board’s skills and experience and to ensure that half its members are independent non-executives. After an extensive search led by the
Chairman of the Board, with the assistance of other Directors, and interviews by the Chairmen of the Board and the Nominations Committee,
Alexander Izosimov was identified as the best candidate. This reflected the combination of senior international business experience, in markets
in which the Group operates, and the independence which he would bring to the Board. The Committee therefore recommended the
appointment of Mr Izosimov to the Board. No external adviser was engaged in the search for and appointment of Mr Izosimov, as the Board
considered the Chairman to be the best positioned for such a task. The Nominations Committee also considered its own composition and work
programme and recommended that Alexander Izosimov and Eugene Shvidler should become members of the Nominations Committee. In
addition, the Committee considered the composition of the Audit and Remuneration Committees and recommended that Michael Peat should
be appointed to the former and Alexander Izosimov to the latter.
(cid:114)(cid:1) At its second meeting, the Committee considered compliance with the UK Corporate Governance Code and recommended that Alexander
Abramov and Eugene Tenenbaum should step down as members of the Remuneration Committee to ensure that all its members are
independent non-executives. The Committee also considered the mix of length of time in office, skill, experience and diversity of the Directors
and the continuing independence of the independent non-executives, as a basis for Board development and succession planning. With respect
to diversity, the Board has a mix of nationalities, reflecting the international nature of its business, but at present only one female Director. It is
intended to appoint further female Directors when there is an opportunity and suitable candidates. In addition, the Committee considered the
annual reviews of the performance of the Board, the Chairman and each Director, and made recommendations to the Board in these respects.
The Committee also recommended the appointment of Olga Pokrovskaya to the Health, Safety and Environmental Committee.
An internal assessment of the Board’s performance was undertaken. It was led by the senior Independent Non-Executive Director and was based
on discussions with Directors and responses to a questionnaire.
During 2013 the Committee will continue to fulfill its general responsibilities, with particular emphasis on compliance with the UK Corporate
Governance Code, development and succession planning for senior management, providing updates and training for Directors and facilitating an
external review of the Board’s performance.
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Annual Report and Accounts 2012
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Health, Safety and Environment Committee
The members of the Health, Safety and Environment Committee at 31 December 2012 were Karl Gruber (Chairman), Alexander Frolov,
Terry Robinson and Olga Pokrovskaya (from 19 November 2012).
Role of the Health, Safety and Environment Committee
The Health, Safety and Environment Committee leads the Board’s thinking on health and safety issues, as well as maintaining responsibility for
environmental, safety 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 incidents within the Group and actions taken
by management as a result of such fatalities or serious incidents;
(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, reviewing any strategies and action plans developed by management in response to issues raised and, where appropriate making
recommendations to the Board concerning the same;
(cid:114)(cid:1) Making whatever recommendations it deems appropriate to the Board on any area within its remit where action or improvement is needed.
The Committee met on two occasions during 2012, on 17 April 2012 and 9 October 2012. The following sections summarise how the Committee
has fulfilled its duties in 2012.
HSE performance assessment of the Group
The HSE committee reviewed HSE performance and EVRAZ HSE Policy implementation progress including the following metrics:
Health & Safety performance:
(cid:114)(cid:1) Fatal incidents
(cid:114)(cid:1) Fatal-Injury Frequency Rate (FIFR)
(cid:114)(cid:1) Lost Time Injuries (LTI)
(cid:114)(cid:1) Lost Time Injury Frequency Rate (LTIFR) calculated as number or lost working hours due to injuries per 1 million hours worked
(cid:114)(cid:1) Fundamental safety requirements implementation
Environmental performance:
(cid:114)(cid:1) Non-compliance related environmental levies (taxes) and penalties
(cid:114)(cid:1) Air Emissions (Nitrogen Oxides NOx, Sulphur Oxides SOx, Dust and Volatile Organic Compounds)
(cid:114)(cid:1) Non-mining waste and by-products generation, recycling and re-use
(cid:114)(cid:1) Fresh water intake and water management aspects
The Committee reviewed the status of 2011 – 2012 initiatives and discussed the roadmap for 2013 HSE goals and actions, including:
(cid:114)(cid:1) Drive a cultural change that involves moving the Group’s safety programme from just a compliance perspective to instilling safety as a core part
of the steelmaking and mining processes. A culture where safety is recognized as a core value from the top levels of management down to the
front line employees and contractors.
(cid:114)(cid:1) Improve personal responsibility and management accountability.
(cid:114)(cid:1) Facilitate improved reporting and investigation skills. The evaluation of the 2012 serious incidents has led to a focused effort to
– improve working conditions;
– implement a 100% Tie off programme for working at heights;
– separate pedestrian and vehicle traffic;
– improve tools and personal protective equipment.
(cid:114)(cid:1) All of these areas of focus also involve new and improved training for managers, employees and contractors.
(cid:114)(cid:1) Facilitate a more proactive approach with the utilisation of risk or hazard assessment into the daily activity of all employees.
The Committee also considered environmental activities to minimise the risks of environmental incidents and issues such as water usage
and quality of return discharged water, air emissions, metallurgical waste recycling, tailing dam overflow or collapse and community complaints.
The key environmental initiatives are to be focused on the following in 2013: decrease of air emissions and fresh water consumption and
increase of share of non-mining waste recycled or used.
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Fatalities and serious accidents reports review
In 2012 the Company recorded 25 fatal incidents which was a significant increase from the 13 experienced in 2011. The HSE Committee had
reviewed the causes of fatalities and serious incidents within the Group and follow-up actions taken by the management. Additional details could
be found in the Corporate Social Responsibility section on pages 54 to 56.
HSE audit results review
EVRAZ operations are the subject of HSE compliance inspections undertaken by supervising state bodies. The consequential risks of HSE
regulation violation are regulatory fines, penalties or in the extreme withdrawal of mining or plant environmental licences thus curtailing operations.
The Committee approved the initiative to establish the Internal Industrial Audit Departments (IIAD) for the coal and mining assets and reviewed
the summary of results of state bodies inspections vs. performance of IIAD. The Committee concluded that establishment of similar audit
departments for the other assets seemed unnecessary at present due to the fact that their industrial risks level is lower and safety performance
is better.
The Committee recommended improvements to existing control systems by including the personalised data for each identified case of violation
into the statistics.
Other issues and recommendations
The Committee reviewed the results of the survey of the availability of skilled HSE personnel and HSE competency. The total percentage of
employees aged over 51 years old involved with HSE services is 30%. The Committee recommended steps should be taken to attract younger
people into the HSE structures and improve the competence of existing staff by providing more training and role exchanges to develop
experience. In order to improve HSE responsibility at all levels (down to shop floor management) the Committee requested that additional
measures should be developed by management and brought to the Committee for review.
The Committee members reviewed HSE internal communication measures and assessed them as positive.
The Committee members discussed the approach for the Sustainability report production. It was agreed that report should reflect the details of
fundamental social risks for business and related strategies to meet these risks.
In the course of 2012 the Committee approved the following corporate policies for:
(cid:114)(cid:1) alcohol, drug and smoking;
(cid:114)(cid:1) fundamental environmental requirements.
Risk management and internal control
Risk management framework
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 arise from the jurisdiction of the Group’s international business activities,
and others relate to changes in the global economy and are largely outside management’s control.
The Board of Directors is ultimately responsible for maintaining our risk management and internal controls systems. The Board defines the
Group’s risk appetite, being a measure of residue risk by impact and probability and is responsible for monitoring our risk exposures to ensure
that the nature and extent of significant risks taken by the Company are aligned with our overall goals and strategic objectives.
The Audit Committee supports the Board of Directors in monitoring our risk exposures and has been delegated responsibility for reviewing the
effectiveness of our risk management and internal control systems. The Internal Audit provides assurance to the Audit Committee as to the
effectiveness of internal controls and risk management systems through its audit of these systems and follow-up on implementation of mitigation
actions by management. The Executive Risk Committee assesses risk exposure and evaluates the adequacy of processes in place to mitigate
these risks and their implementation by management at the Group and Regional levels. Detailed risk assessment and evaluation of risk issues
at the site, plant, mine and operational level were instigated in 2012. Substantially operational risks are managed by the Group’s operational
controls which are attested by Internal Audit; however, the Group is now instigating a parallel risk management process and culture at the
operational level.
Risk management processes and internal controls operate across our steel plants, mines, ancillary service operations, capital projects and
administrative functions. Risk management and internal control procedures are embedded within our business practices across function areas
including finance, HSE, human resources, procurement, IT, legal, security and insurance management. There is detailed assessment of safety
risks at all hazardous work places, steel plants and mines, and of project risks for all major projects which from 2012 include environmental risk
assessments. The finance and strategic risks of major projects are prepared by the executive and presented to the Board for its consideration
and key associated risks are kept under regular review by the Board.
Regional risk committees have been set up at all major regions of the Group’s assets and lead the process to deploy the risk management at
our major steel and mining operations. The Group Enterprise Risk Management (ERM) process is designed to identify, quantify, respond to and
to monitor the consequences of a Risk Committee agreed executive risk register 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 is tasked with the
development of the ERM process, identifying key risk elements and, to further risk management accountability, executive management is
assigned ownership of the relevant risk areas, according to their designated functions.
EVRAZ plc
Annual Report and Accounts 2012
83
Executive oversight of the Group risk profile is mandated to the Group’s Executive Risk Committee, under the chairmanship of the Audit
Committee Chairman and including the Group’s CEO and Group’s Vice Presidents. The role and responsibility of the Executive Risk Committee is
to keep under review risk identification and the evaluation of risks and to supervise the entire risk management process including response and
mitigation procedures. Particular scrutiny is given to risks having an ‘inherent’ risk greater than the Group’s risk appetite and the mitigating
actions to manage, where feasible, to a ‘residual’ risk evaluation directed below the Group’s risk appetite.
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.
EVRAZ applies 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; and
(cid:114)(cid:1) All acquired businesses are brought within the Group’s system of internal control as soon as practicable.
EVRAZ’s risk management framework
‘Top-down approach’:
oversight, identification
assessment and management
of risks at corporate level
‘Bottom up approach’:
identification, assessment
and management of risks at
regional and site level and
across the functions
* in progress
The Board of Directors:
(cid:114)(cid:1) Overall responsibility for the Group’s risk management and internal control
(cid:114)(cid:1) Approves strategic objectives and the risk appetite
Executive Risk Committee
(cid:114)(cid:1) Identifies, assesses and
monitors Group-wide risks
and mitigation actions
Audit Committee
(cid:114)(cid:1) Supports the Board in
monitoring risk exposure
against risk appetite
(cid:114)(cid:1) Reviews the effectiveness
of risk management and
internal controls systems
Internal Audit
(cid:114)(cid:1) Supports the Audit
Committee in reviewing the
effectiveness of the risk
management and internal
controls systems
Regional risk committees
(cid:114)(cid:1) Adopt regional risk appetite
(cid:114)(cid:1) Support the Executive Risk Committee in reviewing and monitoring effectiveness of risk
management
(cid:114)(cid:1) Identification, assessment and management of risks at the regional level
(cid:114)(cid:1) Monitoring risk management process and effectiveness of internal control
Site/Product line/Shop/Project/Functional levels*
(cid:114)(cid:1) Identification, assessment and mitigation of risks
(cid:114)(cid:1) Promoting risk awareness and safety culture
Risk management activity in 2012
In 2012, the Group established regional risk committees responsible for identifying and evaluating regional risks, instigating mitigating actions to
manage these risks and nominating regional risk owners. Also in 2012 the Group’s Executive Risk Committee established the methodology and
set out procedures to instigate site, product line, shop, project and functional level risk management with the same aims and objectives as
engaged at the Group’s and Regional levels. The operational level will be particularly focused on Health and Safety, environmental management,
human resources and security. Additionally in 2012, the Group has addressed the issues and risk exposures following on from the UK Bribery Act
legislation. The Group has been active in the implementation of an anti-bribery and corruption programme. The implementation has presented
various challenges primary of which has been developing the training materials prepared by UK lawyers in an on-line multi-lingual e-training facility.
This facility has had to be custom developed, particularly there is no available Russian language off-the-shelf training material. Key Group and
functional management have undergone training facilitated by UK lawyers and intermediate management is taking the e-training programme.
Management who have successfully taken the in-person training and e-training are formally certified as to their understanding and compliance
with the procedures and policies.
In 2013, Internal Audit will audit all the Group’s UK Bribery Act and anti-corruption procedures and records to provide assurance over successful
implementation.
EVRAZ risk profile
EVRAZ’s original risk assessment across all plants, mines and operations in 2008 detailed all key risks. A number of these risks exhibited a
common nature, e.g. global economy and industry conditions. Following the original risk assessment the Executive Risk Committee consolidated
the risk profile to 40 specific risks. On a risk evaluation review, Impact/Probability and following agreed risk mitigation actions, these risks were
detailed into the Group’s risk register as to Inherent and Residual risk. From the 40 specific risks 17 risks were identified as high priority risks
which were required to be monitored by the Risk Committee and the Audit Committee and regularly reviewed by the Board of Directors. Further,
Internal Audit through its audit process reviews risk issues and reports critical risks to the Audit Committee and to the Executive Risk Committee.
Where such reports suggest risks evaluation exceed the Group’s risk appetite, these risks are presented by the Audit Committee to the Board for
its attention and if necessary executive action and further remediation Board reports.
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EVRAZ plc
Annual Report and Accounts 2012
Corporate Governance Report (Continued)
From the 17 high priority risks, 9 risks are considered the Group’s principal risks.
The principal risks of EVRAZ can be found on page 28 of the report.
Controls
EVRAZ’s system of internal control has 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 system of internal control 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 control in place within the Group to manage significant business, operational and financial risks (including, environmental,
safety and ethical risks) throughout the year.
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 has the primary oversight role of the Group’s internal control regime and has direction as to the internal audit function
resources and the annual audit programme thereby ensuring that the Group’s ongoing internal control process is adequate and effective.
Components of the system of internal control
Component of the system of internal control
Basis for assurance
Assurance framework – principle entity-level controls to prevent
and detect error or material fraud, ensure effectiveness of
operations and compliance with principle external and internal
regulations
Documented regulations on establishment of delegated
authorities, including approval of transactions and investment
projects
Operating policies and procedures
Operating budgets
(cid:114)(cid:1) Self-assessment by management at all major operations
(cid:114)(cid:1) Review of the self-assessment by Internal Audit
(cid:114)(cid:1) Monitored by controlling and established management committee
and sub-committees
(cid:114)(cid:1) Reviewed by Internal Audit
(cid:114)(cid:1) Implemented, updated and monitored by management
(cid:114)(cid:1) Reviewed by Internal Audit
(cid:114)(cid:1) Monitored by Controlling Unit
(cid:114)(cid:1) Reviewed by Internal Audit
(cid:114)(cid:1) Approved by the Board of Directors
Accounting policies and procedures as per the corporate
accounting manual
(cid:114)(cid:1) Developed and updated by Reporting department
(cid:114)(cid:1) Reviewed by Internal Audit
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, in order to reduce business risks to an acceptable level in a cost effective manner.
The latest version of Internal Audit Charter of EVRAZ plc was approved by the Board on 13 December 2012.
The role of the Internal Audit Department 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 2012, 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 internal audit planning process starts with the Group’s strategy and includes the formal risk assessment process, and the process
of identification of management concerns based on the previous audits results, and ends with an internal audit plan which is approved by
the Audit Committee. Audit resource is predominantly allocated to risky areas and to the extent considered necessary is allocated to the
company/processes universe with appropriate reservation for the ad hoc and follow-up assignments.
EVRAZ plc
Annual Report and Accounts 2012
85
In 2012; Internal audit projects have covered the following principal group risks:
1. Financing of capital projects;
2. Health, safety and environmental;
3. Business interruption; and
4. Treasury and taxation.
The Company’s internal audit is structured on a regional basis, reflecting the developing geographic diversity of the Group’s operations. In light of
this the head office internal audit function has been in process of aligning common internal audit practices throughout the Group through its
quality assurance and improvement programmes.
During 2012 the internal audit function worked in cooperation with Ernst & Young, EVRAZ’s external auditor, on an appraisal of the general
competence, independence and professional objectivity of the Group’s internal audit resource.
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. Ms. Pokrovskaya, Mr. Shvidler, Mr. Tenenbaum,
Mr. Abramov and Mr. 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.
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.
In addition, the Board noted the nomination of Terry Robinson to the Board of OJSC Raspadskaya, a subsidiary of the Company, and was satisfied
that this nomination had no impact on Mr. Robinson’s independence.
Relations with shareholders
An ongoing dialogue with stakeholders is an essential aspect of corporate activity. We use various communication channels including
announcements made via the London Stock Exchange, 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 240 individual/group meetings,
conferences and other public events involving the investment community took place during 2012.
The senior Independent Director, Sir Michael Peat, is available to shareholders if they have concerns that have not been resolved by contact
through the normal channels of the Chairman, Chief Executive Officer or Chief Financial Officer 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 Committees will be present at the AGM to answer shareholders’ questions. The next AGM will be held on 13 June 2013.
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 2012
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 September 2012.
The Group’s auditors, Ernst & Young LLP, have audited the financial information contained in the tables set out in sections below on
Non-Executive Directors’ Remuneration and Executive Director’s emoluments.
Summary Statement from the Remuneration Committee Chairman
Dear Shareholder,
I am pleased to present our Remuneration Report for 2012. Despite the challenging market environment
over the past 12 months, we made good progress on our major modernisation programme and reached a
milestone agreement on the acquisition of the controlling interest in Raspadskaya. Furthermore, we ran
our core Russian steelmaking operations at full economic capacity and demonstrated strong utilisation
rates at North American operations. Our continued focus will be on achieving strong financial returns for
our shareholders, and we consider that our remuneration policy will play a vital role in helping us to
achieve this.
We believe that our remuneration policy remains appropriate, and as such we made no major changes in 2012. However, in line with corporate
governance best practice, we have changed the membership of the Remuneration Committee and as a result it is now comprised entirely of
independent Non-Executive Directors, allowing for completely independent oversight and judgement.
The Committee is fully aware of its responsibilities in developing a balanced and structured remuneration policy, and takes into account the views
of investors and their representatives when making decisions on executive remuneration.
The Chief Executive Officer participates in a bonus scheme, the KPIs of which are aligned with the creation of shareholder value. We have made
some further changes with effect from 2013, the purpose of which is to align the bonus further with the Company’s strategic objectives and
priorities for the year.
At present, given our Chief Executive Officer’s substantial shareholding in the Company, it is considered appropriate that he does not participate
in any long-term incentive plan, nor in fact in any pension or superannuation scheme. Members of senior management are eligible to participate
in a long-term incentive plan in order to ensure their interests are aligned with those of shareholders.
We recognise that we are moving into new territory in remuneration reporting. As such, we are taking appropriate actions to ensure that we add
additional value to what was disclosed in our Remuneration Report last year, and we have provided a Remuneration Report which reflects some
of the proposed reporting requirements put forward by the UK Government’s Department for Business, Innovation and Skills (“BIS”). Although
these are not due to come into effect until later this year, we are reflecting come of the proposed requirements as an early response to what is
being asked of us. We are committed to providing clear and insightful disclosure for our shareholders, and we await the final BIS regulations due
to be published later this year.
The Committee will continue to keep abreast of market trends and external expectations to ensure that the overall remuneration policy remains
appropriate, in the context of business performance and strategy.
Members of the Remuneration Committee
The EVRAZ plc Remuneration Committee was constituted and appointed by the Board on 14 October 2011, and the Committee comprised the
following Non-Executive Directors during the 2012 year:
(cid:114)(cid:1) Duncan Baxter (Committee Chairman);
(cid:114)(cid:1) Alexander Abramov1
(cid:114)(cid:1) Eugene Tenenbaum1
(cid:114)(cid:1) Karl Gruber;
(cid:114)(cid:1) Sir Michael Peat2;
(cid:114)(cid:1) Alexander Izosimov2
1 Stood down on 19 November 2012
2 Sir Michael Peat was replaced by Alexander Izosimov from March 2012
On 19 November 2012 the Board, on the recommendation of the Nominations Committee, decided that it was important to ensure that the
membership of the Remuneration Committee was comprised of only independent Non-Executive Directors in compliance with the UK Corporate
Governance Code. Consequently, Mr Abramov and Mr Tenenbaum stood down from the Committee.
Therefore, as of 10 April 2013 the Remuneration Committee consists of three members:
(cid:114)(cid:1) Duncan Baxter (Committee Chairman);
(cid:114)(cid:1) Karl Gruber;
(cid:114)(cid:1) Alexander Izosimov.
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.
EVRAZ plc
Annual Report and Accounts 2012
87
Role of the Remuneration Committee
The Remuneration Committee is a formal committee of the Board and can operate with a quorum of two 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 a 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; and
(cid:114)(cid:1) to oversee any major changes in employee benefits structures throughout the Group.
During 2012, the EVRAZ’s Remuneration Committee met four times. The purpose of the meetings was to consider and to make
recommendations to the Board in relation to the remuneration packages of the Chairman, Non-executive Directors, the Executive Director
and key senior managers, as well as to approve the 2012 LTIP awards and list of participants.
Advisors
The Committee received advice during the year from independent remuneration consultants Deloitte LLP. Deloitte LLP was selected by the
Committee to provide the Company remuneration consultancy services. Deloitte is a member of the Remuneration Consultant’s Group and,
as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK.
Sir Michael Peat is an independent non-executive on the Board of Deloitte LLP. Both the Chairman and the Remuneration Committee Chairman
recognise the need to ensure that there is no conflict of interest arising from the appointment of Deloitte LLP as independent remuneration
consultants. We are satisfied that the nature of Sir Michael’s role at Deloitte LLP does not give rise to such conflict and that there are appropriate
internal controls and segregation of duties in place. Sir Michael did not play a part in the tender and selection process.
Policy report
Details of the executive Director and Non-Executive Director remuneration policies are given in the following sections. The full text of the
Remuneration Policy can be found on the Company’s website www.evraz.com.
Currently none of the Directors receive any fees paid in shares of the Company and they are not entitled to participate in the Group’s pension plan
or long-term incentive schemes.
Executive Director remuneration
Base salary
Benefits
Annual bonus
Purpose and link to strategy
Operation
Performance metrics for 2013
Reflects individual experience and
role and attracts and retains world-
class talent
Facilitates the recruitment and
retention of executives and
employees
Reviewed annually and fixed for 12
months
The CEO is entitled to private
healthcare and meal allowances
N/A
N/A
Aligns executive remuneration to
Company strategy through rewarding
the achievement of annual financial
and strategic business targets
Targets are reviewed annually and
linked to corporate performance
based on predetermined targets set
by the Board of Directors
The bonus payout is based on
achievement of the Company’s KPIs
(LTIFR, EBITDA, Current/approved
NPV, Free Cash Flow and Cash
Cost index with equal weighting
20%) to ensure focus is spread
across the key aspects of Company
performance and strategy
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 (10.76% of
issued share capital as of 10 April 2013) provides alignment to the delivery of long-term growth in shareholder value. As such, we do not consider
it necessary for the CEO to participate in any long-term incentive plans, or to impose formal shareholding guidelines. However, the Remuneration
Committee will review this on an ongoing basis.
The current balance between fixed and variable pay for the executive Director means that, on achievement of the set targets, 50% of
remuneration is performance-related, rising to 66.7% for the achievement of maximum performance above the set targets.
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EVRAZ plc
Annual Report and Accounts 2012
Remuneration Report (Continued)
The composition of executive Director’s remuneration is as follows:
Target
Maximum
50%
67%
50%
33%
annual bonus
base salary
Target remuneration comprises current base salary and on-target annual cash bonus. Maximum remuneration comprises current base salary and
maximum annual cash bonus.
The pay and conditions of employees across the Group and market data have been taken into account when setting the CEO’s remuneration.
The CEO did not hold any external appointments during the year.
Senior management remuneration
Senior managers are entitled to a base salary, a performance related bonus (KPIs aligned with Company’s strategy), participation in the long-term
incentive programme (with a 3 year vesting period) and the provision of benefits.
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:
(cid:114)(cid:1) sufficient to attract and retain world-class non-executive talent;
(cid:114)(cid:1) consistent with recognised best practice standards for Non-Executive Director remuneration;
(cid:114)(cid:1) 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;
(cid:114)(cid:1) 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 Non-Executive 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).
As disclosed last year, the fee for the Chairman of the Board was increased at the Board meeting on 28 February 2012 and amounts to
US$750,000 from 1 March 2012 (this fee includes, for the avoidance of doubt, the Director’s fees and the fees that are paid for committee
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.
In addition the Company contributes an annual amount of US$30,000 towards secretarial and administrative expenses of Non-Executive
Directors.
Implementation report
Executive Director’s remuneration
Base salary
As disclosed in last year’s report, from 1 March 2012, the CEO’s salary reverted to the salary that was originally approved by the Remuneration
Committee on 23 May 2008, of US$2,500,000 (which includes, for the avoidance of doubt, the Director’s fee, the fees that are paid for
committees’ membership and any salary from an EVRAZ plc subsidiary). 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 and 2012. The Committee has not recommended a base salary increase for 2013.
Annual bonus outcome for 2012
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 bonus is linked to corporate performance. Three indicators were taken into account when determining the CEO’s annual bonus for 2012:
EBITDA (30% weighting), return on assets (40% weighting) and relative share price performance (30% weighting).
All targets were set at a very challenging level and during 2012 there were very tough market conditions, and as a result targets were not
achieved (for example, relative share price performance was not achieved due to the high financial and operational leverage of the Company).
Therefore, the CEO received no bonus.
EVRAZ plc
Annual Report and Accounts 2012
89
KPIs
EBITDA
Relative share price
performance
Return on
assets (ROA)
Total
Weight
Target 2012
Upper level
Planned level
Lower level
Actual 2012
Result measurement
US$3,171mln
Average
5.2%
110%
5%
115%
100%
0%
100%
30%
30%
40%
100%
90%
US$2,012mln
-7.5%
-21.46%
90%
-0.5%
0%
Annual bonus structure for 2013
New KPIs for 2013 have been developed and approved by the Board, to ensure a better alignment to the Company’s strategy. The 2013 bonus is
based on the achievement of the Company’s KPIs (LTIFR, EBITDA, Current/approved NPV, Free Cash Flow and Cash Cost Index with equal
weighting 20%) to ensure focus is spread across the key aspects of Company performance and strategy.
Pension and benefits
The CEO does not participate in any private pension plans. Benefits principally consist of a private healthcare and meal allowances.
Single figure of remuneration
Key elements of the CEO’s remuneration package are set out below. Further details are contained in the audited table on page 91.
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Alexander Frolov
Salary1
Director’s fee2
Benefits3
Bonus
Total
2012 (US$, ‘000)
2011 (US$, ‘000)
1,962
174
5
0
2,141
817
155
130
565
1,667
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1 There was an increase in salary in 2012 back to the agreed 2008 level.
2 Director’s fee also includes fee for HSE committee membership (pro rata working days).
3 Figure for 2011 includes payment for holiday entitlement not used.
Executive Director’s service contract
The CEO has a service contract with a subsidiary of EVRAZ plc. The terms of the CEO’s service contract are summarised below:
Executive Directors
Alexander Frolov
Date of contract
31 December 2012
Notice period (months)
N/A*
*
The service contract does not provide for any specific notice period and therefore, in the event of termination, the applicable notice period will be as provided for in the
Russian labour code (where the termination is at the Company’s initiative the entitlement to pay in lieu of notice is to 3 months’ base salary). Other than entitlement to notice
and a payment in lieu of notice, the CEO will not be entitled to compensation on termination of his contract.
Non-Executive Directors remuneration
Non-executive remuneration payable in respect of 2012 and 2011 is given below (audited information):
2012 (US$, ‘000)
2011 (US$, ‘000)
Non-Executive Director
Total fees1
Admin
Alexander Abramov
Alexander Izosimov
Eugene Shvidler
Eugene Tenenbaum
Karl Gruber
Duncan Baxter
Olga Pokrovskaya
Sir Michael Peat
Terry Robinson
658
165
170
172
224
224
176
224
298
25
25
25
22.5
30
30
22.5
30
30
Total
683
190
195
194.5
254
254
198.5
254
328
1 Total fees include annual fees and fees for committee membership or chairmanship (pro rata working days).
Total fees1
Admin
179
–
150
174
224
110
174
48
279
–
–
–
–
30
19
–
6
30
Total
179
–
150
174
254
129
174
54
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EVRAZ plc
Annual Report and Accounts 2012
Remuneration Report (Continued)
Non-Executive Directors letter of appointment
Each Non-Executive Director has a Letter of Appointment setting out the terms and conditions covering his or her 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.
All Directors are subject to annual re-appointment and accordingly each Non-Executive Director will stand for re-election at the AGM on 13 June
2013.
The key terms of the Non-Executive Directors’ appointment letters are summarised below:
Non-Executive Directors
Alexander Abramov
Duncan Baxter
Karl Gruber
Alexander Izosimov
Sir Michael Peat
Olga Pokrovskaya
Terry Robinson
Eugene Shvidler
Eugene Tenenbaum
Date of contract
14 October 2011
14 October 2011
14 October 2011
28 February 2012
14 October 2011
14 October 2011
14 October 2011
14 October 2011
14 October 2011
Notice period (months)
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
Share ownership by the Board of Directors
As of 31 December 2012, the following Directors had beneficial interests in EVRAZ shares:
Directors
Alexander Abramov
Alexander Frolov
Eugene Shvidler
Total holdings, ordinary shares, %
24.64%
12.32%
3.50%
Further to the announcement on 16 January 2013 that EVRAZ has completed the acquisition of a 50% interest in Corber Enterprises Limited,
which holds an 82% interest in OJSC Raspadskaya and its subsidiaries, the Company issued 132,653,006 new ordinary shares.
As a result the Directors’ interests in EVRAZ shares were as follows as of 16 January 2013:
Directors
Alexander Abramov
Alexander Frolov
Eugene Shvidler
Total holding, ordinary shares, %
22.42%
11.20%
3.18%
From 16 January 2013 to 4 February 2013 some of the Directors sold the shares which resulted in the following changes in ownership:
Directors
Alexander Abramov
Alexander Frolov
Total holding, ordinary shares, %
22.30%
11.13%
Pursuant to the exchange of shares for warrants by Lanebrook in February 2013, Lanebrook’s interest in EVRAZ changed which resulted in
changes of ultimate holders’ ownership.
EVRAZ plc
Annual Report and Accounts 2012
91
Thus, the Directors’ interests in EVRAZ’s shares as of 10 April 2013 were as follows:
Directors
Alexander Abramov
Alexander Frolov
Eugene Shvidler
Total holding, Ordinary shares, %
21.55%
10.76%
3.07%
All shares held by Directors are held outright, with no performance or other conditions attached to them, other than those applicable to all shares
of the same class.
Performance graph
The following graph shows the Company’s performance measured by total shareholder return compared to the performance of the FTSE 100
Index since EVRAZ plc’s admission to the premium listing segment of the London Stock Exchange on 7 November 2011. The FTSE 100 Index
has been selected as an appropriate benchmark as it is a broad based index of which the Company is a constituent member.
120
100
80
60
7 Nov 2011
EVRAZ
FTSE 100
30 Dec 2012
Shareholder considerations
We remain committed to ongoing shareholder dialogue and take an active interest in feedback received from our shareholders and voting
outcomes. Following feedback from shareholders on the structure of our Remuneration Committee and on the recommendation of the
Nominations Committee, we made changes to its composition.
Where there are substantial votes against resolutions in relation to Directors’ remuneration, we shall seek to understand the reasons for any
such vote and will detail any actions in response to these.
The following table sets out actual voting in respect of our previous remuneration report:
Number of votes ‘000s
For
Against
Abstain
Total
2011 Directors’ Remuneration Report
(2012 AGM)
1,071,353,172
(98.69%)1
1 Percentage of votes cast.
14,166,679 (1.31%)
17,678,212
1,103,198,063
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):
US$, ‘000
Alexander Frolov
Salary
1,962
Director’s fee
Annual bonus
Benefits
Total 2012
Total 2011
174
0
5
2,141
1,667
Including amounts payable to Non-Executive Directors, the aggregate amount of Directors’ remuneration payable in respect of qualifying services
for the year ended 31 December 2012 was US$4,692 thousand (2011: US$3,090 thousand).
Signed on behalf of the Board of Directors,
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Chairman of the Remuneration Committee
10 April 2013
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EVRAZ plc
Annual Report and Accounts 2012
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. The Company has a premium listing on the London Stock Exchange and is included in the FTSE
100 Index. 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 Overview, Strategy, Operating Review, Corporate Social Responsibility, Financial Review and Governance sections of this
document, which are deemed to form part of this report by reference.
Sustainable development
The Corporate Social Responsibility 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 62
to 67.
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 June 2014. 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
to the consolidated financial statements on page 107 including further information regarding certain risks related to projected debt covenant
compliance.
Results and dividends
Financial results of the Group are presented in the Financial Review of this Annual Report on pages 62 to 67.
Under the dividend policy, EVRAZ is targeting a long-term average dividend pay-out ratio of at least 25% of the consolidated net profit calculated in
accordance with IFRS and adjusted for non-recurring items. 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.
In August 2012, EVRAZ’s Board declared an interim dividend of 11 cents per share (US$147 million in total) based on the results for the first half
of 2012. The Board, having reviewed the results in respect of the financial year to 31 December 2012 and after taking into account the
substantial deterioration in the respective prices of steel and steel raw materials towards the year-end, has decided to forgo the recommendation
of a final dividend in respect of 2012 in order to preserve the financial standing of the Company and provide greater flexibility to manage the
current market environment.
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 2012, the carrying value of land amounted to US$181 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 2012.
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, as well as in EVRAZ Greenfield development. Information about the direct and indirect subsidiaries of EVRAZ is
provided in the Additional Information (EVRAZ’s Corporate Structure) section of this report on page 178.
Future developments
Information on the Group and its subsidiaries’ future developments is provided in the Chairman’s Statement, Chief Executive’s Statement,
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 Note 29 to the Consolidated Financial Statements, the Corporate Governance section of this report on
pages 84 to 85 and in the Financial Review on page 67.
Political and charitable donations
No political donations were made in 2012. The Company’s corporate social expenditure supports initiatives that benefit local communities of the
Group’s operations in the areas of sports, education, charity funds, and infrastructure. In 2012, the Company set aside US$51 million for social
and social infrastructure maintenance expenses. No donations were made to UK registered charities in 2012.
Events since the reporting date
The major events after 31 December 2012 are disclosed in Note 33 to the Consolidated Financial Statements on page 167.
EVRAZ plc
Annual Report and Accounts 2012
93
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 70 to 71.
Detailed information on share ownership by directors and their connected persons can be found in the Remuneration Report on page 90.
Members of EVRAZ plc Board do not receive share-based compensations.
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 the authority to allot
shares or grant rights to subscribe for or to convert any security into shares in the Company. 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 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 are subject to annual re–election.
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 Acts. In addition, Directors and officers of the Company and its
subsidiaries are covered by Directors & Officers liability insurance.
Substantial shareholdings
As of 31 December 2012, 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
Number of ordinary Shares
% of Issued ordinary Shares
967,561,578
37,499,997
72.21
2.80
*
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 held a beneficial interest in 463,801,971 ordinary shares in EVRAZ plc (34.68%), (ii)
Mr. Abramov, who held a beneficial interest in 329,622,798 ordinary shares in EVRAZ plc (24.64%), (iii) Mr. Frolov, who held a beneficial interest in 164,811,399 ordinary
shares in EVRAZ plc (12.32%) and (iv) Mr. Shvidler, who held a beneficial interest in 46,825,407 ordinary shares in EVRAZ plc (3.50%). The percentages in this paragraph
exclude any treasury shares and any shares held by or on behalf of EVRAZ pursuant to any employee incentive plan.
From 31 December 2012 to 10 April 2013 (being the last practicable date prior to the publication of this document), there was a decrease in the underlying number of
beneficial interests held by each of Mr. Abramovich, Mr. Abramov, Mr. Frolov and Mr. Shvidler.
In October 2012 EVRAZ agreed the terms of an acquisition of a further 50% interest in Corber Enterprises Limited, a 82% shareholder of OJSC
Raspadskaya and its subsidiaries, from Mr. Gennady Kozovoy and Mr. Alexander Vagin. The acquisition was completed in January 2013 when
132,653,006 new EVRAZ ordinary shares were issued in equal shares in favour of the sellers. The new shares were admitted to the Official List
of the Financial Services Authority and began to be traded on the London Stock Exchange Main Market.
Pursuant to the terms of the acquisition, EVRAZ also issued to Messrs. Kozovoy and Vagin 33,944,928 new warrants to subscribe for
33,944,928 new ordinary shares in EVRAZ. Cash consideration was also agreed to be paid to the sellers in the amount of approximately
US$202 million, payable in four equal instalments in Q1, Q2, Q3 2013 and Q1 2014.
In February 2013, following an agreement between EVRAZ’s major shareholder, Lanebrook, and Messrs. Kozovoy and Vagin, the latter two
shareholders exchanged all their warrants for Lanebrook’s 33,121,022 EVRAZ shares. The 33,944,928 warrants, now held by Lanebrook,
may be exercised at any time between 16 January 2014 and 16 April 2014.
As a result the following ultimate beneficial owners had interests in EVRAZ plc share capital (in each case, except for Mr. Kozovoy, held indirectly)
as of 10 April 2013 (being the last practicable date prior to the publication of this document):
Shareholder
Mr. Roman Abramovich
Mr. Alexander Abramov
Mr. Alexander Frolov
Mr. Gennady Kozovoy
Mr. Alexander Vagin
Mr. Eugene Shvidler
Number of ordinary Shares
% of issued share capital
456,310,736
317,300,488
158,442,915
83,751,827
82,887,014
45,257,031
30.99%
21.55%
10.76%
5.69%
5.63%
3.07%
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EVRAZ plc
Annual Report and Accounts 2012
Directors’ Report (Continued)
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.
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 with each appointee being 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$759 million contain change of control provisions. If a change of control occurs under the terms of these notes, note
holders 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 2012, the principal amount of these
borrowings amounted to US$1,802 million, accrued interest was US$21 million.
Supplier payment policy and practice
The Group does not have any specific published code, however the Group has developed standard payment periods in respect of trade accounts
payable and monitors the timeliness of payments to its suppliers and contractors.
Trade creditors of the Group at 31 December 2012 were US$1,100 million.
Annual General Meeting (AGM)
An annual general meeting shall be held in each period of six 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.
The 2013 AGM will be held on 13 June 2013 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 www.evraz.com.
EVRAZ plc
Annual Report and Accounts 2012
95
Electronic communications
A copy of the 2012 Annual Report, the Notice of the AGM and other corporate publications, reports and announcements are available on the
Company’s website 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 147.
Share capital
As of 31 December 2012 EVRAZ plc subscribed share capital is represented by 1,339,929,360 ordinary shares with a nominal value of US$1
each. As a result of acquisition of controlling interest in Raspadskaya on 16 January 2013 the Company issued 132,653,006 new EVRAZ
ordinary shares, thus increasing EVRAZ’s share capital to 1,472,582,366 ordinary shares. In addition the Company issued 33,944,928 warrants,
which may be exercised at any time between 16 January 2014 and 16 April 2014.
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. 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, subject to applicable law, 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
10 April 2013
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96
EVRAZ plc
Annual Report and Accounts 2012
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 70 to 71. Having made enquiries
of fellow Directors and of the Company’s auditors, each of these Directors confirms 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; and
(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 70 to 71 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 92 to 95 and 62 to 67 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 2012
97
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; and
(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
10 April 2013
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EVRAZ plc
Annual Report and Accounts 2012
EVRAZ plc
EVRAZ plc
Annual Report and Accounts 2012
Annual Report and Accounts 2012
99
99
Financial
Statements
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EVRAZ plc
Annual Report and Accounts 2012
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 2012 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 97, 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 2012 and of its loss 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 92, 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 year ended 31 December 2012
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
10 April 2013
Notes:
1. The maintenance and integrity of the EVRAZ plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration
of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were
initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
EVRAZ plc
Annual Report and Accounts 2012
101
Financial Statements
Contents
102 Consolidated Statement of Operations
103 Consolidated Statement
of Comprehensive Income
104 Consolidated Statement
of Financial Position
105 Consolidated Statement of Cash Flows
107 Consolidated Statement
of Changes in Equity
109 Notes to the Consolidated
Financial Statements
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EVRAZ plc
Annual Report and Accounts 2012
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
The accompanying notes form an integral part of these consolidated financial statements.
Year ended 31 December
Notes
2012
2011
2010
3
3
7
7
7
6
7
7
7
11
7
12
4
8
20
20
$14,367
359
14,726
(11,797)
$16,077
323
16,400
(12,473)
$13,144
250
13,394
(10,319)
2,929
(1,211)
(860)
(51)
(56)
(413)
(41)
75
(129)
243
23
(645)
1
164
114
–
(6)
(106)
(229)
$(335)
$(308)
(27)
$(335)
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
$(0.23)
$0.36
$(0.23)
$0.36
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
$0.39
$0.39
EVRAZ plc
Annual Report and Accounts 2012
103
Consolidated Statement of Comprehensive Income
(in millions of US dollars)
Net profit/(loss)
Other comprehensive income/(loss)
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
Net gains/(losses) on available-for-sale financial assets of the Group’s
joint ventures and associates
Effect of translation to presentation currency of the Group’s joint ventures
and associates
Share of other comprehensive income/(loss) 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
The accompanying notes form an integral part of these consolidated financial statements.
Notes
13
13
9
8
11
11
Year ended 31 December
2012
$(335)
286
4
–
–
4
–
–
–
1
44
45
335
$–
$28
(28)
$–
2011
$453
(620)
(20)
20
–
–
(1)
–
(1)
–
(35)
(35)
(656)
$(203)
$(177)
(26)
$(203)
2010
$470
64
(8)
4
–
(4)
(7)
1
(6)
–
(9)
(9)
45
$515
$522
(7)
$515
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EVRAZ plc
Annual Report and Accounts 2012
Consolidated Statement of Financial Position
(in millions of US dollars)
The financial statements of EVRAZ plc (registered number 7784342) on pages 102 to 167 were approved by the Board of Directors on 10 April
2013 and signed on its behalf by Alexander Frolov, Chief Executive Officer.
Notes
2012
2011
2010
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
Liabilities directly associated with disposal groups classified as held for sale
9
10
5
11
8
13
13
14
15
16
17
18
19
12
20
20
20
20
11,13
21
8
22
23
25
26
27
21
16
28
22
25
12
$7,792
586
2,180
561
66
92
103
11,380
1,978
895
143
19
12
59
329
712
1,320
5,467
930
6,397
$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
$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
$17,777
$16,975
$17,539
$1,340
(1)
1,820
173
–
5
3,356
(1,520)
5,173
200
5,373
6,373
927
11
294
257
170
8,032
1,412
157
1,783
257
48
195
2
32
–
8
3,894
478
4,372
$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
$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
Total equity and liabilities
$17,777
$16,975
$17,539
The accompanying notes form an integral part of these consolidated financial statements.
EVRAZ plc
Annual Report and Accounts 2012
105
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
2012
2011
2010
$(335)
$453
$470
(38)
1,259
56
413
41
(23)
645
(1)
(164)
(114)
–
6
12
(40)
22
–
(6)
1,733
121
(78)
37
141
120
18
96
(1)
(43)
(1)
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)
2,030
(191)
(239)
(44)
(34)
(91)
38
107
80
5
1
2,143
2,647
1,662
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i
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i
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y
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i
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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
Return of capital by a joint venture (Note 11)
Purchases of subsidiaries, net of cash acquired (Note 4)
Purchases of interest in associates/joint ventures
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
(5)
1
–
4
38
(12)
–
–
(656)
(1,261)
9
311
88
(61)
(3)
46
(4)
4
–
(36)
–
(1)
5
(1,281)
23
5
54
–
R
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G
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e
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n
a
n
c
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(46)
5
(1)
2
–
(27)
(9)
17
29
(832)
21
42
1
54
Net cash flows used in investing activities
(1,544)
(1,188)
(744)
Continued on the next page
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EVRAZ plc
Annual Report and Accounts 2012
Consolidated Statement of Cash Flows (Continued)
(in millions of US dollars)
Cash flows from financing activities
Purchase of treasury shares in the course of the Group’s reorganisation (Note 20)
Purchase of treasury shares (Note 20)
Sale of treasury shares (Note 20)
Payments relating to conversion of bonds into shares (Note 21)
Proceeds from issue of shares by a subsidiary to non-controlling shareholders
Purchases of non-controlling interests (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
Net cash flows used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash of disposal groups classified as assets held for sale (Note 12)
Cash and cash equivalents at the end of the year
Supplementary cash flow information:
Cash flows during the year:
Interest paid
Interest received
Income taxes paid by the Group
The accompanying notes form an integral part of these consolidated financial statements.
Year ended 31 December
2012
2011
2010
$(4)
–
–
–
–
(1)
(375)
(1)
2,706
(2,716)
292
(7)
81
10
2
(29)
(42)
32
589
801
(70)
$1,320
$(559)
7
(298)
$–
(22)
3
(161)
1
(51)
(491)
(1)
3,507
(3,815)
(283)
–
66
(10)
(1)
(24)
(1,282)
(59)
118
683
–
$801
$(586)
8
(443)
$–
–
–
–
–
(13)
–
(1)
3,172
(4,142)
106
(29)
31
–
–
(23)
(899)
(7)
12
671
–
$683
$(594)
11
(341)
EVRAZ plc
Annual Report and Accounts 2012
107
Consolidated Statement of Changes in Equity
(in millions of US dollars)
At 31 December 2011
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 shares in the course of the Group’s
reorganisation (Note 20)
Acquisition of non-controlling interests in
subsidiaries (Note 4)
Derecognition of non-controlling interests on sale of
subsidiaries (Note 12)
Contribution of a non-controlling shareholder to share
capital of the Group’s subsidiary (Note 20)
Buyback of own shares by a joint venture’s
subsidiary (Note 11)
Purchase of treasury shares (Note 20)
Transfer of treasury shares to participants of the
Incentive Plan (Notes 20 and 24)
Share-based payments (Note 24)
Reclassification of distributed dividends to share
premium account (Note 20)
Dividends declared by the parent entity to its
shareholders (Note 20)
Dividends declared by the Group’s subsidiaries to non-
controlling shareholders (Note 20)
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
$1,338
–
–
$(8)
–
–
$2,289
–
–
$171
–
–
$–
–
–
$–
–
5
$3,606
(308)
–
$(1,851)
331
Non–
controlling
interests
$236
(27)
(1)
Total
$5,545
(308)
336
Total
equity
$5,781
(335)
335
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4)
11
–
–
–
–
–
–
–
–
–
–
–
–
–
22
(491)
–
–
2
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
–
–
–
–
–
–
–
–
–
–
(2)
–
(310)
331
8
(31)
–
–
(22)
–
(11)
–
491
(375)
–
–
–
–
–
–
–
–
–
–
–
–
–
28
10
–
(28)
(10)
–
–
–
(31)
(6)
(37)
–
–
(22)
(4)
–
22
–
(375)
2
7
–
–
–
–
–
–
2
7
(22)
(4)
–
22
–
(375)
–
(1)
(1)
At 31 December 2012
$1,340
$(1)
$1,820
$173
$–
$5
$3,356
$(1,520)
$5,173
$200
$5,373
Attributable to equity holders of the parent entity
Issued
capital
Treasury
shares
At 31 December 2010
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 (Note 4)
Sale of non-controlling interests in
subsidiaries (Note 20)
Non-controlling interests arising on establishment of
subsidiaries
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)
$375
–
–
–
–
29
–
2,247
(1,313)
–
–
–
–
–
–
–
–
–
$–
–
–
–
–
–
–
–
–
–
–
–
(22)
11
3
–
–
–
Additional
paid–in
capital
$1,742
–
–
–
–
524
–
–
–
–
–
–
–
–
–
23
–
–
Revaluation
surplus
Legal
reserve
Unrealised
gains and
losses
Accumulated
profits
Translation
difference
$180
–
(1)
(8)
(9)
–
–
–
–
–
–
–
–
–
–
–
–
–
$36
–
–
–
–
–
3
(39)
–
–
–
–
–
–
–
–
–
–
$–
–
–
$4,570
461
–
$(1,214)
–
(637)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8
–
469
–
(3)
(2,219)
1,313
(18)
–
(4)
–
(11)
–
–
(491)
–
(637)
–
–
–
–
–
–
–
–
–
–
–
–
–
Non–
controlling
interests
Total
equity
$247
(8)
(18)
$5,936
453
(656)
Total
$5,689
461
(638)
–
(177)
553
–
(11)
–
–
(26)
–
–
11
–
–
(203)
553
–
–
–
(18)
(33)
(51)
–
34
34
(4)
(22)
–
3
23
(491)
4
–
–
–
–
–
–
(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
The accompanying notes form an integral part of these consolidated financial statements.
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EVRAZ plc
Annual Report and Accounts 2012
Consolidated Statement of Changes in Equity (Continued)
(in millions of US dollars)
Attributable to equity holders of the parent entity
Revaluation
surplus
Legal
reserve
Unrealised
gains and
losses
Accumulated
profits
Translation
difference
Non–
controlling
interests
$275
(16)
9
Total
$5,167
486
36
Total
equity
$5,442
470
45
$4,065
486
–
$(1,260)
–
46
Issued
capital
Treasury
shares
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 4)
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)
$375
–
–
–
–
–
–
–
–
$–
–
–
–
–
–
–
–
–
Additional
paid–in
capital
$1,739
–
–
–
–
1
–
2
–
$208
–
(6)
(22)
(28)
–
–
–
–
$36
–
–
–
–
–
–
–
–
$4
–
(4)
–
(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 accompanying notes form an integral part of these consolidated financial statements.
EVRAZ plc
Annual Report and Accounts 2012
109
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Notes to the Consolidated Financial Statements
year ended 31 December 2012
1. Corporate information
These consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 10 April 2013.
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. in
November 2011 (Note 20), the Company became a new parent entity of Evraz Group S.A. (Luxembourg), a holding company which owns steel
production, mining and trading companies.
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.
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 (in 2011 merged
with West-Siberian Iron & Steel Plant)
EVRAZ Vitkovice Steel a.s.
EVRAZ Highveld Steel and Vanadium Limited
EVRAZ Dnepropetrovsk Iron and Steel Works
EVRAZ Inc. NA
EVRAZ Inc. NA Canada
Yuzhkuzbassugol
EVRAZ Kachkanarsky Mining-and-Processing
Integrated Works
Evrazruda
EVRAZ Sukha Balka
Effective
ownership interest, %
2012
100.00
100.00
–
100.00
85.12
96.78
100.00
100.00
100.00
100.00
100.00
99.42
2011
100.00
100.00
–
100.00
85.12
96.77
100.00
100.00
100.00
100.00
100.00
99.42
2010
Business
activity
Location
100.00
100.00
Steel production
Steel production
Russia
Russia
100.00
100.00
85.12
96.04
100.00
100.00
100.00
100.00
100.00
99.42
Steel production
Steel production
Steel production
Steel production
Steel mill
Steel mill
Coal mining
Ore mining and
processing
Ore mining
Ore mining
Russia
Czech Republic
South Africa
Ukraine
USA
Canada
Russia
Russia
Russia
Ukraine
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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. According to management’s current forecasts, at 30 June 2013 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, including, if and when necessary,
a refinancing of certain borrowings, a financial covenant reset and a waiver from its lenders. 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.
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 2012, 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.
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110
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
2. Significant accounting policies (continued)
Basis of Preparation (continued)
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 in 2011
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.
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 2012.
New/Revised standards and interpretations adopted in 2012
(cid:114)(cid:1) IFRS 7 – Disclosures – Transfers of Financial Assets (Amendment)
The amendment to IFRS 7 enhances disclosures for financial assets. These disclosures relate to assets transferred (as defined under
IAS 39). If the assets transferred are not derecognised entirely in the financial statements, an entity has to disclose information that
enables users of financial statements to understand the relationship between those assets which are not derecognised and their associated
liabilities. If those assets are derecognised entirely, but the entity retains a continuing involvement, disclosures have to be provided that
enable users of financial statements to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those
derecognised assets. The amendment had no effect on the Group’s financial statements.
(cid:114)(cid:1) IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets
The amendment clarified the determination of deferred tax on investment property measured at fair value and introduces a rebuttable
presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis
that its carrying amount will be recovered through sale. It includes the requirement that deferred tax on non-depreciable assets that are
measured using the revaluation model in IAS 16 should always be measured on a sale basis. The amendment had no effect on the Group’s
financial position, performance or its disclosures.
Standards Issued But Not Yet Effective in the European Union
Standards not yet effective for the financial statements for the year ended 31 December 2012
(cid:114)(cid:1) Amendments to IAS 1 “Presentation of Financial Statements” – Changes to the Presentation of Other Comprehensive
Income
(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 standards following the May 2012 “improvements to IFRS” project
(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) IAS 27 “Separate Financial Statements”
(cid:114)(cid:1) IAS 28 “Investments in Associates and Joint Ventures”
(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 2012
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2014
1 January 2014
1 January 2014
1 January 2014
1 January 2014
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 2012 and 2011, the Group had $332 million and $261 million
actuarial losses, respectively (Note 23), they will increase the Group’s liabilities under defined benefit plans.
Significant accounting judgements and estimates
Accounting judgements
In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving
estimates, which have the most significant effect on the amounts recognised in the consolidated financial statements:
(cid:114)(cid:1) The Group determined that it obtained control over Corber on 16 January 2013 (Note 11). As of 31 December 2012, certain conditions
relating to acquisition of an additional 50% ownership interest in Corber were not met. As such, the Group did not consolidate Corber in 2012.
(cid:114)(cid:1) The Group determined that the future sale of EVRAZ Highveld Steel and Vanadium Limited and EVRAZ Vitkovice Steel does not constitute a
discontinued operation as the expected disposal will not lead to the Group abandoning any geographical area of operation or any product line
(Note 12).
EVRAZ plc
Annual Report and Accounts 2012
111
2. Significant accounting policies (continued)
Significant accounting judgements and estimates (continued)
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Impairment of property, plant and equipment
The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group
makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair
value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are
largely independent of those from other assets or 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 2012, 2011 and 2010, the Group recognised an impairment loss of $404 million, $105 million and $109 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 value in use 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 2012 and 2010, the change in estimates of useful lives of property, plant and equipment resulted in an additional depreciation expense of
approximately $5 million and $10 million, respectively. In 2011, the Group changed its estimation of useful lives of property, plant and equipment,
which resulted in a $16 million decrease in depreciation expense as compared to the amounts that would have been charged had no change in
estimate occurred.
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 2012, 2011 and 2010 was $2,180 million, $2,180 million and $2,219 million, respectively.
In 2012, 2011 and 2010, the Group recognised an impairment loss in respect of goodwill in the amount of $Nil, $Nil and $16 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 a depletion 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 carrying amount
of a provision is the present value of the expected expenditures, i.e. cash outflows discounted using pre-tax rates that reflect current market
assessments of the time value of money and the risks specific to the liability.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
2. Significant accounting policies (continued)
Significant accounting judgements and estimates (continued)
Estimation uncertainty (continued)
Site restoration provisions (continued)
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.
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 2012, 2011 and 2010, allowances for doubtful accounts in
respect of trade and other receivables have been made in the amount of $101 million, $108 million and $117 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 quantify the possible range of the
final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated
provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the
support of outside consultants. Revisions to the estimates may significantly affect future operating results. More details are provided in Note 31.
Current taxes
Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations and changes 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 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.
EVRAZ plc
Annual Report and Accounts 2012
113
2. Significant accounting policies (continued)
Foreign currency transactions (continued)
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities
arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
Basis of consolidation
Subsidiaries
Subsidiaries, which are those entities in which the Group has an interest of more than 50% of the voting rights, or otherwise has power to
exercise control over their operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group
and are no longer consolidated from the date that control ceases.
All intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for
subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
Non-controlling interest is 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
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.
Increases in ownership interests in subsidiaries
The differences between the carrying values of net assets attributable to interests in subsidiaries acquired and the consideration given for
such increases is either added to additional paid-in capital, if positive, or charged to accumulated profits, if negative, in the consolidated
financial statements.
Purchases of controlling interests in subsidiaries from entities under common control
Purchases of controlling interests in subsidiaries from entities under common control are accounted for using the pooling of interests method.
The assets and liabilities of the subsidiary transferred under common control are recorded in these financial statements at the historical cost of
the controlling entity (the “Predecessor”). Related goodwill inherent in the Predecessor’s original acquisition is also recorded in the financial
statements. Any difference between the total book value of net assets, including the Predecessor’s goodwill, and the consideration paid is
accounted for in the consolidated financial statements as an adjustment to the shareholders’ equity.
These financial statements, including corresponding figures, are presented as if a subsidiary had been acquired by the Group on the date it was
originally acquired by the Predecessor.
Put options over non-controlling interests
The Group derecognises non-controlling interests if non-controlling shareholders have a put option over their holdings. The difference between the
amount of the liability recognised in the statement of financial position over the carrying value of the derecognised non-controlling interests is
charged to accumulated profits.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
2. Significant accounting policies (continued)
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.
The Group’s property, plant and equipment include mining assets, which consist of mineral reserves, mine development and construction costs
and capitalised site restoration costs. Mineral reserves represent tangible assets acquired in business combinations. Mine development and
construction costs represent expenditures incurred in developing access to mineral reserves and preparations for commercial production,
including sinking shafts and underground drifts, roads, infrastructure, buildings, machinery and equipment.
At each end of the reporting period management makes an assessment to determine whether there is any indication of impairment of property,
plant and equipment. If any such indication exists, management estimates the recoverable amount, which is the higher of an asset’s fair value
less cost to sell and its value in use. The carrying amount is reduced to the recoverable amount, and the difference is recognised as impairment
loss in the statement of operations or other comprehensive income. An impairment loss recognised for an asset in previous years is reversed if
there has been a change in the estimates used to determine the asset’s recoverable amount.
Land is not depreciated. Depreciation of property, plant and equipment, except for mining assets, is calculated on a straight-line basis over the
estimated useful lives of the assets. The useful lives of items of property, plant and equipment and methods of their depreciation are reviewed,
and adjusted as appropriate, at each fiscal year end. The table below presents the useful lives of items of property, plant and equipment.
Buildings and constructions
Machinery and equipment
Transport and motor vehicles
Other assets
Weighted
average
remaining
useful life
(years)
19
11
10
6
Useful lives
(years)
15–60
4–45
7–20
3–15
The Group determines the depreciation charge separately for each significant part of an item of property, plant and equipment.
Depletion of mining assets including capitalised site restoration costs is calculated using the units-of-production method based upon proved and
probable mineral reserves.
Maintenance costs relating to items of property, plant and equipment are expensed as incurred. Major renewals and improvements are
capitalised, and the replaced assets are derecognised.
The Group has the title to certain non-production and social assets, primarily buildings and facilities of social infrastructure, which are carried at
their recoverable amount of zero. The costs to maintain such assets are expensed as incurred.
EVRAZ plc
Annual Report and Accounts 2012
115
2. Significant accounting policies (continued)
Exploration and evaluation expenditures
Exploration and evaluation expenditures represent costs incurred by the Group in connection with the exploration for and evaluation of mineral
resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. The expenditures include
acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling, activities
in relation to evaluating the technical feasibility and commercial viability of extracting mineral resources. These costs are expensed as incurred.
When the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, the Group commences recognition of
expenditures related to the development of mineral resources as assets. These assets are assessed for impairment when facts and
circumstances suggest that the carrying amount of an asset may exceed its recoverable amount.
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 fair 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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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
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)
11
–
2
13
–
6
Useful lives
(years)
1–15
5
5
18
1–49
5–10
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.
EVRAZ plc
Annual Report and Accounts 2012
117
2. Significant accounting policies (continued)
Financial assets (continued)
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 generally accepted valuation techniques.
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 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 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.
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.
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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.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
2. Significant accounting policies (continued)
Equity (continued)
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.
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 34%), 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 (Note 24), under which certain 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 grantees 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. In valuing equity-settled transactions, no account is taken
of any conditions, other than market conditions.
EVRAZ plc
Annual Report and Accounts 2012
119
2. Significant accounting policies (continued)
Share-based payments (continued)
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity (additional paid-in capital), over the period
in which service conditions are fulfilled, ending on the date on which the relevant persons become fully entitled to the award (“the vesting date”).
The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit in the
statement of operations for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest. Once a share-settled transaction is vested, no further accounting entries are
made to reverse the cost already charged, even if the instruments that are the subject of the transaction are subsequently forfeited. In this case,
the Group makes a transfer between different components of equity.
Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified.
In addition, an expense is recognised for any modification which increases the total fair value of the share-based payment arrangement,
or is otherwise beneficial to the employee as measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised
for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as
described in the previous paragraph.
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 outside profit or loss is recognised in other comprehensive income or equity and not in the
statement of operations.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
2. Significant accounting policies (continued)
Deferred income tax
Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are
provided for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for financial reporting
purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that
is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary
differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset
is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the end of the reporting period.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where
the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the
foreseeable future.
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:116)(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 2012
US$ million
Revenue
Sales to external customers
Inter-segment sales
Total revenue
Segment result – EBITDA
Steel
production
$13,884
324
14,208
$1,096
Mining
$258
2,261
2,519
$569
Vanadium
products
Other
operations
Eliminations
Total
$192
317
509
$54
$200
606
806
$180
$–
(3,508)
(3,508)
$87
$14,534
–
14,534
$1,986
EVRAZ plc
Annual Report and Accounts 2012
121
3. Segment information (continued)
Year ended 31 December 2011
US$ million
Revenue
Sales to external customers
Inter-segment sales
Total revenue
Segment result – EBITDA
Year ended 31 December 2010
US$ million
Revenue
Sales to external customers
Inter-segment sales
Total revenue
Segment result – EBITDA
Steel
production
$15,622
422
16,044
$1,120
Steel
production
$12,592
359
12,951
$1,445
Mining
$420
3,092
3,512
$1,529
Mining
$322
2,056
2,378
$898
Vanadium
products
Other
operations
Eliminations
Total
$269
364
633
$111
$166
656
822
$176
$–
(4,534)
(4,534)
$17
$16,477
–
16,477
$2,953
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
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.
Mining
$2,519
2
129
$2,650
$569
3
49
–
1
53
Vanadium
products
Other
operations
Eliminations
Total
$509
(3)
14
$520
$54
7
3
(83)
(73)
$806
14
226
$(3,508)
–
475
$14,534
109
83
$1,046
$(3,033)
$14,726
$180
(12)
$87
–
$1,986
(3)
4
–
17
9
–
6
–
6
$1,096
(1)
103
(6)
134
230
$1,326
$622
$(19)
$189
$93
(556)
(58)
(38)
171
$845
(611)
(354)
(17)
(95)
(47)
–
(1)
–
(38)
(1)
–
–
–
–
–
–
$(455)
$(67)
$150
$93
Year ended 31 December 2012
US$ million
Revenue
Forecasted vs. actual revenue
Reclassifications and other adjustments
Steel
production
$14,208
96
(761)
Revenue per IFRS financial statements
$13,543
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 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
Gain/(loss) on disposal groups classified
as held for sale
Other non-operating gains/(losses), net
Profit/(loss) before tax
159
–
69
225
$2,211
(199)
$2,012
(1,252)
(413)
(56)
76
$367
(124)
$243
$(622)
1
164
114
(6)
$(106)
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
3. Segment information (continued)
Year ended 31 December 2011
US$ 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 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
Gain/(loss) on disposal groups classified
as held for sale
Other non-operating gains/(losses), net
Profit/(loss) before tax
Steel
production
$16,044
134
(1,461)
$14,717
$1,120
(63)
91
(5)
119
142
Mining
$3,512
(1)
273
$3,784
$1,529
(10)
43
–
66
99
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)
$822
(4)
148
$966
$176
(1)
2
–
20
21
$17
–
–
15
–
15
$1,262
$1,628
$22
$197
$32
(546)
(78)
(29)
(29)
(530)
(31)
(20)
103
(34)
–
–
(1)
(40)
5
(1)
1
–
–
–
–
$580
$1,150
$(13)
$162
$32
$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)
$873
EVRAZ plc
Annual Report and Accounts 2012
123
3. Segment information (continued)
Year ended 31 December 2010
US$ 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
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
Gain/(loss) on disposal groups classified
as held for sale
Gain on bargain purchases
Other non-operating gains/(losses), net
Profit/(loss) before tax
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
Vanadium
products
Other
operations
Eliminations
Total
$537
(4)
33
$566
$90
(1)
2
3
(41)
(37)
$676
(1)
148
$823
$122
–
2
–
20
22
$(3,208)
–
583
$13,334
100
(40)
$(2,625)
$13,394
$(155)
–
$2,400
(39)
–
45
–
45
$1,485
$935
$53
$144
$(110)
(558)
–
(81)
(33)
65
$878
(282)
–
(20)
(18)
(2)
$613
(47)
(16)
–
–
–
$(10)
(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)
$633
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
3. Segment information (continued)
The revenues from external customers for each group of similar products and services are presented in the following table:
US$ 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
2012
2011
2010
$4,322
2,265
1,737
1,288
2,066
459
1,109
87
13,333
347
211
62
15
635
31
465
5
4
505
253
253
$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
$14,726
$16,400
$13,394
EVRAZ plc
Annual Report and Accounts 2012
125
3. Segment information (continued)
Distribution of the Group’s revenues by geographical area based on the location of customers for the years ended 31 December was as follows:
US$ million
CIS
Russia
Ukraine
Kazakhstan
Others
America
USA
Canada
Others
Asia
Taiwan
Thailand
Indonesia
China
Korea
United Arab Emirates
Philippines
Mongolia
Jordan
Japan
Vietnam
Syria
Others
Europe
Italy
Germany
Austria
Czech Republic
Poland
Slovakia
Other members of the European Union
Turkey
Others
Africa
South Africa
Others
Other countries
None of the Group’s customers amounts to 10% or more of the consolidated revenues.
2012
2011
2010
$6,191
473
355
168
7,187
2,293
1,234
44
3,571
492
451
355
178
118
87
87
67
64
59
27
10
120
$6,632
623
401
163
7,819
2,172
1,478
91
3,741
360
708
212
252
111
315
84
43
6
81
33
51
94
$4,692
471
342
147
5,652
1,674
1,451
37
3,162
459
550
113
367
126
410
285
7
29
71
93
65
96
2,115
2,350
2,671
224
204
160
155
131
96
261
182
37
267
368
224
205
221
94
348
145
69
205
219
188
189
139
64
265
118
35
1,450
1,941
1,422
323
74
397
6
472
72
544
5
407
78
485
2
$14,726
$16,400
$13,394
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
3. Segment information (continued)
Non-current assets other than financial instruments, deferred tax assets and post-employment benefit assets were located in the following
countries at 31 December:
US$ million
Russia
USA
Canada
Ukraine
South Africa
Czech Republic
Italy
Other countries
2012
$6,072
2,014
2,046
668
43
42
204
94
2011
$6,153
2,047
2,069
759
567
213
206
52
2010
$6,200
2,119
2,166
892
723
241
221
40
$11,183
$12,066
$12,602
4. Acquisition of subsidiaries
Acquisitions of controlling interests
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.
Acquisition of other controlling interests
On 1 January 2012, the Group obtained control over the operating activities of Kachkanar Heat and Power Plant (Russia), for which the Group paid
$20 million in 2011. This payment was included in other non-current assets as of 31 December 2011 (Note 13). Goodwill arising on this
business combination amounted to $3 million.
In 2012, the Group paid $12 million for the scrap yards located in the USA. Goodwill arising on this acquisition amounted to $1 million.
EVRAZ plc
Annual Report and Accounts 2012
127
4. Acquisition of subsidiaries (continued)
Acquisitions of Controlling Interests (continued)
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.
Other payments for acquisition of subsidiaries
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.
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).
EVRAZ Group S.A.
On 17 February 2012, the Group purchased the remaining global depository receipts, 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 and a non-controlling interest amounting to $10 million was derecognised.
Mezhegey project
In June 2012, the Group acquired an additional 9.996% ownership interest in Actionfield Limited, which holds and operates the Mezhegey coal
field project (Note 20). As a result, the Group increased its share in the project to approximately 60.016%.
The fair value of the consideration amounted to $36 million. It was agreed to settle the liabilities for the purchase by an offset with a loan
receivable by the Group. The excess of the consideration over the carrying value of the acquired non-controlling interest amounting to $30 million
was charged to accumulated profits.
Evraztrans
In 2011, the Group acquired an additional non-controlling interest of 24% in Evraztrans (Note 12), 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 $1 million
was recorded in additional paid-in capital.
5. Goodwill
The table below presents movements in the carrying amount of goodwill.
US$ million
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
Goodwill recognised on acquisition of subsidiaries (Note 4)
Adjustment to contingent consideration
Goodwill allocated to disposal groups classified as held for sale (Note 12)
Translation difference
Gross
amount
Impairment
losses
Carrying
amount
3,081
8
–
–
43
3,132
(6)
(35)
3,091
4
(5)
(23)
24
(895)
–
(16)
(16)
(2)
(913)
–
2
(911)
–
–
–
–
2,186
8
(16)
(16)
41
2,219
(6)
(33)
2,180
4
(5)
(23)
24
At 31 December 2012
$3,091
$(911)
$2,180
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
5. Goodwill (continued)
Goodwill relates to the assembled workforce and synergy from integration of the acquired subsidiaries into the Group. The carrying amount of
goodwill was allocated among cash-generating units as follows at 31 December:
US$ million
EVRAZ Inc. NA
Oregon Steel Portland Mill
Rocky Mountain Steel Mills
OSM Tubular – Camrose Mills
Claymont Steel
General Scrap
Others
EVRAZ Inc. NA Canada
Calgary
Red Deer
Regina Steel
Regina Tubular
Others
EVRAZ Palini e Bertoli
EVRAZ Vanady-Tula
Strategic Minerals Corporation
EVRAZ Nikom, a.s.
EVRAZ Highveld Steel and Vanadium Limited (Note 12)
EVRAZ Kachkanar Heat and Power Plant
2012
$1,131
412
410
157
135
16
1
845
232
56
397
137
23
76
66
20
39
–
3
$2,180
2011
$1,130
412
410
157
135
16
–
827
227
55
389
134
22
74
63
25
37
24
–
$2,180
2010
$1,130
412
410
157
135
16
–
845
232
57
397
137
22
78
66
31
40
29
–
$2,219
6. Impairment of goodwill and other non-current assets
For the purpose of the impairment testing as of 31 December 2012 the Group assessed the recoverable amount of each cash-generating unit
(“CGU”) to which the goodwill was allocated or where indicators of impairment were identified.
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.
The key assumptions used by management in the value-in-use calculations with respect to the cash-generating units to which the goodwill was
allocated are presented in the table below.
EVRAZ Inc. NA
EVRAZ Inc. NA Canada
EVRAZ Palini e Bertoli
EVRAZ Vanady-Tula
Vametco
EVRAZ Nikom, a.s.
EVRAZ Highveld Steel and Vanadium
Limited
Period of
forecast,
years
Pre-tax
discount
rate, % Commodity
5
5
5
5
5
5
5
10.80-12.03
11.32-11.76
14.20
13.26
13.73
12.44
13.28
steel products
steel products
steel plates
vanadium
products
ferrovanadium
products
ferrovanadium
products
ferrovanadium
products
steel products
Average
price of
commodity
per tonne
in 2013
$901
$1,066
€608
$23,756
$24,246
$22,733
$23,928
$769
Recoverable
amount of
CGU,
US$ million
Carrying
amount of
CGU,
US$ million
3,916
2,546
220
172
105
170
612
2,157
1,851
193
112
43
42
443
EVRAZ plc
Annual Report and Accounts 2012
129
6. Impairment of goodwill and other non-current assets (continued)
In addition, the Group determined that there were indicators of impairment in other cash generating units and tested them for impairment using
the following assumptions.
EVRAZ Dnepropetrovsk Iron and Steel Works
EVRAZ Nizhny Tagil Iron & Steel Plant
EVRAZ United West-Siberian Iron & Steel Plant
EVRAZ Vitkovice Steel a.s.
EVRAZ Caspian Steel
EVRAZ Yuzhny Stan
EVRAZ Bagleykoks
Strategic Minerals Corporation
Yuzhkuzbassugol
Mezhegeyugol
EVRAZ Kachkanarsky Mining-and-Processing Integrated Works
EVRAZ Sukha Balka
EVRAZ Vysokogorsky Mining-and-Processing Integrated Works
Evrazruda
EVRAZ Nakhodka Trade Seaport
Period of
forecast,
years
Pre-tax
discount
rate, % Commodity
Average price
of commodity
per tonne
in 2013
5
5
5
5
5
5
5
5
17
29
7
21
17
5
5
13.85
13.26
13.26
11.03
12
12
15.64
13.24
14.49
14
14.83
16.91
14.83
14.83
13.26
steel
products
steel
products
steel
products
steel
products
steel mill
under
construction
steel mill
under
construction
coke
ferrovanadium
products
coal
undeveloped
coal field
ore
ore
ore
ore
port services
$619
$698
$536
$838
$601
$640
$227
$37,234
$88
$133
$74
$60
$86
$93
$12
The major drivers that led to impairment were the changes in expectations of long-term prices for iron ore and steel products and the increase in
the forecasted costs.
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. Reasonably possible changes in discount rates could lead to an additional
impairment at EVRAZ United West-Siberian Iron & Steel Plant, EVRAZ Dnepropetrovsk Iron and Steel Works, EVRAZ Sukha Balka, EVRAZ Palini e
Bertoli and EVRAZ Inc. NA cash-generating units. If discount rates were 10% higher, this would lead to an additional impairment of $284 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 growth rate of 0%-6.5% in 2013 – 2017, 3.0% in 2018 and thereafter. Reasonably possible changes in sales prices could lead
to an additional impairment at EVRAZ United West-Siberian Iron & Steel Plant, EVRAZ Dnepropetrovsk Iron and Steel Works, EVRAZ Sukha Balka
and EVRAZ Inc. NA cash-generating units. If the prices assumed for 2013 and 2014 in the impairment test were 10% lower, this would lead to an
additional impairment of $411 million.
Sales volumes
Management assumed that the sales volumes of steel products would increase by 7% in 2013 and would grow evenly during the following four
years to reach normal asset capacity utilisation thereafter. Reasonably possible changes in sales volumes could lead to an additional impairment
at EVRAZ United West-Siberian Iron & Steel Plant, EVRAZ Dnepropetrovsk Iron and Steel Works, and EVRAZ Sukha Balka cash-generating units. If
the sales volumes were 10% lower than those assumed for 2013 and 2014 in the impairment test, this would lead to an additional impairment of
$119 million.
Cost control measures
The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonably possible deviation of
cost from these plans could lead to an additional impairment at EVRAZ United West-Siberian Iron & Steel Plant, EVRAZ Dnepropetrovsk Iron and
Steel Works, EVRAZ Bagleykoks, EVRAZ Sukha Balka, EVRAZ Palini e Bertoli and EVRAZ Inc. NA cash-generating units. If the actual costs were
10% higher than those assumed for 2013 and 2014 in the impairment test, this would lead to an additional impairment of $1,048 million.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
6. Impairment of goodwill and other non-current assets (continued)
Cost control measures (continued)
The unit’s recoverable amount would become equal to its carrying amount if the assumptions used to measure the recoverable amount changed
as follows:
EVRAZ United West-Siberian Iron & Steel Plant
EVRAZ Sukha Balka
EVRAZ Palini e Bertoli
EVRAZ Claymont Steel
EVRAZ Bagleykoks
Discount
rates
0.09%
3%
6%
2%
–
Sales
prices
(0.05)%
(3)%
–
(6)%
–
Sales
volumes
(0.19)%
(5)%
–
–
–
Cost control
measures
0.02%
4%
5%
3%
4%
In addition to the impairment losses recognised as a result of the impairment testing at the level of cash-generating units, the Group made a
write-off of certain functionally obsolete items of property, plant and equipment and recorded an impairment relating to the VAT with a
long-term recovery.
The summary of impairment losses recognition and reversals is presented below.
Year ended 31 December 2012
US$ million
Evrazruda
EVRAZ Dnepropetrovsk Iron and Steel Works
Others, net
Year ended 31 December 2011
US$ million
EVRAZ Dneprodzerzhinsky Coke-chemical Plant
Yuzhkuzbassugol
Others, net
Year ended 31 December 2010
US$ million
Velcast
Evraz Highveld Steel and Vanadium Limited
Frotora Holdings Ltd. (Note 12)
Stratcor, Inc. (Note 5)
Yuzhkuzbassugol
Others, net
Goodwill and
intangible
assets
Property, plant
and equipment
Taxes
receivable
$(1)
–
–
$(1)
$(355)
(47)
(2)
$(404)
$–
(4)
(4)
$(8)
Goodwill and
intangible
assets
Property, plant
and equipment
Taxes
receivable
$–
–
9
$9
$(59)
(31)
(15)
$(105)
$(9)
–
–
$(9)
Goodwill and
intangible
assets
Property, plant
and equipment
Taxes
receivable
$–
–
(30)
(16)
–
1
$(38)
(31)
–
–
(19)
(21)
$(45)
$(109)
$–
–
–
–
–
–
$–
Total
$(356)
(51)
(6)
$(413)
Total
$(68)
(31)
(6)
$(105)
Total
$(38)
(31)
(30)
(16)
(19)
(20)
$(154)
EVRAZ plc
Annual Report and Accounts 2012
131
7. Income and expenses
Cost of revenues, selling and distribution costs, general and administrative expenses include the following for the years ended 31 December:
US$ million
Cost of inventories recognised as expense
Staff costs, including social security taxes
Depreciation, depletion and amortisation
2012
2011
2010
$(6,266)
(2,404)
(1,259)
$(7,106)
(2,228)
(1,153)
$(5,241)
(1,743)
(925)
In 2012, 2011 and 2010, the Group made a net reversal of the allowance for net realisable value in the amount of $2 million, $14 million and
$35 million, respectively.
Staff costs include the following:
US$ 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
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 (Note 25)
Interest on contingent consideration
Other
Interest income consisted of the following for the years ended 31 December:
US$ million
Interest on bank accounts and deposits
Interest on loans receivable
Interest on loans receivable from related parties
Interest on accounts receivable
Other
2012
$1,766
412
83
22
121
$2,404
2012
63,054
38,878
1,240
3,884
3,404
2011
$1,662
404
59
23
80
$2,228
2011
63,414
37,490
1,212
3,583
3,362
2010
$1,347
257
59
2
78
$1,743
2010
61,858
38,336
1,178
3,855
3,279
110,460
109,061
108,506
2012
$(77)
(8)
–
(44)
$(129)
2012
$(103)
(485)
(3)
(28)
(19)
(1)
(6)
2011
$(40)
(4)
(6)
(46)
$(96)
2011
$(154)
(495)
(5)
(28)
(19)
(1)
(6)
2010
$(45)
(17)
–
(48)
$(110)
2010
$(241)
(423)
(6)
(32)
(15)
(1)
(10)
$(645)
$(708)
$(728)
2012
$13
6
–
–
4
$23
2011
$6
4
3
–
4
$17
2010
$9
1
2
1
–
$13
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
7. Income and expenses (continued)
Gain/(loss) on financial assets and liabilities included the following for the years ended 31 December:
US$ million
Impairment of available-for-sale financial assets (Note 13)
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
2012
$–
–
–
177
(13)
2011
$(20)
(71)
(161)
(110)
7
$164
$(355)
2012
20.00%
25.54%
10.00%
19.00%
31.40%
28.00%
9.82%
21.00%
38.20%
2011
20.00%
26.50%
10.00%
19.00%
31.40%
28.00%
10.09%
23.00%
and 25.00%
37.95%
2010
$(2)
–
–
4
6
$8
2010
20.00%
28.00%
10.00%
19.00%
31.40%
28.00%
10.09%
25.00%
38.32%
In 2010, a new Tax Code was adopted in Ukraine, which introduced a gradual reduction in income tax rates from 25% in 2010 to 16% in 2014. In
addition, in accordance with the new Tax Code the carrying values of property, plant and equipment per statutory books as of 1 April 2011
became a new tax base of these assets for income tax calculations. The Group’s subsidiaries in Ukraine measured the respective deferred tax
assets and liabilities at 31 December 2010 based on the new tax bases using the announced tax rates and a forecast of temporary differences
reversal and realisation.
Major components of income tax expense for the years ended 31 December were as follows:
US$ million
Current income tax expense
Adjustment in respect of income tax of previous years
Deferred income tax benefit/(expense) relating to origination and reversal of temporary
differences
2012
$(336)
69
38
2011
$(537)
129
(12)
2010
$(415)
(8)
260
Income tax expense reported in the consolidated statement of operations
$(229)
$(420)
$(163)
The major part of income taxes is paid in the Russian Federation. A reconciliation of income tax expense applicable to profit before income tax
using the Russian statutory tax rate to income tax expense as reported in the Group’s consolidated financial statements for the years ended
31 December is as follows:
US$ 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
Effect of the difference in tax rates in countries other than the Russian Federation
Tax on dividends distributed by the Group’s subsidiaries to parent company
Share of profits in joint ventures and associates
2012
$(106)
21
69
(53)
–
–
(118)
(165)
31
(14)
–
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
$(229)
$(420)
$(163)
EVRAZ plc
Annual Report and Accounts 2012
133
O
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p
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b
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l
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t
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i
a
l
8. Income taxes (continued)
Deferred income tax assets and liabilities and their movements for the years ended 31 December were as follows:
Year ended 31 December 2012
US$ million
2012
Change
recognised
in
statement
of
operations
Change
recognised
in other
comprehen-
sive income
Change
due to
business
combina-
tions
Change
due to
disposal of
subsidiaries
Received
from tax
authorities
Transfer
to disposal
groups
classifies
as held for
sale
Translation
difference
2011
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
Net deferred income tax
liability
Year ended 31 December 2011
US$ million
2011
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
$1,021
221
93
1,335
151
123
33
87
394
79
Net deferred income tax
liability
$1,020
$900
153
83
(64)
(30)
(9)
1,136
(103)
101
112
32
30
275
66
(37)
26
(2)
(52)
(65)
(5)
$927
(43)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
(1)
–
–
–
–
–
–
(13)
–
(4)
(72)
(39)
–
(17)
(111)
–
(12)
(1)
–
(13)
–
(17)
(28)
–
(7)
(52)
(13)
29 $1,021
1
3
33
4
3
2
2
11
5
221
93
1,335
151
123
33
87
394
79
(1)
(4)
(72)
27 $1,020
Change
recognised
in
statement
of
operations
Change
recognised
in other
comprehen-
sive income
Change
due to
business
combina-
tions
Change
due to
disposal of
subsidiaries
Received
from tax
authorities
Transfer
to disposal
groups
classifies
as held for
sale
Translation
difference
2010
(1)
(38)
11
(28)
14
(17)
3
(40)
(40)
(17)
(5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
R
e
v
e
w
i
G
o
v
e
r
n
a
n
c
e
(52)
$1,074
(15)
(7)
(74)
(13)
(13)
(3)
(2)
(31)
(4)
274
89
1,437
150
153
33
129
465
100
(47)
$1,072
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
134
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
8. Income taxes (continued)
Year ended 31 December 2010
US$ million
2010
Change
recognised
in
statement
of
operations
Change
recognised
in other
comprehen-
sive income
Change
due to
business
combina-
tions
Change
due to
disposal of
subsidiaries
Received
from tax
authorities
Transfer
to disposal
groups
classifies
as held for
sale
Translation
difference
2009
Deferred income tax liabilities:
Valuation and depreciation
of property, plant and
equipment
Valuation and amortisation
of intangible assets
Other
Deferred income tax assets:
Tax losses available for offset
Accrued liabilities
Impairment of accounts
receivable
Other
Net deferred income tax asset
$1,074
(184)
274
89
1,437
150
153
33
129
465
100
(38)
(7)
(229)
5
23
6
(3)
31
24
Net deferred income tax liability $1,072
(236)
–
–
–
–
(74)
–
–
–
(74)
–
74
(1)
–
–
(1)
–
–
–
–
–
–
5
–
–
5
11
–
5
1
17
10
(13)
–
–
(13)
–
–
–
–
–
–
(1)
(2)
(13)
–
–
–
–
–
–
–
–
–
–
–
10 $1,257
15
4
29
5
2
–
(1)
6
(4)
297
92
1,646
203
128
22
132
485
70
19 $1,231
As of 31 December 2012, 2011 and 2010, 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 2012, the Group has not recognised a deferred tax liability and deferred tax asset in
respect of temporary differences of $4,985 million and $8,975 million, respectively (2011: $5,686 million and $3,478 million, 2010: $5,764
million and $2,831 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 and the United Kingdom where group relief can be
applied. As of 31 December 2012, the unused tax losses carry forward approximated $3,398 million (2011: $3,481 million, 2010: $3,365 million).
The Group recognised deferred tax asset of $101 million (2011: $151 million, 2010: $150 million) in respect of unused tax losses. Deferred tax
asset in the amount of $728 million (2011: $694 million, 2010: $655 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 $2,603 million (2011: $2,568 million, 2010: $2,555 million)
for which deferred tax asset was not recognised arose in companies registered in Luxembourg, Cyprus, Russia and Ukraine. Losses in the amount
of $2,414 million (2011: $2,479 million, 2010: $2,535 million) are available indefinitely for offset against future taxable profits of the companies in
which the losses arose and $189 million will expire during 2013–2022 (2011: $89 million, 2010: $20 million).
9. Property, plant and equipment
Property, plant and equipment consisted of the following as of 31 December:
US$ 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
2012
2011
2010
$181
2,825
5,894
402
3,074
51
1,177
$187
2,594
5,798
508
2,631
75
1,027
$177
2,536
5,734
483
2,656
84
702
13,604
12,820
12,372
(1,218)
(2,706)
(225)
(1,628)
(35)
(5,812)
(954)
(2,358)
(227)
(923)
(52)
(4,514)
(854)
(2,046)
(203)
(607)
(55)
(3,765)
$7,792
$8,306
$8,607
EVRAZ plc
Annual Report and Accounts 2012
135
9. Property, plant and equipment (continued)
The movement in property, plant and equipment for the year ended 31 December 2012 was as follows:
US$ million
At 31 December 2011, cost, net of
accumulated depreciation
Assets acquired in business combination
Additions
Assets put into operation
Disposals
Depreciation and depletion charge
Impairment losses recognised in
statement of operations
Impairment losses reversed through
statement of operations
Transfer to assets held for sale
Change in site restoration and
decommissioning provision
Translation difference
At 31 December 2012, cost, net of
accumulated depreciation
Buildings
and
constructions
Machinery
and
equipment
Transport
and motor
vehicles
Land
Mining
assets
Other
assets
Assets under
construction
Total
$187
3
–
1
(1)
–
$1,640
7
2
210
(12)
(152)
$3,440
14
4
590
(43)
(534)
$281
–
8
59
(3)
(42)
$1,708
–
35
254
(3)
(467)
(3)
–
(10)
–
4
(96)
2
(72)
4
74
(81)
(15)
(199)
10
(318)
(3)
109
–
(125)
–
14
6
(16)
52
76
$23
–
1
4
–
(7)
–
–
(5)
–
–
$1,027
–
1,269
(1,118)
(5)
–
$8,306
24
1,319
–
(67)
(1,202)
(28)
(422)
–
(21)
–
53
18
(567)
53
330
$181
$1,607
$3,188
$177
$1,446
$16
$1,177
$7,792
The movement in property, plant and equipment for the year ended 31 December 2011 was as follows:
US$ million
At 31 December 2010, cost, net of
accumulated depreciation
Reclassifications between categories
Additions
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 assets held for sale
Change in site restoration and
decommissioning provision
Translation difference
At 31 December 2011, cost, net of
accumulated depreciation
Buildings
and
constructions
Machinery
and
equipment
Transport
and motor
vehicles
Land
Mining
assets Other assets
Assets
under
construction
Total
$177 $1,682 $3,688
16
7
193
(17)
(151)
(25)
5
522
(44)
(485)
–
12
4
–
–
(14)
(47)
–
–
–
–
–
(6)
3
(1)
–
6
–
(4)
(3)
(75)
$280 $2,049
(1)
–
66
(4)
(43)
(3)
–
–
–
–
28
101
(3)
(379)
(29)
–
–
–
4
(180)
–
(14)
16
(75)
$29
(5)
3
7
(1)
(6)
$702 $8,607
–
1,352
–
(72)
(1,064)
15
1,297
(893)
(3)
–
–
–
–
–
–
(4)
(21)
(114)
1
–
(5)
–
(66)
10
(1)
(9)
17
(420)
$187 $1,640 $3,440
$281 $1,708
$23 $1,027 $8,306
O
v
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a
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e
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O
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a
t
i
n
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R
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o
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a
t
e
S
o
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i
a
l
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e
s
p
o
n
s
i
b
i
l
i
t
y
i
F
n
a
n
c
i
a
l
R
e
v
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w
i
G
o
v
e
r
n
a
n
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F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
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136
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
9. Property, plant and equipment (continued)
The movement in property, plant and equipment for the year ended 31 December 2010 was as follows:
US$ million
At 31 December 2009, cost, net of
accumulated depreciation
Reclassifications between categories
Additions
Assets acquired in business combination
Assets put into operation
Disposals
Depreciation and depletion charge
Impairment losses recognised in
statement of operations
Impairment losses reversed through
statement of operations
Impairment losses recognised or reversed
through other comprehensive income
Transfer to assets held for sale
Change in site restoration and
decommissioning provision
Translation difference
At 31 December 2010, cost, net of
accumulated depreciation
Buildings
and
constructions
Machinery
and
equipment
Transport
and motor
vehicles
Land
$164
–
–
11
1
(1)
–
$1,745
1
2
47
54
(9)
(149)
$3,706
(4)
4
55
423
(39)
(453)
–
–
–
–
–
2
(4)
3
(4)
(6)
2
–
(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
Total
$8,585
–
877
123
–
(76)
(803)
$539
–
840
5
(604)
(10)
–
(65)
(117)
3
–
–
–
(6)
15
(7)
(90)
73
27
$27
(1)
–
3
11
(2)
(10)
–
–
–
–
–
1
$177
$1,682
$3,688
$280
$2,049
$29
$702
$8,607
Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $92 million,
$287 million and $250 million as of 31 December 2012, 2011 and 2010, respectively.
On 1 April 2012, the Group updated its mining plans relating mostly to the extraction of coking coal reserves. Consequently, the depreciation
and depletion charge in 2012 is lower by $276 million compared to the amount that would have been charged in accordance with the
previous mining plans.
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 (Note 6).
The amount of borrowing costs capitalised during the year ended 31 December 2012 was $16 million (2011: $13 million, 2010: $5 million).
In 2012, the rate used to determine the amount of borrowing costs eligible for capitalisation was 4.8% (2011: 4.6%, 2010: 6.3%), which is the
effective interest rate of borrowings that were outstanding during the period, other than borrowings made specifically for the purpose of obtaining
qualifying assets.
10. Intangible assets other than goodwill
Intangible assets consisted of the following as of 31 December:
US$ 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
2012
2011
2010
$878
28
57
9
–
63
1,035
(373)
(28)
–
(8)
–
(40)
(449)
$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)
$586
$838
$1,004
As of 31 December 2012, 2011 and 2010, water rights and environmental permits with a carrying value of $56 million had an indefinite useful life.
EVRAZ plc
Annual Report and Accounts 2012
137
10. Intangible assets other than goodwill (continued)
The movement in intangible assets for the year ended 31 December 2012 was as follows:
US$ million
At 31 December 2011,
cost, net of accumulated
amortisation
Assets acquired in
business combination
Additions
Amortisation charge
Emission allowances
granted
Emission allowances
used/sold/purchased for
the period
Impairment loss
recognised in statement
of operations
Transfer to assets held
for sale
Translation difference
At 31 December 2012,
cost, net of accumulated
amortisation
Customer
relationships
Trade
names and
trademarks
Water
rights and
environmental
permits
Patented
and
unpatented
technology
Contract
terms
Other
Total
$750
$–
$57
$1
$12
$18
$838
1
–
(99)
–
–
–
(149)
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(12)
–
–
13
(4)
4
(7)
(1)
–
–
1
13
(103)
4
(7)
(1)
(161)
2
$505
$–
$57
$1
$–
$23
$586
The movement in intangible assets for the year ended 31 December 2011 was as follows:
US$ 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)
$1,004
4
(123)
7
(4)
(2)
–
–
7
(4)
(2)
11
(59)
$750
$–
$57
$1
$12
$18
$838
O
v
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v
e
w
i
S
t
r
a
t
e
g
y
O
p
e
r
a
t
i
n
g
R
e
v
e
w
i
C
o
r
p
o
r
a
t
e
S
o
c
i
a
l
R
e
s
p
o
n
s
i
b
i
l
i
t
y
i
F
n
a
n
c
i
a
l
R
e
v
e
w
i
G
o
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e
r
n
a
n
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F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
138
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
10. Intangible assets other than goodwill (continued)
The movement in intangible assets for the year ended 31 December 2010 was as follows:
US$ 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)
$12
–
(6)
$59
–
(1)
–
–
–
1
55
–
–
–
–
–
–
–
–
–
–
$3
–
(2)
–
–
–
–
1
$40
–
(1)
–
–
(30)
–
(1)
$15
7
(4)
$1,098
7
(127)
6
(5)
–
–
(1)
6
(5)
(30)
1
54
$912
$6
$58
$2
$8
$18
$1,004
11. Investments in joint ventures and associates
The Group accounted for investments in joint ventures and associates under the equity method.
The movement in investments in joint ventures and associates was as follows:
US$ million
Investment at 31 December 2009
Share of profit/(loss)
Impairment of investments
Translation difference
Investment at 31 December 2010
Additional investments
Write-off of loan receivable
Share of profit/(loss)
Reversal of impairment of investments
Dividends paid
Translation difference
Investment at 31 December 2011
Additional investments
Write-off of loan receivable (Note 16)
Share of profit/(loss)
Reversal of impairment of investments
Dividends paid
Acquisition of non-controlling interests
Return of capital
Unrealised gains on financial assets
Translation difference
Investment at 31 December 2012
Corber
Streamcore
Kazankov-
skaya
Other
associates
$569
95
–
(8)
656
–
–
50
–
(52)
(33)
$621
–
–
(11)
–
(86)
(22)
(38)
1
42
$507
$44
–
(23)
–
21
–
–
–
4
–
(1)
$24
–
–
7
5
(2)
–
–
–
2
$36
$–
–
–
–
–
3
(3)
–
–
–
–
$–
5
(5)
–
–
–
–
–
–
–
$–
$21
1
(10)
(1)
11
9
–
1
–
(2)
(1)
$18
–
–
–
–
–
–
–
–
–
$18
Total
$634
96
(33)
(9)
688
12
(3)
51
4
(54)
(35)
$663
5
(5)
(4)
5
(88)
(22)
(38)
1
44
$561
EVRAZ plc
Annual Report and Accounts 2012
139
11. Investments in joint ventures and associates (continued)
Share of profit/(loss) of joint ventures and associates which is reported in the statement of operations comprised the following:
US$ million
Share of profit/(loss), net
Reversal of impairment/(impairment) of investments
Group’s share in excess of net assets of ZAO Koksovaya transferred to Raspadskaya over
consideration received (Note 12)
Share of profits/(losses) of joint ventures and associates recognised in the consolidated
statement of operations
2012
$(4)
5
–
$1
2011
$51
4
–
$55
2010
$96
(33)
(42)
$21
Corber Enterprises Limited
Corber Enterprises Limited (“Corber”) is a joint venture established in 2004 for the purpose of exercising joint control over economic activities of
Raspadskaya Mining Group. Corber is registered in Cyprus. The Group had a 50% share in the joint venture, i.e. at 31 December 2012 it
effectively owned approximately 41% in JSC Raspadskaya (2011 and 2010: 40%).
The table below sets forth Corber’s assets and liabilities as of 31 December:
US$ 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
The table below sets forth Corber’s income and expenses:
US$ million
Revenue
Cost of revenue
Other expenses, including income taxes
Net profit/(loss)
Attributable to:
Equity holders of the parent entity
Non-controlling interests
Net profit/(loss)
50% of unrealised profits on transactions with the joint venture
Group’s share of profits/(losses) of the joint venture
2012
$742
924
70
111
252
8
2,107
593
172
106
871
227
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
$1,009
$1,240
$1,319
505
2
–
$507
2012
$542
(460)
(112)
$(30)
$(23)
(7)
$(30)
1
$(11)
620
2
(1)
$621
2011
$726
(361)
(246)
$119
$93
26
$119
4
$50
659
2
(5)
$656
2010
$706
(323)
(139)
$244
$194
50
$244
(2)
$95
Buyback of shares by Raspadskaya
In 2012, Raspadskaya, a subsidiary of Corber, the Group’s joint venture, made a buyback of 9.94% of its shares from shareholders. At the end of
February 2012, Corber sold 48,351,712 shares back to Raspadskaya for $248 million. As a result of the buyback, Corber effectively acquired an
additional 1.95% share in Raspadskaya and its ownership interest increased to 81.95%.
The Group’s share in the excess of the amounts of consideration over the carrying values of non-controlling interests acquired amounting to
$22 million was charged to accumulated profits of the Group.
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140
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
11. Investments in joint ventures and associates (continued)
Corber Enterprises Limited (continued)
Return of capital
In September 2012, the Board of Directors of Corber decided to reduce its additional paid-in capital by $76 million by the return of funds to its
shareholders. The Group received $38 million in cash.
Acquisition of a controlling interest in Corber
In October 2012, EVRAZ plc concluded a preliminary agreement with Adrolive Investments Limited for an acquisition of a 50% ownership interest
in Corber subject to the receipt of regulatory approvals and fulfillment of certain other conditions. On 16 January 2013, all the conditions were
met and the Group obtained control over the entity. As a result, Corber became a wholly owned subsidiary of the Group in 2013.
Management believes that this acquisition will increase the Group’s coking coal self-coverage and generate substantial operational synergies to
the Group, including the optimal use of various coal grades.
The purchase consideration includes 132,653,006 shares of EVRAZ plc issued on 16 January 2013, warrants to subscribe for additional
33,944,928 EVRAZ plc shares exercisable at zero price in the period from 17 January to 17 April 2014 and a cash consideration of $202 million
to be paid in equal quarterly installments through 15 January 2014. Fair value of the consideration transferred totalled to $964 million and was
determined by reference to the market value of EVRAZ plc shares at the date of acquisition.
The fair value of the equity interest in the acquiree held by the Group immediately before the acquisition approximated $650 million. If this
business combination had occurred as of the beginning of 2012, the revenue of the combined entity would have been $15,133 million.
In addition to the information disclosed in respect of this acquisition, IFRS 3 “Business Combinations” requires the Group to disclose the
amounts to be recognised at the acquisition date for each class of the acquiree’s assets, liabilities and contingent liabilities and profit or loss
of the combined entity as if this acquisition had occurred as of the beginning of the annual reporting period. It is impracticable to disclose this
information because the Group has not completed purchase price allocation in accordance with IFRS 3 “Business Combinations”.
Kazankovskaya
ZAO Kazankovskaya (“Kazankovskaya”) is a Russian coal mining company that was acquired as part of the purchase of Yuzhkuzbassugol in 2007.
The Group owns 50% in Kazankovskaya.
The table below sets forth Kazankovskaya’s assets and liabilities as of 31 December:
US$ 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 liabilities
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
2012
2011
2010
$–
–
–
–
2
2
9
–
116
125
$–
–
–
1
2
3
69
3
25
97
$–
–
1
1
1
3
65
4
24
93
$(123)
$(94)
$(90)
2012
$(39)
2011
$(27)
2012
2011
$–
–
(23)
(23)
$(12)
$–
(1)
(10)
(11)
$(6)
2010
$(21)
2010
$14
(32)
(23)
(41)
$(21)
In January 2013, the Group acquired an additional 50% in Kazankovskaya from Magnitogorsk Steel Plant for a cash consideration of 167 US dollars.
The primary reason for the business combination is a preparation for the subsequent sale of the mines.
EVRAZ plc
Annual Report and Accounts 2012
141
11. Investments in joint ventures and associates (continued)
Streamcore
The Group owns a 50% interest in Streamcore (Cyprus), a joint venture established for the purpose of exercising joint control over facilities for
scrap procurement and processing in Siberia, Russia.
The table below sets forth Streamcore’s assets and liabilities as of 31 December:
US$ million
Property, plant and equipment
Accounts receivable
Total assets
Deferred income tax liabilities
Current liabilities
Total liabilities
Net assets
Group’s share of net assets
Group’s share in goodwill
Investment
The table below sets forth Streamcore’s income and expenses:
US$ million
Revenue
Cost of revenue
Other expenses, including income taxes
Net profit
Group’s share of profit of the joint venture
2012
$55
59
114
3
39
42
$72
36
–
$36
2012
$504
(472)
(18)
$14
$7
2011
$40
11
51
1
1
2
$49
24
–
$24
2011
$9
(6)
(3)
$–
$–
2010
$31
17
48
4
1
5
$43
21
–
$21
2010
$10
(9)
(1)
$–
$–
12. Disposal groups held for sale
The major classes of assets and liabilities of the disposal groups measured at the lower of carrying amount and fair value less costs to sell were
as follows as of 31 December:
US$ million
Property, plant and equipment
Intangible assets
Goodwill
Other non-current assets
Accounts receivable
Cash and cash equivalents
Assets classified as held for sale
Deferred income tax liabilities
Non-current liabilities
Current liabilities
Liabilities directly associated with assets classified as held for sale
Non-controlling interests
Net assets classified as held for sale
2012
$368
149
18
35
290
70
930
75
125
278
478
49
2011
2010
$9
–
–
–
–
–
9
–
–
–
–
–
$2
–
–
–
–
–
2
–
–
–
–
–
$403
$9
$2
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
12. Disposal groups held for sale (continued)
The net assets of disposal groups classified as held for sale at 31 December related to the following reportable segments:
US$ million
Assets classified as held for sale
Steel production
Mining
Vanadium products
Liabilities directly associated with assets classified as held for sale
Steel production
Mining
Vanadium products
Non-controlling interests
Steel production
Vanadium products
2012
$930
843
16
71
478
429
41
8
49
40
9
2011
2010
$9
8
1
–
–
–
–
–
–
–
$2
–
2
–
–
–
–
–
–
–
At 31 December 2012, the disposal groups held for sale consisted mostly of the assets and liabilities of EVRAZ Vitkovice Steel and EVRAZ
Highveld Steel and Vanadium Limited (“EHSVL”), which the Group plans to sell in 2013. The difference between the carrying value of the net
assets of the subsidiaries and the expected consideration amounting to $83 million was recognised as a loss on disposal groups classified as
held for sale.
The table below demonstrates the carrying values of assets and liabilities, at the dates of disposal, of the subsidiaries and other business units
disposed of during 2010–2012.
US$ million
Property, plant and equipment
Other non-current assets
Inventory
Accounts receivable
Cash and cash equivalents
Total assets
Deferred income tax liabilities
Non-current liabilities
Current liabilities
Total liabilities
Non-controlling interests
Net assets
The net assets of disposal groups sold in 2010–2012 related to the following reportable segments:
US$ million
Assets classified as held for sale
Steel production
Mining
Other operations
Liabilities directly associated with assets classified as held for sale
Steel production
Mining
Other operations
Non-controlling interests
Steel production
Cash flows on disposal of subsidiaries and other business units were as follows:
US$ million
Net cash disposed of with subsidiaries
Cash received
Net cash inflow
2012
$130
13
10
70
2
225
12
7
99
118
(2)
$109
2012
$225
75
3
147
118
86
2
30
(2)
(2)
2012
$(2)
313
$311
2011
$1
–
–
–
–
1
–
–
–
–
–
2010
$90
–
–
22
–
112
13
1
–
14
–
$1
$98
2011
$1
–
1
–
–
–
–
–
–
–
2011
$–
5
$5
2010
$112
–
112
–
14
–
14
–
–
–
2010
$–
42
$42
At 31 December 2010, the Group owed $5 million in respect of the disposed business units. In 2011, following the arbitration court’s decision,
these payables were written off and recorded as a gain on assets held for sale.
EVRAZ plc
Annual Report and Accounts 2012
143
12. Disposal groups held for sale (continued)
The disposal groups sold during 2010–2012 are described below.
Evraztrans
In December 2012, the Group sold to a third party a business of its wholly owned subsidiary Evraztrans, which renders long-distance railway
transportation services using own and rented railcars. Cash consideration amounted to $306 million. The Group recognised a gain of
$190 million on this transaction.
Dneprodzerzhinsky coke-chemical plant
In August 2012, the Group sold to its parent a controlling interest in a loss-making coke-chemical plant located in Ukraine. Cash consideration
amounted to $4. The Group recognised a $14 million gain on this sale.
Frotora Holdings Ltd.
In April 2012, the Group sold its ownership interest in a subsidiary whose assets comprised only rights under a long-term lease of land to be
used for a construction of a commercial seaport in Ukraine. These rights were 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.
In 2012, the Group recognised a $6 million loss on sale of this subsidiary.
Sale of Koksovaya
In April 2010, the Group sold ZAO Koksovaya to Raspadskaya, a subsidiary of Corber, the Group’s joint venture (Note 11). 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 $15 million and was included in loss on disposal groups classified as held for sale caption of the
consolidated statement of operations.
Other disposal groups held for sale
Other disposal groups held for sale included a few small subsidiaries involved in non-core activities (construction business, trading activity and
recreational services) and other non-current assets.
13. Other non-current assets
Non-current financial assets
US$ million
Available-for-sale financial assets – investments in Delong Holdings Limited
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
Other
2012
$21
2
4
–
12
4
49
$92
2012
$33
17
39
–
–
–
14
2011
$17
–
15
–
18
3
–
$53
2011
$26
11
28
–
20
–
22
2010
$37
5
9
46
17
3
1
$118
2010
$24
11
19
11
–
9
29
$103
$107
$103
Available-for-sale financial assets
At 31 December 2012, the Group holds 82,853,998 shares of Delong Holdings Limited (“Delong”), which is approximately 15% 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.
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144
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
13. Other non-current assets (continued)
Available-for-sale financial assets (continued)
In 2010, the Group recognised $6 million impairment loss on Delong shares, including $4 million through other comprehensive income and
$2 million through the statement of operations within the gain/(loss) on financial assets and liabilities caption. In 2011, a $20 million loss
relating to the decline in quotations of Delong shares was recognised in the statement of operations. In 2012, the Group recognised a $4 million
gain on the increase in market quotations in other comprehensive income.
Impairment of long-term taxes
In 2012, 2011 and 2010, the Group recognised an impairment relating to the VAT with a long-term recovery in the amount of $8 million,
$9 million and $Nil, respectively. This loss was included in the impairment of assets caption of the consolidated statement of operations.
14. Inventories
Inventories consisted of the following as of 31 December:
US$ million
Raw materials and spare parts
Work-in-progress
Finished goods
2012
$959
397
622
2011
$975
466
747
2010
$974
444
652
$1,978
$2,188
$2,070
As of 31 December 2012, 2011 and 2010, the net realisable value allowance was $90 million, $90 million and $114 million, respectively.
As of 31 December 2012, 2011 and 2010, certain items of inventory with an approximate carrying amount of $319 million, $250 million and
$203 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 21).
15. Trade and other receivables
Trade and other receivables consisted of the following as of 31 December:
US$ million
Trade accounts receivable
Other receivables
Allowance for doubtful accounts
2012
$939
32
971
(76)
$895
2011
$1,002
56
1,058
(87)
$971
2010
$1,239
72
1,311
(98)
$1,213
Ageing analysis and movement in allowance for doubtful accounts are provided in Note 29.
16. Related party disclosures
Related parties of the Group include associates and joint venture partners, key management personnel and other entities that are under the
control or significant influence of the key management personnel, the Group’s ultimate parent or its shareholders. In considering each possible
related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Amounts owed by/to related parties at 31 December were as follows:
US$ million
Kazankovskaya
Lanebrook Limited
Raspadsky Ugol
Vtorresource-Pererabotka
Yuzhny GOK
Other entities
Less: allowance for doubtful accounts
Amounts due from
related parties
Amounts due to
related parties
2012
$23
–
2
3
4
14
46
(34)
$12
2011
$21
–
2
–
5
9
37
(29)
$8
2010
$21
53
2
–
19
97
104
(24)
$80
2012
$–
–
42
45
163
257
–
$257
2011
2010
$–
–
39
–
46
13
98
–
$1
–
32
–
178
6
217
–
$98
$217
In 2012, 2011 and 2010, the Group recognised an expense for bad and doubtful debts of related parties in the amount of $4 million, $7 million
and $15 million, respectively.
EVRAZ plc
Annual Report and Accounts 2012
145
16. Related party disclosures (continued)
Transactions with related parties were as follows for the years ended 31 December:
US$ million
Interlock Security Services
Kazankovskaya
Raspadsky Ugol
Vtorresource-Pererabotka
Yuzhny GOK
Other entities
Sales to
related parties
Purchases from
related parties
2012
2011
2010
$1
1
8
14
66
9
$1
1
8
–
42
8
$1
61
11
–
20
8
2012
$48
127
485
124
31
2011
$43
5
207
–
165
27
2010
$37
14
192
–
67
20
$99
$60
$46
$816
$447
$330
In addition to the disclosures presented in this note, some of 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, which 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 2012 and 2011, the Group issued short-term loans to Kazankovskaya bearing an interest rate ranging from 8.1% to 8.5% per
annum. At the reporting dates, the Group assessed the recoverability of these loans and recognised a loss, which was included in the other
non-operating expenses caption of the consolidated statement of operations (2012: $5 million, 2011: $3 million).
Lanebrook Limited is a controlling shareholder of the Company. At 31 December 2010, 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 2013.
In 2012, the Group sold one of its subsidiaries to Lanebrook (Note 12).
OOO Raspadsky Ugol (“Raspadsky Ugol”), a subsidiary of the Group’s joint venture Corber (Note 11), sells coal to the Group. Raspadsky Ugol
represents approximately 12% of the Group’s coal consumption. The coal was sold at prevailing market prices at the dates of transactions.
The Group sells steel products and renders services to Raspadsky Ugol.
Vtorresource-Pererabotka is a new subsidiary of Streamcore, the Group’s joint venture, acquired in February 2012. It sells scrap metal to the
Group and provides scrap processing and other services. In 2012, the purchases of scrap metal from Vtorresource-Pererabotka amounted to
$399 million (1,366,423 tonnes).
Yuzhny GOK, an 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 2012, the volume of purchases achieved 1,432,473 tonnes.
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 $102 million.
The transactions with related parties were based on market terms.
Compensation to key management personnel
Key management personnel include the following positions within the Group:
(cid:114)(cid:1) Directors of the Company,
(cid:114)(cid:1) vice presidents,
(cid:114)(cid:1) top managers of major subsidiaries.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
16. Related party disclosures (continued)
Compensation to key management personnel (continued)
In 2010-2012, key management personnel totalled 55 people. Total compensation to key management personnel were included in general and
administrative expenses in the consolidated statement of operations and consisted of the following:
US$ million
Salary
Performance bonuses
Social security taxes
Share-based payments (Note 24)
Termination benefits
Other benefits
2012
$21
14
3
10
–
1
$49
2011
$20
12
1
13
3
1
$50
2010
$21
14
1
1
4
3
$44
Other disclosures on Directors’ remuneration required by the Companies Act 2006 and those specified for audit by the Directors’ Remuneration
Report Regulations 2002 are included in the Directors’ Remuneration Report.
17. Other taxes recoverable
Taxes recoverable consisted of the following as of 31 December:
US$ million
Input VAT
Other taxes
2012
$206
123
$329
2011
$287
125
$412
2010
$241
112
$353
Input VAT, representing amounts payable or paid to suppliers, is recoverable from the tax authorities via offset against VAT payable to the tax
authorities on the Group’s revenue or direct cash receipts from the tax authorities. Management periodically reviews the recoverability of the
balance of input value added tax and believes it is fully recoverable within one year.
18. Other current financial assets
Other current assets included the following as of 31 December:
US$ million
Investments in Yuzhny GOK (Note 16)
Bank deposits
Restricted deposits at banks
Collateral under swap agreements (Note 26)
2012
$38
674
–
–
$712
2011
$38
2
7
10
$57
19. Cash and cash equivalents
Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of 31 December:
US$ million
US dollar
Russian rouble
Canadian dollar
Euro
South African rand
Ukrainian hryvnia
Czech koruna
Other
2012
$855
347
80
17
10
9
–
2
$1,320
2011
$314
262
21
89
80
25
6
4
$801
2010
$38
1
13
–
$52
2010
$306
200
69
46
49
10
1
2
$683
20. Equity
Share Capital
Prior to the reorganisation on 7 November 2011, in which substantially all shares of Evraz Group S.A. were converted 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. before reorganisation
Number of shares
Ordinary shares of €2 each, issued and fully paid
7 November
2011
31 December
2010
156,214,373 145,957,121
The issued and fully paid share capital of Evraz Group S.A. included 7,333,333 shares which were issued at zero consideration in 2009.
EVRAZ plc
Annual Report and Accounts 2012
147
20. Equity (continued)
Share capital (continued)
Share capital of Evraz Group S.A. before reorganisation (continued)
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
Number of shares
Ordinary shares of $1 each, issued and fully paid
31 December
2012
2011
1,339,929,360
1,337,560,713
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.
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 depository receipts of Evraz Group S.A. to trading on the London Stock Exchange has
been cancelled.
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. 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 869,469 newly issued shares of EVRAZ plc. Since that date
Evraz Group S.A. became a wholly-owned subsidiary of EVRAZ plc.
Treasury shares
Parent entity
Number of treasury shares
31 December
2012
2011
2010
EVRAZ plc
146,731
EVRAZ plc
775,410
Evraz Group S.A.
7,333,333
In 2012, the Group purchased 869,469 shares of EVRAZ plc for $4 million and transferred 1,498,148 shares to participants of the Incentive
Plan. The cost of treasury shares gifted under Incentive Plans, amounting to $11 million, was charged to accumulated profits.
In 2011, the Group purchased 235,878 shares of Evraz Group S.A. for $22 million, sold 34,332 shares for $3 million and transferred
115,389 shares to participants of the Incentive Plan (Note 24). The outstanding balance of the treasury shares has been exchanged into the
shares of EVRAZ plc during the reorganisation described above. The cost of treasury shares gifted under an Incentive Plan, amounting to
$11 million, was charged to accumulated profits.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
20. Equity (continued)
Earnings per share
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary
shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity
holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares
that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
Weighted average number of ordinary shares for basic earnings per share
Effect of dilution: share-based awards
1,339,027,567
–
1,293,795,125
2,689,622
1,247,614,092
134,937
Weighted average number of ordinary shares adjusted for the effect of dilution
1,339,027,567
1,296,484,747
1,247,749,029
Profit/(loss) for the year attributable to equity holders of the parent,
US$ million
Basic earnings/(losses) per share
Diluted earnings/(losses) per share
$(308)
$(0.23)
$(0.23)
$461
$0.36
$0.36
$486
$0.39
$0.39
2012
2011
2010
In 2010, 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 lent 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 2012, the Group reported net loss. Consequently, they were
antidilutive. In 2010, 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 2010 were recalculated using the share exchange ratio.
In 2013, in connection with the purchase of a controlling interest in Corber (Note 11), EVRAZ plc issued 132,653,006 shares and warrants to
subscribe for an additional 33,944,928 shares exercisable at zero price. The number of the additionally issued shares is adjusted for dividends
that could be declared during the period from the date of issue of the warrants till the date of their exercise.
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 the parent company during 2010–2012 were as follows:
Declared by Evraz Group S.A.
Interim for 2011
Declared by EVRAZ plc
Final for 2011
Interim for 2012
Date of
declaration
To holders
registered at
Dividends
declared,
US$ million
10/10/2011
28/10/2011
18/06/2012
29/08/2012
08/06/2012
07/09/2012
491
228
147
US$ per
share
3.30
0.17
0.11
In 2011, prior to the Group’s reorganisation, Evraz Group S.A. declared interim dividends of $3.30 per share, including special dividends of
$2.70 per share. In the consolidated financial statements of the Group for 2011 these dividends were charged against accumulated profits.
At a meeting held on 15 May 2012, the shareholders of Evraz Group S.A. approved the distribution of those dividends from share premium of
Evraz Group S.A. Consequently, in 2012, the Group decreased its additional paid-in capital and increased accumulated profits by $491 million.
The shareholders’ meeting held on 16 May 2011 resolved not to declare dividends for 2010.
In addition, certain subsidiaries of the Group declared dividends. The share of non-controlling shareholders in those dividends was $1 million in
2012, 2011 and 2010.
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.
EVRAZ plc
Annual Report and Accounts 2012
149
20. Equity (continued)
Other movements in equity
Acquisitions of non-controlling interests in subsidiaries
In 2012, 2011 and 2010, the Group acquired non-controlling interests in certain subsidiaries (Note 4). The excess of consideration over the
carrying value of non-controlling interests amounting to $30 million, $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, $Nil and $1 million, respectively, was recorded as
additional paid-in capital.
In 2012, as a result of the completion of the Group’s reorganisation, in which the remaining global depository receipts of Evraz Group S.A.
were converted into the newly issued shares of EVRAZ plc, a 0.18% non-controlling interest in Evraz Group S.A. was derecognised (Note 4).
This increased the shareholders’ equity by $6 million.
Non-controlling interests in subsidiaries
In 2011, the Group sold a 49.98% share in the Mezhegey coal field project to a third party for a non-cash consideration of $34 million, which
approximated the carrying value of a non-controlling interest arose on the transaction. In June 2012, the Group acquired an additional 9.996%
ownership interest and its share in the project increased to approximately 60.016% (Note 4). During 2012 the non-controlling shareholder
contributed $7 million to the Mezhegey coal field project.
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. In 2012, the Group sold Frotora to a third party (Note 12).
21. Loans and borrowings
As of 31 December 2012, 2011 and 2010, total interest-bearing loans and borrowings consisted of short-term loans and borrowings in the
amount of $527 million, $339 million and $381 million, respectively, and long-term loans and borrowings in the amount of $7,652 million,
$6,919 million and $7,636 million, respectively, including the current portion of long-term liabilities of $1,164 million, $193 million and
$244 million, respectively.
Some of the loan agreements and terms and conditions of notes provide for certain covenants in respect of Evraz Group S.A. and its
subsidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios, including restrictions in respect of
indebtedness and profitability.
Short-term and long-term loans and borrowings were as follows as of 31 December:
US$ million
Bank loans
European commercial papers
8.875 per cent notes due 2013
7.25 per cent convertible bonds due 2014 (Note 20)
8.25 per cent notes due 2015
7.40 per cent notes due 2017
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
The average effective annual interest rates were as follows at 31 December:
2012
$2,562
242
534
–
577
600
509
850
658
494
494
658
1
(116)
–
93
2011
$2,613
–
534
–
577
–
509
850
621
466
466
621
1
(133)
–
81
2010
$3,472
–
1,156
650
577
–
509
–
656
492
492
–
13
(192)
(104)
90
$8,156
$7,206
$7,811
US dollar
Russian rouble
Euro
Canadian dollar
Czech koruna
Long-term borrowings
Short-term borrowings
2012
7.13%
10.51%
3.93%
3.85%
–
2011
6.96%
10.37%
4.66%
–
–
2010
8.01%
11.17%
5.05%
––
––
2012
3.00%
11.52%
2.75%
2011
2.89%
10.83%
3.64%
–
3.38%
2010
3.06%
12.50%
1.48%
–
–
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
21. Loans and borrowings (continued)
The liabilities are denominated in the following currencies at 31 December:
US$ million
US dollar
Russian rouble
Euro
Canadian dollar
Czech koruna
Unamortised debt issue costs
Difference between the nominal amount and liability component of convertible bonds
(Note 20)
2012
$5,434
2,349
381
108
–
(116)
2011
$4,790
2,215
328
–
6
(133)
2010
$6,079
1,699
322
–
7
(192)
–
–
(104)
$8,156
$7,206
$7,811
Pledged assets
The Group pledged its rights under some export contracts as collateral under the loan agreements. All proceeds from sales of steel pursuant
to these contracts can be used to satisfy the obligations under the loan agreements in the event of a default.
At 31 December 2012, 2011 and 2010, the Group had inventory with a carrying value of $319 million, $250 million and $203 million,
respectively, pledged as collateral under the loan agreements.
Issue of notes and bonds
In April 2012, the Group issued notes in the amount of $600 million due in 2017. The notes bear semi-annual coupon at the annual rate of
7.40% and must be redeemed at their principal amount on 24 April 2017. The proceeds from the issue of the notes were used for the repayment
of certain bank loans.
In December 2012, the Group issued European commercial papers in the amount of $80 million and $170 million bearing an interest rate of
3.50% and 3.75%, respectively, and maturing on 6 September 2013 and 4 December 2013, respectively.
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 convertible bonds in the amount of $650 million, which bore interest of 7.25% per annum with maturity on
13 July 2014 (Note 20). These bonds were converted into shares in 2011 (Note 20).
In 2009, the Group issued bonds in the total amount of 20,000 million Russian roubles, which bear interest of 13.50% per annum and mature
on 16 October 2014. In 2010, the Group issued bonds in the amount of 15,000 million Russian roubles bearing interest of 9.25% per annum
with maturity on 22 March 2013 (Note 33), and bonds amounting to 15,000 million Russian roubles bearing interest of 9.95% per annum with
maturity 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 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.
Covenants reset
In 2012, the lenders under certain bank facilities and the holders of the 8.25% guaranteed notes due 2015 approved the requested amendments
to the loan agreements and notes removing certain financial restrictions. The Group incurred $7 million with respect to this covenants reset.
In 2010, the Group paid the remaining $29 million of consent fees and legal fees in connection with the covenants reset, which was performed
in 2009.
Unamortised debt issue costs
Unamortised debt issue costs represent agent commission and transaction costs paid by the Group in relation to the arrangement and reset of
loans and notes.
EVRAZ plc
Annual Report and Accounts 2012
151
21. Loans and borrowings (continued)
Unutilised borrowing facilities
The Group had the following unutilised borrowing facilities as of 31 December:
US$ million
Unutilised borrowing facilities
2012
$1,146
2011
$1,322
2010
$1,010
Loans of disposal groups classified as held for sale
At 31 December 2012, the loans relating to the subsidiaries classified as held for sale (Note 12) amounted to $79 million, including $77 million
of short-term liabilities. They were included in liabilities directly associated with the assets held for disposal.
22. Finance lease liabilities
The Group has several lease agreements under which it has an option to acquire the leased assets at the end of lease terms ranging from 1 to
21 years. The estimated remaining useful life of leased assets varies from 1 to 29 years. The leases were accounted for as finance leases in the
consolidated financial statements. The carrying value of the leased assets was as follows as at 31 December:
US$ million
Buildings and constructions
Machinery and equipment
Transport and motor vehicles
Assets under construction
2012
$2
15
–
–
$17
2011
2010
$2
22
83
–
$1
22
93
10
$107
$126
The leased assets are included in property, plant and equipment in the consolidated statement of financial position (Note 9).
Future minimum lease payments were as follows at 31 December:
US$ 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
2012
2011
2010
Minimum
lease
payments
Present
value of
minimum
lease
payments
$3
12
3
18
(5)
$13
$2
9
23
13
–
$13
Minimum
lease
payments
$16
29
2
48
(9)
$39
Present
value of
minimum
lease
payments
$13
24
5
39
–
$39
Minimum
lease
payments
$25
41
5
71
(14)
$57
Present
value of
minimum
lease
payments
$19
33
57
–
$57
In the years ended 31 December 2012, 2011 and 2010, the average interest rates under the finance lease liabilities were 9.6%, 9.8% and 9.9%.
23. Employee benefits
Russian plans
Certain Russian subsidiaries of the Group provide regular lifetime pension payments and lump-sum amounts payable at 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, some 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.
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.
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The Ukrainian subsidiaries make regular contributions to the State Pension Fund thereby 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.
In 2010 and 2011, these preferential pensions were partially funded by the State Pension Fund. The Ukrainian subsidiaries gradually increased
these contributions and starting from 2012 they pay 100% of preferential pensions. In addition, employees receive lump-sum payments on
retirement and other benefits 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 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
23. Employee benefits (continued)
US and Canadian plans
The Group’s subsidiaries in the USA and Canada have defined benefit pension plans that cover specified 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 applicable bonuses.
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 defined contribution plans 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
2012
$412
2011
$404
2010
$257
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 2012, 2011
and 2010 and amounts recognised in the consolidated statement of financial position as of 31 December 2012, 2011 and 2010 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 2012
Net benefit expense
$(35)
$(12)
US$ 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
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)
Russian
plans
Ukrainian
plans
US
& Canadian
plans
$(6)
(17)
–
(9)
(3)
$(3)
(8)
–
(1)
–
$(20)
(33)
32
(12)
(1)
$(34)
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)
–
–
$(14)
(34)
28
(4)
1
1
(1)
$(23)
Other
plans
$–
(2)
–
–
–
$(2)
Other
plans
$–
(2)
–
–
–
$(2)
Other
plans
$(1)
(2)
–
–
–
–
–
$(3)
Total
$(29)
(60)
32
(22)
(4)
$(83)
Total
$(29)
(60)
32
(14)
12
$(59)
Total
$(25)
(60)
28
(7)
5
1
(1)
$(59)
Net benefit expense
$(18)
$(15)
EVRAZ plc
Annual Report and Accounts 2012
153
23. Employee benefits (continued)
Actual return on plan assets was as follows:
US$ million
Actual return on plan assets including:
US & Canadian plans
Benefit liability
31 December 2012
US$ million
Benefit obligation
Plan assets
Unrecognised net actuarial gains/(losses)
Unrecognised past service cost
Benefit asset
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
2012
$50
50
Ukrainian
plans
US
& Canadian
plans
$68
–
68
(12)
1
–
$57
$793
(537)
256
(232)
–
39
$63
Ukrainian
plans
US
& Canadian
plans
$65
–
65
(8)
2
–
$59
$700
(470)
230
(185)
(1)
28
$72
Ukrainian
plans
US
& Canadian
plans
$77
–
77
(2)
(10)
–
$65
$629
(463)
166
(95)
1
19
$91
Russian
plans
$251
(1)
250
(88)
9
–
$171
Russian
plans
$203
(1)
202
(68)
10
–
$144
Russian
plans
$192
(1)
191
(68)
12
–
$135
2011
$1
1
Other
plans
$3
–
3
–
–
–
$3
Other
plans
$21
–
21
–
–
–
$21
Other
plans
$24
–
24
–
–
–
$24
2010
$44
44
Total
$1,115
(538)
577
(332)
10
39
$294
Total
$989
(471)
518
(261)
11
28
$296
Total
$922
(464)
458
(165)
3
19
$315
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
23. Employee benefits (continued)
Movements in benefit obligation
US$ million
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
At 31 December 2011
Interest cost on benefit obligation
Current service cost
Past service cost
Benefits paid
Actuarial (gains)/losses on benefit obligation
Disposal of subsidiaries
Reclassification to liabilities directly associated with
disposal groups classified as held for sale
Translation difference
At 31 December 2012
Changes in the fair value of plan assets
US$ million
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
Expected return on plan assets
Contributions of employer
Benefits paid
Actuarial gains/(losses) on plan assets
Translation difference
At 31 December 2012
Russian
plans
Ukrainian
plans
US
& Canadian
plans
$173
16
5
(4)
(13)
17
(1)
(1)
192
16
7
1
(15)
14
(12)
203
17
6
5
(16)
24
(1)
–
13
$251
$72
8
5
–
(6)
(2)
–
–
77
9
5
(24)
(7)
5
–
65
8
3
–
(8)
5
(5)
–
–
$68
$562
34
14
–
(37)
39
–
17
629
33
17
3
(39)
65
(8)
700
33
20
1
(44)
75
–
–
8
$793
Other
plans
$20
2
1
–
(1)
–
–
2
24
2
–
–
(1)
–
(4)
21
2
–
–
(2)
1
–
(18)
(1)
$3
Russian
plans
Ukrainian
plans
US
& Canadian
plans
Other
plans
$1
–
13
(13)
–
–
–
1
–
15
(15)
–
–
1
–
16
(16)
–
–
$1
$–
–
6
(6)
–
–
–
–
–
7
(7)
–
–
–
–
8
(8)
–
–
$403
28
37
(37)
16
1
15
463
32
52
(39)
(31)
(7)
470
32
54
(44)
18
7
$–
–
1
(1)
–
–
–
–
–
1
(1)
–
–
–
–
2
(2)
–
–
Total
$827
60
25
(4)
(57)
54
(1)
18
922
60
29
(20)
(62)
84
(24)
989
60
29
6
(70)
105
(6)
(18)
20
$1,115
Total
$404
28
57
(57)
16
1
15
464
32
75
(62)
(31)
(7)
471
32
80
(70)
18
7
The amount of contributions expected to be paid to the defined benefit plans during 2013 approximates $66 million.
$–
$537
$–
$538
EVRAZ plc
Annual Report and Accounts 2012
155
23. Employee benefits (continued)
The major categories of plan assets as a percentage of total plan assets were as follows at 31 December:
US & Canadian plans:
Equity funds and investment trusts
Corporate bonds and notes
Property
Cash
2012
2011
2010
83%
13%
2%
2%
81%
11%
3%
5%
86%
11%
0%
3%
The following table is a summary of the present value of the benefit obligation, fair value of the plan assets and experience adjustments for the
current year and previous four annual periods.
US$ million
Defined benefit obligation
Plan assets
Deficit
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2012
$1,115
538
(577)
122
3
2011
$989
471
(518)
137
(12)
2010
$922
464
(458)
60
9
The principal assumptions used in determining pension obligations for the Group’s plans are shown below:
2012
2011
2008
$717
325
(392)
(38)
16
2009
$827
404
(423)
54
24
2010
Russian
plans
Ukrainian
plans
US &
Canadian
plans
Other
plans
Russian
plans
Ukrainian
plans
US &
Canadian
plans
Other
plans
Russian
plans
Ukrainian
plans
US &
Canadian
plans
Other
plans
Discount rate
Expected rate of return on
assets
Future benefits increases
Future salary increase
Healthcare costs increase rate
7%
8%
8%
8%
–
14.0%
3.9-5.1%
2.0-8.8%
8%
14.0%
4.0-5.3%
4.0-8.8%
8%
12.6%
5.1-5.8%
3.9-8.3%
–
6.5-7.0%
–
12%
–
0.9-7.1%
–
12%
–
0.9-7.3%
–
8%
8%
–
–
3.1-3.5%
6-7%
2%
3%
7.0-7.3%
8%
8%
–
8%
8%
–
–
3.0-3.1%
6.5-7%
3.0%
2.0-6.3%
7.3-7.5%
8%
8%
–
8%
8%
–
–
3.0-3.2%
6.8-10%
3%
2.0-6.5%
6.5-7%
The expected long-term rate of return on defined benefit pension plan assets represents the weighted-average asset return for each forecasted
asset class return over several market cycles.
A one percentage point change in the assumed rate of increase in healthcare costs would have insignificant effects on the Group’s current
service cost and the defined benefit obligation.
24. Share-based payments
On 14 December 2010, 13 October 2011 and 6 September 2012, the Group adopted Incentive Plans under which certain senior executives and
employees (“participants”) could be gifted shares of the parent company upon vesting.
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 2012 are presented below:
Number of Shares of EVRAZ plc
11 April 2013
29 March 2014
29 March 2015
Incentive Plan
2012
Incentive Plan
2011
Incentive Plan
2010
2,857,558
2,857,558
3,810,363
792,969
1,094,426
–
656,697
–
9,525,479
1,887,395
656,697
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, 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.
There have been no modifications or cancellations to the plans during 2010–2012. 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.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
24. Share-based payments (continued)
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 2012 was $3.41 per share of EVRAZ plc (in 2011 and 2010 $48.26 and $102.07 per share
of Evraz Group S.A., respectively). The fair value of these awards was estimated at the date of grant and measured at the market price of the
shares of a parent company reduced by the present value of dividends expected to be paid during the vesting period. The following inputs,
including assumptions, were used in the valuation:
Dividend yield (%)
Expected life (years)
Market prices of the shares of EVRAZ plc (2011 and 2010: Evraz Group S.A.)
at the grant dates
Incentive Plan
2012
Incentive Plan
2011
Incentive Plan
2010
1.9 – 5.4
0.6 – 2.6
3.6 – 4.8
0.5 – 2.5
1.2 – 1.5
0.5 – 2.5
$3.61
$51.57
$103.83
The following table illustrates the number 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
Exchange into shares of EVRAZ plc
Outstanding at 31 December
2012
2011
2010
4,460,547
9,892,313
(785,141)
(1,498,148)
–
321,898
335,069
(45,960)
(115,389)
3,964,929
–
334,755
(12,857)
–
–
12,069,571
4,460,547
321,898
The weighted average share price at the dates of exercise was $4.31 and $97.46 in 2012 and 2011, respectively.
The weighted average remaining contractual life of the share-based awards outstanding as of 31 December 2012, 2011 and 2010 was 1.2, 1.2
and 1.4 years, respectively.
In the years ended 31 December 2012, 2011 and 2010, expense arising from the equity-settled share-based compensations was as follows:
US$ million
Expense arising from equity-settled share-based payment transactions
2012
$22
2011
$23
2010
$2
In 2012, 2011 and 2010, the Group paid $Nil, $1 million and $3 million, respectively, relating to the cash-settled share-based awards under the
incentive plans which were in place before 2010.
25. Provisions
At 31 December the provisions were as follows:
US$ million
Non-current
Current
Non-current
Current
Non-current
Current
2012
2011
2010
Site restoration and decommissioning
costs
Legal claims
Other provisions
$252
–
5
$257
$14
12
62
$32
$283
–
1
$285
$27
15
1
$53
$277
–
2
$279
$28
17
9
$54
EVRAZ plc
Annual Report and Accounts 2012
157
25. Provisions (continued)
In the years ended 31 December 2012, 2011 and 2010, the movement in provisions was as follows:
US$ million
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
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
Reclassification to liabilities directly associated with disposal groups
classified as held for sale
Translation difference
At 31 December 2012
Site restoration
and decom-
missioning
costs
Legal
claims
Other
provisions
$190
23
15
20
55
(5)
–
7
305
45
19
(8)
(9)
(12)
(2)
(28)
310
27
19
35
(1)
(7)
(6)
(120)
9
$266
$6
18
–
–
–
(5)
(2)
–
17
20
–
–
(1)
(12)
(8)
(1)
15
18
–
–
(4)
(11)
(6)
(1)
1
$12
$15
12
–
–
–
(15)
(1)
–
11
19
–
–
–
(14)
(2)
(1)
13
21
–
–
–
(20)
(1)
(2)
–
$11
Total
$211
53
15
20
55
(25)
(3)
7
333
84
19
(8)
(10)
(38)
(12)
(30)
338
66
19
35
(5)
(38)
(13)
(123)
10
$289
Site restoration costs
Under the legislation, mining companies and steel mills have obligations to restore mining sites and contaminated land. The respective liabilities
were measured based on estimates of restoration costs which are expected to be incurred in the future discounted at the annual rate ranging
from 3.7% to 14% in 2012 and 2011 (2010: 6.1% to 13%).
26. Other long-term liabilities
Other long-term liabilities consisted of the following as of 31 December:
US$ 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)
2012
$12
10
14
7
18
115
16
192
(22)
$170
2011
$16
11
14
2
26
209
16
294
(9)
$285
2010
$24
21
14
3
33
38
24
157
(14)
$143
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 2012, the Group was not required to pay this consideration due to the movements in the vanadium
pentoxide market relative to the levels set in the agreement. In 2011 and 2010, the Group paid $3 million and $16 million, respectively.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
26. Other long-term liabilities (continued)
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 currency and interest rate 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 ($2,100 million at the exchange rate as of
31 December 2012). The exchange is exercised on approximately the same dates as the payments under the bonds.
The swap contracts are summarised in the table below.
13.5 per cent bonds due 2014
9.25 per cent bonds due 2013
9.95 per cent bonds due 2015
8.40 per cent bonds due 2016
Principal,
millions of
roubles
20,000
15,000
15,000
20,000
70,000
Hedged
amount,
millions of
roubles
14,019
14,778
14,997
19,996
63,790
Swap
amount,
US$ 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 2012, 2011 and 2010, the change in fair value of the derivatives of $96 million, $(176) million and
$(27) million, respectively, together with a realised gain on the swap transactions, amounting to $81 million, $66 million and $31 million,
respectively, was recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations (Note 7).
27. Trade and other payables
Trade and other payables consisted of the following as of 31 December:
US$ 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
2012
$1,100
249
22
41
$1,412
2011
$1,147
254
9
50
$1,460
2010
$880
229
14
50
$1,173
2012
$87
61
11
11
14
11
2011
$81
53
17
10
12
15
2010
$90
40
14
10
10
16
$195
$188
$180
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. In 2012, the major customers were Russian Railways and Enbridge Energy Partners (3.1% 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 applies for credit terms which are longer than
normal. In this case, the Group requires bank guarantees or other collateral. The Group has developed standard credit terms and constantly
monitors the status of accounts receivable collection and the creditworthiness of the customers.
EVRAZ plc
Annual Report and Accounts 2012
159
29. Financial risk management objectives and policies (continued)
Credit risk (continued)
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)
2012
$4
51
733
899
31
12
1,320
2011
$22
10
57
974
62
8
801
2010
$22
6
76
1,216
18
124
683
$3,050
$1,934
$2,145
Receivables from related parties in the table above do not include prepayments in the amount of $Nil, $Nil and $2 million as of 31 December
2012, 2011 and 2010, respectively.
The ageing analysis of trade and other receivables, loans receivable and receivables from related parties at 31 December is presented in the
table below.
US$ million
Not past due
Past due
less than six months
between six months and one year
over one year
2012
2011
2010
Gross
amount
$759
284
198
20
66
Impairment
$(16)
(85)
(11)
(11)
(63)
Gross
amount
$846
306
204
30
72
Impairment
$(5)
(103)
(24)
(16)
(63)
$1,043
$(101)
$1,152
$(108)
Gross
amount
$1,098
377
232
27
118
$1,475
In the years ended 31 December 2012, 2011 and 2010, the movement in allowance for doubtful accounts was as follows:
US$ million
At 1 January
Charge for the year
Utilised
Translation difference
At 31 December
2012
$(108)
(14)
25
(4)
$(101)
2011
$(117)
(45)
47
7
$(108)
Impairment
$(8)
(109)
(16)
(10)
(83)
$(117)
2010
$(92)
(45)
19
1
$(117)
Liquidity Risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing
liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group manages liquidity risk by maintaining adequate cash reserves and borrowing facilities, by continuously monitoring forecast and actual
cash flows and matching the maturity profiles of financial assets and liabilities.
The Group prepares a rolling 12-month financial plan which ensures that the Group has sufficient cash on demand to meet expected operational
expenses, financial obligations and investing activities as they arise. The Group exercises a daily monitoring of cash proceeds and payments.
The Group maintains credit lines and overdraft facilities that can be drawn down to meet short-term financing needs. If necessary, the Group
refinances its short-term debt by long-term borrowings. The Group also uses forecasts to monitor potential and actual financial covenants
compliance issues. Where compliance is at risk, the Group considers options including debt repayment, refinancing or covenant reset.
The Group has developed standard payment periods in respect of trade accounts payable and monitors the timeliness of payments to its
suppliers and contractors.
The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including
interest payments.
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160
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
29. Financial risk management objectives and policies (continued)
Liquidity risk (continued)
Year ended 31 December 2012
On
demand
Less than
3 months
3 to 12
months
US$ 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
Total variable-rate debt
Non-interest bearing debt
Financial instruments
included in other
liabilities
Trade and other payables
Payables to related parties
Amounts payable under
put options for shares of
subsidiaries
Dividends payable
Total non-interest
bearing debt
$7
–
–
–
7
158
–
158
–
266
218
–
8
492
$657
$501
23
1
14
539
119
22
141
1
809
39
–
–
849
$795
404
2
3
1,204
112
68
180
–
66
–
4
–
70
1 to 2
years
$678
396
4
21
1,099
359
84
443
3
–
–
6
–
9
2 to 5
years
After
5 years
Total
$2,393
647
8
100
3,148
1,601
121
1,722
2
–
–
–
–
2
$1,380
58
3
24
1,465
76
7
83
2
–
–
–
–
2
$5,754
1,528
18
162
7,462
2,425
302
2,727
8
1,141
257
10
8
1,424
$1,529
$1,454
$1,551
$4,872
$1,550
$11,613
EVRAZ plc
Annual Report and Accounts 2012
161
29. Financial risk management objectives and policies (continued)
Liquidity risk (continued)
Year ended 31 December 2011
US$ 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
Total non-interest bearing
debt
On
demand
Less than
3 months
3 to 12
months
1 to 2
years
2 to 5
years
After 5
years
Total
$4
–
–
1
5
158
–
–
158
–
238
67
9
9
$1
23
1
1
26
213
22
4
239
–
949
31
–
–
$27
420
3
6
456
129
68
8
205
–
10
–
–
–
323
$486
980
$1,245
10
$671
$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
$1,828
$5,105
$1,627
$10,962
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162
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
29. Financial risk management objectives and policies (continued)
Liquidity risk (continued)
Year ended 31 December 2010
US$ 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
Total non-interest bearing
debt
On
demand
Less than
3 months
3 to 12
months
1 to 2
years
2 to 5
years
After
5 years
Total
$7
–
–
1
8
235
–
–
235
–
104
177
6
13
$20
55
1
2
78
224
19
5
248
–
795
37
–
–
$124
462
2
11
599
15
56
17
88
–
31
2
–
–
300
$543
832
$1,158
33
$720
$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
$902
$7,677
$716
$11,716
Payables to related parties in the tables above do not include advances received in the amount of $Nil, $Nil and $1 million as of 31 December
2012, 2011 and 2010, 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
affect 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 2012
163
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
2012
Basis
points
(2)
2
(4)
4
Effect on
PBT
US$
millions
$–
–
–
$–
2011
Basis
points
(6)
6
(15)
15
Effect on
PBT
US$
millions
$1
(1)
–
$–
2010
Basis
points
(25)
100
(25)
100
Effect on
PBT
US$
millions
$4
(17)
1
$(2)
Currency risk
The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in currencies other than the functional
currencies of the respective Group’s subsidiaries. The currencies in which these transactions are denominated are primarily US dollars,
Canadian dollars and euro.
The Group does not have formal arrangements to mitigate currency risks of the Group’s operations. However, management believes that the
Group is partly secured from currency risks as foreign currency denominated sales are used to cover repayment of foreign currency
denominated borrowings.
The Group’s exposure to currency risk determined as the net monetary position in the respective currencies was as follows at 31 December:
US$ million
USD/RUB
EUR/RUB
EUR/USD
USD/CAD
EUR/CZK
USD/CZK
USD/ZAR
EUR/ZAR
USD/UAH
RUB/UAH
2012
$(1,478)
(382)
109
(24)
4
(176)
(9)
69
(168)
28
2011
$4,402
(321)
127
(995)
35
(229)
14
77
(156)
(1)
2010
$3,419
(283)
137
(1,180)
38
(282)
66
41
(1)
(43)
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
29. Financial risk management objectives and policies (continued)
Market risk (continued)
Currency risk (continued)
Sensitivity analysis
The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held
constant, of the Group’s profit before tax. In estimating reasonably possible changes the Group assessed the volatility of foreign exchange
rates during the reporting periods.
USD/RUB
EUR/RUB
EUR/USD
USD/CAD
EUR/CZK
USD/CZK
USD/ZAR
EUR/ZAR
USD/UAH
RUB/UAH
2012
2011
2010
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
Change in
exchange rate
Effect on
PBT
%
US$ millions
%
US$ millions
%
US$ millions
(11.09)
11.09
(8.12)
8.12
(8.45)
8.45
(6.69)
6.69
(6.38)
6.38
(12.64)
12.64
(19.27)
19.27
(12.09)
12.09
(0.08)
0.08
(11.07)
11.07
164
(164)
31
(31)
(9)
9
2
(2)
–
–
22
(22)
2
(2)
(8)
8
–
–
(3)
3
(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)
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
2012
2011
2010
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
(11.09)
11.09
271
(217)
(11.36)
11.36
252
(201)
(9.70)
9.70
167
(137)
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 2012
165
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
2012
2011
2010
Assets measured at fair value
Available-for-sale financial assets
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 26)
Contingent consideration payable for
the acquisition of Stratcor (Note 26)
Amounts payable under put options
for shares of subsidiaries
21
–
–
–
10
–
–
–
2
–
115
–
–
–
–
–
––
–
–
12–
––
17
–
–
–
11
–
–
–
–
–
209
–
16
9
–
–
–
–
–
–
–
37
–
–
–
21
–
–
–
5
16
38
–
24
6
–
–
–
–
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
7.40 per cent notes due 2017
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
2012
Carrying
amount
$105
2,115
542
–
562
604
503
854
675
506
501
661
Fair
value
$131
1,956
545
––
637
634
582
879
670
467
474
590
2011
2010
Carrying
amount
$104
2,109
535
–
560
–
501
853
635
476
472
623
Fair
value
$115
1,943
559
5
581
–
520
759
676
468
478
559
Carrying
amount
$1,201
1,807
1,144
51
555
–
499
–
670
502
498
–
Fair
value
$1,198
1,663
1,248
650
615
–
565
–
740
498
496
–
1
11
1
1
3
12
$7,629
$7,566
$6,869
$6,659
$7,440
$7,685
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
USD
EUR
RUB
2012
2011
2010
7.5 – 8.6%
2.9%
9.2%
8.2 – 9.1%
3.2%
9.7%
7.7 – 8.3%
2.8%
12.0%
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 2012.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Consolidated Financial Statements (Continued)
year ended 31 December 2012
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 $2,000 million minimum representing consolidated equity of Evraz Group
S.A. less goodwill. In 2010–2012, the Group was in compliance with this requirement.
30. Non-cash transactions
Transactions that did not require the use of cash or cash equivalents were as follows in the years ended 31 December:
US$ million
Liabilities for purchases of property, plant and equipment
Purchases of property, plant and equipment settled by an offset with accounts receivable
Loan issued to a partner of the Mezhegey coal field project
Purchase of a non-controlling interest in the Mezhegey coal field project settled by
an offset with a loan due to the Group (Note 4)
Carrying amount of convertible bonds transferred to equity upon debt conversion
(Note 21)
2012
$144
–
7
40
–
2011
$93
10
36
–
553
2010
$70
12
–
–
–
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, Ukraine and the
Republic of South Africa are considered to be emerging markets with higher economic and political risks.
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 2012, the sovereign debt problems in Europe added extra volatility to commodity and financial 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 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 $19 million.
Contractual commitments
At 31 December 2012, the Group had contractual commitments for the purchase of production equipment and construction works for an
approximate amount of $579 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 2012, 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 2013, the Group plans to spend approximately $159 million under these programmes.
EVRAZ plc
Annual Report and Accounts 2012
167
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 addition, the Group has committed to various environmental protection programmes covering periods from 2013 to 2022, under which the
Group will perform works aimed at reductions in environmental pollution and contamination. The costs of implementing these programmes are
estimated at $267 million.
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
$27 million.
In 2008, the Competition Commission initiated a complaint against various steel manufacturers, including EVRAZ Highveld Steel and Vanadium
Corporation Limited (“EHSVL”), alleging that EHSVL (then Highveld Steel and Vanadium Corporation) was involved, whether directly or indirectly,
in the fixing of the selling prices and trading conditions for flat steel products. It was further alleged that EHSVL contravened the Competition Act
by engaging in the exchange of information with a competitor through information exchanges and meetings of the South African Iron and Steel
Institute or its committees.
In March 2012, the Commission referred the complaints to the South African Competition Tribunal for prosecution.
No decision has yet been announced by the Competition Tribunal as to whether it will decide to impose any penalty against EHSVL or, if imposed,
the amount of any such fine. Should the Competition Commission be successful, which is not expected by management, it could raise a
maximum penalty of R554 million ($65 million).
Management believes that EHSVL acted in compliance with applicable laws and regulations. Thus, no provision for this matter has been accrued
as of 31 December 2012. The Group has cooperated with the Competition Commission throughout the investigation and intends to continue to
do so.
32. Auditor’s remuneration
The remuneration of the Group’s auditor in respect of the services provided to the Group was as follows.
US$ 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
2012
$2
5
7
–
1
1
$8
2011
$4
7
11
3
2
5
2010
$2
6
8
1
1
2
$16
$10
33. Subsequent events
Acquisition of a controlling interest in Corber
In January 2013, the Group obtained control over Corber, which owns 81.95% interest in JSC Raspadskaya (Note 11).
Extension of the notes due 2013
In March 2013, the holders of 9.25% rouble-denominated notes received an option to accept a new coupon of 8.75% per annum till 20 March
2015 or put the notes back to the Group at a nominal value. By 26 March 2013, the date of the expiration of the option, the Group re-purchased
back the notes totalling 12,265 million roubles ($399 million at the exchange rate as of the date of the transaction). The remaining notes with the
aggregate principal amount of 2,735 million roubles (approximately $89 million) continue to be traded on the Moscow Exchange. The Group has a
right to resell the repurchased notes on the market at any time and at its own discretion.
Timir Iron Ore project
On 3 April 2013, the Group acquired a 51% ownership interest in the joint venture with Alrosa for the development of 4 iron ore deposits in
the southern part of the Yakutia region in Russia. The Group’s consideration for this stake amounts to 4,950 million roubles (approximately
$160 million) payable in installments through 15 July 2014. Total investments in the first phase of the Timir project are estimated at $1.8 billion
during the period from 2013 to 2018. The Group and Alrosa are expected to finance the Timir project on a pro rata basis.
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EVRAZ plc
Annual Report and Accounts 2012
Independent auditor’s report to the members of EVRAZ plc
We have audited the parent company financial statements of EVRAZ plc for the year ended 31 December 2012 which comprise
the Separate Statement of Comprehensive Income, the Separate Statement of Financial Position, the Separate Statement of
Cash Flows, the Separate Statement of Changes in Equity and the related notes 1 to 9. 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 97, 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 2012 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.
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 year 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 2012.
Ken Williamson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
10 April 2013
Notes:
1. The maintenance and integrity of the EVRAZ plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration
of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were
initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
EVRAZ plc
Annual Report and Accounts 2012
169
Separate Statements
Contents
170 Separate Statement of
Comprehensive Income
171 Separate Statement
of Financial Position
172 Separate Statement of Cash Flows
173 Separate Statement of Changes in Equity
174 Notes to the Separate
Financial Statements
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170
EVRAZ plc
Annual Report and Accounts 2012
Separate Statement of Comprehensive Income
(In millions of US dollars)
General and administrative expenses
Interest expense
Dividend income
Net profit/(loss)
Total comprehensive income
The accompanying notes form an integral part of these separate financial statements.
Note
7
8
Year ended
31 December
2012
Period from
23 September
to 31 December
2011
$(11)
(1)
390
378
$378
$(1)
–
–
(1)
$(1)
EVRAZ plc
Annual Report and Accounts 2012
171
Separate Statement of Financial Position
(In millions of US dollars)
The Financial Statements on pages 170 to 177 were approved by the Board of Directors on 10 April 2013 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
Short–term loans
Payables to related parties
Trade and other payables
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
The accompanying notes form an integral part of these separate financial statements.
31 December
Note
2012
2011
3
4
4
5
4
7
6
$2,343
2,343
$2,073
2,073
1,340
(584)
26
1,315
2,097
242
1
3
246
246
1,338
(582)
4
1,312
2,072
–
–
1
1
1
$2,343
$2,073
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EVRAZ plc
Annual Report and Accounts 2012
Separate 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:
Interest expense
Dividend income
Changes in working capital:
Receivables from/payables to related parties
Trade and other payables
Net cash flow used in operating activities
Cash flows from investing activities
Purchases of subsidiaries
Dividends received
Net cash flow from investing activities
Cash flows from financing activities
Proceeds from bank loans an notes
Dividends paid to shareholders
Net cash flow used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the year
The accompanying notes form an integral part of these separate financial statements.
Year ended
31 December
2012
Period from
23 September
to 31 December
2011
Note
7
8
6
3
8
7
4
$378
1
(390)
(11)
1
2
(8)
(248)
390
142
241
(375)
(134)
–
–
$–
$(1)
–
–
(1)
–
1
–
–
–
–
–
–
–
–
–
$–
EVRAZ plc
Annual Report and Accounts 2012
173
Separate Statement of Changes in Equity
(In millions of US dollars)
At 23 September 2011
Total comprehensive income/(expense) for
the period
Share-based payment
Issue of share capital in exchange for the
shares of Evraz Group S.A.
Reduction in par value of shares
At 31 December 2011
Total comprehensive income for the period
Share-based payment
Issue of share capital in exchange for the
shares of Evraz Group S.A.
Dividends declared
At 31 December 2012
Note
Issued
capital
Reorganisation
reserve
Share-based
payments
Accumulated
profits
$–
–
–
2,651
(1,313)
$1,338
–
–
2
–
5
4
4
5
4
4
$–
–
–
(582)
–
$(582)
–
–
(2)
–
$–
–
4
–
–
$4
–
22
–
–
$–
(1)
–
–
1,313
$1,312
378
–
–
(375)
Total
$–
(1)
4
2,069
–
$2,072
378
22
–
(375)
$1,340
$(584)
$26
$1,315
$2,097
The accompanying notes form an integral part of these separate financial statements.
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174
EVRAZ plc
Annual Report and Accounts 2012
Notes to the Separate Financial Statements
for the year ended 31 December 2012
1. Corporate information
These separate financial statements of EVRAZ plc were authorised for issue in accordance with a resolution of the Directors on 10 April 2013.
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., 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.
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 2012, but not adopted by the European Union, do not have any impact on the Company’s 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 measurement 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 (Note 3).
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.
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.
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 2012
175
3. Investments in subsidiaries
Investments in subsidiaries consisted of the following as of 31 December 2012 and 2011:
Evraz Group S.A.
EVRAZ Greenfield Development S.A.
TOTAL
Ownership interest
Cost, US$ million
2012
100%
100%
2011
99.82%
–
2012
2,095
248
2,343
2011
2,073
–
2,073
As described in Note 4, the Company acquired Evraz Group S.A. in 2011 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.
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, at 31 December 2012, the cost of investments in Evraz Group S.A. includes $26
million of share-based compensations to participants of Incentive Plans which are employed by the Company’s indirect subsidiaries (Note 5).
In 2012, the Company acquired 100% of Susurrus Finance S.A. (Luxembourg) for a consideration of 36,000 euro. In May 2012, the name of the
subsidiary was changed to EVRAZ Greenfield Development S.A. (“EGD”). Subsequently, the Company made a cash contribution to the share
capital of EGD for a total amount of $248 million. This contribution was used by EGD for the purchase of a 60.016% share in the Mezhegey coal
field project from Mastercroft Limited, an indirect subsidiary of the Company, for $245 million.
4. Equity
Share capital
Number of shares
Ordinary shares of $1 each, issued and fully paid
EVRAZ plc does not have an authorised limit on its share capital.
31 December
2012
2011
1,339,929,360
1,337,560,713
At 31 December 2012 and 2011, Mastercroft Finance Limited had 0.01% and 0.06% interest, respectively, in the Company’s issued capital.
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.
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
Number of shares
of Evraz Group S.A.
exchanged
Ownership
interest
exchanged
1,313,258,883
23,212,353
1,089,477
145,917,653.67
2,579,150.33
121,053.00
1,337,560,713
148,617,857.00
839,388
659,790
93,265.33
73,310.00
98.01%
1.73%
0.08%
99.82%
0.06%
0.05%
1,339,059,891 148,784,432.33
99.93%
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Upon the closure of the offer, the admission of the global depository receipts of Evraz Group S.A. to trading on the London Stock Exchange has
been cancelled.
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EVRAZ plc
Annual Report and Accounts 2012
Notes to the Separate Financial Statements (Continued)
for the year ended 31 December 2012
4. Equity (continued)
Share capital (continued)
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.
At 31 December 2011, there were shareholders which did not accept the share exchange offer. On 17 February 2012, Mastercroft Finance
Limited, an indirect subsidiary of EVRAZ plc, purchased the remaining GDRs of Evraz Group S.A. 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. This transaction increased the
Company’s share capital by $2 million with a corresponding charge to the reorganisation reserve.
Dividends
In 2012 and 2011, the Company declared dividends as follows:
Final for 2011
Interim for 2012
Date of
declaration
To holders
registered at
18/06/2012
29/08/2012
08/06/2012
07/09/2012
Dividends
declared,
US$ million
228
147
US$ per share
0.17
0.11
5. Share-based payments
As disclosed in Note 24 of the consolidated financial statements, in 2012 the Group has incentive plans under which certain employees
(“participants”) can be gifted shares of the Company.
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 31 December 2011 in the
amount of $4 million as a cost of investments in Evraz Group S.A. with a corresponding increase in equity. In 2012, the Company recognised a
$22 million expense under the share-based compensations 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 2012 and 2011 amounted to 12,069,571 and 4,460,547 shares of EVRAZ
plc, respectively. More details are provided in Note 24 of the consolidated financial statements.
6. Related party transactions
Related parties of the Company include 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 4. MFL exchanged the global depository receipts (“GDRs”) of Evraz Group S.A. into 775,410 shares of
EVRAZ plc.
In 2012, Evraz Group S.A. paid general and administrative expenses on behalf of the Company in the amount of $4 million under the Paying
Agency agreement.
In 2012, OOO Evrazholding, an indirect subsidiary of the Company, rendered consulting services in the amount of $2 million. At 31 December
2012, the balances with related parties comprised accounts payable to OOO Evrazholding in the amount of $1 million.
7. Short-term loans
In December 2012, the Group issued European commercial papers with a nominal amount of $80 million and $170 million bearing an interest
rate of 3.50% and 3.75%, respectively, and maturing on 6 September 2013 and 4 December 2013, respectively. The proceeds from this issue
amounted to $242 million.
At 31 December 2012, the fair value of the European commercial papers approximates their carrying amount.
8. Dividend income
In 2012, the Company received dividends from Evraz Group S.A. in the amount of $390 million.
9. Subsequent events
Acquisition of a controlling interest in Corber
In October 2012, EVRAZ plc concluded a preliminary agreement with Adrolive Investments Limited for an acquisition of a 50% ownership interest
in Corber subject to the receipt of regulatory approvals and fulfillment of certain other conditions. On 16 January 2013, all the conditions were
met and the Group obtained control over the entity (the other 50% share in Corber is held by an indirect subsidiary of Evraz Group S.A.).
Management believes that this acquisition will increase the Group’s coking coal self-coverage and generate substantial operational synergies to
the Group, including the optimal use of various coal grades.
EVRAZ plc
Annual Report and Accounts 2012
177
9. Subsequent events (continued)
Acquisition of a controlling interest in Corber (continued)
The purchase consideration includes 132,653,006 shares of EVRAZ plc issued on 16 January 2013, warrants to subscribe for additional
33,944,928 EVRAZ plc shares exercisable at zero price in the period from 17 January to 17 April 2014 and a cash consideration of $202 million
to be paid in equal quarterly installments through 15 January 2014. Fair value of the consideration transferred totalled to $964 million and was
determined by references to the market value of EVRAZ plc shares at the date of acquisition.
Timir Iron Ore project
On 3 April 2013, the Company acquired a 51% ownership interest in the joint venture with Alrosa for the development of 4 iron ore deposits in the
southern part of the Yakutia region in Russia. The Company’s consideration for this stake amounts to 4,950 million roubles (approximately $160
million) payable in installments through 15 July 2014. Total investments in the first phase of the Timir project are estimated at $1.8 billion during
the period from 2013 to 2018. The Company and Alrosa are expected to finance the Timir project on a pro rata basis.
Dividends from Evraz Group S.A.
On 28 March 2013, the Board of Directors of Evraz Group S.A. declared interim dividends for 2013 in the amount of $130 million.
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EVRAZ plc
Annual Report and Accounts 2012
Additional Information
Group Structure
STEEL
IRON ORE
COAL
VANADIUM
OTHER BUSINESS
EVRAZ plc*
EVRAZ ZSMK, Russia 100%
EVRAZ KGOK, Russia
100%
Yuzhkuzbassugol,
Russia
100%
EVRAZ Vanady Tula,
Russia
100%
EVRAZ NMTP, Russia
100%
EVRAZ NTMK, Russia 100%
Evrazruda, Russia
100%
Raspadskaya,***
Russia
82%
EVRAZ Nikom,
Czech Republic
100%
Sinano Shipmanagement
Limited, Cyprus
100%
EVRAZ Inc NA, USA
100%
EVRAZ VGOK, Russia
100%
Mezhegeyugol,
Russia
60.02%
EVRAZ Stratcor, USA 78.76%
TC EvrazHolding,
Russia
100%
EVRAZ Inc NA, Canada 100%
EVRAZ Sukha Balka,
Ukraine
99.42%
EVRAZ Vametco,****
South Africa
66.95%
EVRAZ Metall Inprom, ****
Russia
100%
EVRAZ DMZ,
Petrovskogo, Ukraine 96.78%
EVRAZ Bagliykoks,
Ukraine
94.37%
EVRAZ Palini Bertoli,
Italy
100%
EVRAZ Vitkovice Steel,
Czech Republic**
100%
EVRAZ Highveld,
South Africa**
85.12%
*
**
As of 31 December 2012
Assets classified as held for sale
East Metals AG,
Switzerland
100%
Metallenergofinance,
Russia
100%
EVRAZEnergoTrans,
Russia
100%
***
As of 31 December 2012 EVRAZ held a 41% effective interest in Raspadskaya. On 16 January 2013 EVRAZ increased its interest in Raspadskaya to 82%
**** Effective interest
EVRAZ plc
Annual Report and Accounts 2012
179
Additional Information
Glossary
Term
Definition
Operations and Products
API-certified
American Petroleum Institute certified (API grade) products
Beam
Billet
Blast furnace
Brownfield
By-product
Capex
CFR
Channel
CIF
Coke
Coke battery
Coking coal
Concentrate
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
An exploration or development project which is either on industrial lands that are now vacant or
underused or located within an existing operation, with the ability to share infrastructure and
management
A secondary product which results from a manufacturing process or chemical reaction
Capital expenditure
Cost and freight, the seller must pay the costs and freight to bring the goods to the port of
destination. However, risk is transferred to the buyer once the goods are loaded on the vessel.
Insurance for the goods is not included
U-shaped section for construction
Cost, Insurance and Freight, the same as CFR except that the seller must in addition procure and
pay for the insurance
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
A group of coke ovens operating as a unit and connected by common walls
Highly volatile coal used to manufacture coke
A product resulting from iron ore/coal enrichment, with a high grade of extracted mineral
Construction products
Include beams, channels, angles, rebars, wire rods, wire and other goods
Converter
Crude steel
Debottlenecking
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
Increasing capacity of a supply or production chain through the modification of existing equipment
or infrastructure to improve efficiency
ECP
Eurocommercial Paper
Electric arc furnace
A furnace used in the steelmaking process which heats charged material via an electric arc.
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
Greenfield
Grinding balls
The development or exploration of a new project not previously examined
Balls used to grind material by impact and pressure
Head-hardened rails
High strength rails with head hardened by heat treatment
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EVRAZ plc
Annual Report and Accounts 2012
Additional Information
Glossary (Continued)
Term
Iron ore
JORC Code
Ladle furnace
Lean
Long products
Longwall
Lumpy ore
MENA
OCTG pipe
Old order/New order mining rights
OSB technology
Pellet
Pig iron
Pipe blank
Plate
Pulverised coal injection (PCI)
Railway products
Raw steam coal
Rebar
Definition
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 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 of 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.
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
Middle East and North Africa
Oilfield Casing and Tubing Goods or Oil Country Tubular Goods – pipes used in the oil industry
Reference terms for South African mining agreements.
Old order mining rights are those licenses 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
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
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
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
Rolled steel products
Products finished in a rolling mill; these include bars, rods, plate, beams etc
Rolling mill
SG&A
Saleable products
Self-coverage
Scrap
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
Selling, General and Administrative Expenses
Products produced by EVRAZ mines or steel mills which are suitable for sale to third parties
The raw material requirement of EVRAZ’s steelmaking facilities fulfilled by EVRAZ owned mines
Iron containing recyclable materials (mainly industrial or household waste) that is generally
remelted and processed into new steel
EVRAZ plc
Annual Report and Accounts 2012
181
Term
Definition
Semi-finished products
Shale gas
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
Steam coal
Tailings
Titaniferrous ores
Tubular products
Vanadium
Vanadium pentoxide
Vanadium slag
Social Responsibility
ISO 14001
ISO 9001:2008
LTIFR
OHSAS 18001
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
All other types of hard coal not classified as coking coal. Coal of this type is also commonly
referred to as thermal coal
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
The International Standardisation Organisation’s standard for environmental management systems
The International Standardisation Organisation’s standard for a quality management system
Lost time injury frequency rate, which represents the number of lost time injuries (1 day or more of
absence) divided by the total number of hours worked expressed in millions of hours
The internationally recognised assessment specification for occupational health and safety
management systems
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EVRAZ plc
Annual Report and Accounts 2012
Notes
EVRAZ plc
Annual Report and Accounts 2012
183
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EVRAZ plc
Annual Report and Accounts 2012
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 allow 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.
Additional Information
Contact Details
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
Investor Relations
Tel: London: +44 (0) 207 832 8990
Moscow: +7 (495) 232 1370
ir@evraz.com
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 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.
(cid:114)(cid:1) Details of any share dealing facilities that the company endorses will
be included in Company mailings.
www.evraz.com