Evercore
Annual Report 2019

Plain-text annual report

ANNUAL REPORT & ACCOUNTS 2019 Meet EVRAZ For our PARTNERS For our PEOPLE 13.2 mt 71,223 employees STEEL PRODUCTS OUTPUT AS OF 31 DECEMBER 2019 GLOBAL FOOTPRINT Canada USA Switzerland London Office Czech Republic Moscow Office Kazakhstan Russia Steel segment Steel, North America segment Coal segment Annual report & accounts 2019 Leader in construction and railway product markets in Russia in production of rails and large diameter pipes in North America the largest coking coal producer in Russia For our COMMUNITY US$ 26 million SOCIAL AND SOCIAL INFRASTRUCTURE MAINTENANCE EXPENSES REPORT BOUNDARIES This annual report (“the Report”) presents the results for EVRAZ plc and its subsidiaries for 2019 divided into segments: Steel; Steel, North America; and Coal. It details the Group’s operational and financial results and corporate social responsibility activities in 2019. The Report has been prepared in accordance with the information disclosure requirements of the United Kingdom and the Financial Conduct Authority: the Companies Act 2006, the Listing Rules, the Disclosure Guidance and Transparency Rules, and the Competition and Market Authority Order. The Report has also been prepared taking into account the International Integrated Reporting Framework, and sustainability reporting best practices. www.evraz.com CONTENTS Meet EVRAZ EVRAZ in figures Strategic report Chairman’s introduction Chief Executive Officer’s letter EVRAZ business model Operational model Sustainable development EVRAZ Business System Market overview Strategic priorities Key performance indicators Financial review Principal risks and uncertainties Viability statement Statement in accordance with S172 of the Companies Act Non-financial reporting Business review Steel segment EVRAZ steel across the globe Coal segment Resilient R&D Steel, North America segment Digital transformation CSR report Our approach Health, safety and environment Environment case studies Using renewable energy Social policy Anti-corruption and anti-bribery Corporate governance Board of Directors Management Corporate governance report Stakeholder engagement Remuneration report Directors report Directors responsibility statement Financial statements Independent Auditor’s report to members of EVRAZ Plc 4 6 8 12 14 16 18 20 22 26 28 34 40 41 42 44 46 54 56 62 64 70 74 76 76 86 88 90 102 104 106 110 112 118 130 140 145 146 148 EVRAZ plc Consolidated Financial Statements for the year ended 31 December 2019 156 EVRAZ plc Separate Financial Statements Additional information Stock performance indicators and shareholder information Definitions of selected alternative performance measures Data on mineral reserves Terms and abbreviations Short summary of relevant anti-corruption policies Contact details 240 248 250 251 253 254 257 258 EVRAZ in figures Financial highlights Consolidated revenues by segment, US$ million Consolidated EBITDA by segment, US$ million Revenue US$ 11,905 million 7.3% year-on-year 9 7 8 , 8 3 4 1 , 8 3 4 7 , 7 4 1 2 , 2 7 3 3 , 2 1 2 0 , 2 3 8 5 , 2 0 0 5 , 2 4 6 8 , 1 2 6 4 2 7 4 3 8 4 ) 6 5 4 , 1 ( ) 5 3 4 , 1 ( ) 2 4 2 , 1 ( 6 3 8 , 2 1 5 0 9 , 1 1 7 2 8 , 0 1 EBITDA US$ 2,601 million 31.1% year-on-year 2 7 6 , 3 2 8 4 , 1 5 9 7 , 1 6 2 2 , 1 8 1 2 , 1 3 4 8 8 5 4 1 8 3 1 2 7 1 8 1 7 7 7 , 4 3 2 6 , 2 1 0 6 , 2 ) 5 4 1 ( ) 3 9 ( ) 4 6 1 ( Steel Coal Steel, NA Other operations Eliminations TOTAL Steel Coal Steel, NA Other operations Eliminations TOTAL 2017 2018 2019 2017 2018 2019 For more information, read Financial review section on pages 28–29. For more information, read Financial review section on pages 28–29. Operating highlights Crude steel output, kt Steel products output1, kt Iron ore products output, kt 2019 2018 2017 13,814 13,019 14,033 2019 2018 2017 13,230 12,376 12,576 2019 2018 2017 13,765 13,515 13,879 1. 2. Net of re-rolled volumes. Including payments on deferred terms recognised in financing activities. CSR highlights LTIFR (excluding fatalities), per million hours Key air emissions, kt EVRAZ GHG emissions, MtCO2e 2019 2018 2017 2.04 1.91 1.90 2019 2018 2017 127.69 128.24 137.11 2019 2018 2017 43.38 38.79 41.65 Read more on page 78 Read more on page 82 Read more on page 82 SHAREHOLDER STRUCTURE Geographic dispersion of institutional shareholders, % of voting rights United Kingdom 8.79% North America 10.58% 2 Russia 2.05% Europe (excl. UK, Russia) 6.83% Asia&Pacific 1.46% Other 1.54% Annual report & Accounts 2019 Net debt US$ 3,445 million 3.5% year-on-year CAPEX US$ 762 million 44.6% year-on-year Net profit US$ 365 million 85.2% year-on-year For more information, read Financial review section on pages 28–29. For definition of Alternative performance measures (APM) please see pages 251–252 Raw coking coal production, kt Coking coal concentrate production, kt Gross vanadium slag production,3 mtV 2019 2018 2017 26,140 24,188 23,306 13,975 14,130 13,061 2019 2018 2017 1,947 2,057 15,923 16,188 2,083 15,143 2019 2018 2017 18,380 17,052 18,636 Production by Coal segment Production by Steel segment 3. In tonnes of pure vanadium. Fresh water consumption, million m3 Diversity, % (number of people) Employees by region 2019 2018 2017 205.8 226.49 319.43 78% (7) 82% (323) 72% (51,101) Men Women Board Senior Management Employees 22% (2) 18% (71) 28% (19,728) Europe 0.2% North America 6.0% 71,223 people Russia and CIS 93.8% Read more on page 83 Read more on page 91 Read more on page 91 Ultimate beneficial owners, % of voting rights4 28.77 ROMAN ABRAMOVICH4 19.41 ALEXANDER ABRAMOV4 9.69 ALEXANDER FROLOV4 5.77 GENNADY KOZOVOY5 33.56 FREE-FLOAT 4. 5. The number of shares as per dealing notification dated 20 June 2019. The number of shares is as per TR-1 Form: Notification of major interest in shares dated 6 February 2013. For Mr Kozovoy, includes shares held directly. www.evraz.com 3 Strategic report Setting right goals for a Better Future Setting right goals Abu Dhabi Plaza Nur-Sultan, Kazakhstan Chairman’s introduction Key factors that are not within the Group’s control are, of course, the markets, but the Board and I are quietly confident that whatever the markets hold in store, EVRAZ is well prepared. Dear shareholder, Last year was not easy, as EVRAZ and the broader industry faced complex market headwinds. However, thanks to efficiency initiatives, diligent strategic efforts and the hard work of each employee, the Group was able to overcome all the difficulties and achieve resilient results. For the Board of Directors, 2019 was a year of numerous critical initiatives in the Group. These included a major health, safety and the environment (HSE) drive to implement a new approach to safety by engaging employees more in risk identification and mitigation. HSE The overriding priority of the EVRAZ Board of Directors has been and continues to be achieving and maintaining zero injuries and fatalities in the workplace. Despite the Group’s efforts, however, there was a substantial increase in fatalities during the reporting period. Half of these occurred in a single February 2019 incident that caused the death of eight employees and the serious injury of another 16 people. Overall, as a result of occupational safety and risk management shortcomings, the EVRAZ team suffered the loss of 12 employees and four contractors during 2019. To avoid a repeat of these tragedies, the Group is placing paramount importance on undertaking measures to improve its safety culture, beginning with improved employee engagement in identifying and mitigating risks. Please, read CSR report on page 78 for more details. To spearhead the efforts to improve safety performance, we decided to conduct the safety culture assessment and develop a roadmap for its improvement. Recognising the urgency of climate change, it also tasked the committee with identifying possible ways to reduce the Group’s greenhouse gas Audit Committee report Read more on 120-125. HSE Committee report Read more on 128-129. Nominations Committee report Read more on 126-127. 6 Strategic report Business review CSR report Corporate governance Financial statements Additional information the economic, social and environmental aspects of the company’s operations and reporting. as satisfactory. EVRAZ reputation index shows sustainably high performance over the last three years. Dividends In 2019, the Board approved the payments of: an interim dividend of US$0.40 per ordinary share, totalling US$577.3 million, on 29 March 2019; and an interim dividend of US$0.35 per share, totalling US$508.2 million, on 5 September 2019. In consideration of EVRAZ performance in 2019, the Group has announced an interim dividend. On 26 February 2020, the Board of Directors voted to disburse a total of US$580.8 million, or US$0.40 per share. The record date is 6 March 2020 and payment date is 27 March 2020. Alexander Abramov Non-Executive Chairman At its January 2020 meeting, following the annual review of Board Performance effectiveness, the Board agreed on an action plan for 2020, which continued and developed the review and approval function of the management’s strategy proposals. Our people EVRAZ understands the vital importance of regular employee engagement, which allows the Group to hear and incorporate employee opinions throughout the organisation. This invaluable bottom-up insight helps to attract and retain impactful employees, who in turn play critical roles in ensuring that the Group achieves its vision and strategy. This workforce feedback loop, which EVRAZ has practiced for many years, also helps to foster informative decision taking in all aspects of the business. One important employee engagement effort is an annual survey that seeks to take the pulse of the workforce as a whole on various matters. In previous years, this survey helped to generate numerous initiatives focused on employees, as well as to determine ways to improve overall employee engagement going forward. Following each annual survey, the Board reviews the results to ensure that it is informed of important trends, comments and concerns. During 2019, two Board members met with employees and learned what is important to them. Alexander Izosimov visited Raspadskaya Coal Company in Novokuznetsk, Russia, and Laurie Argo visited EVRAZ Portland’s rolling mill in North America for town-hall meetings. In addition, Board members reviewed the results of the annual reputation audit, engaging businesses, clients, media, government representatives and local communities. The Group’s efforts to build sustainable partnerships with key stakeholders were rated 7 emissions and develop an implementation strategy. In addition, the Board requested that the HSE Committee review the control measures that EVRAZ uses to mitigate the risks associated with its largest tailing dams. The information on dam safety issues has been publicly disclosed on EVRAZ website at the following link: https://www. evraz. com/ en/sustainability/tailings-storage-facilities/ Governance The Board continues to work to ensure that the Group operates in accordance with international best practices and complies with the guidelines laid out in the UK Corporate Governance Code. The only non-compliances reported are related to EVRAZ particular situation, they were as follows: • The Company does not operate clawback arrangements on bonus payments on the basis that such arrangements would not be enforceable under the Russian Labour Code. A further explanation for this non- compliance is set out in the Remuneration Report on page 131. • The 2018 Code now treats individuals such as myself, a significant shareholder, as no longer independent on appointment as chairman. As part of its commitment to support the interests of all stakeholders, the Board takes a long-term view of how the business needs to develop within its industry and geographical markets. The EVRAZ business and operational model, which are explained in detail on pages 12-15, shows how value is created for all stakeholders; and the Governance report demonstrates how this important engagement is monitored. Please read Statement in accordance with S172 of the Companies Act on page 41. In April 2019, EVRAZ published its first comprehensive report on sustainability performance, making a logical step in the Group’s continuous efforts to improve Remuneration report Read more on 130-139. Annual report & accounts 2019Chief Executive Officer’s letter EVRAZ works hard to create environmental improvements in every aspect of its operations. In 2019, the Group’s greenhouse gas (GHG) intensity ratio dropped below the target of less than 2.0 tonnes of carbon dioxide equivalent (tCO2e) per tonne of crude steel. Dear shareholder, Last year, the global metals and mining industry faced renewed market headwinds, growing demand from society for sustainable development and accelerated digital transformation. EVRAZ is prepared to meet these new challenges and seize the opportunities that arise. In 2019, global steel and commodity markets were not as favourable as they were in 2018. Steel prices have fallen as a result of excess supply in an environment of limited end-use demand. Global coal and vanadium markets returned to supply-demand equilibrium. However, during the reporting period, EVRAZ benefited from an upswing on the Russian steel market amid increased demand for housing construction that is expected to continue, supported by government spending on national projects. Focus on sustainability EVRAZ always strives to adhere to the strictest safety standards. Unfortunately, in February 2019, the Group lost eight employees and another 16 people were injured in an incident involving Financial review Read more on pages 28-33. 8 The “Top-300” leadership programme for mine directors and shop heads aims to involve them in implementing EVRAZ Business System transformation projects and searching for development opportunities. The first wave of the “Top-300” programme, in which 97 production facility managers participated, finished in July 2019 and the second wave, with 96 managers involved, started in October 2019. Investing in development In 2019, EVRAZ announced an investment programme with total annual CAPEX averaging US$1.0 billion over 2020–23. Half of this yearly amount will be spent on development projects, of which US$335 million will be allocated to three major development projects and around US$165 million will be used to finance small and medium-sized projects, focusing primarily on energy efficiency, debottlenecking and various operational improvements. The other roughly US$500 million per year will be spent on maintenance projects. One of EVRAZ major current projects is the new long rail mill in Colorado, which will have total CAPEX of US$512 million. The project is aimed at producing long rails, including 100-metre rails, to meet customer needs and sustain the Group’s leadership position in the US rail market. As of the end of 2019, the Group was completing the engineering and design stage of the project. Another major project, the rail and beam mill modernisation at EVRAZ NTMK, seeks to maintain the Group’s leadership in long products and will help to meet increased future beam demand as a result of the “Construction from Steel” promotion programme. Project investments amounted to US$205 million. In 2019, the Group entered the design and engineering stage, and selected the main equipment supplier and engineering works partner. a crew bus at the Raspadsky open pit mine. The management has undertaken numerous measures to prevent similar accidents, including purchasing crew vehicles with reinforced safety cages, installing video recorders in all crew vehicles and upgrading the automated dispatch control system. Overall, this isolated case shows how vitally important it is to predict all possible risks at every stage of the production process, as well as to increase employee awareness and engagement in risk analysis. To this end, in 2019, EVRAZ began to implement a new risk management system that applies a balanced approach to engage every worker in risk identification and mitigation. As a part of this new system, at the end of 2019, more than 200 key managers of different levels (from vice presidents to line managers) in the Siberia, Urals and Coal divisions attended training to learn how to apply this new approach in theory and practice. EVRAZ works hard to create environmental improvements in every aspect of its operations. In 2019, the Group’s greenhouse gas (GHG) intensity ratio dropped below the target of less than 2.0 tonnes of carbon dioxide equivalent (tCO2e) per tonne of crude steel to 1.97 tCO2e per tonne of crude steel. To further minimise EVRAZ environmental footprint, in 2019, the Group began to implement projects aimed at reducing the atmospheric emissions at its Russian steel assets. EVRAZ has also cut freshwater consumption by 38% over the last five years and this progress is expected to continue going forward. In 2019, the Group finished implementing three water treatment projects in the Coal segment and launched major water treatment programmes in the Urals and Siberia divisions. EVRAZ believes that its people are the cornerstone of its strategy implementation and remains focused on attracting and developing the best talent. The Group expends substantial efforts to develop its managers, which in 2019 included major educational events such as the “EVRAZ New Leaders” programme and new “Top-300” development programme. Strategic report Business review CSR report Corporate governance Financial statements Additional information The third major project is the construction of a 2.5 million tonne integrated flat casting and rolling facility at EVRAZ ZSMK, which will have CAPEX of US$647 million. The project will help to improve the product portfolio, penetrate the highly concentrated plate market and enhance the Group’s presence in the Siberian region. At the end of 2019, the project specification was agreed, equipment suppliers were chosen, and the decision was approved to enter the design and engineering phase. EVRAZ is taking a staged approach to these three major projects to maintain maximum flexibility. The execution decisions on the projects should be made in 2020. EBITDA effect of US$407million from the efficiency improvement programme in 2019 9 Annual report & accounts 2019Сontinuous operational improvements Retaining a low-cost position and maintaining market leadership positions remain very important for the Group, which has invested significant time and managerial efforts to develop the EVRAZ Business System. EVRAZ Business system is a combined approach founded on a culture of continuous improvement and currently covers nearly all the Group’s main operations. It is based on five key elements: ambitious target setting, EVRAZ principles, employee development, efficient management and process improvement. The overall target of the EVRAZ Business System is to enhance employee engagement in the idea generation process. These ideas are the major source of new efficiency improvement initiatives within the Group. In 2019, a total of 22,083 employees were involved and around 44,596 ideas were generated, 36% of which were implemented. Technology is an additional resource that makes it possible to improve operational efficiency. Last year, EVRAZ continued to develop the competencies and organisational system needed to scale up its digital transformation efforts. The Group primarily focused on innovative technologies to improve production efficiency, including yields and process quality. Overall, in 2019, 32 digital transformation projects were implemented. For example, EVRAZ ZSMK introduced mathematical models for all production stages that make it possible to calculate the end-to-end economic effect and, on that basis, optimise raw material consumption and the semi-finished product mix. In 2019, the total economic effect of this project was around US$20 million. The efficiency improvement programme is a performance monitoring system that aims to generate and implement initiatives with an annual EBITDA effect of US$300 million. During the reporting period, the efficiency improvement programme delivered an EBITDA effect of US$407 million from customer focus and cost-cutting initiatives. The Steel segment remains the core of EVRAZ business model, allowing the Group to maintain leadership positions in the railway product and infrastructure steel markets. In 2019, total pig iron production increased by 10.2% to 11,016 thousand tonnes after the new blast furnace No. 7 reached its full capacity of 2,550 thousand tonnes a year. Efficiency improvement initiatives had a total effect of US$284 million, most of which came from respective increases in wheel production and beam sales of 6% and 18%, as well as from a programme to optimise coke, sinter and blast furnace operations at EVRAZ ZSMK. The Coal business continues to generate very strong results. In 2019, the Group increased coal mining volumes by 8% to a total 10 Strategic report Business review CSR report Corporate governance Financial statements Additional information of 26.1 million tonnes following efficiency improvements at the Uskovskaya and Alardinskaya mines. The growth of mining volumes made it possible to expand export supplies to Asia by 12% to 5.6 million tonnes in 2019. EVRAZ self-sufficiency in all coal grades rose from 69% in 2018 to 74% in 2019 due to metal charge changes at the Group’s steel mills and higher production of K-grade coal amid a ramp-up of volumes at the Raspadskaya- Koksovaya mine. During the reporting period, the Coal segment generated US$76 million from efficiency improvement initiatives, primarily due to increasing the production yield and implementing measures to enhance product quality. EVRAZ North America is a strategic business that benefits from healthy demand in railway product markets in the US and Canada. Sales of rails rose by 7% to 438 thousand tonnes, which allowed EVRAZ to improve its rail market share in North America to 42% in the period. The segment’s efficiency improvement programme contributed a total of US$46 million from customer focus and cost-cutting initiatives during the year. In August 2019, James “Skip” Herald joined EVRAZ as the president and CEO of EVRAZ North America. Mr Herald has more than 35 years of experience in the oil and gas and energy pipe industries. The Group is confident that his solid experience and outstanding professional skills will bring additional momentum to its core tubular business in North America and will help to achieve an EBITDA margin position in line with peers. Consistent with the Group’s vision and focusing on key markets in Russia and North America, EVRAZ continued to divest non-core assets during the reporting period. In August, the Group announced the disposal of EVRAZ Stratcor, a US-based vanadium oxides producer, due to high operational costs. In December, EVRAZ sold the Palini e Bertoli steel mill in Italy, a decision that was primarily driven by the unfavourable market environment and limited growth opportunities. In 2019, EVRAZ reported total EBITDA of US$2,601 million. The Steel segment’s EBITDA fell by 32.8% to US$1,795 million as a result of challenging global steel and vanadium market conditions. Despite price fluctuations, the Coal segment managed to generate EBITDA of US$843 million. During the reporting period, EVRAZ North America delivered a better financial performance in year-on-year terms with EBITDA of US$38 million, up from US$14 million in 2018. EBITDA remains at low levels due to weak OCTG market and tariffs on slab consumed by Portland operations in North America. Overall, EVRAZ maintained its low net leverage level and ended 2019 with net debt of US$3,445 million (net debt/EBITDA of 1.3x), in line with the medium-term net debt target of below US$4 billion. In 2019, the Group was able to generate strong free cash flow of US$1,456 million, which made it possible to pay dividends of US$1,086 million. Alexander Frolov Chief Executive Officer EVRAZ plc Outlook for 2020 In 2020, EVRAZ will continue to make significant efforts to improve safety and other vitally important areas of sustainable development. The Group has also set ambitious production targets for the year that should help it to reach solid results despite potential market headwinds. 11 Annual report & accounts 2019EVRAZ business model Our vision Global market trends EVRAZ is a global steel and mining company, the leading producer of infrastructure steel products with low-cost production along the value chain. In 2019, global steel and raw materials markets remained strong despite the pressure as steel prices corrected from the high levels seen in 2018. Meanwhile, iron ore and coal prices experienced different dynamics. Iron ore prices peaked in July, balancing by the end of the year. Conversely, coal prices were lower amid increased supplies as a result of elevated Asian production and import restrictions in China. In 2020, we expect stable market conditions and reduced price volatility. OUR BASIS STRATEGIC PRIORITIES BUSINESS SEGMENTS EVRAZ strategic priorities reflect current focus areas that are driven by market conditions and business fundamentals. Sustainable development DEBT MANAGEMENT AND STABLE DIVIDENDS EVRAZ Business System PRUDENT CAPEX RETENTION OF LOW-COST POSITION Steel EVRAZ Steel segment uses locally sourced raw materials to produce steel products in the CIS, which it sells for domestic infrastructure and construction projects while taking a flexible approach to exports. The Group’s vanadium business is based on processing vanadium slag from steelmaking operations. Read more on page 46 Coal EVRAZ Coal segment provides raw materials for the Group’s steel mills, supplies coking coal to major domestic coke and steel producers, and exports its products to foreign customers. Read more on page 56 DEVELOPMENT OF PRODUCT PORTFOLIO AND CUSTOMER BASE Steel, NA The Steel, North America segment focuses on the premium markets in the Western US and Canada, offering high value-added products including infrastructure steel, rails, large- diameter pipes and oil country tubular goods. Read more on page 22 Read more on page 64 For additional information, read the EVRAZ Sustainability Report for 2019, which is to be published in May 2020 12 Strategic report Business review CSR report Corporate governance Financial statements Additional information The value we create for stakeholders COMPETITIVE ADVANTAGES EVRAZ uses the synergies derived from its competitive advantages to ensure that its overall operations are able to generate, sustain and capture value over the long-term. Leader in infrastructure steel products A premium portfolio of railway, construction and tubular products with firm footprint in Russian, North American and global markets. Strong position in coking coal market The largest coking coal producer in Russia with an attractive portfolio of hard and semi-hard coking coal grades. Vertically integrated low-cost operations A sound base of steel and coal assets in the first quartile of the global cost curve. Shareholders and investors EVRAZ strives to act in shareholders’ best interest by building an experienced management team and implementing corporate governance best practices. Employees EVRAZ is among the most sought-after employers in its regions of operation partly due to its staff development programmes and best- in-class working conditions. Customers EVRAZ generates value for its global clientele by prioritising value-added products, offering better shipping terms and running a client oriented business model. Suppliers and contractors EVRAZ honours its position as a vital purchaser of auxiliary materials by fostering the advancement of its customers’ industries and running fair, transparent tenders. Local communities EVRAZ believes that conducting its business in a sustainable manner helps to promote regional prosperity where it operates and strives to create healthier, happier local communities by sponsoring social and economic development programmes. Government and regulatory authorities EVRAZ is one of Russia’s largest taxpayers and employers, and plays a valuable role for the state by providing construction and railway products for the development of infrastructure. Media EVRAZ proactive engagement with the media boosts the quality and transparency of information about the Group. Industry organisations EVRAZ cooperates and supports various industry organisations through joint initiatives and proactivly participates in conferences and forums. The section 172(1) statement, describing how the directors have had regard to the matters set out in section 172(1)(a) to (f) when performing their duty under section 172, is on page 41. 13 Annual report & accounts 2019Operational model Steel segment Read more on page 46 INPUT OPERATIONS Raw materials Proved and probable reserves 9.9 bln t of iron ore 1.9 bln t of coking coal Iron ore products consumption • Internal consumption • 3rd parties’ iron ore products purchases 3rd parties scrap purchases Coking coal products consumption • Coal segment coal products • 3rd parties raw coal • 3rd parties concentrate 18,363 kt 13,624 kt 4,739 kt 1,674 kt 8,408 kt 6,569 kt 935 kt 904 kt Steelmaking Pig iron production Crude steel production Vanadium slag production 11,016 kt 11,953 kt 18,380 mtV Rolling and processing Steel products production 11,018 kt Self-coverage1 70% of iron ore 221% of coking coal SALES TO 3rd PARTIES 1. The raw material requirement of EVRAZ steelmaking facilities compared with coal product sales or production of iron ore products from own raw materials Semi-finished products Construction products Railway products Flat-rolled products Other steel products 5,636 3,800 1,393 622 624 Steel products 12,075 kt Iron ore products 1,893 kt Vanadium products (alloys and chemicals) 12,858 kt Number of employees 46,175 in Steel segment 16,133 in Coal segment 4,302 in Steel, NA segment 14 EBITDA US$ 1,795 million 32.8% year-on-year The Steel segment’s EBITDA dropped amid lower steel and vanadium prices, as well as higher expenses due to increased prices for raw and auxiliary materials, including iron ore, scrap and refractories. This was partly offset by lower coking coal prices. Strategic report Business review CSR report Corporate governance Financial statements Additional information Coal segment Read more on page 56 Steel, North America segment Read more on page 64 Mining Raw materials Total raw coking coal mined Sales to Steel segment 26,140 kt 2,044 kt 3rd parties scrap puchases Slab purchases 1,222 kt 508 kt Coal washing Total coking coal concentrate production 13,975 kt Sales to Steel segment 4,525 kt EVRAZ unique combination of reserves, operations, product quality and clients makes its Coal segment one of the key pillars of its operational model. The synergy between the steelmaking and coal operations, combined with a broad export client base, provides the opportunity for further development of the coal business. Steelmaking Crude steel production 1,861 kt Rolling and processing Steel products production 2,212 kt Coking coal concentrate Raw coal 8,841 2,211 Coking coal products 11,053 kt Steel products 2,207 kt Tubular products Flat-rolled products Railway products Construction products Semi-finished products 795 523 441 256 192 US$ 843 million 30.8% year-on-year The Coal segment’s EBITDA decreased year-on-year, mainly due to sales prices trending lower in line with global benchmarks. US$ 38 million 171.4% year-on-year The Steel, North America segment’s EBITDA rose, driven mainly by the decline of Section 232 duties on sales to the US, which were included in 2018 expenses. EBITDA remains at low levels due to the weak OCTG market and tariff on slab supply to Portland operations in North America. 15 Vanadium products (alloys and chemicals) 12,858 kt Annual report & accounts 2019Sustainable development Acknowledgment of Sustainable Development Goals EVRAZ believes that the Sustainable Development Goals (SDG) adopted by the United Nations General Assembly in 2015 are of vital importance to the global mission of addressing significant economic, environmental and social challenges. To help achieve these global goals, the Group implements fair and transparent business practices, reduces its operational impact on the environment and local communities, and seeks to maximise the positive values that it can bring to society. For additional information, read the EVRAZ Sustainability Report for 2019, which is to be published in May 2020. Governance Read more on page 106 Health and safety Read more on page 76 Environmental matters Read more on page 81 Social and community matters EVRAZ strives to adhere to international corporate social responsibility principles by making a meaningful contribution to local economies and supporting communities wherever it operates. Everywhere the Group operates, it seeks to build sustainable, positive partnerships with local governments and non-government organisations, as well as with business, media and other partners. Our people Read more on page 90 Read more on page 96 CSR 16 Annual report & Accounts 2019 Annual report & Accounts 2019 Our approach Strategic report Business review CSR report Corporate governance Financial statements Additional information EVRAZ understands the responsibility inherent in its position as one of the world’s leading steelmakers and, as such, is committed to integrating sustainable development principles and values into its daily operations. The Group believes that sustainable development will help it to maintain the long-term stability of its business, retain a competitive market position and create value for its stakeholders. EVRAZ sustainable development initiatives adhere to the OECD’s Guidelines for Multinational Enterprises to apply a consistent approach and adopt best practices across its global operations. The Group bases these commitments on the best international standards and practices, fully endorsing the United Nations Universal Declaration of Human Rights provisions and respecting people’s civil, political, economic, social and cultural rights. CSR highlights LTIFR (excluding fatalities), per million hours Key air emissions, kt EVRAZ GHG emissions, MtCO2e 2019 2018 2017 2.04 1.91 1.90 2019 2018 2017 127.67 128.24 137.11 2019 2018 2017 43.38 38.79 41.65 Read more on page 78 Read more on page 83 Read more on page 83 Fresh water consumption, million m3 Diversity, % (number of people) Employees by region 2019 2018 2017 205.8 226.49 319.43 78% (7) 82% (323) 72% (51,101) Men Women Board Senior Management 22% (2) 18% (71) Employees 28% (19,728) Europe 0.2% North America 6.0% 71,223 people Russia and CIS 93.8% Read more on page 83 Read more on page 91 Read more on page 91 Human rights The Group’s commitments are based on internationally recognised standards and respect for all human rights, including civil, political, economic, social and cultural rights. EVRAZ seeks to develop and maintain a work environment that is free from discrimination. Child labour, bonded labour, human trafficking and other forms of slavery (known as modern slavery) are strictly prohibited at all Group subsidiaries and by their suppliers. Anti-corruption and anti-bribery EVRAZ is fully committed to strict compliance with the Law of the Russian Federation No. 273 “On Preventing Corruption,” the UK Bribery Act, the US Foreign Corrupt Practices Act and other relevant local legal equivalents. EVRAZ has implemented and further developed policies and procedures that define compliance managers’ day-to-day efforts. Read more on page 76 Read more on page 102 17 EVRAZ Business System EVRAZ Business System (EBS) is a combined approach founded on a culture of continuous improvement which currently covers nearly all the Group’s main operations. EBS targeted to enhance employee engagement in the continuous improvement process through key elements of the EVRAZ Business System, such as ambitious target setting, EVRAZ principles, employee development, efficient management and process improvement. EVRAZ principles The basic working principles are safety, respect, performance and responsibility, customer focus and effective teamwork. Process improvement Each employee views finding and implementing improvements as part of their daily work. In 2019, EVRAZ launched an ambitious target- setting process as a source of new efficiency improvement initiatives. In line with this process, 30 shops and segments in the Urals, Siberia, Coal and Vanadium divisions were analysed. Key technical drivers were identified for every shop and segment, and targets were set for each key technical driver based on global benchmarking. 18 Ambitious target setting Each employee understands why they must improve their work. Employee development Employees have opportunities for training and development, as well as access to the tools and knowledge needed to achieve the target. Efficient management Managers support the continuous improvement process by acting in accordance with EVRAZ principles, as well as training and encouraging their employees. Outlook 2020 In 2020, a total of 24 EBS transformations will be implemented in three divisions (4 in the Siberia division, 15 in the Urals division and 5 in the Coal division). The key focus for the year will be on rolling out EBS transformations in the Steel, North America segment. Additionally, the EVRAZ Business System will focus on digital solutions in production and implementing an agile approach to improve processes. 45231Annual report & Accounts 2019 EBS transformations are the initial projects at every shop of the plant that create the infrastructure for the continuous improvement process. There are two main phases in EBS transformations: active and maintenance. The active phase presumes setting goals, planning and implementing various improvement initiatives, while the maintenance phase aims to reach the target effects from initiatives and further improve the process. During 2019, a total of 43 active EBS transformation phases were completed across four divisions (23 in the Siberia division, 14 in the Urals division, 4 in the Coal division and 2 in the Vanadium division). EVRAZ employees generated 44,596 ideas, 36% of which were implemented. Overall, a total of 22,083 employees were involved in EBS transformations in 2019. KEY EBS TOOLS AT WORK Strategic report Business review CSR report Corporate governance Financial statements Additional information Number of initiatives 44,596 2,935 2017 14,275 2018 2019 Number of employees involved 22,083 9,608 2018 2019 5,250 2017 VANADIUM DIVISIONS URALS SIBERIA COAL Idea Factory Each employee can suggest ideas to improve a production process, workplace safety or labour conditions. 10,110 6,012 3,599 424 206 136 30,890 16,111 12,072 Ideas submitted Ideas accepted Ideas implemented 3,172 736 375 Problem-Solving Board This is a tool that allows each employee to openly discuss any production problem and be sure that it will be solved. Problems discussed Problems solved 230 198 4,692 3,548 24 days average solution time 32 days average solution time 18,368 17,347 35 days average solution time 2,670 2,585 6 days average solution time 19 Market overview GLOBAL PICTURE In 2019, the pressure on the steel and raw materials market increased. Despite the economic and political uncertainty, by the end of the year, there was a positive trend in prices and steel demand from end user’s sectors in key markets. Steel, US$/t Iron ore, US$/t Coal, US$/t 600 400 200 0 150 120 90 60 30 0 250 200 150 100 50 0 2013 2018 2019 2013 2018 2019 2013 2018 2019 Slab, FE&SEA, CIF 2019 average Iron ore 62% Fe fines, China, CFR 2019 average Premium Hard coking coal, FOB Australia 2019 average In 2019, global finished steel consumption increased by 3.2% to 1,774 million tonnes, compared with 1,719 million tonnes in 2018. Asia remained the key source of global demand with growth of 5.5% and consumption of 1,276 million tonnes. China’s total consumption climbed by 7.2% to 928 million tonnes in the period. Global demand excluding Asia fell by 2.3% to 497.3 million tonnes, versus 508.9 million tonnes in 2018. Consumption in the EU dropped by 4.9% due to lower demand for vehicles and equipment. Global crude steel production in the year grew by just 2.3% to 1,886 million tonnes, along with multidirectional trends diversified by regions. Chinese production totalled 1,009 million tonnes, up 6.3% year-on- year, compared with 4.0% in 2018. India demonstrated moderate growth of 1.0% to 111.1 million tonnes, driven by the expansion of government support efforts. Crude steel production in the EU fell by a further 4.9% as a result of blast furnace closures due to low demand and stronger environmental requirements. In 2019, steel prices based on the CIF slab FE&SEA benchmark decelerated, especially in the second half of the year. The downturn in prices took place amid slower steel consumption growth, prompting manufacturers to protect their market share. By the end of year, prices rebounded from US$385 per tonne in November to US$415 per tonne in December. Thus, the average price in 2019 was US$445 per tonne, down 16% year-on-year from US$532 per tonne in 2018. 20 Iron ore apparent consumption continued to grow smoothly in 2019, rising by 3.0% to 2,221 million tonnes. Additional demand was supported by strong steel production growth in China and other Asian countries. Iron ore demand rose by 4.6% to 1,348 million tonnes in China, by 3.4% to 76 million tonnes in South Korea and by 9.0% to 163 million tonnes in India. Europe and US market showed reductions of 3.4% and 3.8%, respectively, due to low steel production. Total iron ore production increased by 1.1% to 2,294 million tonnes in 2019, compared with 2,270 million tonnes in 2018. Reduction of iron ore production in Brazil by 12% following Vale’s tragic dam accident was compensated by production growth in China and India. Iron ore production in China surged by 11.7% to cover supply shortages from external suppliers, exceeding 348 million tonnes for the year. India is also on track to increase production, achieving iron ore output growth of 21.8% to 182 million tonnes in 2019. In 2019, prices for Fe 62% fines CFR China breached US$120 per tonne in July for the first time since 2014 following Vale’s dam accident, as well as supply disruptions from Australia and Brazil due to unfavourable weather. By the end of the year, prices normalised at US$86–100 per tonne amid improved supplies from these countries and a strong supply response from India and China. The average iron ore prices climbed by 35% to US$93 per tonne in 2019, compared with US$69 per tonne in 2018. In 2019, global metallurgical coal consumption grew by 2.2% year-on-year to exceed 1,146 million tonnes with the Asian market as a key driver. In China, consumption climbed by 3.0% to 766.7 million tonnes due to the increase in crude steel output. In the second half of 2019, China implemented import restrictions to support domestic producers, resulting in an import reduction of 2.1%. However, coking coal imports to India increased by 2.8% to 60.6 million tonnes amid high steelmaking activity. Following the steel demand decline, metallurgical coal consumption in Europe also fell by 3.3% and imports dropped by 4.0%. Total coking coal production rose by 2.0% year-on-year to 1,147 million tonnes during the period. The major upward trends were formed in China with 3.7% growth (697 million tonnes) and Australia with 2.5% growth (186.9 million tonnes). Australia also demonstrated export growth of 2.7% in 2019. During the year, metallurgical coal prices based on the HCC, FOB Australia benchmark fell from the highs of 2018. The second half of 2019 was accompanied by Chinese import restrictions on coal at major ports, combined with uncertainty around a trade deal with the US, which led to weak interest in buying seaborne coking coal. As a result, the average price was US$178 per tonne in 2019, down 14% from US$206 per tonne in the previous year. Vanadium 90 80 70 60 50 40 30 20 10 0 2013 2018 2019 MB EU FeV Mid, $/kgV 2019 average Global vanadium demand jumped by 11% year- on-year to 102,000 tonnes in 2019, mainly as a result of China’s HS rebar standard implementation and rising steel demand. However, the supply response was quicker than expected as Chinese steelmakers reoriented their facilities for vanadium slag production. Vanadium demand outside China was stagnant due to weakening steel markets, especially in the automotive sector, which together with substitution led the market to surplus. Ferrovanadium prices decreased continuously throughout 2019, reaching bottom in November at US$22 per kgV, with an average price drop of 49% year-on-year in 2019. Strategic report Business review CSR report Corporate governance Financial statements Additional information TRENDS AT EVRAZ CORE MARKETS Steel In 2019, Russian apparent steel consumption surged by 8% year-on-year to 44.9 million tonnes, with respective growth of 8% in long, 8% in plate and 10% in tubular products. The strong demand for long products was supported by additional activity in the construction sector amid the implementation of new financing rules for developers. Crude steel production remained unchanged at 72.0 million tonnes. Export dropped by 12% to 27.1 million tonnes due to high steel demand on the domestic market and trade barriers around the world. In 2019, the average price for rebar in the Moscow region fell by 5% to US$469 per tonne. Coal Russian coking coal consumption remained relatively flat year-on-year, at 36.9 million tonnes in 2019. Coking coal mining volumes rose by 8% to 94.9 million tonnes, mainly due to production growth from EVRAZ and Colmar. Amid stable domestic demand, exports grew by 7% year-on- year to 27 million tonnes, and the additional output went primarily to Asian markets. Following the downward global trend, the average price for FCA Zh-grade fell by 14% to US$137 per tonne during the period. Steel, North America During the reporting period, finished steel consumption in the US edged down by 2% year-on-year to 97.0 million tonnes amid a slower US manufacturing. Meanwhile US finished steel production increased by 2% to 85.3 million tonnes. As Section 232 tariffs and other trade barriers continued to limit steel supplies to the US, imports of finished steel products decreased by 16% to 18.8 million tonnes in 2019. The average domestic FOB Midwest price for hot-rolled coil (HRC) fell by 27% to US$670 per tonne due to weaker demand from end users and sufficient supply. 21 Annual report & accounts 2019Strategic priorities DEBT MANAGEMENT AND STABLE DIVIDENDS EVRAZ remains focused on medium-term debt management and maintaining a stable dividend payout: • Dividend payout according to stated dividend policy: a minimum of US$300 million to shareholders annually provided that the net leverage ratio remains below 3.0x • Medium-term net debt level below US$4,000 million • Target average net debt/EBITDA at 2.0x throughout the cycle In 2019, EVRAZ net debt amounted to US$3,445 million and remained comfortably below the medium-term target of US$4 billion. The average net debt/EBITDA ratio was 1.3x. Even in the case of market volatility, EVRAZ will remain committed to maintaining its long-term average net debt/EBITDA at 2.0x. In 2019, EVRAZ generated strong free cash flow of US$1,456 million, which is higher than its average free cash flow since 2014. Robust free cash flow and a net debt/EBITDA ratio below 2.0x made it possible for the Group to return US$1,086 million to its shareholders in the form of dividends with a dividend yield of 11%. Net debt (net debt/EBITDA), US$ million 3,966 (1.5) <4,000 3,571 (0.9) 3,445 (1.3) 2017 2018 2019 Medium-term target Dividends, US$ million Dividends Yield 2019 1,086 11% 2018 1,556 17% 2017 430 9% 22 Strategic report Business review CSR report Corporate governance Financial statements Additional information PRUDENT CAPEX According to the current investment programme, EVRAZ total annual capital expenditures are expected to be on average US$1.0 billion during 2020-23, including: • Three major development projects around US$335 million a year (2020-23 total capex around US$1,340 million) • Small and middle-sized development projects roughly US$165 million a year • Maintenance CAPEX around US$500 million a year Key projects In 2019, EVRAZ CAPEX totalled US$762 million, of which US$581 million was spent on maintenance projects and US$181 million on development projects. Maintenance investments grew by 61%, mainly due to the execution of Blast furnace No. 6 major overhaul at EVRAZ NTMK, projects in the Coal segment linked with higher production volumes. Major development projects – such as the long rail mill at EVRAZ Pueblo, rail and beam mill modernisation at EVRAZ NTMK and integrated flat casting and rolling facility at EVRAZ ZSMK – are currently in the equipment supplier selection stage or the engineering phase. Annual CAPEX, US$ million Average 2020-23 2019 2018 2017 2016 1,000 581 181 360 167 367 236 264 164 Maintenance Development Projects under review Projects in execution stage Integrated flat casting and rolling facility at EVRAZ ZSMK Incremental effect: 2.5 mtpa of premium 0.8–16 mm flat products instead of slabs and billets Execution decision: October 2020 Blast furnace No. 6 major overhaul at EVRAZ NTMK Reconstruction of blast furnace No. 6 with a planned capacity of 2.5 mtpa; after the project is launched, blast furnace No. 5 with a current capacity of 2.3 mtpa will be shut down CAPEX: ~US$647 million Launch date: 2023 CAPEX: ~US$187 million Launch date: 2020 Long rail mill at EVRAZ Pueblo 630 ktpa of rails with a maximum length of 100 metres Execution decision: Beginning of 2020 Tashtagol iron ore mine upgrade Increase Tashtagol mining volumes to 3.25 mtpa CAPEX: ~US$512 million Launch date: 2022 CAPEX: ~US$108 million Launch date: 2021 Rail and beam mill modernisation at EVRAZ NTMK Incremental effect: 481 ktpa of high value-added products (H-beams,sheet piles and HH rails) instead of semi-finished products Execution decision: October 2020 CAPEX: ~US$205 million Launch date: 2022 23 Annual report & accounts 2019 RETENTION OF LOW-COST POSITION Efficiency and cost-cutting remain Group’s primary focus. EVRAZ is on pace to generate improvements with an annual EBITDA effect of 3% of the cost of goods sold. In 2019, the EBITDA effect from cost-cutting initiatives totalled US$284 million. Breakdown of cost-cutting programme effect in 2019, US$ million Increasing productivity and cost effiectiveness Auxilary materials and services Yields and raw material costs in Urals and Siberia Energy efficiency G&A costs and non-G&A headcount Yields and raw material costs of North American and other assets 167 46 47 16 4 3 Steel segment Coal segment Steel, North America segment 175 72 37 Steel Coal Steel, North America 2019 key initiatives and results • Pig iron production at EVRAZ NTMK rose by 6% to 4.9 million tonnes due to the new blast furnace No. 7 reaching full capacity of 2.5 million tonnes a year in 2019 • Wheel production climbed by 6% 2019 key initiatives and results • Mining volumes grew by 8% to 26.1 million tonnes in 2019 due to increased efficiency (reduced the number and amount of longwall moves) at the Uskovskaya and Alardinskaya mines to 210 thousand tonnes in 2019 as the wheel resurfacing line at EVRAZ NTMK reached full capacity • Launched flotation at the Abashevskaya washing plant to increase concentrate production yield by 1.3% and improve quality • Vanadium slag production grew by 8% • Installed chamber filter presses to 18,380 mtV amid higher vanadium content in the pig iron and an increased number of duplex melts • Achieved a US$38 million EBITDA effect at EVRAZ ZSMK from an optimisation programme of coke, sinter and blast furnace operations mainly aimed at increasing productivity and improving yields 2020 key initiatives • Launch blast furnace No. 6 at EVRAZ NTMK after overhaul • Reduce consumption rates of metal charge, rolled metal, electrodes and energy in the Siberia division • Increase productivity of wheels and reduce downtime of discontinuous production line at EVRAZ NTMK • Improve steel production at continuous casting machine No. 1 at EVRAZ NTMK at the Raspadskaya (third section) and Kuznetskaya washing plants to increase the concentrate production yield by a respective 2% and 0.2% 2020 key initiatives • Launch the first longwall in the Uskovskaya mine’s seam No. 48 • Launch the first longwall in the Esaulskaya mine’s seam No. 29a and increase coal mining to 2.4 million tonnes a year • Optimise the production flow at the Abashevskaya and Kuznetskaya washing plants • Optimise expenses for auxiliary materials and industrial services at the Raspadskaya- Koksovaya mine and Raspadskaya-Koksovaya open-pit 2019 key initiatives and results • Electrode consumption was improved at EVRAZ Regina and EVRAZ Pueblo • API threading line at EVRAZ Pueblo was commissioned to fully replace threading suppliers and reduce cost • Started construction work under the EAF repowering project at EVRAZ Regina to increase coil and plate production by 90 thousand tonnes to 1,250 thousand tonnes, reduce electrode consumption and maintain current electric rate 2020 key initiatives • Focus on operational improvements and reaching production performance targets at EVRAZ Canada • Further optimise electrode, alloy and refractory consumption at EVRAZ Regina • Increase steelmaking and billet productivity at EVRAZ Pueblo 24 Strategic report Business review CSR report Corporate governance Financial statements Additional information DEVELOPMENT OF PRODUCT PORTFOLIO AND CUSTOMER BASE EVRAZ remains focused on executing its development projects aimed at diversifying its product portfolio. In 2019, the customer focus programme generated an EBITDA effect of US$123 million. Customer focus programme EBITDA effect in 2019, US$ million Railway products Beams Grinding balls Logisticts Other 33 26 12 14 38 Steel segment Coal segment Steel, North America segment 110 4 9 Steel Coal Steel, North America 2019 key initiatives and results • The Steel segment’s total sales of railway products rose by 4% to 1.4 million tonnes • The availability of beams improved due to the organisation of regional hubs in Moscow, Kazan and Novosibirsk, as well as direct sales to infrastructure projects, driving beam sales up 18% to 724 thousand tonnes in 2019 • Sales of grinding balls climbed by 7% to 305 thousand tonnes in 2019 due to higher demand from key clients • More efficient dispatching made it possible to achieve a US$14 million effect on logistics in 2019 2020 key initiatives • Complete the construction of the new hub in Nizhny Tagil and launch the beam service centre in Noginsk, Moscow region 2019 initiatives and results • Implemented longwall mining instead of room and pillar mining at Raspadskaya-Koksovaya, increasing K-grade coal extraction from 0.5 million tonnes to 0.8 million tonnes • EVRAZ self-sufficiency in all coal grades grew by 5 percentage points to 74% in 2019 due to charge changes at EVRAZ mills and higher production of K-grade coal • The growth of mining volumes made it possible to expand export supplies to Asia by 12% in 2019 2020 key initiatives • Maximise internal coal supplies to EVRAZ operations • Maintain Russian market share at 22% • Maintain sales to key clients in Eastern Europe and Turkey • Increase sales of rails to Russian Railways • Increase shipments through ports in Asia, 2019 key initiatives and results • Sales of large-diameter pipes surged by 64% to 346 thousand tonnes as all major available LDP projects in Canada were secured • Improved the rail market share in North America by 3 percentage points to 42% in 2019 • Launched the heat treatment line at EVRAZ Red Deer with a total annual capacity of 110 thousand tonnes • EVRAZ Portland restarted its spiral mill with a capacity of 130 thousand tonnes 2020 key initiatives • Increase OCTG sales and expand product mix of OCTG products, produce EVRlock connections • Grow rail market share, and further commercialise APEX G2 rail and rubber reinforcement products by improving product quality and expand export sales by reducing downtime as China and India continue to have the most growth opportunities • Commercialise new EVRAZ Portland products including laser flat quality products • Boost sales of grinding balls of the fifth hardness group • Introduce new profiles in the structural product range at EVRAZ ZSMK 25 Annual report & accounts 2019Key performance indicators EVRAZ performance is assessed against several key performance indicators (KPIs), which are linked to our strategic priorities. FINANCIAL KPI Data EBITDA, US$ million Free cash flow, US$ million Effect from efficiency improvement programme, US$ million (cost cutting + customer focus) Cash cost of slab, US$ per tonne 2019 2018 2017 2,601 3,777 2,624 2019 2018 2017 1,456 1,940 1,322 2019 2018 2017 407 340 267 2019 2018 2017 236 225 247 What does it mean? Our financial performance Our ability to generate free cash flow from the current business The effect of our efforts to generate and implement efficiency improvements initiatives Our integrated cash- cost per tonne of slab for Russian steel plants How did we perform in 2019? The decline comparing to 2018 is primarily attributable to lower vanadium and coal product sales prices, as well as higher expenses for raw materials (mainly increased iron ore prices) The decline comparing to 2018 is primarily attributable to lower EBITDA and increased capital expenditures The efficiency programme generated its additional effect mostly through productivity growth, yield improvements and numerous savings projects. Customer focus initiatives generated additional effect a result of sales efforts in wheels, beams, grinding balls and large diameter pipes as well as to improvements in logistics efficiency Cash cost of slab increased following change in blast furnace charge as higher percentage of more expensive pellets were added in the mix at EVRAZ ZSMK as well as due to the higher prices for raw materials and increased salary expenses Relevance to strategic priorities or basis • Retention of low cost position • Development of product portfolio and customer base • Debt management and stable dividend • Prudent CAPEX • Retention of low cost position • Development of product portfolio and customer base • Retention of low-cost • Retention of low-cost position • Development of product portfolio and customer base position • Development of product portfolio and customer base • EVRAZ business system Further details Read more on page 251 Read more on page 251 Read more on page 251 Read more on page 251 26 Strategic report Business review CSR report Corporate governance Financial statements Additional information NON-FINANCIAL Cash cost of coal concentrate, US$ per tonne Labour productivity, steel, tonnes per person LTIFR (excluding fatalities), per 1 million hours GHG intensity ratio, tCO2e per tonne of crude steel 2019 2018 2017 35 47 42 2019 2018 2017 392 355 352 2019 2018 2017 2.04 1.91 1.90 2019 2018 2017 1.97 2.01 2.02 Our cash-costs per tonne of washed coal products Productivity of our workforce Key indicator of the Group’s health and safety performance The effect of our efforts to reduce the carbon footprint of our production Coking coal concentrate cash cost decreased as a result of increased mining volumes Labour productivity increased as a result of higher production volumes at EVRAZ steel mills The increase in this key metric was primarily caused by an incident involving a crew bus in February 2019 in which eight colleagues lost their lives and 16 people were seriously injured Intensity ratio decreased due to more effcient operation of Blast Furnace shop at EVRAZ ZSMK in 2019 and exclusion of EVRAZ DMZ (cease of operations in Ukraine) as from Q1 2018 • Retention of low cost • Retention of low-cost • Sustainable development • Sustainable development position • Development of product portfolio and customer base position Read more on page 251 Read more on page 251 Read more on page 251 Read more on page 251 27 Annual report & accounts 2019Financial review The decline in EVRAZ consolidated EBITDA year on year is primarily attributable to lower vanadium and coal product sales prices, as well as higher expenses for raw materials. Statement of operations In its full-year financial results for 2019, EVRAZ reported a decrease of 7.3% year- on-year in consolidated revenues, which totalled US$11,905 million compared with US$12,836 million in 2018. The reduction mainly resulted from a drop in the sales prices for vanadium and coal products amid less favourable market trends. 28 EVRAZ consolidated EBITDA amounted to US$2,601 million in the period, compared with US$3,777 million in 2018, bringing the EBITDA margin down from 29.4% to 21.8%. The decline is primarily attributable to lower vanadium and coal product sales prices, as well as higher expenses for raw materials (mainly increased iron ore prices). Free cash flow declined by 24.9% year-on-year and amounted to US$1,456 million. The decline was attributable to lower EBITDA and higher capital expenditures in 2019 compared to 2018. The Steel segment’s revenues (including inter-segment) dropped by 8.3% year-on-year to US$8,143 million, or 61.9% of the Group’s total before elimination. This was mainly attributable to lower revenues from the sale of vanadium products, which declined by 43.8% year-on-year, 45.1% revenue fall resulted from lower vanadium prices. Steel product sales edged up by 0.9% year-on-year due to higher sales prices for railway products, albeit partly offset by lower prices for construction, flat-rolled and other steel products. The Steel, North America segment’s revenues decreased by 3.2% year-on-year. Prices went down by 5.6%, partially offset by a 2.4% uptick in sales volumes. The key drivers were weaker demand across product segments, particularly for construction and flat-rolled products, amid reduced demand for concrete reinforcing bar caused by inclement weather in the beginning of 2019 and softer market demand as customers managed inventory levels. The Coal segment’s revenues fell by 13.5% year- on-year, driven largely by lower sales prices for coal concentrate to third parties, which were down 13.6% due to lower market demand from Russia, CIS and European countries. In 2019, the Steel segment’s EBITDA dropped amid lower steel and vanadium prices, as well as higher expenses due to increased prices for raw and auxiliary materials, including iron ore, scrap and refractories. This was partly offset by lower coking coal prices. The Steel, North America segment’s EBITDA rose, driven mainly by the decline of Section 232 duties on sales to the US, which were included in 2018 expenses. EBITDA remains at low levels due to the weak OCTG market and tariffs on slab consumed by Portland operations in North America. The Coal segment’s EBITDA decreased year-on- year, mainly due to sales prices trending lower in line with global benchmarks. Eliminations mostly reflect the change in unrealised profits or losses that relate to the inventories produced by the Steel segment on the Steel, North America segment’s balance sheet, and coal inventories produced by the Coal segment on the Steel segment’s balance sheet. Strategic report Business review CSR report Corporate governance Financial statements Additional information 2019 2018 Change Change, % 8,143 2,500 2,021 483 (1,242) 11,905 8,879 2,583 2,337 472 (1,435) 12,836 (736) (83) (316) 11 193 (931) (8.3) (3.2) (13.5) 2.3 (13.4) (7.3) Revenues, US$ million Segment Steel Steel, North America Coal Other operations Eliminations Total Revenues by region, US$ million Region Russia Americas Asia Europe CIS (excl. Russia) Africa and the rest of the world Total 2019 4,373 2,709 2,893 956 865 109 11,905 2018 Change Change, % 4,564 3,009 2,716 1,426 936 185 12,836 (191) (300) 177 (470) (71) (76) (931) (4.2) (10.0) 6.5 (33.0) (7.6) (41.1) (7.3) EBITDA, US$ million Segment Steel Steel, North America Coal Other operations Unallocated Eliminations Total 2019 1,795 38 843 18 (141) 48 2,601 2018 2,672 14 1,218 17 (135) (9) 3,777 Change Change, % (877) 24 (375) 1 (6) 57 (1,176) (32.8) n/a (30.8) 5.9 4.4 n/a (31.1) For the definition of EBITDA, please refer to page 251 of the Annual Report 2019 The following table details the effect of the Group’s cost-cutting initiatives. Effect of Group’s cost-cutting initiatives in 2019, US$ million Improving yields and raw material costs, including Improving yields and raw material costs of Urals and Siberia divisions Various improvements at coal washing plants and mines Improving yields and raw material costs of North American assets and vanadium operations Increasing productivity and cost effectiveness Others Total 113 69 32 12 167 4 284 29 Annual report & accounts 2019Revenues, cost of revenues and gross profit of segments, US$ million Steel segment Revenues Cost of revenues Gross profit Steel, North America segment Revenues Cost of revenues Gross profit Coal segment Revenues Cost of revenues Gross profit Other operations – gross profit Unallocated – gross profit Eliminations – gross profit Total Gross profit, expenses and results, US$ million Gross profit Selling and distribution costs General and administrative expenses Impairment of non-financial assets Foreign exchange gains/(losses), net Other operating income and expenses, net Profit from operations Interest expense, net Share of profits/(losses) of joint ventures and associates Impairment of non-current financial assets Gain/(loss) on financial assets and liabilities, net Gain/(loss) on disposal groups classified as held for sale, net Other non-operating losses, net Profit before tax Income tax expense Net profit 2019 2018 Change Change, % 8,143 (5,836) 2,307 2,500 (2,204) 296 2,021 (1,046) 975 116 (4) (58) 3,632 2019 3,632 (966) (611) (442) (341) (55) 1,217 (328) 9 (56) 17 29 14 902 (537) 365 8,879 (5,613) 3,266 2,583 (2,215) 368 2,337 (1,042) 1,295 15 (8) (111) 4,825 (736) (223) (959) (83) 11 (72) (316) (4) (320) 101 4 53 (1,193) (8.3) 4.0 (29.4) (3.2) (0.5) (19.6) (13.5) 0.4 (24.7) n/a 50.0 47.7 (24.7) 2018 Change Change,% 4,825 (1,013) (546) (30) 361 (69) 3,528 (341) 9 - 13 (10) 2 3,201 (731) 2,470 (1,193) 47 (65) (412) (702) 14 (2,311) 13 - (56) 4 39 12 (2,299) 194 (2,105) (24.7) (4.6) 11.9 n/a n/a (20.3) (65.5) (3.8) - n/a 30.8 n/a n/a (71.8) (26.5) (85.2) In 2019, selling and distribution expenses fell by 4.6%, mostly due to the removal of tariffs imposed on steel exports to US customers of EVRAZ North America in 2018, albeit partly offset by increased freight costs and port charges. General and administrative expenses climbed by 11.9% due to implementation of projects for productivity increase (EVRAZ Business System - Transformation, SAP implementation, legal and IT) and consulting services for these projects, a headcount increase which was driven by the above mentioned projects accompanied by wage indexation. This was partly offset by the effect that depreciation of the average rouble exchange rate had on costs. In 2019, EVRAZ recognised a US$442 million impairment loss. As a result of impairment testing at the level of cash-generating units, EVRAZ recognised an impairment of goodwill of US$300 million attributable to large diameter pipes cash generating unit in the Steel, North America segment. The impairment was caused by a change to a more conservative fair value model of valuation in recognition of an increase in current market volatility. EVRAZ also decided during 2019 to postpone the reopening of the MUK-96 coal mine, a subsidiary of Raspadskaya and, as a result, fully impaired the mining assets of this mine. Additionally, EVRAZ wrote off certain functionally obsolete property, plant and equipment in 2019. Foreign exchange losses amounted to US$341 million and were primarily related to intra-group loans denominated in roubles payable by EVRAZ plc and Evraz Group S.A., US dollar functional currency companies, to the Russian subsidiaries that have rouble as a functional currency. The year end appreciation of the Russian rouble against the US dollar led to exchange losses recognised in the income statements of non- Russian subsidiaries, which were not offset by exchange gains recognised in the income statements of Russian subsidiaries. Net interest expense incurred by the Group fell to US$328 million in 2019, compared with US$341 million in 2018. This was mainly due to the management’s efforts to refinance existing indebtedness at more favourable terms during the reporting period. 30 Strategic report Business review CSR report Corporate governance Financial statements Additional information In the first half of 2019 EVRAZ recognised a partial impairment loss US$56 million in relation to non-current financial assets of steel- rolling mill located in Yartsevo, a town in Smolensk region of Russia. A net gain on disposal groups classified as held for sale in the amount of US$29 million arose on the disposal of three subsidiaries and the non-current assets of a Yartsevo rolling mill which were held for sale. The total Cash flow, US$ million consideration amounted to US$110 million, while net assets disposed of were US$38 million. In addition, US$42 million of cumulative exchange losses were recycled from other comprehensive income in equity to the consolidated statement of operations on disposal of foreign operations and transaction costs amounted to US$1 million. For more details please read Note 12 of the financial statements at page 198. During the reporting period, the Group had a current income tax expense of US$540 million, compared with US$679 million in 2018. This expense included taxes withheld on dividends distributed within the Group, which were US$178 million in 2019 and US$53 million in 2018. The decrease in the current income tax expense reflects the lower operating results as compared with the previous year. Cash flows from operating activities before changes in working capital Changes in working capital Net cash flows from operating activities Short-term deposits at banks, including interest Purchases of property, plant and equipment and intangible assets Proceeds from sale of disposal groups classified as held for sale, net of transaction costs Other investing activities Net cash flows used in investing activities Net cash flows used in financing activities including dividends paid Effect of foreign exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Calculation of free cash flow, US$ million EBITDA EBITDA excluding non-cash items Changes in working capital Income tax accrued Social and social infrastructure maintenance expenses Net cash flows from operating activities Interest and similar payments Capital expenditures, including recorded in financing activities Proceeds from sale of disposal groups classified as held for sale, net of transaction costs Other cash flows from investing activities Free cash flow 2019 2,057 373 2,430 7 (762) 44 46 (665) (1,415) (1,086) 6 356 2019 2,601 2,615 373 (532) (26) 2,430 (302) (762) 44 46 1,456 2018 Change Change,% 3,063 (430) 2,633 11 (521) 52 80 (378) (2,606) (1,556) (48) (399) (1,006) 803 (203) (4) (241) (8) (34) (287) 1,191 470 54 755 (32.8) n/a (7.7) (36.4) 46.3 (15.4) (42.5) 75.9 (45.7) (30.2) n/a n/a 2018 Change Change,% 3,777 3,773 (430) (683) (27) 2,633 (298) (527) 52 80 1,940 (1,176) (1,158) 803 151 1 (203) (4) (235) (8) (34) (484) (31.1) (30.7) n/a (22.1) (3.7) (7.7) 1.3 44.6 (15.4) (42.5) (24.9) In 2019, net cash flows from operating activities decreased by 7.7% year-on-year. Free cash flow for the period was US$1,456 million. Increase of interest and similar payments by 1.3% is mainly driven by premium on early repurchase of bonds in 2019, partly offset by decrease of interest paid on loans year-on-year. For the definition of free cash flow, please refer to page 251 of the Annual Report 2019. 31 Annual report & accounts 2019CAPEX and key projects Capital expenditures in 2019, US$ million In 2019, EVRAZ capital expenditure increased to US$762 million, compared with US$527 million a year earlier. Capital expenditures for 2019 in millions of US dollars can be summarised as follows. Financing and liquidity EVRAZ began 2019 with total debt of US$4,638 million. By the end of the year, the Group had completed several transactions to extend its maturity profile and build up a liquidity cushion in view of coming maturities through 2021. In March, EVRAZ completed an issuer substitution, a capital markets transaction intended to substitute EVRAZ plc in place of Evraz Group S.A. as the issuer of the outstanding Eurobonds in accordance with their terms. Upon substitution, three major international rating agencies assigned EVRAZ plc and its notes credit ratings in line with those of Evraz Group S.A. prior to the transaction. In April, EVRAZ plc issued a US$700 million Eurobond due in 2024 with a semi-annual coupon of 5.25%. The proceeds were used to fund the tender offer for the Eurobonds due in 2020 that was completed in April and the make whole call for the residual outstanding balance of these notes that was completed in May. As a result of these transactions, EVRAZ effectively shifted 2020 maturities to 2024. In April, EVRAZ repaid US$50 million in loans from Sberbank due in 2019. In June, the Group repaid RUB15,000 million of 12.95% rouble bonds due in 2019 and respective cross-currency swaps, which economically hedged the Group’s exposure to currency risk. DEVELOPMENT PROJECTS Steel segment Tashtagol iron ore mine upgrade at EVRAZ ZSMK mining site The project aim is to increase annual ore production of Tashtakolsky deposit with partial switch to sublevel caving using mobile equipment Sobstvenno-Kachkanarsky deposit greenfield project The project aim is to maintain raw ore production Integrated flat casting and rolling facility at EVRAZ ZSMK The project aim is to improve the profitability of EVRAZ product portfolio by replacing semi-finished products with hot-rolled sheets and coils Rail and beam mill modernisation at EVRAZ NTMK The project aim is to increase production of beams and of sheet piles Steel, North America segment Long rail mill at EVRAZ Pueblo The project aim is to replace the existing rail facility and meet customers’ interest in long rail Electric arc furnace (EAF) repowering at EVRAZ Regina The project aim is to increase EVRAZ Regina’s prime coil and plate production and reduce electrode consumption Heat treatment at EVRAZ Red Deer The project aim is to develop heat treatment capability to access a higher margin market Seamless threading at EVRAZ Pueblo The project aim is to in-source seamless threading and coupling process from third- party providers to improve cost competitiveness Coal segment Access and development of reserves in the Uskovskaya mine’s seam No. 48 The project aim is to prepare the reserves in seam No. 48 for mining Access and development of reserves in the Esaulskaya mine’s seam No. 29a The project aim is to relocate mining operations from seam No. 26 to seam No. 29a Other development projects MAINTENANCE PROJECTS Steel segment Blast furnace No. 6 major overhaul at EVRAZ NTMK Converter No.4 technical performance improvement at EVRAZ ZSMK Steel, North America segment Steel reheat furnace at EVRAZ Regina Other maintenance projects Total 21 2 0.6 0.5 19 15 6 2 30 10 75 74 6 4 497 762 32 In August, EvrazHolding Finance LLC, a finance subsidiary of the Group, issued RUB20,000 million (around US$317 million at the exchange rate on the transaction date) in five-year, exchange-traded bonds due in 2024 with a 7.95% coupon payable semi-annually. To manage the currency exposure on the rouble- denominated bonds, the Group was able to economically hedge these transactions using cross-currency interest rate swaps, effectively converting the liability exposure to US dollars. In October and November, EVRAZ raised two term loans of US$85 million and US$265 million from Sberbank, both due in 2025. Part of the proceeds were used to refinance an existing US$85 million loan from Alfa Bank. Further, in November, EVRAZ obtained a new loan from Alfa Bank of US$535 million due in 2025. The Group used some of the proceeds from this borrowing to refinance an existing US$300 million loan from the same bank with maturity in 2023. At 1 January 2019, as a result of the application of a new accounting standard, the Group recognised US$118 million of lease liabilities, which at recognition increased total debt of the Group. Under the previous accounting standard, these contracts were accounted for as operating leases and were not recognised as either assets or liabilities in the Group’s Statement of Financial Position. These transactions and accounting change, together with several less significant borrowings, resulted in an increase of total debt in 2019 by US$230 million to US$4,868 million. During the reporting period, EVRAZ paid an interim dividend to its shareholders in the amount of US$577 million (US$0.40 per share) in H1 2019 and an interim dividend in the amount of US$508 million (US$0.35 per share) in H2 2019. Despite the increase in total debt, net debt decreased in 2019 by US$126 million to US$3,445 million, compared with US$3,571 million as at 31 December 2018. Interest expense accrued in respect of loans, bonds and notes amounted to US$231 million in the period, compared with US$248 million in 2018. The lower interest expense was mainly due to the management’s efforts to refinance existing indebtedness at more favourable terms amid a strong performance of the debt markets. The reduction of EBITDA in 2019 resulted in a slight increase of the Group’s major leverage metric, the ratio of net debt to EBITDA, which was 1.3 times as at 31 December 2019, compared with 0.9 times as at 31 December 2018. As at 31 December 2019, debt with financial maintenance covenants comprised various bilateral facilities with a total outstanding principal of around US$1,191 million. Maintenance covenants under these facilities include two key ratios calculated using EVRAZ plc’s consolidated financials: a maximum net leverage and a minimum EBITDA interest cover. As at 31 December 2019, EVRAZ was in full compliance with its financial covenants. As at 31 December 2019, cash amounted to US$1,423 million, while short-term loans and the current portion of long-term loans stood at US$140 million. Total scheduled debt maturities during 2020 do not exceed US$52 million. The first sizeable maturities are due in Q1 2021 and are comfortably covered by cash balances. Strategic report Business review CSR report Corporate governance Financial statements Additional information 33 Annual report & accounts 2019Principal risks and uncertainties RISK MANAGEMENT SYSTEM CEO Board of Directors Has ultimate responsibility for risk management, ensuring that it is in place and effectively functioning • Has an oversight role • Ensures that risk management processes are in place, adequate, effective • Approves the risk appetite in accordance with the risk management methodology adopted by EVRAZ Risk Management Group Audit Committee Internal audit Identifies, assesses and monitors Group- wide risks and mitigation actions • Supports the board in monitoring risk exposure against risk appetite • Reviews the effectiveness of risk management and internal control systems Supports the Audit Committee in reviewing the effectiveness of risk management and internal control systems TOP-DOWN APPROACH Oversight, identification, assessment and management of risks at the corporate level Effective risk management The risk management process aims to identify, evaluate and manage potential and actual threats to the Group’s ability to achieve its objectives For more information, read risk management and internal control section of the corporate governance report on pages 116-117. BOTTOM-UP APPROACH Identification, assessment and management of risks at regional and site levels and across functions Site levels Regional business unit management teams • Identification, assessment and mitigation of risks • Promoting risk awareness and safety culture • Adopt regional risk appetite • Support the Risk Management Group in reviewing and monitoring effectiveness of risk management • Identify, assess and manage risks at the regional level • Monitor risk management process and effectiveness of internal control 34 RISKS MIGRATION IN 2019 AND ROBUST ASSESSMENT In 2019, the management carried out a robust reassessment of the principal risks facing the Group. The Audit Committee has carefully reviewed this assessment on behalf of the Board. The assessment focused on the risks that could adversely affect the Group’s strategies. It included an evaluation of risks identified at the operational level and their relevance and significance for the Group, as well as a detailed assessment of specific areas where new risks have been identified or the risk profile has changed significantly. The management also considered the speed of impact and volatility of each risk in their assessment. As a result, the principal risks have been updated. The Group’s development plans are focused on capital projects and depend on its economic viability, efficiency and effectiveness of execution, as well as availability and cost of capital to finance the Group’s capital expenditure. This risk was reassessed during 2019 to reflect the expanded portfolio of capital projects being executed by the Group. As a result, this has been classified as a principal risk. While the Group’s internal controls address the risk, additional control measures were adopted to ensure the risk remained within the risk appetite level. The assessment included other risks that were not recognised as principal, eg HR and employee risks (including the risks of lack of skills, failure of succession planning, reduced productivity due to labour unrest or poor job satisfaction), taxation, compliance risks (including anti- corruption and anti-bribery matters), social and community risks, risks related to respect for human rights, and other risks. While the impact and probability analysis suggests that such risks could affect the Group’s operations to some extent, the management believes they are being adequately managed and does not consider them as being capable of seriously affecting the Group’s performance, future prospects or reputation. In order to enhance its focus and control over the Environmental, Social and Governance risks, in 2020, the Group plans to initiate development of the related strategies and policies: Environmental and Climate Change Strategies, and Human Rights and Diversity Policy. This will provide more transparency on how the Group addresses the related risks. While the composition of the Group’s principal risks has not changed substantially compared with the previous year, a detailed analysis of their impact and probability of negative consequences for the Group has led to a recalibration in the assessment of some of the risks. The UK formally left the EU on 31 January 2020 and now in the transition period until end of 2020. The Group closely monitors the situation and continues to believe that it will not significantly affect its business. Principal risks and uncertainties heat map in 2019 1. Global economic factors, industry 5. Functional currency devaluation conditions and cyclicality 2. Product competition 3. Cost effectiveness 4. Potential regulatory actions by Governments, incl. trade, anti-monopoly, anti-dumping regulation, sanctions regimes, and other laws and regulations Risk appetite level 6. HSE: environmental 7. HSE: health, safety 8. Business interruption 9. Digital effectiveness, effective, efficient and continued IT service 10. Capital projects and expenditure High Medium Low Volatility Speed of impact Risk migration, yoy 5 4 3 2 1 Strategic report Business review CSR report Corporate governance Financial statements Additional information Key developments in 2019 and outlook for 2020 In 2019, the Group was focused on enhancing its health and safety risk management methodology, and this work will continue in 2020. During the reporting period, there were various initiatives implemented in the IT process focused on improving risk management. For example, an IT Security Operation Centre was created to process IT security events. The process of managing risks related to personal data protection has been improved, strengthening the data protection control system. In 2020, in addition to continuing to implement ongoing initiatives focused on risk management improvement (in HSE, equipment maintenance and repairs, procurement and other processes), the Group plans to focus more on addressing climate-related risks. The Group intends to begin developing a climate change policy and strategy. This will bring more transparency regarding how the Group identifies, assesses and addresses climate-related risks. Environmental risk has always been a topic of focus for the management and is recognised as a principal risk for the Group. EVRAZ mitigates it by implementing air emission reduction programmes at plants, participating in developing greenhouse gas emission regulations in Russia, implementing energy efficiency projects and, as a result, reducing greenhouse gas emissions. Read more in the CSR Report section on pages 76-103 for more details. SEVERITY 8 6 9 2 5 3 10 4 1 2 3 4 5 P R O B A B I L I T Y 1 7 35 Annual report & accounts 2019 PRINCIPAL RISKS AND UNCERTAINTIES OUR BASIS Strategic priorities Sustainable development EVRAZ Business System Debt management and stable dividends Prudent CAPEX Retention of low-cost position Development of product portfolio and customer base Direction of risk change No changes Increased Decreased Description and impact Risk owner(s) Mitigating/risk management actions in 2019 Direction/ reason for change The risk is monitored at the level of CEO, as well as by the Strategy Committee, Management Committee, Budgeting Committee and at other levels This is an external risk that is mostly outside the Group’s control; however, it is partly mitigated by exploring new market opportunities, focusing on expanding the share of value-added products, further downscaling inefficient assets, suspending production in low- growth regions, reducing and managing the cost base with the objective of being among the sector’s lowest-cost producers, and balance sheet/gearing improvement. In 2019, there were noted indictors of risk realisation. At the same time, the management actions noted reduced the impact of the risk on the Company’s business and operations. VP Sales Expand product portfolio and penetrate new geographic and product markets. Develop and improve loyalty and customer focus programmes and initiatives. Quality improvement initiatives. Expand the share of value-added products. EVRAZ operations are dependent on the global macroeconomic environment, as well as economic and industry conditions, eg the global supply and demand balance for steel, iron ore and coking coal, which affect both product prices and volumes across all markets. The Group’s operations involve substantial fixed costs, and global economic and industry conditions can impact the Group’s operational performance. Excessive supply on the global market and greater competition, mostly in the steel products market, primarily due to competitors’ activity and introduction of new facilities. Low demand for construction products and increasing competition in this segment. Increasing competition in the rail product segment. Excessive supply of slabs on the global market and intensified competition. Risk 1. Global economic factors, industry conditions and cyclicality 2. Product competition 36 Strategic report Business review CSR report Corporate governance Financial statements Additional information Risk 3. Cost effectiveness Description and impact Risk owner(s) Mitigating/risk management actions in 2019 Direction/ reason for change Most of the Group’s steel production remains sensitive to costs and prices. VPs of business units, VP Commerce and Business Development For both the mining and steelmaking operations, the Group is implementing cost-reduction projects to increase asset competitiveness. Given the substantial product share of commodity semi-finished, which requires less customer service and is more cost driven, maintaining a low-cost position is one of EVRAZ key business objectives in steelmaking, as well as in the iron ore and coking coal mining businesses. Digitalisation is having a significant impact on the sector, as companies seek to use new technology to support efforts to improve productivity and margins across the value chain. Failure to find digital solutions for the most urgent business problems could reduce operational flexibility and cost advantage. New laws, regulations or other requirements and regimes could limit the Group’s ability to obtain financing on international markets, sell its products and purchase equipment. EVRAZ may also be adversely affected by government sanctions against Russian businesses or otherwise reducing its ability to conduct business with counterparties. Risk of adverse geopolitical situations in countries of operation. Risks of the Group’s failure to adapt to new market conditions and to take losses connected with existing contracts in case of additional sanctions implementation. 4. Potential regulatory actions by governments, incl. trade, anti- monopoly, anti- dumping regulation, sanctions regimes, and other laws and regulations Focused investment policy aimed at reducing and managing the cost base. Control of the Group’s Russian steel distribution network. Development of high value-added products. EVRAZ Business System transformation projects focused on increasing efficiency and effectiveness. VP Compliance and Security, VP Legal, VP Sales, VP Strategy and others Decreased due to enhancement of internal compliance control in 2019 to address the associated risks EVRAZ and its executive teams are members of various national industry bodies. As a result, they contribute to the development of such bodies and, when appropriate, participate in relevant discussions with political and regulatory authorities. Procedures have been implemented and will be further developed to ensure that sanction requirements are complied with across the Group’s operations. Ongoing control over regulatory compliance, monitoring regulatory changes and developing necessary controls. While the Group’s internal compliance controls address the associated risks, the general uncertainty in the area increases the management’s focus on this risk. 5. Functional currency devaluation Any significant fluctuation in subsidiaries’ functional currencies relative to the US dollar could have a significant effect on the Group’s financial accounts, which might impact its ability to borrow. The risk is monitored at the level of the CFO EVRAZ works to reduce the amount of intergroup loans denominated in Russian roubles to limit the possible devaluation effect on its consolidated net income. 37 Annual report & accounts 2019Description and impact Risk owner(s) Mitigating/risk management actions in 2019 Direction/ reason for change Risk 6. HSE: environmental HSE Committee at the Board of Directors level, as well as at the management level The environmental risk matrix is monitored on a regular basis. Respective mitigation activity is developed and performed in response to the risks. Increased focus of the top management on monthly monitoring of environmental risk trends and factors. Steel and mining production carry an inherent risk of environmental impact and incidents relating to issues as diverse as water usage, quality of water discharged, waste recycling, tailing management, air emissions (including greenhouse gases), and community satisfaction. Consequently, EVRAZ faces risks including regulatory fines, penalties, adverse reputational impact and, in the extreme, the withdrawal of plant environmental licences, which would curtail operations indefinitely. Globally, there is an increase in regulatory scrutiny and pressure, as well as investor and customer expectations. Implementation of air emissions and water use reduction programmes at plants. Waste management improvement programmes. Most of EVRAZ operations are certified under ISO 14001 and the Group continues to work towards bringing the remaining plants to ISO 14001 requirements. EVRAZ is currently compliant with REACH requirements. Participation in development of GHG emissions regulation in Russia. Reduction in GHG emissions as a positive side-effect of energy efficiency projects. While there was a noted increase in regulatory scrutiny and pressure resulting in a heightened risk impact in 2019, the management focus and mitigation activity keeps the risk level unchanged. Read pages 81 for more details. Management KPIs place significant emphasis on safety performance and the standardisation of critical safety programmes. Implementation of an energy isolation programme. Further development of a programme of behaviour safety observations which drives a more proactive approach to preventing injuries and incidents. A series of health and safety initiatives related to underground mining. Maintenance and repair modernisation programmes, downtime management system. Further development of occupational safety risk assessment methodology. Analysis of effectiveness of corrective measures. In 2019, there were noted cases indicating risk realisation. However, the management focus on measures addressing the risk is especially high. Read pages 78 for more details. 7. HSE: health, safety HSE Committee at the Board of Directors level, as well as at the management level Potential danger of fire, explosions and electrocution, as well as risks specific to individual mines: methane levels, rock falls and other accidents could lead to loss of personnel, outage or production delays, loss of material, equipment or product, or extensive damage compensation. Breach of any HSE laws, regulations and standards may result in fines, penalties and adverse reputational impacts and, in the extreme, the withdrawal of mining operational licences, thereby curtailing operations for an indefinite period. 38 Risk 8. Business interruption 9. Digital effectiveness, effective, efficient and continued IT service 10. Capital projects and expenditure Strategic report Business review CSR report Corporate governance Financial statements Additional information Description and impact Risk owner(s) Mitigating/risk management actions in 2019 Direction/ reason for change Prolonged outages or production delays, especially in coal mining, could have a material adverse effect on the Group’s operating performance, production, financial condition and future prospects. In addition, any long-term business interruption may result in a loss of customers and competitive advantage, as well as damage to the Group’s reputation. A failure to proactively use IT opportunities to increase the efficiency of business operations can result in a loss of competitive advantage and margins. Information technology and information security risks have the potential to cause prolonged production delays or shutdowns. At the same time, increased digital transformation and the convergence of IT and operational technology makes companies more vulnerable. The Group’s development plans largely rely on capital projects and depend on its economic viability, efficiency and effectiveness of execution, as well as the availability and cost of capital to finance the Group’s capital expenditure. Economic issues outside those factored into the Group’s business plans including regulatory approvals, also may negatively impact the Group’s anticipated free cash flow and cause certain elements of the planned capital expenditure to be re-phased, deferred or abandoned with consequential impact on the Group’s planned future performance. In addition, the profitability of new projects could be impacted by higher than expected operating and life of mine costs due to variables such as lower than expected coal and iron ore quality, coal seam economics, and technical processing and engineering factors. VPs of business units VPs of business units, VP IT, IT Architecture Committee The Group has defined and established disaster recovery procedures that are subject to regular review. Business interruptions in mining mainly relate to production safety. Measures to mitigate these risks include methane monitoring and degassing systems, timely mining equipment maintenance, and employee safety training. Detailed incident cause analysis is performed in order to develop and implement preventative actions. Records of minor interruptions are reviewed to identify any more significant underlying issues. Digital Transformation is a part of the IT strategy. Assessment and monitoring of risks of information security, implementation of related mitigation activity. Implementation of mitigation measures upon completion of external assessment by independent advisor. IT continuity regular testing for the most critically important IT systems. IT Security Operation Centre launched. Decreased due to enhancement of information security controls in 2019. In addition, a Digital Transformation strategy was developed and made a part of the IT strategy. CFO, Strategy Committee, Investment Committee, VPs of business units Review all proposed capital projects on a risk return basis. 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. Increased to reflect expanded portfolio of capital projects being executed by the Group Project delivery is closely monitored against project plans resulting in high-level action to manage project investment for both timely delivery and planned project expenditure. New mine development and definition of feasibility plans are reviewed and signed off by independent mining engineers. Regularly revisit key assumptions of the main investment projects and perform scenario analysis, which may result in the suspension and/or postponement of certain projects. Financial modelling to define the strategy of each individual asset and the enterprise in general for the purpose of long-term FCF forecasting, including investment projects. The project management system’s transformation is ongoing. 39 Annual report & accounts 2019Viability statement As a global steel and mining group, EVRAZ is exposed to a range of risks and inherent uncertainties that are explained more fully in this section. The Group’s principal risks and its approach to managing them, together with the latest financial forecasts and five- year strategic plan, have formed the basis of this long-term viability assessment. EVRAZ believes that a five-year period is optimal for the viability analysis, as it corresponds to the period used in the Group’s strategic planning and therefore reflects the information available to management regarding the future performance of the business. Visibility of performance and risks beyond the strategic planning cycle is limited and scenarios beyond this five-year period have not been analysed for the purposes of the viability statement. In accordance with provision 31 of the UK Corporate Governance Code 2018, the Board has assessed the Group’s prospects over the period of the current strategic plan to December 2024 and considers it possible to form a reasonable expectation of the Group’s viability over this five-year period. The assessment included consideration of the stress-testing detailed below, with particular attention paid to the forecast cash position and compliance with financial maintenance covenants in each scenario, as well as the mitigation plan developed by the management. the Group’s resilience to the significant risks set out on pages 34-39 and combinations of correlated risks. Some risks are outside the Group’s control and the potential implications are difficult to predict in the current environment and considered remote. The key scenarios tested can be summarised as: • Base scenario: – The key assumptions as disclosed in Note 6 to the financial statements under Impairment of assets on pages 186–188 – Future pricing of steel and raw materials is within the range of the external analyst forecasts set out in Note 6 – Annual steel volumes are assumed to vary from -3.7% to 6.3% compared with the 2019 level over the five-year period to December 2024 • Global economic decline: – Steel and raw material prices and exchange rates during 2020 and future periods are at the lower end of the external analyst forecast set out in Note 6 – Sales volumes are assumed to decrease by 3.0% in comparison with the base scenario • Increased conversion costs in the CIS • Increased CAPEX • Potential changes in HSE requirements and standards The assessment was underpinned by scenarios that encompass a wide spectrum of potential events. These scenarios are designed to explore • Appreciation of local operating currencies • Cybersecurity failure resulting in production delays or shutdowns • Introduction of new tariffs and duties • Business interruption, leading to lost production and restoration costs • Combinations of correlated risks/scenarios The scenarios are designed to be severe but plausible. They take full account of the potential actions available to mitigate the occurrence and impact of the risk, and the likely effectiveness of such action. The process makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required and available in each scenario. EVRAZ considers this assessment of its prospects based on stress- testing to be reasonable, given the risks and inherent uncertainties facing the business. The directors confirm that their assessment of the principal risks facing the Group is robust. Based upon this robust assessment and the stress-testing of the Group’s prospects across several risk-related scenarios, the directors have a reasonable expectation that EVRAZ will be able to continue in operation and meet its liabilities as they fall due over the five-year period to December 2024. In making this statement, the directors have made the following key assumptions: • Funding or refinancing, by way of capital markets, bank debt and asset financing, continues to be available • Selling prices remain in line with prevailing market assumptions 40 Strategic report Business review CSR report Corporate governance Financial statements Additional information Statement in accordance with S172 of the Companies Act The Board has considered in detail the Company’s business model outlined on pages 12-15 of this report, which identifies the Company’s stakeholders as: • Shareholders and investors • Employees • Customers • Suppliers and contractors • Local communities • Government and regulatory authorities • Media • Industry organisations The Board of EVRAZ recognises the benefit of clear and precise engagement with the Group’s stakeholders. Value is generated through the Group’s core activities as outlined in the discussion of its business model on page 13. The Group’s dividend policy anticipates dividend payments to shareholders of US$300 million per annum, provided that the Group’s net debt/ EBITDA ratio remains below 3x. In addition, the Board may consider further distributions of free cash flow available after implementing its investment programme to support the business. The Group has an active IR programme to enable shareholders to engage with the Company and the Board, not only on businesses issues but also any governance concerns that they might have. A capital markets day is also held each year for the investment community, which covers both the current performance and future plans, as well as governance issues. Sir Michael Peat, the senior independent non-executive director and chairman of the Nominations Committee, attended Capital Markets Day in October 2019 and presented on the Company’s corporate governance structure as well as meeting with investors; other independent non-executive directors were in attendance. All shareholders are welcomed at the AGM where all directors are available to discuss any issues that they might raise. The CEO, supported by the CFO, held conference calls and briefed analysts and institutional investors fully after the publication of the Company’s half-year and full-year results. Additionally, the CFO, supported by the director for investor relations, held a series of in-person meetings with institutional investors during the year. Engagement with employees remains key, and the Board closely monitors the results of the annual engagement survey which has seen satisfactory levels of improvement. Two independent non-executive directors have taken responsibility for engaging with employees in our businesses in North America and Russia, respectively, and this is undertaken by their attendance at key staff briefing events and town hall meetings. Throughout the year, senior management attend the Group’s board meetings to present the annual budget for their respective business units, and to present key investment projects which require the Board to approve significant capital expenditure sums. All presentations made to the board consider both the benefit to shareholders of the proposal and the impact on other key stakeholders. The Remuneration Committee receives a detailed presentation from the Vice President of HR, which outlines remuneration and incentive plans across the whole business at each level. A whistleblowing arrangement is in place which allows staff to raise issues in confidence, and the responses to the issues are routinely monitored by the Audit Committee who escalate key issues to the Board. The Board established a Health, Safety and Environment Committee in 2011 to help it to monitor the Group’s Health, Safety and Environment performance, as well as the initiatives designed by management to improve the Group’s performance in that area. In addition, it considers the planned actions that are necessary to reduce the Group’s impact on the environment, including the reduction of greenhouse gas emissions. More details are available on pages 81-87. The Board considers the interests of all stakeholders by taking a long-term view of how the business needs to develop within its economic market. The Board has considered the technological developments in the market to ensure that its assets are improved to remain competitive, and that the necessary financing requirements will be available over the medium to long term to implement strategic projects. When development plans for projects are in their early stages, the management engages key customers to ensure that the products produced meet their specific requirements. All suppliers are treated in line with agreed contract terms, and when new opportunities come available then the Group has transparent tendering procedures, to ensure new contracts are awarded on a fair basis. The Board is introducing a stakeholder impact analysis for all proposals brought to its attention and will include an analysis in the annual strategy plan. The full range of EVRAZ Stakeholder engagement is detailed on pages 118–119. These actions assist the directors in performing their duties under S172 of the Companies Act 2006 and the analysis will confirm to the Board that the impact of business plans on all stakeholders is being considered by management when developing initiatives for Board approval. 41 Annual report & accounts 2019Non-financial reporting EVRAZ aims to comply with the non-financial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006. The table below outlines to stakeholders the Group’s position, principal policies, main risks and KPIs on key non-financial areas. Requirement The Group’s approach and policies Documents Related KPIs Related principal risks HSE: environmental read more on page 38 Steel and mining production carry a high risk of environmental impact and incidents related to its production processes. That is why EVRAZ pays the closest attention to environmental matters in order to prevent or minimise any adverse impacts. EVRAZ HSE Policy Code of Business Conduct EVRAZ have adopted five-year environmental targets: • Decreasing fresh water consumption by 10% • Recycling 95% of non-mining waste per year • Maintaining the greenhouse gas intensity ratio below 2 tonnes of carbon dioxide (CO2) equivalent (tCO2e) per tonne of crude steel EVRAZ strictly complies with national labour laws and best practices of business ethics concerning employee management. Discrimination related to a person’s race, ethnic origin, gender, religion, political views, nationality, age, sexual orientation, etc is totally unacceptable throughout the Group, as well as at its subcontractors and suppliers. Due to industry-specific issues, EVRAZ employees and contractors face safety and health risks. Providing a safe work environment is one of the Group’s main core values. EVRAZ strives to make a meaningful contribution to local economies and to support communities wherever it operates. The Group supports infrastructural, sport, educational and cultural programmes with an aim to improve the quality of life in local communities. EVRAZ HSE Policy LTIFR (per 1 million hours) Code of Business Conduct Labour productivity, steel (tonnes per person) HSE: health and safety read more on page 38 Social Investments Guidelines Fulfilment of the Group’s social obligations towards its employees, which were fixed in the collective agreements. Interaction with local communities in the regions of the Group’s presence during the implementation of various CSR related projects. Global economic factors, industry conditions and cyclicality Business interruption read more on pages 36, 39 Environment Further information: Environment, read more on pages 81–87 Employees Further information: Our people, read more on pages 90–95 Health and safety, read more on pages 78–80 Social policy Further information: Community relations. read more on pages 96-101 42 Strategic report Business review CSR report Corporate governance Financial statements Additional information Requirement The Group’s approach and policies Documents Related KPIs Respect for human rights Further information: Our approach, read more on pages 76-77 EVRAZ commitments are based on internationally recognised standards and respect for all human rights. Child labour, bonded labour, human trafficking and other forms of slavery are strictly prohibited at all Group subsidiaries and their suppliers. EVRAZ rules also prohibit abusive, harassing, discriminatory, degrading or aggressive speech or conduct. Code of Business Conduct Zero tolerance to violation. Modern Slavery Transparency Statement In accordance with the Group’s policies and procedures, compliance managers scrutinise tender procedures, check potential and existing business partners, vet prospective new candidates, and ensure that the principles set forth in the EVRAZ Anti-corruption Policy and Code of Business Conduct are adhered to throughout its operations. Anti- corruption and anti- bribery Further information: Anti-corruption and anti-bribery, read more on pages 102-103 A short summary of relevant anti-corruption policies, read more on page 257 Code of Business Conduct Zero tolerance to violation. EVRAZ Anti-Corruption Policy: • Anti-corruption training policy • Sponsorship and charity policy • Gifts and business entertainment policy • Candidate background and criminal record checks • Conflict of interest policy • Contractor/supplier due diligence checks EVRAZ Rules on Securities Dealings Related principal risks None of EVRAZ current principal risks relates to the aspects of human rights None of EVRAZ current principal risks relate to the aspects of anti-corruption. For EVRAZ business model, relationships and products, Read more on pages 12-13, 46-69. For the Group’s related risks and how they are managed, read the Principal risks section on pages 34-39. EVRAZ Strategic Report, as set out on pages 6- 43 inclusive, has been reviewed and was approved by the Board of Directors on 26 February 2020. Alexander Frolov Chief Executive Officer EVRAZ plc By the order of the Board 26 February 2020 43 Annual report & accounts 2019Business review Focusing on efficiency for a Better Future Bugrinsky Road bridge Novosibirsk, Russia Focusing on efficiency Steel segment Introduction and highlights EVRAZ Nikom CZECH REPUBLIC Our goals • Be a leader on the Russian construction steel market • Secure a leadership position on the Russian rail market • Be an efficient producer of steel products for infrastructure projects EVRAZ is No. 1 among rail suppliers and the leader in the construction steel market in Russia. The Steel segment’s primary focus is producing steel in the CIS from closely located raw materials to serve the domestic infrastructure and construction market while maintaining export flexibility. 46 EVRAZ Vanady-Tula EVRAZ ZSMK EVRAZ NTMK EVRAZ Caspian Steel EVRAZ KGOK Urals Division Siberia Division Strategic report Business review CSR report Corporate governance Financial statements Additional information Iron ore Iron ore products Slabs, billets Construction products Railway products Vanadium products KAZAKHSTAN Production highlights Sales highlights1 Crude steel 11,953 kt Steel products 11,018 kt Finished products 6,439 kt Iron ore products 1,895 kt Iron ore products 13,765 kt Vanadium slag 18,380 kt Semi-finished products 5,636 kt Vanadium final products 12,883 kt Financial highlights Revenues US$ 8,143 million 1. Sales to third parties only. EBITDA US$ 1,795 million EBITDA margin 22.0% CAPEX US$ 395 million 47 Annual report & accounts 2019 STRATEGIC PRIORITIES PRUDENT CAPEX KEY INVESTMENT PROJECTS Steelmaking Mining Rail and beam mill modernisation at EVRAZ NTMK Increase production of beams, sheet piles and HH rails. Key developments in 2019 Mill equipment supplier selected, ‘Define’ phase approved and contract signed. CAPEX in 2019: US$0.5m Integrated flat casting and rolling facility at EVRAZ ZSMK Improve the profitability of EVRAZ’ product portfolio by replacing semi-finished products with hot-rolled sheets and coils a year. Key developments in 2019 Technical proposals developed for engineering and equipment supply. Budget and project scope clarified based on proposals from equipment suppliers. Sobstvenno-Kachkanarsky deposit greenfield project Maintain raw ore production. Key developments in 2019 Working documentation developed, land lease issued. CAPEX in 2019: US$2 million Tashtagolsky deposit reconstruction at EVRAZ ZSMK mining site Increase annual ore production of Tashtakolsky deposit with partial switch to sublevel caving using mobile equipment. Key developments in 2019 Subsoil use licence acquired to explore and mine iron ore. Design documentation developed and submitted to relevant government agencies for consideration. Main technical and economic indicators developed for production of flat products with potential technology suppliers. Basic technological equipment supplied. CAPEX in 2019: US$21m CAPEX in 2019: US$0.6m KEY MAINTENANCE PROJECTS Blast furnace No. 6 major overhaul at EVRAZ NTMK Maintain pig iron production volumes. Key developments in 2019 Strengthened foundation of axial cyclone and central hub, installed furnace shell and air heaters. CAPEX in 2019: US$74.0 million Read more on page 23 48 Converter No. 4 technical performance improvement at EVRAZ ZSMK Extend operations of converter No. 4 and improve technical and economic performance with replacement of drive, waste heat boiler, gas purification and upgrade of gas exhaust path. Key developments in 2019 Selected main equipment suppliers. Received equipment for waste heat boiler, has purification and gas exhaust at warehouse. Selected contractor to replace waste heat boiler and gas exhaust. Started top assembly of waste heat boiler. CAPEX in 2019: US$6 million Strategic report Business review CSR report Corporate governance Financial statements Additional information RETENTION OF LOW-COST POSITION DEVELOPMENT OF PRODUCT PORTFOLIO AND CUSTOMER BASE During the year, our operations focused on adjusting controllable costs. Rails EXPANSION OF RAILWAY PRODUCT PORTFOLIO These programmes delivered US$ 175 million in benefit in 2019 Key developments in 2019 Developed premium hardness innovative G2HH steel for RE136 and 60E1 rails. Outlook for 2020 Plan to develop R75 DT 350 rail profile for Russian Railways. Received Railway Equipment Registry certification for R65 DT 400 IK rails. IMPROVING BEAM CONSUMPTION Key developments in 2019 Developed production of H-beams to EN standards for customers in Russia (180HE, 200HE). Outlook for 2020 Plan to expand product portfolio in the small beams with several new profiles for Russian market. Launched regional beam storage hubs to significantly improve market availability of profiles. Launched IT resource for online tracking of beam availability in hubs and dealers warehouses. Plan to launch hub at EVRAZ NTMK and Service Metal Centre in Moscow. INDUSTRIAL PRODUCT PORTFOLIO EXPANSION Key developments in 2019 Developed 20x180 mm and 25x200 mm metal strips. Expanded range of structural circles and squares to include 12 new profiles. Outlook for 2020 Plan to develop SVP-33 mine column profile. Plan to start commercial sales of grinding ball of fifth hardness group, including entrance to export markets. Obtained grinding ball of fifth hardness group in production and sent to customer for tests. Read more on page 24 Read more on page 25 49 Annual report & accounts 2019MARKET REVIEW Russian Steel market While the Russian economy demonstrated moderate 1.3% GDP growth in 2019, the government’s national projects are expected to foster economic growth in the country in the coming years. The domestic steel market expanded by 8% to 44.9 million tonnes. Consumption of long products climbed by 8% to 18.2 million tonnes, driven by higher construction activity amid changes in the financing of real estate. Developers have accelerated the implementation of existing projects to complete them before the new rules come into force. Demand for flat and tubular products grew by a respective 8% to 15.2 million tonnes and 10% to 11.5 million tonnes. In the railway segment, wheel consumption surged by 22%, supported by continued strong demand from railcar producers and repair companies. The rail market rose by 3% due to higher demand from both Russian Railways and other consumers. In the construction segment, demand for beam and rebar climbed by 16% and 13% respectively, while the consumption of structural products was down by 3%. In 2019, strong domestic consumption and widespread trade barriers in foreign steel markets pushed export sales down by 12% to 27.1 million tonnes. Total crude steel production in Russia remained at the level of 72.0 million tonnes in 2019. During the period, steel prices in Russia followed global trends with average levels than in 2018. The CPT Moscow rebar benchmark was down by 5%, averaging US$469 per tonne versus US$493 per tonne in 2018. Channel prices dropped by 17% to US$582 per tonne in 2019, compared with US$698 per tonne the previous year. Prices for HRC and plate also fell by a respective 4% to US$553 per tonne and 4% to US$561 per tonne. Other steel markets Steel consumption in Kazakhstan edged down by 13% to 3.2 million tonnes. Exports from the country plunged by 15% to 2.7 million tonnes due to the reduction of output by Kazakhstan’s leading producer, ArcelorMittal Temirtau. 50 Russian steel consumption by product type, mt 2019 2018 2017 2016 2015 15.2 18.2 14.0 14.1 13.2 13.0 16.9 16.4 15.4 16.0 44.9 10.5 10.6 11.5 41.1 40.8 10.2 11.3 38.8 40.3 Flat Long Tubular Russian steel prices, US$/t 800 700 600 500 400 300 2012 2018 2019 Rebar HRC Plate Channels SALES VOLUMES REVIEW In 2019, the external sales of the Group’s Steel segment climbed by 10% to 12.1 million tonnes. This growth is explained by higher pig iron production as blast furnace No. 7, launched in 2018 at EVRAZ NTMK, reached its target production volumes. Sales of semi-finished products to third parties soared by 20%. During the period, sales of railway products grew by 4%, supported by stronger demand in both the wheel and rail markets. External sales of construction products increased by 3% due to the higher domestic demand. Most of Steel segment’s key products sales in Russia strengthened in 2019, buoyed by solid domestic demand. As result of continued elevated railcar production and a number of overhauls, railway wheel sales rose by 16%. Rail sales climbed by 4%, mainly due to higher supplies to Russian Railways. The Group’s customer focus efforts aimed to promote the use of beams by improving their availability for clients and selling directly to large infrastructure projects, driving beam sales up 21% in 2019. Rebar sales slightly corrected by 1%. Structural products sales edged down by 1% due to heightened market competition. EVRAZ aims to maintain and develop leading positions on the Russian rail market and in steel products in Siberia. In 2019, competition increased for the Steel segment’s key products. The Group’s market share in rails corrected to 76%, compared with 77% in the previous year and the market share for rail wheels edged down by 1 percentage point to 28% during the period. Meanwhile, the market share in beams surged by 5 percentage points to 68% in 2019. In structural products, the market share dropped from 42% to 40% in 2019. Meanwhile, the market share in grinding balls rose from 62% to 63%. In 2019, EVRAZ Caspian Steel’s rebar sales jumped by 65% to 290 thousand tonnes amid dwindling shipments from its main competitor. The Group’s finished vanadium product sales volumes climbed by 4% to 12.9 thousand tonnes in 2019, compared with 12.4 thousand tonnes of pure vanadium in 2018, mainly as a result of customer base expansion and moderately strong demand on Asian markets in H2 2019, while vanadium consumption in the EU, North America and the CIS was stagnant. As a vertically integrated group, EVRAZ focuses on the internal consumption of its own iron ore products. In 2019, total iron ore product sales dropped by 5% to 1.9 million tonnes due to higher pig iron production at EVRAZ steel assets. Strategic report Business review CSR report Corporate governance Financial statements Additional information EVRAZ market shares in Russia by key products, % Railway wheels Rails Grinding balls 2019 2018 28% 29% 2019 2018 76% 77% 2019 2018 63% 62% Structural shapes Beams Rebar 2019 2018 40% 42% 2019 2018 68% 63% 2019 2018 9% 9% Sales volumes of Steel segment, ‘000 tonnes Steel products, external sales Semi-finished products Construction products Railway products Flat-rolled products Other steel products Steel products, inter-segment sales Total steel products Iron ore products1 Sinter Pellets Other iron ore products Vanadium products (tonnes of pure vanadium)1 Vanadium in slag Vanadium in alloys and chemicals 2019 12,075 5,636 3,800 1,393 622 624 318 12,393 1,895 759 1,134 2 19,334 6,451 12,883 2018 10,980 4,703 3,697 1,344 617 619 573 11,553 1,986 8 1,972 6 19,053 6,701 12,352 1. There are some differences from the figures for 2018 that were published in the previous annual report due to adjustments in the sales volumes. Change, % 10.0 19.8 2.8 3.6 0.8 0.8 (44.5) 7.3 (4.6) n/a (42.5) (66.7) 1.5 (3.7) 4.3 51 Annual report & accounts 2019 FINANCIAL PERFORMANCE Sales review In 2019, revenues from the Steel segment dropped by 8.3% to US$8,143 million, compared with US$8,879 million a year earlier. The segment’s revenues were impacted by a sharp reduction in sales prices for vanadium products, as well as a slight dip in construction and flat-rolled sales prices, which was partly offset by higher sales prices for railway products. External revenues from flat-rolled products fell by 7.0%. A 7.7% decrease was attributed to a drop in average prices, which was partly offset by a 0.8% increase due to sales volumes amid lower market demand. The share of sales to the Russian market grew from 49.5% in 2018 to 50.6% in 2019, mainly due to a decline of sales to Europe and Africa, America and the rest of the world. Revenues from sales of construction products to third parties fell by 5.0%: a 7.8% decrease was attributed to a reduction in average prices, which was partly offset by a 2.8% increase due to higher sales volumes amid active construction in Russia and CIS. Steel segment revenues from sales of iron ore products dropped by 25.2%. This was due to a 20.6% decrease in sales prices, as well as 4.6% sales volumes reduction, primarily as a result of higher internal consumption of pellets in 2019 by EVRAZ NTMK after the launch of blast furnace No. 7 in Q2 2018 and by EVRAZ ZSMK amid higher pig iron production. In 2019, around 66.6% of EVRAZ iron ore consumption in steelmaking came from the Group’s own operations, compared with 70.2% a year earlier. Steel segment revenues from sales of vanadium products dropped by 43.8%, primarily due to a 45.1% downturn in sales prices in line with market trends. Ferrovanadium prices dropped along with the London Metal Bulletin and Ryan’s Notes quotations, while vanadium slag prices fell along with vanadium pentoxide (V2О5) quotations. Prices for oxides plunged by 67% (more than the average quotations), as the majority of sales took place in H2 2019, when quotations were lower than the average for the full year. Revenues from external sales of railway products rose due to an 18.8% increase in prices, which was supported by sales volume growth of 3.6%. A key driver of higher railway product prices and sales volumes during the reporting period was greater demand for rails and wheels on the Russian market and better demand for rails in Asian and African markets, albeit partly offset by lower rail export volumes to the US market. Steel segment revenues by products Steel products, external sales Semi-finished products1 Construction products2 Railway products3 Flat-rolled products4 Other steel products5 Steel products, inter-segment sales Including sales to Steel, North America Iron ore products Vanadium products Other revenues Total Geographic breakdown of external steel product sales, US$ million Russia Asia Europe CIS Africa, America and rest of the world Total 2019 3,358 2,028 492 565 195 6,638 2018 3,258 1,810 653 482 377 6,580 Change,% 3.1 12.0 (24.7) 17.2 (48.3) 0.9 2019 2018 US$ million % of total segment revenues US$ million % of total segment revenues Change,% 6,638 2,528 2,166 1,181 386 377 168 154 190 648 499 8,143 81.5 31.0 26.6 14.5 4.7 4.7 2.1 1.9 2.3 8.0 6.1 100.0 6,580 2,521 2,280 965 415 399 334 321 254 1,152 559 8,879 74.1 28.4 25.7 10.9 4.7 4.4 3.8 3.6 2.9 13.0 6.3 100.0 0.9 0.3 (5.0) 22.4 (7.0) (5.5) (49.7) (52.0) (25.2) (43.8) (10.7) (8.3) Includes billets, slabs, pig iron, pipe blanks and other semi-finished products. Includes rebar, wire rods, wire, beams, channels and angles. Includes rails, wheels, tyres and other railway products. Includes commodity plate and other flat-rolled products. Includes rounds, grinding balls, mine uprights and strips. 1. 2. 3. 4. 5. 52 Strategic report Business review CSR report Corporate governance Financial statements Additional information Steel segment cost of revenues • Transportation costs climbed by 11.7%, In 2019, the Steel segment’s cost of revenues increased by 4.0% year-on-year. The main reasons for the increase were: • The cost of raw materials rose by 3.3%, mainly due to higher costs of iron ore (up 46.3%) due to price increases, higher pig iron production volumes and a greater share of more expensive pellets, which was partly offset by lower use of purchased iron ore. • Scrap costs climbed by 5.5% due to higher steel production volumes and higher prices for scrap, which was partly offset by lower use of scrap and increased use of pig iron. • 10.5% reduction in coking coal costs resulted from improvements in the coal structure (a smaller share of the more expensive coal concentrate) and lower prices. • Costs for auxiliary materials grew by 6.7%, mainly due to higher refractories price and volumes of consumption amid increase of EVRAZ NTMK’s coke and blast-furnace shops production. Steel segment cost of revenues Cost of revenues Raw materials Iron ore Coking coal Scrap Other raw materials Auxiliary materials Services Transportation Staff costs Depreciation Energy Other1 primarily due to increase in average railway tariffs and increased rail transportation amid higher primary and secondary concentrate production at EVRAZ ZSMK. • Other costs were up 5.4%, largely because of a decrease of the work in progress balance compared with 2018 amid lower steel prices and scrap stock. Steel segment gross profit The Steel segment’s gross profit declined by 29.4% year-on-year, to US$2,307 million, primarily due to lower vanadium and steel prices. 2019 US$ million % of segment revenue 2018 US$ million % of segment revenue Change,% 5,836 2,577 540 1,082 542 413 366 277 457 501 227 439 992 71.7 31.6 6.6 13.3 6.7 5.0 4.5 3.4 5.6 6.2 2.8 5.4 12.2 5,613 2,494 369 1,209 514 402 343 284 409 491 222 429 941 63.2 28.1 4.2 13.6 5.8 4.5 3.9 3.2 4.6 5.5 2.5 4.8 10.6 1. Includes goods for resale, changes in work in progress and finished goods, taxes in cost of revenues, semi-finished products, allowance for inventory and intersegment unrealised profit. 4.0 3.3 46.3 (10.5) 5.5 3.0 6.7 (2.5) 11.7 2.0 2.3 2.3 5.4 53 Annual report & accounts 2019EVRAZ steel across the globe 14 15 13 7 10 1 8 12 9 5.0 6 11 2 5 4 3 North America BART high-speed t rain system (Bay Area Rapid Transit) 1 BART high-speed t rain system (Bay Area Rapid Transit) (San Francisco, US) (San Francisco, US) 2 RTD regional road network (Denver, US) 3 Texas Capital metro (Texas, US) 4 Enbridge Flanagan South oil pipeline (From Illinois to Oklahoma, US) 5 Kinder Morgan Rockies Express gas pipeline (From Colorado to Ohio, US) 6 Dakota Access oil pipeline (North Dakota, South Dakota and Illinois, US) 7 Seattle-Portland passenger rail Point Defiance Bypass Project (Lakewood, Washington, US) 8 Water supply pipe, AMERON project (Southern California, US) 9 Apple headquarters (California, US) 10 Barges at the Gunderson Marine Shipyard (Portland, US) 11 250,000 barrel oil tanks, Great Basin Industrial project (North Dakota, US) 12 Wilshire Tower high-rise (Los Angeles, US) 13 Southwest Light Rail Transit Minnesota 14 Oil tank floating roof (Calgary Cove, Alberta, Canada) 15 TC Energy pipeline (Canada) 54 South America 16 Vli Rail Operator (Brazil) 17 Rumo ALL Railway (Brazil) 18 Road for Klabin pulp and paper company (Brazil) 17 16 18 34 54 45 62 59 53 60 50 46 47 35 52 38 48 43 63 56 23 25 20 21 42 39 40 49 55 65 41 58 57 61 33 32 51 44 64 36 37 68 19 30 31 27 29 26 24 28 22 69 71 70 66 67 14 15 13 7 10 1 8 12 9 5.0 6 11 2 5 4 3 Annual report & Accounts 2019 Europe 19 Turkish State Railway (TCDD) (Turkey) 20 Deutsche Bahn (Germany) 21 Czech Railways (České dráhy) (Czech Republic) Strategic report Business review CSR report Corporate governance Financial statements Additional information Russia 32 Pella Shipyard (Leningrad region) 33 October Railways (Moscow, St Petersburg) 34 Sabetta Airport (Yamal) 35 KAMAZ Corporation (Naberezhnye Chelny) 36 Sports facilities of the XII Winter Olympics (Sochi) 37 Adler-Krasnaya Polyana Railway (Sochi) 38 Burginsky bridge (Novosibirsk) 39 Seversk NPP (Tomsk region) 40 West Siberian and Far Eastern Railways (Siberia, Russian Far East) 41 Vostochny Cosmodrome (Amursk region) 42 Universiade 2019 sports facilities (Krasnoyarsk) 43 Novovoronezh NPP (Voronezh) 44 Petersburg metro (St Petersburg) 45 Yekaterinburg metro (Ekaterinburg) 46 Kazan metro (Kazan) 47 Samara metro (Samara) 48 Novosibirsk metro (Novosibirsk) 49 Baikal-Amur Railway (Siberia, Russian Far East) 50 Jubilee Stadium, 2018 FIFA World Cup (Saransk) 51 Lakhta Centre (St Petersburg) 52 Omsk Oil Refinery (Omsk) 53 Moscow Oil Refinery (Moscow) 54 Gross Gold Mine (Yakutia) 55 Airport (Sakhalin) 56 Airport (Saratov) 57 Mirny Cosmodrome (Plesetsk) 58 Kola Shipyard (Murmansk) 59 Terminal C, Sheremetyevo Airport (Moscow) 60 Kstovo Refinery (Kstovo) 61 Blast furnace (Cherepovets) 62 FOK Skolkovo (Moscow) 63 Kursk NPP (Kursk region) 64 Ice Palace (Astrakhan) 65 Warehouse complex for Sakhalin Energy (Sakhalin) 58 61 33 32 51 44 57 45 62 59 53 60 50 46 47 35 34 42 39 40 49 52 38 48 43 63 56 23 25 64 36 37 19 30 31 27 29 26 24 28 20 21 22 69 68 54 71 55 65 41 17 16 18 Africa 22 INFRAFER railway company (Algeria) CIS 23 Abu Dhabi Plaza Complex (Astana, Kazakhstan) 24 Diar-Dushanbe Tourist Information Center (Dushanbe, Tajikistan) 25 Cote d’Azur residential complex (Astana, Kazakhstan) 26 Dushanbe-2 CHP (Dushanbe, Tajikistan) 27 Natural gas processing plant (Ashgabat, Turkmenistan) 28 Rogun Hydroelectric Station (Tajikistan) 29 Tashkent metro (Tashkent, Uzbekistan) 30 Floating platforms at the Bank of Darwin field in the Caspian Sea (Azerbaijan) 31 Polyethylene and polypropene production plant (Turkmenistan) Asia 66 Sultan Abdul Aziz Shah Airport SkyPark Terminal (Kuala Lumpur, Malaysia) 67 Railway construction project in Pare-Pare (Indonesia) 68 Riyadh metro (Saudi Arabia) 69 Delhi metro (DMRC) (India) 70 Reconstruction of the Hanoi-Ho Chi Minh Railway (Vietnam) 71 Taipei LRT (light rail) (Taiwan) 70 66 67 55 Coal segment Introduction and highlights Product portfolio The product portfolio comprises a wide range of coking coal blends, including hard, semi-hard and semi-soft Our goals • Work safely and ensure growth by using innovative technology and methods • Achieve 100% self-sufficiency in all coal grades and expand the product portfolio in insufficient grades • Maintain cash costs in the first quartile of the cost curve EVRAZ ranks first among Russian coking coal producers. The Group offers integrated solutions to optimise the coal blend to a global clientele, and prides itself on being a reliable supplier. Coal and concentrate products are used by EVRAZ steelmaking divisions, as well as by third-party domestic customers and export clients in Asia and Europe. 56 Strategic report Business review CSR report Corporate governance Financial statements Additional information Mezhegeyugol Raspadskaya RUSSIA Yuzhkuzbassugol Raw coking coal Coking coal concentrate Production highlights Sales highlights1 Raw coking coal 26,140 kt Coking coal concentrate 13,975 kt Raw coking coal 2,211 kt Coking coal concentrate 8,841 kt Financial highlights Revenues US$ 2,021 million 1. Sales to third parties only. EBITDA US$ 843 million EBITDA margin 41.7% CAPEX US$ 226 million 57 Annual report & accounts 2019 STRATEGIC PRIORITIES PRUDENT CAPEX RETENTION OF LOW-COST POSITION KEY INVESTMENT PROJECTS MAIN COST-REDUCTION PROGRAMMES ACCESS AND DEVELOPMENT OF RESERVES IN USKOVSKAYA MINE’S SEAM NO. 48 Preparation of reserves in seam No. 48 to maintain current coal production level beyond 2020. Key developments in 2019 The begining of preparation of longwall 48-08. The contract for supplying of the mechanised complex is signed. ACCESS AND DEVELOPMENT OF RESERVES IN ESAULSKAYA MINE’S SEAM NO. 29A Switch from mining reserves on seam No. 26 to seam No. 29a. Increase annual coal production to 2.5 mt after 2020. Key developments in 2019 The main volume of development works to launch the longwall 29-37 was complited. CAPEX in 2019: US$30 million CAPEX in 2019: US$10 million OPTIMISATION OF PRODUCTION FLOW AT WASHING PLANTS Key developments in 2019 Installation of chamber filter press at Kuznetskaya washing plant provided the increasing of concentrate yield by 0.2%. Launching of flotation at Abashevskaya washing plant provided increasing concentrate yield by 1.3%. Improving of productivity of Raspadskaya washing plant through EBS efforts and by eliminating logistical bottlenecks (additional warehouses and shipment capacity). REDUCTION OF LONG-WALL MOVE PERIOD Key developments in 2019 Using of Pettito mules to reduce the long-wall removement period at Raspadskaya mine by 11 days. Using of substitute mechanised complex JOY-1 at Erunakovskaya mine to reduce the long-wall removement period by 30 days. Read more on page 23 Read more on page 24 58 Strategic report Business review CSR report Corporate governance Financial statements Additional information DEVELOPMENT OF PRODUCT PORTFOLIO AND CUSTOMER BASE MAIN COST-REDUCTION PROGRAMMES MAINTAINING THE POSITION OF THE LARGEST COAL SUPPLIER IN RUSSIA OPTIMISATION OF EXPENSES FOR AUXILIARY MATERIALS AND INDUSTRIAL SERVICES Key developments in 2019 Substitution of contractors at open-pit mining by improving productivity of own equipment fleet. Optimising of usage rate of auxiliary materials at production processes and improving the share of recycling. Reducing the costs of equipment repairs and technical services by controlling of the work of organisations, performing repairs, as well as by increasing the duration of daily scheduled preventative maintenance done in-house. IMPROVEMENT OF DEVELOPMENT WORK RATE Key developments in 2019 Improving the development work rate by 10% overall at the Group by upgrading the development equipment. These programmes have resulted in approximately US$ 72 million in benefit in 2019 Key developments in 2019 Boosted raw coking coal production volumes by 8.1% and coal product sales volumes by 3.1%. Outlook for 2020 Achieve total production volumes of c. 24 million tonnes. Reach total commercial product sales of more than 20 million tonnes. Increase shipments to EVRAZ steelmaking production facilities. Improve EVRAZ self-sufficiency in coal. Outlook for 2020 Increase export sales to Southeast Asia. Partnerships development with key customers in China and India. Maintain shipments to key customers in Eastern Europe and Turkey. Improved efficiency and yield at washing plants (flotation at Abashevskaya washing plant). Modernised washing plants to improve concentrate quality. Increased premium. hard coking coal production volumes by launching longwall mining at Raspadskaya-Koksovaya mine. Improved EVRAZ self-sufficiency in coal to 74% after expanding production of K-grade coal at Raspadskaya-Koksovaya mine by 66% and increasing share of KS-grade coal in EVRAZ NTMK’s charge. EXPANSION OF THE EXPORT PORTFOLIO Key developments in 2019 EVRAZ achieved its targets for 2019 export sales by: • Maintaining flexible sales geography • Prioritising export routes to: Japan, South Korea, Vietnam, Indonesia and countries in Eastern Europe. Exports to Asia grew by 12%. Organised a stable access to the Baltic ports for coal products transshipment. Signed agreements with ports in Russia’s Far East in addition to Nakhodka Trade Sea Port for 2020. Read more on page 25 59 Annual report & accounts 2019MARKET REVIEW SALES VOLUMES REVIEW In 2019, Russian coking coal concentrate consumption remained mostly at the level of 36.9 million tonnes. Russian coal exports climbed by 7% to 27.0 million tonnes due to favourable conditions on Asian steel markets. During the period, Russian domestic prices followed the downward trend on the global coking coal market. As result, the premium Zh-grade coking coal dropped by 14% and averaged US$137 per tonne. Prices for GZh-grade coking coal fell by 12% to US$100 per tonne. Domestic coking coal concentrate consumption, mt In 2019, the Group’s coal products sales rose by 3% to 17.6 million tonnes, mainly due to higher production volumes at the Raspadskaya- Koksovaya, Uskovskaya and Alardinskaya mines. Inter-segment coal products sales increased by 8% to 6.6 million tonnes, as EVRAZ focuses on maximising supplies to the Group. Total external coal products sales remained at the level of the previous year of 11.1 million tonnes. Export sales moved up just by 1% to 7.7 million tonnes in 2019. EVRAZ significantly rose its supplies to Asian countries by 12%, meanwhile this growth was offset by lower sales to Europe. On the domestic market, EVRAZ remains the leading coking coal producer with an average 22% market share in all coal grades. 2019 2018 2017 2016 2015 Coal prices, US$/t 36.9 37.0 38.5 38.3 38.8 200 150 100 50 2013 2018 2019 GZh Zh (mono-concentrate) GZh+Zh Sales volumes of Coal segment, ‘000 tonnes Coal products, external sales Coking coal Coal concentrate and other products Steam coal Coal products, inter-segment sales Coking coal Coal concentrate Total, coal products 2019 11,053 2,211 8,841 1 6,569 2,044 4,525 17,622 2018 Change, % 11,048 1,690 9,323 35 6,016 1,863 4,153 17,064 0.0 30.8 (5.2) (97.1) 9.2 9.7 9.0 3.3 EVRAZ market share in Russia’s high-vol coking coal grades, % HCC SHCC Average 2019 2018 2019 2018 2019 2018 27% 29% 31% 40% 22% 22% 60 Strategic report Business review CSR report Corporate governance Financial statements Additional information FINANCIAL PERFORMANCE Sales review The segment’s overall revenues decreased due to falling sales prices as global market trends remained weak. This was driven by soft demand for coal and declining prices amid over supply. A reduction in revenues from inter-segment sales of coal products was primarily caused by a 15.1% drop in prices, albeit partly offset by a 9.2% rise in sales volumes. Coking coal sales rose by 3.3% due to higher sales of the K grade to EVRAZ ZSMK, driven by the switch to a new mining method (longwall) for this grade. Coal concentrate volumes grew by 9.0% due to greater sales of the OS, K and KS grades to EVRAZ NTMK, driven by the policy of coal self-sufficiency. The latter was partly offset by a 16.5% drop in prices in line with global trends. Revenues from external sales of coal products fell by 16.9% due to a drop in prices, mostly attributable to lower demand for coal concentrate in Russia, CIS and European countries amid reduced steel production. In 2019, the Coal segment’s sales to the Steel segment amounted to US$730 million (36.1% Coal segment revenues by product of total sales), compared with US$776 million (33.2%) a year earlier. During the reporting period, roughly 74.1% of EVRAZ coking coal consumption in steelmaking came from the Group’s own operations, compared with 68.8% in 2018. Coal segment cost of revenues The main drivers of the year-on-year increase in the Coal segment’s cost of revenues were as follows: • The consumption of auxiliary materials rose by 16.9% due to increased purchases amid higher coal production at Raspadskaya. • Costs for services dropped by 24.8% due to a reclassification of transportation costs related to overburden removal at the Raspadsky open pit to transportation costs in 2019. Such costs were separated from other transportation costs accounting for the use of economic analysis. • Transportation costs grew by 10.0% in the reporting period, primarily due to the reclassification of overburden removal at the Raspadsky open pit costs from services to transportation, as well as the organisation and maintenance of temporary sites for warehousing and storing coal at Raspadskaya. • Staff costs climbed by 15.5%, mainly due to headcount growth driven by higher production volumes and wage indexation. • Depreciation and depletion costs rose, primarily due to higher production volumes at Raspadskaya, Uskovskaya, Alardinskaya, Erunakovskaya and Osinnikovskaya mines and increase of capital expenditure at Osinnikovskaya and Raspadskaya mines started from Q4 2018, as well as the effect of the rouble depreciation. • Other costs decreased in the reporting period, mainly due to lower use of in-house raw materials and goods for resale amid weak coal consumption, soft demand and pricing. Coal segment gross profit In 2019, the Coal segment’s gross profit was US$975 million, down from US$1,295 million a year earlier, primarily due to lower sales prices. External sales Coal products Coking coal Coal concentrate Steam coal Inter-segment sales Coal products Coking coal Coal concentrate Other revenues Total Coal segment cost of revenues 2019 US$ million % of total segment revenue 2018 US$ million % of total segment revenue Change, % 1,251 148 1,103 – 730 124 606 40 2,021 61.9 7.3 54.6 – 36.1 6.1 30.0 2.0 100.0 1,506 145 1,358 3 776 120 656 55 2,337 64.4 6.2 58.1 0.1 33.2 5.1 28.1 2.4 100.0 (16.9) 2.1 (18.8) n/a (5.9) 3.3 (7.6) (27.3) (13.5) 2019 US$ million % of segment revenue 2018 US$ million % of segment revenue Change, % Cost of revenues Auxiliary materials Services Transportation Staff costs Depreciation/depletion Energy Other1 1,046 159 97 351 223 171 51 (6) 51.8 7.9 4.8 17.4 11.0 8.5 2.5 (0.3) 1,042 136 129 319 193 155 49 61 44.6 5.8 5.5 13.6 8.3 6.6 2.1 2.7 1. Primarily includes goods for resale, certain taxes, changes in work in progress and finished goods, allowance for inventory, raw materials and inter-segment unrealised profit. 0.4 16.9 (24.8) 10.0 15.5 10.3 4.1 n/a 61 Annual report & accounts 2019Resilient R&D EVRAZ concentrates on product innovation for rail, wheels, beams, plates, tubular goods and vanadium to enhance the Group’s capabilities and strengthen its market position. Until now, the research and development (R&D) process at EVRAZ was driven by several engaged teams working largely independently at the production sites and in the corporate headquarters. To maximise our expertise and strengthen the Group’s competitiveness, we are developing a new comprehensive integrated R&D system that will unite existing R&D centres and help to unlock the full potential of EVRAZ innovative thinking. R&D teams provide engineering and metallurgical expertise to our production and quality teams to offer innovative solutions and develop new products. An integrated R&D function will harmonise the overall R&D strategy, goals and KPIs. It will also improve the sharing of knowledge and experience, support the execution of highly specialised tasks and promote R&D work across production units globally. Three phases of R&D system development Fact-finding phase: 2019 Collect data and generate ideas Definition phase: 2019–2020 Assess the goals and resources of the Group’s existing R&D centres; define the target state of the organisation, resources and infrastructure; and assign roles and responsibilities 62 Annual report & Accounts 2019 Strategic report Business review CSR report Corporate governance Financial statements Additional information Plates, tubular goods Vanadium Wheels Rails • Develop new products and processes for increasingly specialised, high-quality large- diameter welded pipes • Fill gaps in evolving portfolio of tubular goods, including OCTG for unconventional market • Develop specialty plates for various steel applications such as defence, construction, shipbuilding, mining, transportation and energy • Build strategic and technical partnerships with customers and operators in the development and testing of new products • Conduct physical testing to demonstrate products’ performance and reliability for customer quality tests Technological R&D centre (Tula, Russia) • Supporting the continuous technical improvement process • Developing new products and technologies • Deep processing of EVRAZ raw materials Marketing R&D centre (Zug, Switzerland) • Developing a network of marketing, R&D institutions and technology enablers • Promoting the development of new vanadium-alloyed steel applications • Deploying technical assistance on vanadium usage for customers and EVRAZ operations • Exploiting opportunities arising from regional gaps in vanadium consumption caused by different standards or technological habits • Enriching EVRAZ steel product portfolio in connection with vanadium usage EVRAZ Regina EVRAZ Portland EVRAZ Pueblo • Creating a larger variety of rails, including rails for high-speed mixed traffic and high-load small curve tracks • Developing rails for heavy haul freight trains • Increasing the production lifespan, wear and temperature resistance of the Group’s premium products • Creating a larger variety of wheels, including wheels for heavy haul freight trains and high-speed traffic • Improving strength and corrosion resistance • Strengthening rolling fatigue resistance Beams • Creating new architectural solutions based on beams • Improving beam properties in terms of strength and corrosion resistance • Developing in-demand new profiles MSK OFFICE EVRAZ ZSMK EMAG EVRAZ Tula EVRAZ NMTK Our goals Rails Tubular goods, Plate Beams, Wheels Vanadium General • EVRAZ is building a resilient R&D system to develop innovative new products and solutions that will benefit all the Group’s customers and leverage its long-term competitiveness; • This will give EVRAZ more flexibility to utilise all of its production capacity by balancing volumes within different markets, strengthening the Group’s position as a premium producer able to provide prime service to our customers. 2020–2021 Execution phase: Establish an expert network to execute R&D projects; define a medium- to long-term R&D strategy; use R&D infrastructure efficiently; define cross-location R&D projects; and foster knowledge management Benefits of a comprehensive new R&D system • Satisfy market and customer demands through better product efficiency and services • Develop new and innovative products and solutions to satisfy current and upcoming customer needs • Leverage EVRAZ vast global experience and know-how, and promote product innovation and knowledge management 63 Steel, North America segment Introduction and highlights EVRAZ is a leading North American producer of high-quality, engineered steel for rail, energy and industrial end user markets, with a focus on manufacturing products with unmatched quality for the Group’s customers. The segment is the largest producer of rail and large- diameter pipe (LDP) in North America. EVRAZ also holds leading positions in Western Canada’s oil country tubular goods (OCTG) and small-diameter pipe (SDP) markets, as well as in the US West Coast plate market. In December 2019, EVRAZ North America implemented a reorganisation of business units to strengthen focus on safety, quality and operational excellence across the Steel, North America segment. The business units are now organised by three geographic locations: Canada, Pueblo and Portland, replacing the previous product group structure. Each of the new business units has product portfolios based on product mix at operating facilities. 64 Our goals • Grow leadership position in North American energy pipe market • Maintain leading position in the Western region plate market • Expand leading position in the rail market Strategic report Business review CSR report Corporate governance Financial statements Additional information Construction products Railway products Tubular products Flat-rolled products EVRAZ Portland CANADA EVRAZ Pueblo EVRAZ Red Deer EVRAZ Regina USA EVRAZ Camrose EVRAZ Calgary Production highlights Sales highlights1 Crude steel 1,861 kt Steel products 2,212 kt Steel products 2,207 kt Financial highlights Revenues US$ 2,500 million 1. Sales to third parties only. EBITDA US$ 38 million EBITDA margin 1.5% CAPEX US$ 128 million 65 Annual report & accounts 2019 STRATEGIC PRIORITIES PRUDENT CAPEX KEY INVESTMENT PROJECTS KEY MAINTENANCE PROJECTS LONG RAIL MILL AT EVRAZ PUEBLO The project involves designing, installing and commissioning a long rail mill and weld plant to replace the existing rail facility and meet customers’ interest in long rail. Key developments in 2019 Completed first level of engineering (60%) and pre-awarded contracts for all major equipment, engineering and construction. HEAT TREAT AT EVRAZ RED DEER Expands annual heat treat capacity in Alberta to defend and increase market share and reduce logistics costs. Key developments in 2019 Installation completed, commissioning advanced with production started in Q4 2019. CAPEX in 2019: US$6 million Steel reheat furnace low NOx at EVRAZ Regina Reduce emissions of oxides of nitrogen (NOx) to comply with more stringent government environmental standards, and increase furnace throughput and production of flat-rolled products. Key developments in 2019 Engineering phase and pre-installation work completed. CAPEX in 2019: US$19 million CAPEX in 2019: US$4 million ELECTRIC ARC FURNACE (EAF) REPOWERING AT EVRAZ REGINA The repowering will increase EVRAZ Regina’s prime coil and plate production and reduce electrode consumption. This project is supported by the Government of Canada's Strategic Innovation Fund (SIF). THREADING AT EVRAZ PUEBLO Install equipment for an API threading line at EVRAZ Pueblo to vertically integrate, fully replace threading suppliers, and reduce cost. Key developments in 2019 Completed commissioning and fully operational. Key developments in 2019 Completed engineering and ordered major equipment. CAPEX in 2019: US$15 million CAPEX in 2019: US$2 million Read more on page 23 66 Strategic report Business review CSR report Corporate governance Financial statements Additional information RETENTION OF LOW-COST POSITION DEVELOPMENT OF PRODUCT PORTFOLIO AND CUSTOMER BASE During the year, the segment continued to focus on improving operational performance and tightly managing controllable costs across the board. These programmes have resulted in approximately US$ 37 million in benefit in 2019. MARKET AND CUSTOMER FOCUS Key developments in 2019 Secured all major Canadian LDP projects available and significantly increased production of thick-wall LDP using new production capabilities. Achieved target production and productivity levels at the EVRAZ Regina steel mill following the upgrade programme. Regina coating facility recovered from Q1 2019 facility fire to reach full operations. EVRAZ share of the North American rail market increased in 2019, reaching 42%. Announced partnership with Xcel Energy and Lightsource BP for long-term electricity supply contract, backed by solar power. Ramp-up of large diameter spiral pipe mill at EVRAZ Portland was completed with new orders in the domestic market. Outlook for 2020 Order book for LDP in Canada is full in 2020 for EVRAZ Regina’s mills. EVRAZ rail market share to increase further with new Class I railroads contracts and expanded customer base. EVRAZ Portland’s flat division has a renewed focus on increasing market share in Western Canada to historical levels following the elimination of trade restrictions between the US and Canada. US trade restrictions (Section 232 tariffs) aimed at other nations, including Brazil and Russia, remain, which continue to impact slab purchases. NEW PRODUCT DEVELOPMENT AND QUALITY INCREASES Key developments in 2019 Developed larger sizes for OCTG premium and semi-premium connections driven by market needs. Outlook for 2020 Cost reduction and productivity improvement programmes focused on yield, quality enhancements and operational excellence. Finalised development of heavy gauge pipe products with improved toughness at extreme temperatures and of sour-service line pipe product. Successful ramp up of EVRAZ Red Deer heat treat to full production levels. EVRAZ Portland to commercialise new products, including laser flat quality products, with expected launch in Q2 2020. Read more on page 24 Read more on page 25 67 Annual report & accounts 2019MARKET REVIEW US steel product consumption went down by 2% to 97.0 million tonnes in 2019, compared with 98.4 million tonnes the previous year. Consumption of flat and tubular products edged down by 5% and 7%, respectively, while demand for long products climbed by 8%. In 2019, the North American rail market remained solid at the level of 1.1 million tonnes as the investment programmes of Class I railways held stable. Demand for oil country tubular goods (OCTG) in Canada dropped by 27% to 0.5 million tonnes, compared with 0.7 million tonnes in 2018, amid slower drilling activity. At the same time, large-diameter pipe North America prices, US$/t (LDP) consumption in North America surged by 47% to 1.4 million tonnes in 2019 versus 0.9 million tonnes in 2018, mainly due to the record high pipeline demand in US, which corresponds to high oil and natural gas production. Imports of finished steel products fell by 16% year-on-year to 18.8 million tonnes in 2019 due to the ongoing impact of the Section 232 tariffs introduced by the US in 2018. Weaker demand and high inventory levels pushed prices down in 2019. During the period, prices dropped by 13% to US$876 per tonne for plate, by 4% to US$733 per tonne for rebar and by 5% to US$1377 per tonne for OCTG. US finished steel consumption, mt 29.1 58.7 27.0 61.6 25.6 25.9 26.5 60.4 59.4 60.8 2019 2018 2017 2016 2015 9.2 9.9 10.3 5.5 7.8 97.0 98.4 96.3 90.9 95.1 Long Flat Tubular EVRAZ market shares in North America by key products, % OCTG in Canada 2,000 1,500 1,000 500 2013 2018 2019 Rebar, Domestic US Plate Price - Domestic US OCTG Carbon Sales volumes of Steel North America segment, ‘000 tonnes Steel products, external sales Semi-finished products Construction products Railway products Flat-rolled products Tubular products Total steel products 2019 2,207 192 256 441 523 795 2,207 2018 2,156 57 287 421 568 823 2,156 Change, % 2.4 n/a (10.8) 4.8 (7.9) (3.3) 2.4 SALES VOLUMES REVIEW Despite softer demand in 2019, EVRAZ North America’s steel product sales inched up by 2% to 2.2 million tonnes. This trend was mainly supported by strong sales growth of LDP and railway products. EVRAZ North America moved up its sales of railway products during the period by 5% to 441 thousand tonnes. Meanwhile, construction product sales declined by 11% to 256 thousand tonnes and flat product sales went down by 8% to 523 thousand tonnes in 2019 due to slower year-on-year production growth in the construction, manufacturing and mechanical engineering sectors. Tubular product sales fell by 3% to 795 thousand tonnes, down from 823 thousand tonnes in 2018. Sales of LDP soared by 64% to 346 thousand tonnes in 2019 compared to 211 thousand tonnes the previous year, driven by favourable US and Canadian LDP markets, as well as EVRAZ North America’s customer focus efforts. By contrast, sales of OCTG products dropped by 21% to 245 thousand tonnes, versus 310 thousand tonnes in 2018, due to multiple factors that suppressed drilling activity in Canada. In 2019, EVRAZ North America strengthened its leading position in the rail market by 3 percentage points, reaching a market share of 42%, mainly thanks to higher sales to Canadian Class I railroads. The Group also expanded its LDP market share by 3 percentage points to 26% by achieving the target production level at the Regina steel mill and securing all major Canadian LDP projects. 2019 2018 2019 2018 2019 2018 68 29% 29% 42% 39% 26% 23% Rails in North America LDP in North America FINANCIAL PERFORMANCE Sales review Strategic report Business review CSR report Corporate governance Financial statements Additional information The segment’s revenues from the sale of steel products slightly dropped due to a decrease of 4.8% in prices, offset by an increase of 2.4% in volumes. This was mainly attributable to lower demand on the flat-rolled and construction market, partly offset by higher revenues for semi- finished products. Revenues from the sale of semi-finished products jumped by 210.2% due to a surge in sales volumes of 236.8%, albeit offset by a drop in prices of 26.6%. The sales of semi-finished products only commenced in Q4 2018, hence, the strong YoY volume growth in this product category. Construction product revenues fell by 19.2% due to reductions of 8.4% in prices and of 10.8% in sales volumes as a result of lower demand for concrete reinforcing bar. The downward trend was caused by inclement weather at the beginning of 2019 and softer market demand as customers managed inventory levels. Railway product revenues rose by 6.6%, driven by growth in volumes of 4.8% due to increased demand and market share growth, along with greater sales volumes of the super-premium APEX G2 rails, while a 1.8% uptick was attributed to surges in average prices. Revenues from flat-rolled products decreased due to declines of 5.3% in prices and of 7.9% in sales volumes as a result of weakening market demand. Revenues from tubular product sales edged down by 3.3% year-on-year due to a drop of 3.4% in volumes and an uptick of 0.1% in prices. This was driven by a significant reduction in demand for oil country tubular goods and line pipe, albeit partly offset by increased sales of large-diameter pipe carried over from 2018 and new orders. Steel, North America segment revenues by product 2019 US$ million Steel products Semi-finished products Construction products1 Railway products2 Flat-rolled products3 Tubular products4 Other revenues5 Total 2,372 121 200 405 518 1,128 128 2,500 % of total segment revenue 94.8 4.8 8.0 16.2 20.7 45.1 5.1 100.0 2018 US$ million 2,430 39 247 380 597 1,167 153 2,583 % of total segment revenue 94.1 1.5 9.6 14.7 23.1 45.2 5.9 100.0 Change, % (2.4) n/a (19.2) 6.6 (13.2) (3.3) (16.3) (3.2) Steel, North America segment gross profit The Steel, North America segment’s gross profit totalled US$296 million for 2019, down from US$369 million a year earlier. While the decrease was primarily caused by a decline in revenues due to a deterioration in market conditions, it was partly offset by lower prices for purchased semi- finished products, auxiliary materials and raw materials. at EVRAZ Portland, coil at EVRAZ Camrose and billets at EVRAZ Pueblo. • Auxiliary material costs fell by 9.8%, driven by a decrease in electrode costs. • Staff costs went up 11.5% following an increase in headcount, which occurred mostly at EVRAZ Portland due to the restart of tubular operations, as well as higher payroll taxes and insurance. • Depreciation grew by 8.0% due the adoption of the IFRS 16. • Other costs were up for the reporting period, primarily due to a decrease of the work in progress balance compared with 2018 due to a reduction of slab purchases, lower purchases of billets at EVRAZ Pueblo that were replaced with billets produced in-house. Steel, North America segment cost of revenues Steel, North America segment cost of revenues In 2019, the Steel, North America segment’s cost of revenues was almost flat year-on-year. The main changes related to: • Raw material costs fell by 8.0%, primarily because of a decrease in scrap prices. • The cost of semi-finished products was down 30.4% due to lower purchases of slabs Cost of revenues Raw materials Semi-finished products Auxiliary materials Services Staff costs Depreciation Energy Other6 2019 2018 US$ million 2,204 686 396 222 190 319 109 117 165 % of segment revenue 88.1 27.4 15.8 8.9 7.6 12.8 4.4 4.7 6.6 US$ million 2,215 746 569 246 195 286 101 119 (47) % of segment revenue 85.8 28.9 22.0 9.5 7.5 11.1 3.9 4.6 (1.7) Change, % (0.5) (8.0) (30.4) (9.8) (2.6) 11.5 8.0 (1.7) n/a 1. 2. 3. 4. 5. 6. Includes beams, rebar and structural tubing. Includes rails and wheels. Includes commodity plate, specialty plate and other flat-rolled products. Includes large-diameter line pipes, ERW pipes and casing, seamless pipes, casing and tubing and other products. Includes scrap and services. Primarily includes transportation, goods for resale, certain taxes, changes in work in progress and fixed goods, and allowances for inventories. 69 Annual report & accounts 2019Digital transformation EVRAZ digital transformation strategically addresses customer focus and asset development 2019 initiatives MAIN DIGITAL TRANSFORMATION INITIATIVES Digital transformation: priorities Ideation sessions Advanced analytics Expert systems Production reporting Production control rooms Digital asset management EDI and paperless workflow Mobile solutions Video analysis Through-process quality control Autonomous equipment Production planning To search for innovative technology-based solutions, EVRAZ employs ‘design thinking’, a core element of which is ideation sessions. During these, teams of various employees work to find solutions to current tasks, including by harnessing digital technologies. In 2019, the Group conducted 10 such sessions: in all Russian divisions, the trading unit and several subdivisions. From them, new ideas were prioritised and plans to develop and implement them were devised, and some projects are already under way. Results in 2019 Primary priorities Secondary priorities The foundation for applying contemporary digital technologies is the high-quality basic automation of technological processes. At its production facilities EVRAZ is implementing a programme of projects to increase the level of basic automation and make its production capacity digital ready. 70 implemented 32 projects 15 projects 63 projects being considered under way Annual report & Accounts 2019 Strategic report Business review CSR Report Corporate governance Financial statements Additional information 2020 Plans and priorities Agile approach Advanced analytics In 2019, EVRAZ made a major leap forward in using flexible methodologies for developing software and executing IT projects. Such approaches aim to increase internal customer satisfaction and reduce project delivery time. Within the Group, the ‘agile’ culture is promoted among both IT specialists and people in business subdivisions, and its effectiveness is clear from the results delivered by combined project teams encompassing product owners, ‘scrum masters’ and experts in various areas. Over the last year, 10 initiatives were implemented in accordance with agile principles. In 2020, EVRAZ is planning to launch a range of advanced analytical projects that are expected to have an overall effect of US$10- 12 million. The aim is to optimise technological processes in all production areas using expert systems based on machine learning models. Each system is designed to improve product quality and quantity. In addition, as part of the programme, a Data Science competence centre and a technological IT platform will be established to process data. New digital solution development centre The Group is also planning to open an additional digital competence centre in Novosibirsk. When choosing the location for the new facility, the main factors were considered: maturity of the IT personnel market, number of quality higher educational institutions, convenience of location and transport links to EVRAZ main production units. Among other things, the centre will focus on advanced analytical and machine learning technologies. Read additional information on key projects in 2019 on the next page. Our goal As part of its digital transformation drive, EVRAZ is positioning itself as a company that plays a more active role as a catalyst for digital innovation. This goal foresees implementing digital transformation programmes and creating innovative ecosystems that bring together external partners and internal resources. 71 Annual report & accounts 2019KEY DIGITAL TRANSFORMATION PROJECTS IN 2019 Siberia division (EVRAZ ZSMK) Theme (area) Machine learning Expert system based on machine learning Category Project status on 31.12.2019 Effect Steel Launched • Lower production costs • Higher productivity • Reduced labour expenses Theme (area) Mathematical optimisation Category Steel Project status on 31.12.2019 Launched Effect • In 2019, the overall economic effect was more than RUB1.4 billion System for mathematically modelling production Products high in rhomboidity from continuous casting machines are rejected, or they need to be processed further (grinding, etc) before being dispatched to the customer. A visual inspection for rhomboidity is conducted at the final stage of casting, when it is too late to rectify. Inbuilt machine-learning algorithms analyse the array of operational data collected to identify hidden patterns indicating rhomboidity. Software predicts existing rhomboidity in real time in the casting mould (where the shape of the final cast is formed). The system informs the continuous casting machine operator of the optimal casting speed needed to keep rhomboidity within acceptable limits. A system has been developed and implemented to optimise all metal production units with a view to maximising EBITDA. The system uses mathematical models for all facilities and calculates the end-to-end economic effect given existing restrictions and possibilities for changing the composition of raw materials and semi-finished products. It uses non-linear optimisation methods and GAMS modelling system to identify the global optimum based on 79,000 variables that occur monthly. Theme (area) Predictive maintenance Category Project status on 31.12.2019 Effect Monitoring and diagnostic system for rolling mill equipment Steel Pilot project completed • The upgrades have confirmed the feasi- bility of using modern equipment moni- toring and diagnostic systems • They have also created a foundation for establishing information exchange with enterprise asset management systems In the testing zone of EVRAZ ZSMK’s rail and beam shop, in the hot- rolling mill, the existing automated process control systems have been upgraded to the level of an equipment control system: a monitoring and diagnostic system. The aim is to transform the company's asset maintenance function from a reactive model to a preventive (giving the possibility of planning servicing) and predictive (giving the possibility of forecasting condition) one. Additional functionality has also been introduced: • Monitoring equipment operation data • Monitoring images and operator actions by camera • Digitalising specialist experience and knowledge Coal division (Raspadskaya coal company) Theme (area) Data collection and visualisation systems Category Project status on 31.12.2019 Effect Mining Launched • The new display presents all • of the required information in a full and digestible manner It gives the option of viewing data from previous shifts It also enables management decisions to be taken more quickly • Productivity is increasing as a result • In the control room at Raspadskaya, the video display wall, featuring 19 video panels with analytical information, has been upgraded. It gives information about the air and gas monitoring equipment (data about methane levels in mines); longwall operations (data about the position of mining equipment and reasons for downtime); the positioning system in mines; a summary of the planned and actual mining, throughput and shipment; efficiency indicators; conveyor belts (data about downtime); and the Kuznetskaya beneficiation plant. Videos of shipments and data from underground cameras can be viewed. Executives and managers have access to a web portal and mobile application that enable them to efficiently monitor key occupational safety and production indicators. Production and occupational safety management centre 72 Annual report & Accounts 2019 Strategic report Business review CSR report Corporate governance Financial statements Additional information Theme (area) Data collection and visualisation systems Category Project status on 31.12.2019 Effect Tagging system for personnel identification and tracking in underground coal mines Sales Launched The introduction of the tracking stations has made it possible to positively identify our miners. We can track personnel movements underground in real time. This also provides an additional inspection point to ensure that miners have duly received PPE and undergone medical examinations. Alexey Chervyakov, HSE Director at Raspadskaya After the pilot project was completed at the Osinnikovskaya mine in 2018, the system was rolled out to all of Raspadskaya’s other underground mining operations. The system consists of specially designed stands containing readers: • Access card reader (for descent and ascension) • Cap lamp tag reader • Portable gas analyser reader • Control unit, computer and monitor to visualise tagging process This allows the employee to independently link their cap lamp tag to their data (from their access card). In the future, without this linked tag, access to the mineshaft will be blocked for the employee. In addition, miners are checked to ensure that they have personal protective equipment (PPE) and have undergone a medical examination. This system is integrated with the access control and underground personnel positioning system. Urals division (EVRAZ NTMK) Theme (area) Predictive maintenance Category Project status on 31.12.2019 Effect Predictive maintenance system using vibration diagnostics data Steel Pilot project completed “The installation of the condition monitoring system in the testing zone paves the way for reducing labour spending on diagnostics and integrating with the EAM system as part of the transformation of maintenance services under way at the company.” Andrey Ermakov, Head of the Central Electrotechnical Laboratory In the testing zone of EVRAZ NTMK’s wheel and tyre shop, an automated system for monitoring equipment condition has been introduced. It creates a single IT environment for maintenance teams and a foundation for transitioning predictive equipment maintenance. A permanent vibration diagnostics system has been installed that: • monitors and diagnoses defects in the main production equipment in real time • conducts continuous diagnostics of equipment in various technological regimes under loading conditions • provides remote access to diagnostic information to several specialists simultaneously in real time removing the need for inspections and checks Model for calculating optimal steel temperature Transition to paperless document processing at companies Theme (area) Machine learning Category Project status on 31.12.2019 Effect Steel Launched • The model has increased productivity by boosting output by 47,152 tonnes a year Theme (area) Electronic document processing Category Project status on 31.12.2019 Effect Sales Four projects launched • Labour expenses have been reduced by 4.7% of the worktime fund of production personnel • Document processing time has been decreased to 80% of the previous level • Monitoring procedures have been streamlined, while transparency has increased and the number of errors has been reduced Before the introduction of the system, to ensure an effective temperature for secondary steel processing, operators in the continuous casting plants nos. 1-4, used the maximum permissible temperature given in the technological manuals, as well as experience gained from previous runs. This was insufficient for casting steel at maximum permissible speeds. As a deliverable of this project, a model was built to calculate the optimal production temperature for the casting ladle from the secondary steel processing section . The model was developed based on a production efficiency audit. HR directives regarding employee transfers and appointments are now created using a master template in a single web system (instead of three information systems previously). Both inventory ordering for production and quality certificates for end products have been moved to electronic format, with digital signatures and storage in an electronic archive. A digital version of the labour safety manual has been created. To introduce electronic signatures of users, a EVRAZ corporate registration centre has been established. Another 10 types of documents are being developed. The ultimate aim is to end the use of paper documents in full. 73 CSR report Acting responsibly for a Better Future Acting responsibly Wilshire Grand Center LA, United States Our approach EVRAZ views corporate social responsibility as an integral part of its business and strives to address and monitor all relevant matters in this area. The corporate social responsibility section of this annual report provides an overview of the Group’s policies and performance in 2019 in key areas, including human rights, health and safety, the environment, human capital management and community engagement, as well as an outline of how EVRAZ intends to improve its performance in the years ahead. The Group considers these policies appropriate and effective. EVRAZ follows the OECD’s Guidelines for Multinational Enterprises to ensure a uniform approach to business standards across its global operations. Health, safety and environment Governance A core part of the Group’s sustainability activities and long-term success is occupational health and safety (OHS). Employee safety is a key priority of the business principles that EVRAZ adheres to, and every practicable effort is undertaken to continuously improve in this area. The Group has implemented a multi-stage health, safety and environment (HSE) management system that encompasses everything from strategic decisions down to daily operations. The HSE Committee of the Board of Directors is responsible for coordinating HSE policies and monitoring the implementation of strategic HSE initiatives. The EVRAZ HSE Management Committee consists of the CEO and vice presidents. Its remit includes approving annual HSE KPIs, goals and initiatives, as well as considering all serious incidents and corrective actions on a monthly basis. Each of the Group’s divisions also has monthly HSE Committee meetings to review HSE incidents and approve corrective actions to prevent them from reoccurring in future. A three-stage HSE management system is in place at EVRAZ enterprises in accordance with the OHS Management System that covers all management levels, from line managers to enterprise managers. This multi-tiered system helps the Group to ensure strict compliance with HSE requirements. 76 EVRAZ is also an active partner in local and international industry organisations, including the World Steel Association’s Environmental Policy (EPCO), Technology Policy (TPCO) and Safety and Health (SHCO) committees, as well as the HSE committees of Russian Steel, a Russia-based non- commercial partnership, and the Russian Union of Industrialists and Entrepreneurs. The Group’s HSE management system consists of the following phases: • Identify and assess risks • Develop and implement HSE risk management initiatives • Investigate incidents and identify systemic causes to prevent future reoccurrence • Analyse HSE metrics, update and set new safety HSE system The Group adopted its HSE Policy in March 2011 and has updated it regularly since then, most recently in February 2018. The HSE Policy enshrines five basic safety principles: • All incidents are preventable • Do not start work if it cannot be performed safely • EVRAZ managers at all levels are directly responsible for the safety of employees, as well as contractors and visitors • EVRAZ managers at all levels should be an example and role model for compliance with all HSE rules and principles • All EVRAZ employees are personally responsible for complying with HSE standards and regulations The HSE management system’s most important function is to identify potential environmental hazards and risks to employees’ life and health in the production process, from planning and procurement to the sale of finished products to customers. targets The HSE management system at EVRAZ metallurgical plants is certified in accordance with the OHSAS18001 international standard and is being prepared for recertification in accordance with ISO 45001 in 2020. Emergency response All EVRAZ enterprises have action plans in place to respond to emergencies and accidents. The plans are coordinated with local emergency response units and are regularly inspected during joint exercises to develop procedures for the localisation of and response to accidents and incidents. Some EVRAZ operations, including the mines of the Coal division, have auxiliary mine-rescue teams to act as first responders to incidents and help to evacuate personnel ahead of the arrival of professional rescue teams. Members of the auxiliary teams are specially selected, trained and regularly re-trained. Strategic report Business review CSR report Corporate governance Financial statements Additional information in which the Group operates, all cultures must be treated with respect. EVRAZ rules prohibit the use of abusive, harassing, discriminatory, degrading or aggressive speech or written comments, verbal or physical demonstrations of a sexual nature, and actions or speech that insult the honour or dignity of an individual. The Group’s commitments are based on internationally recognised standards and respect for all human rights, including civil, political, economic, social and cultural rights. EVRAZ fully endorses the provisions of the United Nations’ Universal Declaration of Human Rights. In accordance with its internal Code of Business Conduct, EVRAZ seeks to develop and maintain a work environment that is free from discrimination. The Group is committed to providing every employee with equal opportunities. All personnel and applicants are assessed according to their professional skills, qualities, experience and abilities. Decisions made on grounds unrelated to an individual’s job performance (eg related to the person’s race, ethnic origin, sex, religion, political views, nationality, age, sexual orientation, citizenship status, marital status or disability) are discriminatory and prohibited by the law and the principles accepted in the Group. Child labour, bonded labour, human trafficking and other forms of slavery (known as modern slavery) are strictly prohibited at all EVRAZ subsidiaries and their suppliers. Modern slavery is an abuse of human rights and is a criminal offence in the UK and other jurisdictions. The Group is committed to acting ethically and requires suppliers to conduct business within the same ethical framework. Respect for others is one of EVRAZ overriding principles. In the cross-cultural environment In the event of an incident, an emergency warning system is activated to inform local residents and authorities. For example, Raspadskaya has a commission to prevent and respond to emergencies and to ensure fire safety. The commission coordinates and warns of natural and technological disasters, manages emergency response assets and works to reduce the damage from incidents. HSE reporting system The Group has developed and adheres to an Incident Management Standard, part of which is a system for instantly reporting all incidents. Within 24 hours from the moment of an incident, the HSE Information System sends a Flash Report describing the circumstances of the incident and rapid response measures to ensure that other departments are prepared to prevent such incidents. Data from the HSE Information System are also used to analyse HSE performance. The Group relies on its HSE reporting system to collect and share appropriate data throughout the organisation with an aim to continuously improve the process. The corporate HSE functions monitor subsidiaries using monthly, quarterly and annual HSE performance reporting. Internal audit specialists perform regular audits of all EVRAZ enterprises. In addition, the Group’s operations are continuously monitored by government regulators. Committees at the appropriate levels review all recommendations received as a result of audits and measures are implemented in accordance In recent years, EVRAZ has been consistently implementing measures to prevent the concealment of the circumstances of all incidents and to ensure maximum transparency of the information system, including by creating a hotline via which employees can anonymously report any HSE problems. The Group’s incident reporting transparency policy has created a system to receive reliable information, including potential incidents and dangerous actions, and to use this information to implement preventative measures. EVRAZ distributes a monthly report that includes HSE results and KPI performance, including LTIFR. with these recommendations to improve the effectiveness of controls. The internal audit function regularly assesses EVRAZ compliance with HSE policies, which is supplemented by external monitoring from government authorities. The Group conducts a detailed analysis of any recommendations resulting from the inspections to ensure that remedial actions can be taken, where needed. In addition, the “A3 problem solving” tool is used for all incident and injury investigations to identify systemic causes and develop all possible measures to prevent the recurrence of such incidents. Each month, the HSE Committee reviews such events and approve reports on all fatalities and severe injuries. The Committee also monitors the implementation of preventative measures and their effectiveness. HSE corporate management structure EVRAZ PLC BOARD OF DIRECTORS HSE Committee of the Board of Directors EVRAZ CEO HSE management committee Vice President HSE Industrial Safety Directorate Health and Safety Directorate Enviromental Management Directorate 77 Annual report & accounts 2019HEALTH AND SAFETY Our approach While performing technological operations, EVRAZ employees are exposed to various risks inherent to the working environment. Potential risks when mining for coal and ore underground include rock collapse, flooding, explosion of dust and gas, and others. Employees engaged in steel production are exposed to risks associated with movement of machinery, transportation of materials, lifting, temperature and harmful gases, among many others. In addition, the Group’s enterprises have common risks, including working at height, transportation, electricity, etc. Results in 2019 LTIFR The lost time injury frequency rate (LTIFR) is a strategic KPI that is cascaded down throughout the organisation in individual management performance scorecards. In 2019, the group did not meet its target of 1.67, closing the year with an LTIFR of 2.04. The increase in this key metric was primarily caused by an incident involving a crew bus in February 2019 in which eight colleagues lost their lives and 16 people were seriously injured. The root cause investigation into this incident has resulted in significant revisions in the permit-to-work system for employees and drivers, including pre-trip medical examinations, work order release, and GPS tracking of vehicles on haul roads. In addition, a programme is being implemented to replace buses carrying workers with structurally reinforced, rollover-resistant crew vehicles. These measures are being introduced at all open pit mines operated by EVRAZ. As part of an existing initiative, the Group also continues to implement the Safe Driving Programme, which is a project to train all drivers involved in employee transportation. While efforts to reduce injuries in Q2 and Q3 2019 were quite successful, seasonal Slip-Trip-Fall risks led to an increase in minor injuries in November and December, which made it impossible to a lower LTIFR than in the previous year. 78 To prevent possible incidents associated with these risks, EVRAZ identifies the working operations where these risks are present and implements technical solutions to serve as a reliable barrier and mitigate the risks. Where technical solutions are not available, EVRAZ applies organisational controls to manage the risks and reduce their likelihood and possible consequences. One such solution is a system for teaching workers and contractors safe working methods in the face of inherent risks. The system also includes regular testing of knowledge and skills at training sites. In addition, the Group continuously reviews the personal protective equipment (PPE) available and ensures that all employees have the necessary PPE. EVRAZ has set a goal of improving the safety culture of its employees and contractors by making them personally responsibility for safe behaviour and compliance with the necessary rules, as well as engaging each employee in identifying hazards and risks at their workplaces. To this end, the Group has developed a risk management project and started to implement it at its operations. LTIFR (excluding fatalities), per 1 million hours 2019 2018 2017 2016 2015 2.04 1.91 1.90 2.36 2.18 Fatalities In 2019, EVRAZ lost a total of 16 colleagues: • Eight employees died in the incident involving a crew bus at an open pit coal mine • Four employees died in incidents associated with exposure to moving equipment, rock caving and falling loads • Four contractors were fatally injured due to falling from height, a railway accident and a falling load while preparing for lifting operations Fatalities 2019 2018 2017 2016 2015 6 6 6 12 4 16 10 10 4 4 6 10 3 13 EVRAZ employees Contractors Each month, the HSE Committee reviews and approves preventative measures as a result of all fatalities and serious injuries, and then monitors the implementation and effectiveness of these measures. For each incident, a so-called “90-day plan” is developed to properly eliminate root causes of the incident. In 2019, the Group used the results of a key risk assessment as a basis for reviewing and updating its cardinal safety rules to prevent the most dangerous types of employee activity. These rules must be followed by all employees and contractors. Number of severe injuries (incl. contractors) 2019 2018 2017 2016 2015 38 35 38 45 38 115 115 126 133 148 Severe injuries (incl. contractors) AMHW, million (without contractors) Current cardinal safety rules It is forbidden to be on the territory of enterprises in a state of alcoholic and/or narcotic intoxication It is forbidden to override protective interlock equipment and security systems without prior authorisation It is forbidden to hide and distort the circumstances of HSE incidents When working at heights, it is forbidden to not use safety systems for work at height included in the work permit, as well as personal protective equipment against falls It is forbidden to not use a seat belt in personal transport on the territory of enterprises and motor vehicles of the employer It is forbidden to smoke and/or use open fire in coal mines and other places where explosive hazards are present It is prohibited to use explosive materials for purposes other than those specified in the Permit-to-Work, or not to return to the warehouse the remnants of explosive materials after blasting operations, as well as to change the designs of the detonator It is prohibited to use machines and equipment not intended for these purposes to transport people Treatment of occupational diseases Consistent with all applicable legislation, EVRAZ provides all its employees with insurance against work-related injuries and illnesses. A system of regular medical check-ups helps to identify potential occupational diseases and undergo timely treatment. Mobile app for mine safety Fighting fires in virtual reality Strategic report Business review CSR report Corporate governance Financial statements Additional information In 2019, EVRAZ NTMK and EVRAZ KGOK, both of which are part of the Urals division, began to use a virtual reality firefighting trainer. It was built to order for EVRAZ, and the Group’s employees helped to design it. By putting on a 3D helmet, an employee finds themselves in a virtual office or production facility where a fire has broken out. Using a pair of joysticks, they learn how to act in the presence of heavy smoke, as well as burning fuels, lubricants and electrical appliances. In virtual reality, they can move, pick up items they need and rescue unconscious people. The simulator helps to teach employees to take the right decisions during emergency situations. Employees may also receive financial assistance from the Group, based on their medical condition and other circumstances. Employees who need prolonged medical treatment are also eligible to be compensated for moral harm, although these funds may not be used to arrange independent medical treatment. In 2019, a total of 237 cases of occupational diseases were registered at EVRAZ facilities worldwide, compared with 256 cases in 2018. The Group continues to closely examine working conditions and strives to eliminate the highest- risk workplaces in terms of employee health. In addition, there are ongoing efforts at all EVRAZ facilities to properly treat occupational illnesses in an effort to preserve and improve employee health. To determine the risk group and evaluate fitness to work, every worker undergoes an annual medical check-up. Employees are compensated in accordance with legislative requirements. When occupational illnesses are registered, additional payments are made from the social security fund, including pension supplements. Personnel who are prone to occupational illness also receive free treatment at therapeutic resorts. The Group also strives to proactively improve working conditions in an effort to reduce the likelihood of occupational illnesses occurring. In 2019, the IT department at Raspadskaya updated the RUK MPU mobile app, which works on both the Android and iOS platforms, and is also available online. First launched in 2018, the initial version of the app made it possible to monitor targeted versus actual figures for mining, tunnelling and loading work, as well as key performance metrics for the mine and processing plants, coalface performance and methane content. The updated app includes information about the causes of downtimes. With a current sensor, employees can monitor the work of tunnelling machines. Users can also receive warnings when methane content exceeds safe levels. In addition, they can view online footage from the underground surveillance cameras at all Raspadskaya operations. 79 Annual report & accounts 2019Key projects in 2019 and objectives for 2020 Corporate-wide initiatives in 2019 were mainly focused on cultural change through improving the safety behaviour of employees and contractors. Contractor safety EVRAZ continues to integrate contractors into its HSE management system. In 2019, the Contractor Management Standard was revised. This resulted in clarifications to the contractor pre-qualification requirements for work at the Group’s enterprises, the system of motivation and fines to incentivise rapid adjustments to the organisation of work, the requirements for planning safety measures and the permit-to-work system. Further improvements to the contractor management system in 2020 will include rating contractors on their HSE performance, which aims to increase responsibility for failing to organise safe working conditions, as well as motivate compliance with the EVRAZ HSE system requirements. Risk management In 2019, EVRAZ reviewed its risk management system to maximise employee engagement in the process of identifying and mitigating risks. The Group’s enterprises have been assessed using the existing risk management system to identify areas for improvement. As a result Defensive driving training Hazardous area warnings Lock-out systems are being installed to protect people from moving equipment and tunnelling faces at the Mezhegeyugol mine and other EVRAZ mines. The main component of the STRATA Hazard Alert system is a magnetic field generator, which is installed on a piece of equipment and creates an electromagnetic field around it. Before entering the mine, employees receive a personal signalling device that detects these fields. If an employee comes within three metres of the equipment, it slows down, and light and siren alarms warn of the danger. When a person enters a hazardous area, the equipment shuts down completely. of this assessment, senior management has held a session to review the EVRAZ HSE management system and found that the main elements of the system requiring development were Leadership and Risk Management. and implement measures to stop work that threatens life and health, or to mitigate the risks. The risk assessment matrix was also revised and a risk passport form was developed. To improve these elements, the Group has decided to implement a Risk Management project and, during the year, developed a set of risk management tools. These simple but effective methods for determining hazardous conditions and actions have been tested in pilot workshops and mines. The Risk Hunting and Dynamic Risk Assessment tools help to determine “What could go wrong?” To implement the project, teams of risk managers and internal trainers were created in the Group’s divisions, and the standard work of line managers and enterprise managers was revised. The project’s tools have been integrated into the existing HSE documentation and work schedules. In 2020, implementing this project will be EVRAZ primary HSE initiative. As part of these efforts, all Group employees will be trained to use the risk identification, assessment and mitigation tools. The plan includes creating a system to receive risk warnings from employees, as well as to improve behavioural safety conversations between line managers and employees so that the workforce is more engaged in the routine dynamic risk assessment process on the job. The goals that EVRAZ has set for the Risk Management project in 2020 include engaging employees and receiving at least one risk warning for every two employees who received training. The project’s other goal is to create “red risk passports” based on the key risk management barriers identified while compiling comprehensive maps of the risks present at our employees’ workplaces. In 2019, EVRAZ KGOK held a defensive driving training programme for 155 drivers of passenger transport convoys that aimed to teach them a new way to assess risks on the road. After years of driving on the same route, drivers can stop regarding traffic as a potential threat. The training helped drivers to reconsider their usual approach, focusing on maximum safety. The defensive driving style is a model that makes it possible to prevent an accident regardless of the actions of other road users, as well as road and weather conditions. As part of the training process, attendees comment about the situation on the road and their actions, predict where danger might come from and explain how they might react. The primary aim is to develop skills to ensure complete control of the situation on the road. After the 10-day training programme, most participants felt that their ability to predict traffic situations had grown markedly. Maintaining a level of concentration that gives a margin of time for manoeuvre helps to minimise risks. 80 ENVIRONMENT Our approach One of EVRAZ overriding priorities is to mitigate the potential environmental impacts of its steel and mining operations through best management practices and advanced technology. This approach aims to help the Group to prevent or control any undesired environmental consequences, as well as to reduce its consumption of energy and natural resources. Strict environmental legislation governs these operations, requiring EVRAZ to comply with the terms of special environmental permits and licences, which generally entails certain environmental commitments, recruiting qualified personnel, maintaining necessary equipment and environmental monitoring systems, and periodically submitting information to environmental regulators. Non-compliance with any of these requirements could potentially lead to the suspension, amendment, termination or non- renewal of the environmental permits and licences. The Group could also incur significant costs related to eliminating or remedying any such violations. EVRAZ recognises that its production processes entail certain environmental risks and liabilities and, as such, is focused on preventing or minimising any potential adverse environmental consequences from its operations. The Group employs a corporate management system that bases environmental procedures on the plan- do-check-act (PDCA) model. EVRAZ has developed it to promote its health, safety and environment (HSE) policy principles and support its environmental strategy implementation, which includes environmental risk assessment, planning, legal compliance management, reporting and other processes. For all new operations and projects, the Group performs environmental and social impact assessments (ESIAs) that engage with local and regional governments, businesses and community members in the affected area. EVRAZ uses ESIAs to assess the new operations potential direct and indirect impacts on the local community and surrounding environment. As part of the ESIA process, the Group establishes mitigation plans to minimise and manage any potential impact and engages with local communities throughout the project’s life to discuss any decisions that may be made. EVRAZ strictly complies with the registration, evaluation, authorisation and restriction of chemicals (REACH) regulations concerning various substances supplied to or manufactured in the EU (European Economic Area) by the Group’s assets. EVRAZ supports the European Community’s health and environmental goals as established in the Regulation (EC) No. 1907/2006 of the European Parliament and of the Council, which governs the REACH requirements. The Group’s environmental programme also features training courses and seminars that encourage its specialists in the field to exchange experience. EVRAZ also employs environmental audits (due diligence) to perform environmental liability and risk assessments of existing sites and assets being acquired. Throughout its operations, the Group has introduced an environmental management system that it has developed based on the corporate approach and prioritises international certification, which, while not a legal requirement, has led to seven of the Group’s sites obtaining ISO 14001 certification, including core operations like EVRAZ NTMK and EVRAZ ZSMK. For additional information, read the EVRAZ Sustainability Report for 2019, which is to be published in May 2020. Strategic report Business review CSR report Corporate governance Financial statements Additional information Environmental strategy The Group’s environmental strategy aims to minimise any negative impacts caused by its operations, as well as to make efficient use of natural resources and find optimal industrial waste management solutions. Environmental compliance is an overriding long-term priority. EVRAZ five-year environmental targets (covering 2018–22) aimed at: • Decreasing fresh water consumption by 10% • Recycling 95% of annual non-mining waste • Maintaining the greenhouse gas intensity ratio below 2 tonnes of carbon dioxide (CO2) equivalent (tCO2e) per tonne of steel cast The Group has committed to implement various environmental protection programmes over 2020– 25. As of 31 December 2019, the estimated cost to implement these programmes totalled US$198.6 million, compared with US$121 million as of 31 December 2018. The rising environmental commitments is the result of agreements signed with the Russian government regarding the “Clean Air” National Project in June 2019. In 2019, EVRAZ spent US$30.3 million on measures to ensure environmental compliance and US$28.8 million on projects to improve its environmental performance. Non-compliance- related environmental levies and penalties totalled US$5 million. There were no significant environmental incidents or material environmental claims involving the Group’s assets during the reporting period. Biodiversity EVRAZ understands that it has a responsibility to prevent and minimise its potential impact on the environment and biodiversity at all stages of the mining and steelmaking process, including when performing geological surveys, designing facilities, conducting operations and restoring sites that are no longer used. The Group’s long-term goal is to foster a culture among its employees of care and concern for the environment and biodiversity of the areas in which it operates, as well as in how they implement its projects and create a positive dialogue with the local community. The Group’s primary biodiversity efforts include: • Restoring damaged lands and landscaping • Restoring water biodiversity • Implementing social and environmental initiatives 81 Annual report & accounts 2019EVRAZ implements long-term projects aimed at compensating for its environmental impact. • Since 2011, the Abagursky branch of EVRAZ ZSMK has been working to reclaim the old tailings storage No. 2. During 2012–18, the site completed the dehydration and land planning stages of the project. In 2019, the site started the final phase, which entails biological reclamation, including planting 64,830 trees during the year. • Since 2015, the Raspadskaya mine has been implementing a long-term project to recover land damaged during open-pit mining (138 hectares). • Work to landscape industrial sites and sanitary protection zones at facilities continued in 2019. As part of a programme to restore aquatic bioresources, the Group’s enterprises released more than 379,000 juvenile fish into local rivers of Kemerovo region and Sverdlovsk region. The Group’s environmental initiatives include planting trees in parks and public squares, along town/city streets and in the territory around kindergartens. Young trees brought from mine allotments where the forest is subject to felling are often used for planting as part of the “Second Life for Trees” initiative. The list of EVRAZ social and environmental initiatives include:“Environmental Saturday” voluntary workdays: cleaning parks, planting trees and putting up birdhouses • “Second Life for Trees” initiative: replanting young trees from mining allotments where the forest is subject to logging • “Big Green Games”: environmental competitions among local companies in which teams choose their own areas to clean up • “Clean Games” environmental quest: teamwork in collecting and sorting garbage in parks • “Clean Shore” initiative: helping to clear debris from the protected watersheds of the Bolshoy Unzas, Kondoma and Maly Bachat rivers • “Live Spring” initiative: improving natural springs Air emissions One of EVRAZ foremost environmental priorities is to reduce air emissions. The key air emissions comprise nitrogen oxides (NOx), sulphur oxides (SOx), dust and volatile organic compounds (VOC). In 2019, the key air emissions decreased by 0.4% year-on-year. The current strategy for reducing air emissions envisages upgrading gas treatment systems, introducing modern technology and eliminating obsolete equipment. In June 2019, EVRAZ signed agreements with the Russian government to implement the “Clean Air” National Project. According to the agreements reached, the Group will continue to introduce the best available technologies at its metallurgical plants to reduce its environmental impact. In particular, EVRAZ NTMK and EVRAZ ZSMK are implementing projects to switch to a technology that uses final cooling of coke oven gas in closed heat- exchange equipment, which will reduce emissions from coke production. To address sulphur dioxide emissions from iron ore processing at EVRAZ ZSMK, a desulphurisation system will be built at its sinter plant. The reconstruction of blast furnace No. 6 at EVRAZ NTMK will include modern dust and gas treatment plants similar to the equipment used in the plant’s newest blast furnace No. 7. The Group targets reducing total air emissions during the period of 2017–24 by 22% at EVRAZ ZSMK and by 10% at EVRAZ NTMK. Key air emissions 1, kt 2019 2018 2017 2016 2015 127.69 128.24 137.11 130.68 134.17 GHG emissions EVRAZ operations generate carbon dioxide and other greenhouse gas (GHG) emissions. The Group recognises that mitigating climate change risks is a crucial element in planning for the future welfare of its employees and local communities throughout its global enterprises. EVRAZ understands the urgency of preventing climate change and supports the global effort to reduce the emission of GHGs into the atmosphere. In compliance with the Companies Act 2006 (Strategic and Directors’ Report) Regulations 2013, the Group measures the full GHG emissions at its facilities and has taken part in the CDP Climate Change Programme since 2011. A key aspect of EVRAZ strategy is to reduce GHG emissions by consuming fewer energy resources. The Group has set a five-year target for its Steel segment to keep the GHG intensity ratio below 2 tonnes of crude dioxide (CO2) equivalent (tCO2e) per tonne of crude steel cast. In 2019, the intensity reached the level below the target and amounted to 1.97 tCO2e/tcs. EVRAZ measures direct (Scope 1) emissions of all seven “Kyoto” GHGs 2 and indirect (Scope 2) emissions from the use of electricity and heat. The inventory approach 3 was based on the 2006 IPCC Guidelines for National Greenhouse Gas Inventories (IPCC 2006) and the WRI/WBCSD GHG Protocol Corporate Accounting and Reporting Standard. The Group reports data in terms of tCO2e, calculated using the IPCC 2006 global warming potentials. EVRAZ has collected GHG emissions data for 2019 and compared them with the 2014–18 levels. The Steel segment continues to generate more than half of the gross GHG emissions from the Group’s operations. Nearly 93% of the Coal segment’s full emissions come from fugitive methane (CH4) leakage, which is caused by methane ventilation from underground mines and post-mining emissions from coal. In 2019, the overall GHG emissions from EVRAZ operations increased by around 11.8% (or 4.58 mln. tCO2e) year-on-year. The Group’s Scope 1 emissions rose by 13.1% and Scope 2 emissions slightly increased by 1.2%. The major contribution came from coal mining (3.26 mln. tCO2e) as a result of higher volumes of underground mining (2.81 mln. tonnes of coal) and due to factors which are beyond our control such as increase of methane content in deeper coal seams being developed. Moreover, we had to intensify preliminary methane drainage (by 27% vs 2018) in order to improve safety conditions for employees at some mines. With this in mind, we are developing a project on utilisation of methane emitted from mines after drainage to decrease our full carbon emissions in 2020 and further. Emissions of CO2 grew by 4.20% (or 1.13 million tCO2e) as a result of higher steel production at main steelmaking mills in Russia (+ 6% of crude steel cast). Although absolute emissions in Steel sector increased by 4%, the specific intensity ratio decreased due to more efficient operation of Blast Furnace shop at EVRAZ ZSMK in 2019 and exclusion of EVRAZ DMZ (cease of operations in Ukraine) as from Q1 2018. In addition to the specific intensity ratio in the Steel segment EVRAZ also reports an intensity ratio relating its annual Scope 1 and 2 GHG emissions to consolidated revenue for the Group. This ratio increased due to lower revenue in 2019 on the background of overall GHG emissions growth. Air emissions calculation perimeter differs from the calculation perimeter of GHG emissions. Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC) and perfluorocarbons (PFC), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3) The inventory of emissions includes all entities that EVRAZ controls. Entities that were disposed of during the year were included for the period they were part of the Group. Only entities that were deemed immaterial for consolidated emissions based on their operational indicators were omitted. Direct CO2 emissions from operations were calculated using the carbon balance method for carbon flows within production facilities, including fuel use. Emissions of other GHGs were calculated based on measured volumes, inventory changes or IPCC2006 factors and models (including for post-mining coal methane emissions) where direct measurement data were not available. Indirect emissions were estimated using emission factors specifically developed for the country or region, if available, or otherwise factors provided by UK Defra. 1. 2. 3. 82 Strategic report Business review CSR report Corporate governance Financial statements Additional information EVRAZ GHG emissions in 2019, million tCO2e Specific Scope 1 and 2 GHG emissions from Steel segment (incl. NA), tCO2e per tonne of crude steel cast1 Fresh water intake for production purposes 2, million cubic metres 39.09 4.28 26.57 2.74 EVRAZ Total Steel segment Steel, NA segment Coal segment 0.76 0.65 11.76 0.89 Direct emissions (Scope 1) Indirect energy emissions (Scope 2) 2019 2018 2017 2016 2015 GHG emissions per revenue, kg CO2e/US$ 1.97 2.01 2.02 2.11 2.09 2019 2018 2017 2016 2015 EVRAZ target 2 205.8 226.49 319.43 327.60 340.23 3.6 3 3.6 3.2 6.3 4 EVRAZ Total Steel segment Steel, NA segment 0.6 0.5 Coal segment 2019 2018 Water consumption and discharge EVRAZ aims to efficiently use water resources and prevent any negative water quality impacts through environmental incidents. In 2019, almost 77% of the Group’s total water intake came from surface sources, including rivers, lakes and reservoirs, 3% percentage points year-on-year. During the reporting period, the ongoing programmes to improve the water management EVRAZ GHG emissions, million tCO2e Direct (Scope 1) Consisting of: CO2 CH4 N2O PFC and HFC SF6 NF3 Indirect (Scope 2) Total GHG emissions at EVRAZ operations continued to deliver environmental benefits. In 2019, the Group consumed 205.8 million cubic metres. That is 20.7 million cubic metres less fresh water than in 2018, for a year-on-year reduction of 9.2%. Almost 15.1 million cubic metres have been excluded out of the balance due to the exclusion of assets in 2018–2019, including 14.5 million cubic metres of water intake of Ukrainian assets reported in the first quarter of 2018. The Group’s five-year target is to decrease fresh water consumption by 10% compared with the baseline of 2016 (231 million cubic metres). In 2019 the Group has re-estimated the baseline, taking into account asset exclusion, and set updated target 207 million cubic metres. While water pumped from mines (dewatering) is not included in the fresh water consumption target, pumped water is partly used for technological needs. In 2019, EVRAZ pumped out and used 21.2 million cubic metres of mine water, compared with 17.36 million cubic metres a year earlier. Waste management Mining and steelmaking operations generate significant amounts of waste, including the surplus rock, spent ore and tailings left over after processing ore and concentrates. EVRAZ aims to reduce the amount of waste that it produces, re-use natural resources where possible and dispose of waste in a manner that minimises the environmental impact and maximises operational and financial efficiency. In line with the Group’s strategy to reduce waste storage volumes and enhance waste disposal, it regularly reviews opportunities to recycle and re-use waste at its operations. The main waste by-product that gets recycled is metallurgical slag, which includes materials that previously had been disposed of in dumps. Processing this waste has allowed EVRAZ to maintain a recycling rate of more than 100%. Most of the old slag in these dumps has been processed over the past few years, which is the primary reason why the recycling rate is forecast to decline going forward. The management has decided to continue its 2015 36.87 29.13 7.67 0.07 0.0002 — — 6.17 43.04 2016 35.81 28.76 6.99 0.07 0.0001 — — 5.02 40.83 2017 36.68 28.35 8.26 0.06 0.00003 — — 4.97 41.65 2018 34.56 26.86 7.64 0.06 0.00009 — — 4.23 38.79 2019 39.09 27.99 11.04 0.06 0.00002 — — 4.28 43.38 1. 2. Calculation perimeter includes the following subsidiaries: EVRAZ NTMK, EVRAZ ZSMK, EVRAZ Calgary, EVRAZ Camrose, EVRAZ Portland, EVRAZ Red Deer, EVRAZ Regina, EVRAZ Pueblo. Calculation perimeter includes the following subsidiaries: EVRAZ NTMK, EVRAZ KGOK, EVRAZ ZSMK, Evrazruda, RaspadskayaCoal Company, EVRAZ Caspian Steel, EVRAZ Palini e Bertoli, EVRAZ Vanady Tula, EVRAZ Nikom, EVRAZ Calgary, EVRAZ Camrose, EVRAZ Portland, EVRAZ Red Deer, EVRAZ Regina. 83 Annual report & accounts 2019 waste minimisation efforts and set a target to reuse or recycle at least 95% of waste. In 2019, the Group’s steel mills generated 8.45 million tonnes of metallurgical waste and by-products, including slag, sludge, scale and others, and recycled or re-used 8.88 million tonnes of material. Overall, EVRAZ recycled or re-used 105.1% of non-mining waste and by-products in 2019, compared with 111.3% a year earlier. The Group’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 2019, 38% or 75.47 million tonnes of such waste material were re-used, compared with 26.7% or 62.05 million tonnes in 2018. All non-recyclable waste is stored in facilities that are designed to prevent any harmful substances contained in the waste from escaping into the environment. The Group’s largest tailings dams are owned by EVRAZ ZSMK and EVRAZ KGOK. Safety at such facilities is monitored extremely closely and all necessary steps have been taken to mitigate any danger as far as possible. Tailings storage facilities disclosure EVRAZ has a dam safety management system in accordance with the current legislative procedures that cover all stages of life cycle: design, construction, operation and asset retirement. All dams have safety zones where no residential houses and civilian infrastructure is allowed. The processes and procedures are controlled by operations and audited by the HSE personnel of the sites, the regulator’s inspectors and the Group’s internal industrial safety auditors. Measures to improve the effectiveness of controls have been implemented consistently. The internal industrial safety auditors at EVRAZ performed an operational audit of all active tailings storage facilities (TSFs) during 2019. Waste recycling rate,% 2019 2018 2017 2016 2015 105.1 111.3 104.7 120.1 126.3 To build greater levels of trust with all stakeholders, the Group discloses detailed information about its TSFs at the following link: https://www. evraz. com/en/ sustainability/tailings-storage-facilities/ 84 Strategic report Business review CSR report Corporate governance Financial statements Additional information Waste management strategy Improve technological processes to enhance product quality Secure by-products without generating waste MINIMISE AT THE SOURCE Re-use the main types of waste from metals production: slag, clinker and tailings, including from old dumps RE-USE Develop new products that feature various types of waste Use inert waste to reshape land plots and build dams or roads RECYCLE Generate heat from hot slag Use waste for heating (local boilers) BURN AS FUEL / GENERATE HEAT Store waste that cannot be used today safely, retaining the option of using the locations as industrial sites in the future It is forbidden to: “burn production and consumption waste without special facilities or dump it outside designated areas” (EVRAZ Fundamental Environmental Requirements) STORE BURN e c n e r e f e r p f o r e d r O 85 Annual report & accounts 2019 Environment case studies WATER AIR UPGRADE OF ELECTROSTATIC PRECIPITATORS ON BOILER NO. 8 COMPLETE AT WEST SIBERIAN THERMAL POWER PLANT At West Siberian Thermal Power Plant, ash and soot are formed when burning solid fuel. The previous air treatment equipment did not meet new environmental standards. In 2015, the electrostatic precipitators at the began to be gradually upgraded. Their principle of operation is simple: under the influence of an electromagnetic field, ash and soot settle on special electrodes, are shaken off and fall into a hopper. NEW MINE WATER TREATMENT FACILITY LAUNCHED AT RASPADSKAYA MINE Since 2012, Raspadskaya has been implementing a long-term water protection programme at its facilities, which entails building and reconstructing treatment facilities for mine, quarry, household and industrial wastewater to reduce the impact on water bodies. Over nine years, eight projects have been implemented with a total CAPEX of more than US$20 million. In 2019, the modernisation of mine water treatment facilities at the Raspadskaya mine was completed, doubling the treatment capacity, as well as reducing the discharge of suspended solids by 62% and of oil by 65%. Most of the treated water is now reused for the needs of the mine and the processing plant, while the remaining water is discharged into the river in accordance with all environmental requirements. Overall, from 2020 to 2024, another six projects will be implemented with a total CAPEX of more than US$20 million and the launch of three more wastewater treatment plants is planned in 2020. The modernisation of mine water treatment facilities at the Raspadskaya mine reducing the discharge of suspended solids by 62% New electrostatic precipitators at West Siberian Thermal Power Plant Over 2015–18, the programme implementation helped to reduce annual emissions by 8.2kt. The filter upgrade on boiler No. 8 has made it possible to reduce annual atmospheric emissions by more than 2.9 kt. The last project under the programme is upgrading the filters on boiler No. 10, which will be completed in 2020. New mine water treatment facility at Raspadskaya mine 86 BIODIVERSITY EVRAZ continues to work together with the municipal administrations of the cities where it operates to organise environmental and social campaigns involving volunteers from among the Group’s employees and their families. For example, as part of the environmental campaigns in 2019, a total of 920 trees were planted in parks and squares, including as part of the “Second Life to Trees” initiative, which seeks to transplant young trees from sites where mining will be carried out into city parks. Other events include the “Environmental Saturday” clean-up days, “Clean Games” environmental quest, and “Clean Shore” and “Live Spring” initiatives. These efforts help to unite all EVRAZ employees and family members, as well as ordinary people who care about nature in the cities where the Group operates. In 2019, work continued to reclaim old Tailing Storage Facility No. 2 at EVRAZ ZSMK. During the reporting period, 64,800 trees were planted at the reclaimed site. As part of a programme to restore water bioresources, the Group’s enterprises released more than 379,000 young fish into local rivers and lakes. 64,800 trees were planted at the reclaimed site during the reporting period AWARDS In 2019, EVRAZ NMTK won the award for “Most environmentally responsible enterprise in the field of ferrous metallurgy” at the XV annual “Leader of Environmental Activities in Russia – 2019” competition. EVRAZ ZSMK won the annual regional “Ecoleader” contest. During the official closing ceremony at the Kemerovo region administration, the plant received the award for the “Enterprise” category. Strategic report Business review CSR report Corporate governance Financial statements Additional information Outlook for 2020 OUTLOOK FOR 2020 In 2020 the Group plans to review and update its Environmental strategy taking into consideration all challenges that the company face now and will face in the nearest future, including the climate risks and other issues related with stakeholders’ expectations. As the key priority the Group set implementation of its commitments within the National Project “Clean Air” and achieving the National Environmental Targets for air emission reduction in Novokuznetsk and Nizhny Tagil. EVRAZ Air Emission reduction programme includes: EVRAZ ZSMK: 1. Coke gas cooling system upgrade. 2020 task – to start construction works. 2. Off Gas Desulfurisation Installation. 2020 task – to complete design stage 3. Electric precipitator restoration (HPS). 2020 task – to upgrade the filters on boiler No. 10 EVRAZ NTMK: 1. Coke gas direction to by-product recovery plant № 3. 2020 task – to start construction works 2. Off-gas cleaning units efficiency upgrade. 2020 task – to complete upgrade of gas cleaning units at oxygen converter shop 3. New off-gas cleaning installation at blast furnace #6. 2020 task – to complete construction EVRAZ Vanady-Tula: Kiln off gas system upgrade. 2020 task – to complete commissioning of the new off gas cleaning unit. EVRAZ North America: Regina Reheat Furnace NOx Reduction & Upgrade. 2020 task – to complete installation of low NOx burners. Water management programmes launched in the previous year will be continued at EVRAZ operations: EVRAZ ZSMK, EVRAZ NTMK, Raspadskaya and EVRAZ Vanady-Tula. 87 Annual report & accounts 2019Using renewable energy to produce the greenest steel EVRAZ North America with Xcel Energy and Lightsource BP will develop a new solar energy facility in Pueblo Read more about long rail mill project at EVRAZ Pueblo on page 23 88 Annual report & Accounts 2019 Strategic report Business review CSR report Corporate governance Financial statements Additional information EVRAZ Pueblo will be the first steel mill in North America to rely on solar power 2021 LAUNCH The project is expected to go online by the end of 2021. It will be located on EVRAZ Rocky Mountain Steel property in Pueblo, making it the largest on-site solar facility dedicated to a single customer in the United States. 89 Annual report & accounts 2019Social policy OUR PEOPLE Our approach EVRAZ recognises that its people are the backbone of its achievements and, as such, strongly emphasises human capital development. Within this area, the Group’s priorities are to comply with national legislation wherever it operates, including regulations governing labour protections, minimum wage, annual paid and parental leave, collective bargaining agreements, health insurance, pensions, personal data protection and other matters. EVRAZ does not tolerate discrimination in any form. The Group’s Code of Ethics and Code of Conduct underpin its compliance with the requirements of international human rights laws. These documents ensure equal opportunity in hiring and prohibit discrimination based on race, age, gender, religious and political beliefs, sexual orientation, nationality, ethnicity, citizenship, marital status, disability, etc. During the onboarding process, all employees are familiarised with the internal labour and payroll regulations, as well as the EVRAZ Code of Conduct, Cardinal Safety Rules and Anti-corruption Policy. One of the Group’s core principles is mutual respect. EVRAZ works in a multicultural environment where everyone deserves respect and prohibits the use of offensive, abusive, discriminatory, degrading or aggressive speech, in both oral or written form, as well as verbal or physical sexual harassment and actions or expressions that offend a person’s honour and dignity. Child labour, bonded labour, human trafficking and other forms of slavery (known as modern slavery) are strictly prohibited at all EVRAZ subsidiaries and their suppliers. Notably, most of the Group’s full-time staff (around 94%) are located in Russia and CIS. The entire Russian labour law system is based on general international legal principles and norms, and contains rules explicitly prohibiting any form of discrimination based on gender, social status or class, and any other factors not directly related to an employee’s professional qualities. Similar rules exist in the national legislation of other countries where EVRAZ operates, and local governments constantly monitor compliance with them. In addition, worker treatment is monitored by public organisations, including the trade unions active at the Group’s operations, as well as regional and federal trade union associations and representatives of Russia’s Presidential Council for Civil Society and Human Rights. The Group holds its partners to equally high human rights standards. EVRAZ policies require that all contracts with partners include sections governing the prevention of corruption and human trafficking. For additional information, read the EVRAZ Sustainability Report for 2019, which is to be published in May 2020. 90 Strategic report Business review CSR report Corporate governance Financial statements Additional information Breakdown of permanent and temporary staff, % 100 90 80 2015 2016 2017 2018 2019 Permanent Temporary Diversity of employees, senior management and directors, % 78% (7) 82% (323) 72% (51,101) Men Women Board Senior Management 22% (2) 18% (71) Employees 28% (19,728) Staff recruitment policy EVRAZ is focused on identifying and eliminating risks in the field of human rights, including those related to hiring staff and working conditions. Staff recruitment is conducted in full compliance with the laws of the countries in which the Group operates. EVRAZ strives to provide opportunities in hiring and career development for all candidates and employees, regardless of gender, age, ethnicity, nationality, religion, etc. EVRAZ adheres to the following recruitment principles: • Safety • Respect for people • Performance and responsibility • Customer focus • Effective teamwork In accordance with the Group’s policy, staff are recruited under permanent employment contracts except for certain cases when fixed- term contracts are used, including: • University students undergoing practical training • Interns • Seasonal workers, for example, summer camp staff and employees hired to unload coal from railcars in winter • People participating in investment projects, who are hired for the duration of the project • People hired to cover for employees on parental leave • Employees hired with a probationary period Compensation does not differ for employees under fixed-term and permanent contracts (except for university students undergoing practical training, as well as internal and external part-time workers, who do not receive annual bonuses or vacation travel vouchers). Employees hired on fixed- term contracts receive hiring preferences for permanent positions matching their qualifications, education and work experience. Staff reduction policy EVRAZ strives to consistently improve efficiency. This is a complex task that ultimately leads to increased labour productivity. In cases where staff are laid off as a result, the Group approaches this as responsibly as possible, guided by its Socially Responsible Layoff Programme, which it adopted in 2012. The provisions of this programme are enshrined in EVRAZ collective agreements. In addition, the Group’s collective agreements and industry tariff agreements include detailed employment sections. Under Russian law, the following categories of employees have additional guarantees against dismissal due to downsizing: • Single mothers raising a child with a disability under the age of 18 • Single mothers raising a child under the age of 14 • Women with children younger than three years • Parents (or other legal guardians) who are the sole breadwinner for a child with a disability under the age of 18 if the other parent is not employed • Parents (or legal guardians) who are the sole breadwinner for a child younger than three years in a family raising young children (three or more) if the other parent is not employed • Women who are pregnant Personnel profile Headcount As at 31 December 2019, EVRAZ had a total of 71,223 employees, an increase of 2.2% year-on-year. An increase in headcount was mainly caused by realisation of numerous corporate projects, including EBS Transformation, Procurement Transformation as well as due to the production increase. Number of employees as of 31 December, thousand people 2019 2018 2017 2016 2015 71.2 XX% (XX) 69.7 68.5 77.8 84.5 Diversity EVRAZ sees diversity as a crucial business driver and strives to ensure that all employees’ rights receive equal protection, regardless of race, nationality or sexual orientation. Diversity improves business efficiency, increases engagement and stimulates employee development. Breakdown of employees by age as of 31 December 2019, % <20 20–29 30–39 40–49 50–59 >60 0.4 14.3 30.3 29.9 20.0 5.1 Breakdown of employees by region in 2019, % Russia and CIS North America Europe 93.8 6 0.2 91 Annual report & accounts 2019 the relocation of employees to the Group’s facilities in other regions. EVRAZ also provides training and financial assistance to workers who are laid off and wish to open their own business. covering the basic EBS tools. This programme aims to foster a culture of continuous improvement and includes such courses as “What everyone can do”, “Linear approach” and “Feedback”. • In addition, the preferential right to maintain employment under equal professional qualities is granted to: – People in families with no other independent income – Employees with two or more dependants – Employees who suffered an occupational illness or work-related injury while employed at the Group – Employees who were sent to employer- sponsored on-the-job training In 2019, Russia introduced additional protections for employees who have five or fewer years remaining to retirement age. Such employees cannot be dismissed without cause due to their attainment of pre-retirement age, nor can employment be denied on such grounds. In addition, EVRAZ grants the preferential right to maintain employment to a broader group of employees than that defined under Russian law, including: • Single fathers raising a child under the age of 16 • People whose spouse is retired or unemployed • People who were raised in orphanages and are under the age of 30 In the event of temporary staff reductions, collective agreements contain clearly defined, specific measures to support workers and preserve jobs: changing work schedules, introducing shorter workdays or work weeks, creating temporary jobs, transferring employees to other jobs (with their consent), etc. Collective agreements also define the Group’s obligation to develop a social adaptation programme for workers with the participation of the trade union organisation. All decisions regarding staff reductions are made in dialogue with the trade union organisation. Performance management EVRAZ continues to improve its system of KPIs. Technical KPIs have been developed in accordance with best industry practices (monitored by the Group’s CEO) and are built into the staff motivation system. Corresponding KPI targets are included in management scorecards down to the level of shop managers. • College and university graduates within three years of signing the employment contract for their first job • People with disabilities who have not reached retirement age • Spouses, children under 23 years or parents Learning and development In 2019, EVRAZ continued its initiative to teach EVRAZ Business System (EBS) transformation tools to managers, as well as leadership and management practices that will support these transformations. of an employee who died as a result of an accident at work • People who became ill due to the consequences of the accident at the Chernobyl nuclear power plant EVRAZ strives to retain its production staff. During staff reductions, the Group offers all employees, without exception, existing vacancies and, if necessary, pays for training in their new professions. EVRAZ works with employment centres in the regions where it operates and, if necessary, arranges During the year, the second wave of the “Top 300” corporate management programme was launched. A total of 102 people took part in the first wave (September 2018 to July 2019) and another 97 people are enrolled in the second wave. Every programme participant is mentored by one of the Group’s senior executives. More than 9,000 employees of production divisions (workers, shift supervisors and craftsmen) have attended training sessions EVRAZ approves human capital development strategy One priority for EVRAZ is to develop engineering skills, to which end employees were trained in the following areas: • 139 people attended Chief Engineer School programmes, such as the Rail Production School, Project Management School, etc • 407 people took part in professional retraining programmes covering various areas, including blast furnace production (18 people), thermal power (26 people), etc In addition to developing engineering skills, the Group launched several professional development programmes in 2019 for employees of functional units to support the transformation of their functions, including IT, legal, procurement and finance. Overall, 152 people took part in these programmes. During the reporting period, EVRAZ started to deploy a production mentorship system aimed at improving training quality and helping new employees to adapt to their jobs more quickly. For example, more than 200 people were trained in the Pro Mentor programme: more than 50 mentor-protégé teams were formed and a corporate mentorship forum was held. The Group continues to participate in the WorldSkills Hi-Tech national championship. In 2019, the EVRAZ team competed in 12 skillsets and won 18 medals – four golds, 10 silvers and four bronzes – including in the employees older than 50 years and junior categories. Contractors EVRAZ extends its human rights and anti- discrimination policies to also apply to its suppliers and contractors. Each contract with a partner must contain sections governing the prevention of corruption In 2019, EVRAZ approved its human capital development strategy, which focuses on the management’s responsibility for staff development and motivation. The strategy also aims to help managers to engage employees in achieving the Group’s goals. The primary targets of the human capital development strategy are as follows: 1. Employees share EVRAZ’ principles and apply the EVRAZ Business System in their work 2. Employees have the necessary skill set and are prepared to increase their qualifications, retrain or change professions 3. Employees work efficiently To successfully implement this strategy, EVRAZ is fostering a consistent management culture. Key aspects of this approach are the introduction of standard management practices and the “Top-300” training programme for shop managers and mine directors. In 2020, the Group plans to launch the “Top-1,000” programme for site managers. 92 Strategic report Business review CSR report Corporate governance Financial statements Additional information agreements at the Russian operations of EVRAZ is 90%. At legal entities that do not have collective agreements due to the lack of trade unions, local employer regulations are in place to provide employees with social benefits, protections and compensation in accordance with the Group’s corporate policy. The trade unions at the Russian operations of EVRAZ are part of nationwide industrial unions (including the Russian Mining and Metallurgical Union and the Russian Coal Industry Workers Union), and are also members of the Russian Federation of Independent Unions and international industrial union associations. At the industry level, the Group cooperates with trade unions through industry employer associations, including the Russian Coal Mining Industry Employers Association and the Russian Metallurgists Association. In 2019, there were no conflicts or collective labour disputes at the Group’s Russian operating facilities. All changes and updates of collective agreements were constructive, in strict accordance with the law and the principles of social partnership. At every facility, trade union conferences were held where the employees confirmed that the terms of the collective agreements were complied with in full throughout the year. In 2019, the Social Production Council met two times to discuss ambitious goal-setting, the target pay system and the EVRAZ Business System. Employee engagement During the reporting period, EVRAZ conducted its fourth “We are together” employee engagement survey to develop local and corporate-wide improvement plans. The focus was on increasing employee awareness of what is happening at the Group, including its short- and long-term goals, facility development plans and working conditions. The study was conducted from 9 September to 30 September. The survey gives every employee the opportunity to express their opinion about working at EVRAZ and helps the management to understand people’s concerns. Focus groups are currently being held, after which each division will develop a plan to eliminate pain points. Employee engagement survey response rate, % 2019 2018 80 74 93 and human trafficking. All contractors working at the Group’s facilities are also required to follow the EVRAZ Cardinal Safety Rules. Existing outsourcing procedures require the Group, the outsourcer and the primary trade union to sign a three-party agreement preserving workers’ social benefits and protections. Trade unions are full participants in tendering procedures when a service or deliverable directly concerns EVRAZ employees (for example, when choosing a supplier for personal protective equipment (PPE) and exercising control, selecting healthcare centres for wellness leave, etc). Every EVRAZ employee must be familiarised with the Contractor Auditing Policy as part of the onboarding process. Communication with employees EVRAZ is committed to regularly engaging with its workforce and realises the value in listening to and acting on employee views across the organisation. The Group uses a wide range of tools to communicate with its employees, including the corporate intranet and website, corporate publications, social networks and web conferences, as well as question and answer sessions or townhalls with members of senior management. In addition, the Group holds general meetings and conducts employee surveys to determine the level of satisfaction with working conditions (including employee engagement surveys). The Board reviews the engagement data on a regular basis and in 2018 appointed two non-executive directors to be involved in townhall meetings with employees to ensure that it is aware of any trends, comments or concerns. During 2019, two Board members met with employees and learned what is important to them. As part of this workforce outreach, Alexander Izosimov visited Raspadskaya in Novokuznetsk, Russia and Laurie Argo visited EVRAZ Portland’s rolling mill in North America for townhall meetings. Work with trade unions EVRAZ bases its work with the trade unions representing its workers’ rights on the principles of social partnership. Senior management meets regularly (at least once a week) with trade union representatives at all Group facilities. Meetings between EVRAZ management and trade union leaders are held at the site of the EVRAZ Social Production Council, a special body created by the Group to ensure the right of trade unions to protect workers and receive first-hand information. The overall level of unionisation at the Group is 75%, albeit with significant variations across operations and countries. In Russia, collective agreements are required by legislation to cover all employees of an operating facility regardless of whether they are union members. The level of employees covered by the collective Annual report & accounts 2019Motivation Financial motivation EVRAZ strives to ensure that the remuneration system at the Group’s enterprises is transparent and easily understandable for employees, consistent with the principles of internal fairness and external competitiveness. EVRAZ began to build an integrated grading- based remuneration system in 2017 at the management company in Moscow. The remuneration system for management and administrative staff provides for uniform principles to managing employees’ fixed and variable income. Salary is determined on the basis of a market range for each grade. An annual salary review is performed following the employee performance assessment. An employee’s annual bonus amount is also determined by the grade of the position. In 2018, the system was introduced for personnel at the management company, trading company, EvrazMetallInprom, and Urals and Vanadium divisions. In 2019, it was expanded to include the Siberia division. When new positions appear or the functions of existing positions change, they are quickly evaluated by the evaluation committees at the management company in Moscow and at the division. The Group also began to introduce the system at production enterprises during the reporting period. This included evaluating positions and setting remuneration for shop heads at steelmaking enterprises and mine directors. The system has also begun to be rolled out for employees of engineering departments. In addition, EVRAZ launched a project in 2019 to create a target pay system based on the uniform grading structure for employees of production assets below the level of shop head and mine director. The aim of the project is to develop and implement a uniform set of fair and transparent rules and principles for setting remuneration across the Group’s enterprises, harmonising the fixed and variable pay so that the amount and growth trend depended on the performance of the employee, team and department. This ensures a focus on continuous process improvement and achieving the ambitious goals that have been set for the department and enterprise as a whole. In 2019, a pilot project was introduced at certain departments in the Steel segment of EVRAZ, including four at EVRAZ NTMK, two at EVRAZ KGOK and six at EVRAZ ZSMK. In addition, positions at the Group’s energy assets and EVRAZ Vanady Tula were fully evaluated. Overall, more than 20% of the total Performance as an employer EVRAZ regularly participates in contests that confirm its status as a socially responsible employer. In 2019, the Group won awards for the social performance of its collective agreements, as well as its HSE efforts, in the 16th annual metals and mining industry contest held by the Russian Metallurgists Association and the Central Council of the Russian Mining and Metallurgical Union. EVRAZ operating facilities have also received regional awards for human resource management. EVRAZ Hotline The Group uses the EVRAZ Hotline as a way to monitor employee satisfaction and record incidents at its operating facilities. To ensure the hotline’s effectiveness, it is anonymous, works 24/7, uses an IT system to handle enquiries and has a transparent structure of responsible persons. The process is regulated by the EVRAZ Hotline Statutes. Enquiries are broken down by the responsible business unit (HSE, HR, Security, etc) to be investigated and responded to. All requests related to employee persecution are investigated by the internal audit department. All difficult, controversial or sensitive cases are reviewed by members of the Hotline Committee, which includes the vice president for corporate communications, internal audit director and internal and external communications director. On a quarterly basis, the internal audit director performs random quality control reviews. Breakdown of hotline enquiries in 2019, % General Labour relations Health and safety Security Others 5 68 15 9 3 In 2019, the hotline received 912 requests. The most frequent issues concerned labour relations, including the quality of labour relations (357), worker transportation (80) and labour compensation (56). 94 Strategic report Business review CSR report Corporate governance Financial statements Additional information number of employees of the Steel segment work at the departments included in the pilot project. Key projects in 2019 in the target pay system and finish the transfer to the target system in the Siberia division. Non-financial motivation As a socially responsible company, EVRAZ offers its employees a broad non-financial compensation package that exceeds the minimal legislative requirements and is part of total remuneration. The Group’s employees receive voluntary health insurance, additional voluntary insurance against accidents at work, a government pension programme, a programme that compensates part of the interest on mortgage loans, free wellness leave vouchers for employees and their families, etc. EVRAZ also supports retired former employees who worked 10 or more years at its facilities. It has special programmes to support youth and women that have been united into public organisations. Cultural and sports events are held for employees and their families in the cities where the Group operates. Children of employees receive gifts for the New Year holidays and when they start first grade in school. EVRAZ collective agreements also provide additional leave for childbirth, as well as weddings and funerals of close relatives. There is also a programme that provides financial assistance to employees in difficult life situations. In 2019, a corporate discount programme was introduced for employees of the Moscow office in conjunction with the provider PrimeZone. During the reporting period, the EvrazHolding management company (Moscow) implemented a project aimed at helping employees to adapt called “Buddy”. Each new employee who joins the company is assigned their own person, a “buddy” who can help them out, discuss professional matters and ensure that they adapt to their new job. In 2019, the “Benefit cafeteria” flexible benefit system was developed and introduced for employees of the Urals and Siberia divisions. The amount of the benefit is determined based on management assessments for previous work periods and employees can use a “wallet” to pay for training, sports and/or recreation for themselves or their minor children. In December 2019, a project was launched to automate the recruitment process in the divisions. The introduction of the Huntflow cloud solution has increased transparency for both recruiters and customers. The process was launched in the Siberia, Urals and Coal divisions. Objectives for 2020 In 2020, EVRAZ will continue to expand its new financial motivation system to cover the production assets. The plan is to introduce the grading process in the Coal segment, include the main departments of the Urals division The Group also plans to launch a comprehensive health management programme for its employees that will incorporate new approaches, including identifying risk groups and offering both group and individual preventative programmes. A pilot project will be launched in 2020 at EVRAZ NTMK together with the Tetyukhin Urals Rehabilitation and Clinical Centre. At the centre, employees will receive check-ups as well as year- round medical care. Another initiative planned for 2020 is the “Health and wellness days” at the Moscow office. The programme envisions arranging lectures about physical and mental health, as well as organising interactive events with the help of specialised providers. The “Top 1000” programme is also slated to launch in 2020. The programme aims to align the managerial skills of all managers at a given management level. Developing and training a succession pool is also a priority. The Group aims to understand the strengths and weaknesses of all “Top 300” participants, set up individual development plans for them and determine which of them are ready to take the next step up the career ladder. 95 Annual report & accounts 2019COMMUNITY RELATIONS FEDERAL AND REGIONAL EVENTS EVRAZ organises events to support sports, the environment, and the social and cultural development of cities. It also participates in national programmes, as well as federal and international forums. At the 2019 St Petersburg International Economic Forum, EVRAZ signed an agreement regarding participation in the federal “Clean Air” project, a part of the “Ecology” National Project. EVRAZ was the general partner of the forum “The Role of Women in the Development of Industrial Regions”, which was held in Novokuznetsk and has become an important platform for international discussion with women leaders in various fields. The Group participated in the “Innosocium” nationwide competition of social projects and the WorldSkills Hi-Tech national championship of working professions. It was also a strategic partner of the INNOPROM International Industrial Fair. EVRAZ supports the Novokuznetsk Drama Theatre, the Yeltsin Centre in Yekaterinburg, the Arkhangelskoye Estate Museum, the Documentary Film Centre and the Garage Museum of Modern Art in Moscow. The Group also assists the “Connection” Deaf-Blind Support Foundation, as well as local charitable organisations. AWARDS The video series “What choice would you make?”, which is dedicated to the personal responsibility of EVRAZ employees for safety in their lives and work, was shortlisted at the Cannes Corporate Media and TW Awards. The three short stories, which the Group created in partnership with Freemotion Group, equate knowingly violating safety rules with deciding to take your own life. EVRAZ “Power of Generations” and “Steel Dynasties” digital projects, which were collaborations with Lenta.ru and Komsomolskaya Pravda, received the “Best content solution” and “Employer and brand” awards at the Digital Communications Awards 2019, held by the Association of Directors for Communication and Corporate Media of Russia. The “High Five!” corporate race, which is held in the cities where EVRAZ operates, took first place in the “Sport – Inhouse” award at the international IPRA Golden World Awards 2019. The short film “Stronger than Steel”, a joint project with the renowned Russian actor and director Vladimir Mashkov dedicated to the 55th anniversary of EVRAZ ZSMK, won the grand prize for best sound engineering in the Metal- Vision 2019 competition at the Metall-Expo 2019 international exhibition. The “EVRAZ News – COAL” newspaper, which has been in publication since August 2019, was recognised as the best publication by a mining company in the corporate media competition of “Metal Supply and Sales” magazine. PUBLIC ORGANISATIONS AND BUSINESS ASSOCIATIONS EVRAZ is a member of important industry and business associations, including the Russian Managers’ Association, Russian Union of Industrialists and Entrepreneurs, Russian Steel, Russian Metallurgists’ Association, Steel Construction Development Association, National Association for Subsoil Examination, Association of Railway Product Producers and Russian Railways Consumer Council. In 2019, EVRAZ became a member of the Donor’s Forum, the largest association of grant-making organisations operating in Russia. Our approach Following the international principles of corporate social responsibility, EVRAZ plays an active role in developing the regions where it operates. In the major cities where the Group works, such as Kachkanar, Mezhdurechensk, Nizhny Tagil, Novokuznetsk, Tula and their satellite towns, EVRAZ supports various educational, sports and environmental projects, performs charitable work, improves the labour and living conditions of employees and their families, and promotes the development of urban spaces. The Group’s enterprises are responsible taxpayers and comply with federal and regional laws. EVRAZ strives to maintain a productive and open dialogue with all stakeholders, including local authorities, non-governmental organisations, the business and cultural communities, and the media. Among other things, this cooperation helps EVRAZ to gain an understanding of the socially significant projects in which the Group can take part. The Group’s charity funds in the Urals and Siberia select projects based on the EVRAZ Social Investments Guidelines. Priorities include supporting families in need, orphanages, veterans and victims of disasters, financing educational, sports and cultural projects, as well as subsidising health care activities and environmental protection programmes. 96 KEY PROJECTS Strategic report Business review CSR report Corporate governance Financial statements Additional information EVRAZ for kids EVRAZ participates in various federal youth programmes and works closely with academic institutions, financing the purchase of necessary school supplies and sports equipment, granting scholarships, providing vocational guidance for students, offering training in accordance with WorldSkills methodology, and arranging work study for students and internships for graduates. The Group places a high priority on supporting children in orphanages and with special needs, including through ongoing programmes that provide assistance and rehabilitation for children with health limitations and cerebral palsy. Case study: Children’s foresight Building on the success of the “Children’s Foresight” event held in the town of Kachkanar in 2018 – part of a federal programme aimed at engaging schoolchildren in designing and developing their cities – EVRAZ and the Social Investments and Initiatives Agency significantly increased the scale of the programme in 2019. During the reporting period, more than 200 schoolchildren and 60 teacher-mentors from Kachkanar, Nizhny Tagil and Mezhdurechensk took part in “Children’s Foresight”. They took part in strategy sessions to design their desired future city and develop project ideas, as well as master classes on social technology and personal effectiveness. As a result, 26 projects have already launched. More information about EVRAZ activities in 2019 could be found in the Sustainability Report 2019 which is to be published in May 2020. 97 Annual report & accounts 2019EVRAZ City of friends – City of ideas The grant repaired the pier and purchased sails for yachts. In Novokuznetsk and Mezhdurechensk, with EVRAZ support, multimedia devices were purchased and computer literacy training courses for the elderly were launched. Retirees were introduced to the possibilities of the internet that help to make everyday life easier and more eventful, including online payments for utilities and basic goods, as well as the public services portal, e-mail and social networking. With grant funds from EVRAZ, Nizhny Tagil’s Puppet Theatre staged a new performance for young spectators called “The Singing Whale: Underwater Stories”. Together with the actors, children study the underwater world and its inhabitants, pretend to be pearl gatherers, learn how to get to know each other and make friends, come to the rescue, be surprised and look for adventure. Actors regularly hold charity performances for children from orphanages and kindergartens in Nizhny Tagil and Kachkanar. This is the third baby performance for viewers in the 0+ age group that has been staged with the Group’s support. More information about EVRAZ activities in 2019 could be found in the Sustainability Report 2019 which is to be published in May 2020. The “EVRAZ: City of Friends – City of Ideas” grant contest is a project aimed at engaging people to improve public spaces, protect the environment, develop social initiatives and increase participation in social design, urban improvement, environmental education and preservation of urban natural resources. As part of the project, potential grant recipients attend seminars and business planning training. Since 2017, the contest has been held in four cities where the Group operates. In 2019, the contest received 210 applications from Siberia and 133 from the Urals, of which 54 projects received grants totalling RUB14.5 million. Overall, the projects received more than 28,700 votes and the programme’s website had 139,550 visitors. Case study Several “EVRAZ: City of Friends – City of Ideas” projects were implemented in 2019. EVRAZ helped to revive the sport of sailing in Nizhny Tagil. The Group’s grant funds were used to upgrade the Spartak boating club. So that sailing enthusiasts could practice year-round, the club was repaired, insulated and equipped with the necessary furniture for a classroom. EVRAZ for cities EVRAZ invests to improve urban infrastructure in cities and towns in the regions where it operates. The Group sponsors medical, educational and cultural institutions and projects. Case study To celebrate the 90th anniversary of Siberian State Industrial University, EVRAZ financed major repairs of an auditorium that has been named “Raspadskaya” in appreciation. The Group also installed new furniture and modern multimedia equipment in the auditorium, which was designed by specialists from the university, who used aspects of mining professions to influence the style of the academic space. The university traditionally hosts public lectures by representatives of Raspadskaya, which manages the coal assets of EVRAZ, and also conducts joint specialised training and master classes. The “Raspadskaya” auditorium is the second one that EVRAZ has donated: a year ago, an auditorium named after the metallurgy professor Ivan Bardin was opened at Siberian State Industrial University. 98 More information about EVRAZ activities in 2019 could be found in the Sustainability Report 2019 which is to be published in May 2020. EVRAZ for sport EVRAZ develops sports infrastructure in the cities where it operates, supports amateur and professional sports teams, sponsors federal and regional competitions, and works to popularise sports and healthy lifestyles among its employees and their family members. Case study In November 2019, the EVRAZ Olymp Arena and skiing track were opened in Kachkanar. The Group donated around RUB350 million towards its construction. The sports complex is designed for football, basketball and volleyball. One of the arena’s two sports facilities is multifunctional and the other is reserved for indoor football. In addition, two football fields were built near the arena. The length of the skiing track is more than 2 kilometres. The arena’s facilities will host competitions and practices, as well as public skiing sessions. In 2020, a ski lodge will be built next to the track. EVRAZ volunteers While EVRAZ does not have an official policy regarding volunteering, for many years the Group’s employees have been helping people in difficult situations, supporting children’s institutions and organising various sport and social events. For example, employees of EVRAZ ZSMK have been sponsoring two orphanages for more than 70 years: Orphanage No. 95 and “Island of Hope”. In 2019, the women’s public organisation of the plant, together with the management and primary labour union, continued to work on the social adaptation of orphans and children left without parental care. The children are taught independent housekeeping, cooking, cutting and sewing skills, attend vocational guidance classes, play in sports and competitions and visit cultural events. Material aid is also provided to orphanages. Since 2017, EVRAZ NTMK employees have been holding the “Relay of Good Deeds” Strategic report Business review CSR report Corporate governance Financial statements Additional information More information about EVRAZ activities in 2019 could be found in the Sustainability Report 2019 which is to be published in May 2020. to help educational institutions in Sverdlovsk region. In 2019, they brought gifts to children from the social rehabilitation centres Rainbow and No. 6, and also helped the Kolosok kindergarten in the village of Novopanshino to remove fire-hazardous coatings on the ground floor of the building, install six new doors on emergency exits, and rebuild three gazebos and three sandboxes. A team of volunteers at the EVRAZ Moscow office painted the corridors of the Children’s Rehabilitation Centre in partnership with the Fun Corridor fund, which asked professional artists to prepare sketches of paintings in advance. In addition, employees and their families went to the bison nursery of the Prioksko-Terrasny Nature Reserve, where the men unloaded several tonnes of beets for the bison would eat in winter, while the women and children performed site clean-up. 99 Annual report & accounts 2019New projects DIGITAL projects In 2019, EVRAZ prioritised the development of digital projects. The Group launched communities on the Vkontakte, Odnoklassniki, Facebook, Instagram and YouTube social networks, as well as updated the corporate portal and launched the EVRAZ TV corporate television project. The updated version of the portal includes new services and functionality for users, as well as a more modern design. In 2019, the portal had a total of 9,000 unique users and 120,000 page views. EVRAZ social networking community has become a full-fledged communication channel with more than 15,000 subscribers in just a year. The Group published 1,054 posts and received 65,012 positive reactions from users. EVRAZ TV EVRAZ TV was launched on 1 December 2019. Today, it has 70 broadcast points (televisions) in five cities. The total broadcast time is 351 hours. In addition, it can be streamed directly via the Group’s corporate web portal. Safety challenge: “Zero is also a record” On 11–23 November 2019, EVRAZ conducted the “Zero is also a record” safety challenge at its enterprises and on social media. Steelmakers and miners from the Group’s Urals and Siberian operations, as well as employees of the Moscow office, showed that they want to work without injuries and achieve an LTIFR of zero. The project was supported by EVRAZ vice president for HSE, Konstantin Rubin, the managing director of EVRAZ NTMK and EVRAZ KGOK, Alexey Kushnarev, and more than 40 of the Group’s managers. The challenge also went outside the enterprise. The participants included the EVRAZ-supported Mettalurg and Raspadskiye Panthers hockey clubs, Uralochka volleyball team, Nizhny Tagil Drama Theatre and Novokuznetsk Drama Theatre, as well as journalists and television anchors. 100 “Continuity” project 2,707 social media posts using the hashtag #нольтожерекорд (zero is also a record) 622,000 views of a video about the challenge ~3,000 participants 1,624 positive reactions Strategic report Business review CSR report Corporate governance Financial statements Additional information Viral videos about industrial safety regulations The “Rules are for wimps?” video series was about how blind faith in one’s invulnerability can cause truly unfortunate incidents. The mini- series about animals who ignore safety rules had more than 1 million views in just a month. The cartoon format also helped to convey the importance of safe behaviour to the children of Group employees. Online premiere of the film “Stronger than steel” In the short film “Stronger than steel”, which was made in honour of the 55th anniversary of EVRAZ ZSMK, the renowned Russian actor and director Vladimir Mashkov talked about Novokuznetsk, with which the fate of generations of metallurgists is closely connected and in which he grew up. The film was posted on EVRAZ social networks and, in just a week, had more than 1 million views, 15,000 positive reactions from viewers and 72 references in regional and federal media. More than 80 % of the audience was residents of Novokuznetsk and Kemerovo region. The film made it into the top search results for key queries, including the Russian terms for “Mashkov”, “Novokuznetsk”, “ZSMK” and “Stronger than steel”. This had a positive effect on the EVRAZ brand and helped to minimise the cost of promoting the film. “Steel Irony”: joint photo project of EVRAZ and artist Anton Gudim In a joint project with the popular internet artist Anton Gudim, EVRAZ prepared a series of illustrations called Steel Irony, hashtag #СтальнаяИрония. The project is dedicated to teaching how to protect personal data and remain safe online, and how to behave on social networks to avoid reputational damage. The project had more than 100,000 views and 1,200 positive reactions on social media. Livestream of NLE2019 To maximise the number of Group employees who could be immersed in the atmosphere and feel part of the New Leaders EVRAZ (NLE) 2019 corporate educational programme, a livestream of the speeches from the SKOLKOVO Business School was set up. The total coverage of three livestreams on Vkontakte, Facebook and YouTube had more than 6,000 views and around 2,500 unique viewers. “EVRAZ Football Cup” with MATCH TV anchors On 18 August 2019, the finals of the VIII EVRAZ Football Cup took place at Kachkanar’s Gornyak stadium. The online broadcast featuring commentary of the renowned sports journalist Nobel Arustamyan was watched by 30,000 viewers, including residents of Nizhny Tagil, Kachkanar, Novokuznetsk and Mezhdurechensk. “Continuity”: joint photo project of EVRAZ and Yury Borsch EVRAZ’ enterprises in Russia are separated by thousands of kilometres. Despite the distance, though, all operations and people work in unison. This was the underlying idea for the “CONTINUITY” photo project, which the Group implemented together with the renowned Russian aerial photographer Yury Borsch, who has been ranked among the world’s 20 best aerial photographers by Drone Multimedia magazine. Lines of light were traced by flying a quadcopter above plants and quarries in the photos. Since the drone’s flight path could not be programmed, it took three to five hours to take each photo with the intended linear shape. The photos were used in the corporate calendar for 2020, as well as the new concept for EVRAZ Instagram account. The total number of views of publications about the project is estimated at 1.5 million. “Steel Irony” project 101 Annual report & accounts 2019Anti-corruption and anti-bribery Our approach EVRAZ has always striven for consistency in its strict compliance with the Law of the Russian Federation No. 273 “On Preventing Corruption”, the UK Bribery Act, the US Foreign Corrupt Practices Act and other relevant local legal equivalents. Battling bribery and unethical practices are core aspects of its anti-corruption efforts. The Group has a developed system of well documented and adhered to procedures that define day-to-day routine of managers appointed to monitor compliance with applicable anti-corruption laws. Today, compliance specialists scrutinise all tender procedures, check potential and existing business partners, vet prospective new candidates and ensure that the principles set forth in the Anti-corruption Policy, Code of Conduct and other relevant internal regulations are followed conscientiously and fully. POLICIES AND REGULATIONS In 2019, EVRAZ reviewed its top-level documents that define the norms of ethical and responsible behaviour for employees in all circumstances: the Code of Conduct and Anti-corruption Policy. The updates reflect changes in processes that the Group has made since the previous edition. They enable compliance managers to refer to clearer definitions and a wider range of recommended patterns to avoid risks of corruption. These and other relevant policies are available on the corporate intranet and employees bear personal responsibility for full compliance with them. of Conduct and the Anti-corruption Policy on their first day of work. They are also briefed about other relevant internal documents and procedures that pertain to the Group’s anti-corruption efforts. All internal policies and procedures related to anti- corruption compliance consistently encourage employees to seek guidance from compliance managers whenever they have questions about the expected course of action in difficult situations. The Group urges everyone to voice concerns about any known violations. Today, managers responsible for monitoring compliance with applicable anti-corruption laws are present at every major asset and responsible for controlling risks and handling anti-bribery matters. They ensure that all possible non- compliance with policies receive proper attention immediately; monitor charity payments and hospitality spending; and act on whistle- blower allegations of possible bribery, corruption, fraud and malfeasance. They then present their findings and recommendations to local managing directors, the Group’s compliance manager and specialists reporting to the senior vice president for business support. The latter review investigation results to liaise with senior management as necessary. The Group’s compliance manager routinely informs the Audit Committee about the status of ongoing anti-corruption efforts and prepares memos at the committee’s request. Employees have access to a brief summary of relevant anti-corruption policies as well as links to the full texts of top-level documents on the corporate intranet. Where necessary, the compliance managers discuss the essence of the adopted rules and procedures with all interested parties. New employees are obliged to familiarise themselves with the Code RISK ANALYSIS At the end of each calendar year, compliance managers perform analysis of potential anti- corruption risks across all assets. For this purpose, they consider every business process and redefine key risk areas if necessary. Each area is then evaluated to see if existing controls and procedures effectively mitigate the associated risks. In its Anti-corruption Policy, EVRAZ declares zero tolerance for bribery and corruption. The Group investigates carefully and discreetly all signals suggesting potential violations of applicable law and internal anti-corruption policies. As the Group’s business processes are stable and consistent from year to year, compliance managers typically examine the same following processes for signs of risk: • Purchase of goods or services • Payments • Sale of goods, works and services • Business gifts, hospitality, entertainment and travel expenses • Charity and sponsorship • Interaction with government authorities • Vetting contractors or customers • Contract approval • Group property management In 2019, the compliance managers involved in the abovementioned processes assessed the risks based on their own statistics from checking tenders, approving contracts, monitoring purchases, conducting inventory checks, etc. Key Group policies to regulate anti-corruption and anti-money laundering efforts CODE OF CONDUCT Anti-corruption policy Rules on securities dealings Hotline policy and whistle-blowing procedures Anti-corruption training policy Sponsorship and charity policy Gifts and business entertainment policy Candidates’ background and criminal record check Conflict of interest policy Contractors/ suppliers due diligence check 102 Strategic report Business review CSR report Corporate governance Financial statements Additional information Examples of anti-corruption risks tested in the Group’s business processes In the process “sale of goods, works and services”, compliance managers define risk indicators to look and then test for: • Goods are sold at prices and on terms that are significantly different from the market average. • Goods, works and services are sought to be sold via middlemen and agents when direct contracts are possible. • There are discounts or mismatched conditions set in supply contracts that contradict the Group’s trade policy requirements. Other corruption risk indicators here includeunexplained/unjustified bonuses to the buyerbased on the amount of purchased products,lack of primary and shipping documentation,and granting a delay in payment that violates the current internal requirements. So, random transactions – recent or past– are singled out and carefully consideredfor signs of said risks. Should compliance managers reveal systemic or significant violations of anti-corruption procedures, this is drawnto the attention of the Group’s compliance manager and the top management, locally or at the Group level. Compliance managers then ensure that risks are properly addressed and mitigated. Similarly, compliance managers further examine every major process for signs of corruption risks, unethical practices or bribery. So, in another example, they consider charity and sponsorship payments to make sure: • There were no violations of the approval procedure for charity and sponsorship projects. • All the required and correct documents were properly supplied for consideration to decide if the charity or sponsorship payment can be made. • Potential recipients of charity or sponsor support are allowable in accordance with the internal policy. Anti-corruption risk management cycle Determine or update list of risks for all business processes Oct Input from legal, internal audit and security departments Prepare comprehensive list of risks Oct-Nov Check events for signs of risk Nov-Dec Input from internal audit Analyse and draft risk reports Dec-Jan COMPLIANCE TEAM Inform senior vice president for business support and interregional relations Mar-Oct Monitor how risks are being mitigated Mar-Oct Risk owners Discuss results with risk owners and top managers Top managers Compliance officer presents reports to the Audit Committee The compliance managers routinely meet with the managers responsible for each asset to inform them of known or newly revealed risks and threats and to recommend further actions. The compliance managers then monitor any corrective measures undertaken to mitigate the risks discussed. Should there be that the necessary follow-up is lacking or inadequate, the matter is presented to the senior vice- president for business support for consideration. In early January 2020, the compliance officer presented to the Audit Committee the analysis for 2019, which revealed no significant violations of anti-corruption statutes or cases of non- compliance with Group policies. KEY DEVELOPMENTS IN 2019 In 2019, EVRAZ compliance function did not initiate any investigations into signs of corrupt practices involving state or public officials. However, there were signs of potential collusion between Group employees and vendors, and all of these were carefully investigated. In addition, compliance managers’ own leads regarding potential fraudulent schemes between unscrupulous managers and suppliers/providers also led to investigations. In the past year, there were four cases of fraudulent intent, namely lobbying for money, kickbacks. The employees involved were dismissed and vendors banned. Compliance considers ongoing preventive efforts, effective existing controls, the tone from the top and employees’ adherence to the anti-corruption requirements as effective and adequate for the existing risks. In 2019 alone, over 2,000 more managers throughout the Group have completed online anti-corruption training developed by a leading international provider in the field. Overall, close to 13,000 licences have been used so far by the Company employees to undergo online training. The programme will continue in 2020. Those previously trained receive invitations to refresh their active knowledge of anti-corruption principles and best practices. This course defines bribery and corruption and examines the implementation of anti- bribery legislation in Russia. The training also covers a business-wide system of controls aimed at managing and reducing bribery risks. The key learning objectives remain to: • Confirm the Group’s position and full compliance with applicable anti-corruption laws • Explain existing controls to manage the risk of bribery and corruption • Raise awareness about the damaging effects of bribery and corruption • Draw attention to red flags and warnings about possible illegal payments or other corrupt activities For additional information, see EVRAZ Sustainability Report for 2019, which is to be published in May 2020. OUTLOOK FOR 2020 In 2020, more anti-corruption policies (for example, on conflict of interests and on sponsorship) will be updated to reflect existing and best practice as well as the changes implemented within the compliance system since its launch. There are plans to launch own Group- specific training modules and tests to complement the current anti-corruption course. Other new online options will also be considered in further search for the optimum system of ongoing training. 103 Annual report & accounts 2019Corporate governance Using high standards for a Better Future Apple Park CA, United States Using high standards Board of Directors Key to committee membership Audit Committee Nominations Committee Remuneration Committee HSE Committee Chairman Member 106 Alexander Abramov Non-Executive Chairman Alexander Frolov Chief Executive Officer Appointment Appointment Alexander Abramov has been a Board member since April 2005. He was CEO and chairman of Evraz Group S.A. until 1 January 2006, and continued to serve as chairman until 1 May 2006. Mr Abramov was a non-executive director from May 2006 until his re-appointment as chairman of the Board on 1 December 2008. He was appointed chairman of EVRAZ plc on 14 October 2011. Committee membership Mr Abramov is a member of the Nominations Committee. Skills and experience Mr Abramov graduated from the Moscow Institute of Physics and Technology with a first- class honours degree in 1982, and he holds a PhD in Physics and Mathematics. He founded EvrazMetall in 1992. Other appointments Mr Abramov is a Bureau member of the Russian Union of Industrialists and Entrepreneurs (an independent non-governmental organisation), a member of the Board of Skolkovo Institute for Science and Technology, and a member of the Supervisory Board of the Moscow Institute of Physics and Technology. Alexander Frolov has been a Board member since April 2005. He was chairman of the Board of Evraz Group S.A. from May 2006 until December 2008, and was appointed CEO with effect from January 2007. Mr Frolov was appointed CEO of EVRAZ plc on 14 October 2011. Committee Membership Mr Frolov is a member of the Health, Safety and Environment Committee. Skills and Experience Mr Frolov graduated from the Moscow Institute of Physics and Technology with a first-class honours degree in 1987 and received a PhD in Physics and Mathematics in 1991. Prior to working at EVRAZ, he was a research fellow at the I. V. Kurchatov Institute of Atomic Energy. He joined EvrazMetall in 1994 and served as its chief financial officer from 2002 to 2004, then as senior executive vice president of Evraz Group S. A. from 2004 to April 2006. Other appointments None. Eugene Shvidler Non-Executive Director Eugene Tenenbaum Non-Executive Director Appointment Appointment Eugene Shvidler has been a Board member of Evraz Group S.A. since August 2006. He was appointed to the Board of EVRAZ plc on 14 October 2011. Eugene Tenenbaum has been a Board member of Evraz Group S.A. since August 2006. He was appointed to the Board of EVRAZ plc on 14 October 2011. Committee Membership Committee Membership Mr Shvidler is a member of the Nominations Committee. None. Skills and Experience Mr Shvidler served as president of Sibneft from 1998 to 2005, having previously been senior vice president from 1995. He holds an MSc and an MBA. Other appointments Mr Shvidler currently serves as chairman of Millhouse LLC and Highland Gold Mining Ltd. Skills and Experience Mr Tenenbaum served as head of corporate finance for Sibneft in Moscow from 1998 through 2001. He worked as director for corporate finance at Salomon Brothers from 1994 until 1998. Prior to that, he spent five years in corporate finance with KPMG in Toronto, Moscow and London, including three years (1990–93) 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. He is a chartered accountant. Other appointments Mr Tenenbaum is currently managing director of MHC (Services) Ltd and serves on the Board of Chelsea FC Plc. Strategic report Business review CSR report Corporate governance Financial statements Additional information 10 scheduled Board meetings EVRAZ plc held during 2019 107 Annual report & accounts 2019Board of Directors INDEPENDENT DIRECTORS Laurie Argo Independent Non-Executive Director Deborah Gudgeon Independent Non-Executive Director Key to committee membership Appointment Appointment Laurie Argo has been a Board member of EVRAZ plc since August 2018. Deborah Gudgeon has been a Board member of EVRAZ plc since May 2015. Audit Committee Nominations Committee Remuneration Committee HSE Committee Chairman Member 108 Committee Membership Committee Membership Ms Argo is a member of the Audit Committee and the Remuneration Committee. Ms Gudgeon serves as chairman of the Audit Committee and is a member of the Remuneration Committee. Skills and Experience Ms Argo has over 20 years of experience in the energy industry. From 2015 to 2017, she served as senior vice president of Enterprise Products Holdings LLC, the general partner of Enterprise Products Partners L.P. From October 2014 to February 2015, Ms Argo was chief executive officer and president of OTLP GP LLC, the general partner of Oiltanking Partners L.P. From January 2014 to January 2015, she served as vice president, NGL fractionation, storage and unregulated pipelines, which included gas gathering and processing in the Rockies, San Juan and Permian areas. From 2005 to 2014, she held various positions in the NGL and natural gas processing businesses for Enterprise, where her responsibilities included the commercial and financial management of four joint venture companies. From 2001 to 2004, Ms Argo worked for San Diego Gas and Electric Company and from 1997 to 2000 PG&E Gas Transmission in Houston, Texas. Other appointments Ms Argo is currently an independent non- executive director of the general partner of Rattler Midstream LP. Skills and Experience Ms Gudgeon is a qualified chartered accountant with 30 years experience. She started her career with Coopers and Lybrand, and in 1987 became a senior accountant for Salomon Brothers International. From 1987 to 1995, Ms Gudgeon served as a finance executive at Lonrho PLC and was appointed a member of the Finance Committee in March 1993. From 1995 to 1998, she served as a director for Halstead Services Limited, and from 1998 to 2003, she served as a director of Deloitte, specialising in corporate finance. From 2003 to 2009, Ms Gudgeon served as a founding director of the Special Situations Advisory team for BDO LLP, providing integrated advice on corporate finance, restructuring, debt and performance improvement. From 2011 to 2017, Ms Gudgeon served as managing director of Gazelle Corporate Finance Limited. Other appointments Ms Gudgeon is currently a Senior Adviser of Penfida Limited. She is also an independent non-executive director of Highland Gold Mining Ltd. Strategic report Business review CSR report Corporate governance Financial statements Additional information Karl Gruber Independent Non-Executive Director Alexander Izosimov Independent Non-Executive Director Sir Michael Peat Senior Independent Non-Executive Director Appointment Appointment Appointment Karl Gruber has been a Board member of Evraz Group S.A. since May 2010. He was appointed to the Board of EVRAZ plc on 14 October 2011. Committee Membership Mr Gruber serves as chairman of the Health, Safety and Environment Committee. He is also a member of the Nominations Committee. Alexander Izosimov was appointed to the Board of EVRAZ plc on 28 February 2012. Sir Michael Peat was appointed to the Board of EVRAZ plc on 14 October 2011. Committee Membership Committee memberships Mr Izosimov is chairman of the Remuneration Committee. He is also a member of the Nominations Committee and the Audit Committee. Sir Michael Peat serves as Chairman of Nominations Committee and member of Remuneration Skills and Experience Skills and Experience Mr Gruber has extensive experience in the international metallurgical mill business and holds a diploma in mechanical engineering. He has 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 chaired the boards of Metals Technologies (MT) Germany and MT Italy. Further, he has executed various consultancy projects for the steel industry and served as CEO and chairman of the Management Board of LISEC Group. Other appointments None. Mr 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 worked at Mars Inc, where he held various managerial positions, including regional president for CIS, Central Europe and Nordics, and was a member of the executive board. Prior to Mars Inc, Mr Izosimov was a consultant with McKinsey and Co (Stockholm, London; 1991–96) and was involved in numerous projects in the transportation, mining, manufacturing and oil businesses. Until recently, Mr Izosimov served on the boards of MTG AB, Dynasty Foundation, LM Ericsson AB and Transcom SA. He also previously served as director and chairman of the GSMA (global association of mobile operators) board of directors, and was a director of Baltika Breweries, confectionery company Sladko, and IT company Teleopti AB. He holds an MBA from INSEAD. Other appointments Alexander Izosimov is an independent non- executive director of the Moscow Exchange. Skills and Experience 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 and then Treasurer to The Queen and Keeper of the Privy Purse. 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. He holds an MA and MBA, and is a fellow of the Institute of Chartered Accountants in England and Wales. He was the 2018 recipient of the Institute of Chartered Accountants Outstanding Achievement Award. Other appointments Sir Michael Peat is chairman of CQS Management Limited and a partner in CQS (UK) LLP, chairman of GEMS MENASA Holdings Limited, a non-executive director of Arbuthnot Latham & Co Limited, a non-executive director of Architekton Limited, and chairman of the Regeneration Group Limited. 109 Annual report & accounts 2019Management Alexander Frolov Chief Executive Officer Leonid Kachur Senior Vice President, Business Support and Interregional Relations Aleksey Ivanov Senior Vice President, Commerce and Business Development Nikolay Ivanov Chief Financial Officer Alexander Kuznetsov Vice President, Corporate Strategy and Performance Management Ilya Shirokobrod Vice President, Sales Alexey Soldatenkov Vice President, Head of the Siberia Division 110 Denis Novozhenov Vice President, Head of the Urals Division Sergey Stepanov Vice President, Head of the Coal Division Strategic report Business review CSR report Corporate governance Financial statements Additional information NEW APPOINTMENT Alexander Erenburg Vice President, Vanadium Division James Skip Herald Chief Executive Officer, EVRAZ North America Sergey Vasiliev Vice President, Compliance with Business Procedures and Asset Protection Konstantin Rubin Vice President, Health, Safety and Environment Vsevolod Sementsov Vice President, Corporate Communications Natalia Ionova Vice President, Human Resources Artem Natrusov Vice President, Information Technologies Yanina Staniulenaite Vice President, Legal 111 Annual report & accounts 2019Corporate governance report Introduction EVRAZ is a public company limited by shares incorporated in the United Kingdom. It is a premium-listed company on the Main Market of the London Stock Exchange and is a member of the FTSE 100 Index. EVRAZ is committed to high standards of corporate governance and control. COMPLIANCE WITH CORPORATE GOVERNANCE STANDARDS EVRAZ approach to corporate governance is based on the UK Corporate Governance Code published by the Financial Reporting Council (FRC) in July 2018 and the Listing Rules of the UK Listing Authority. During the year to 31 December 2019, EVRAZ complied with all the principles and provisions of the 2018 UK Corporate Governance Code (the Governance Code is available at www.frc.org.uk), with the following exceptions: • Provision 9: The chairman was non- independent on appointment, as he was and remains a significant shareholder, and had previously served as a CEO and chairman of the Group prior to listing in 2011. The Board considers that he brings independence of judgement to the Group’s activities, as well as extensive experience and expertise of the Group’s key markets. The Board also considers that the current Board structure provides a suitable level of protection for minority shareholders, as it operates in accordance with the Relationship Agreement currently in place (read page 143). • Provision 37: The Company does not operate clawback arrangements. An explanation for this non-compliance is set out in the Remuneration Report on page 131. An explanation of how the Company has complied with the UK Corporate Governance Code is given on the following pages: • Board Leadership and Company Purpose – please read at Corporate Governance Statement on pages 112-115 • Division of Responsibilities - please read at Corporate Governance statement on pages 112-115 112 • Composition, Succession and Evaluation – please read at Nominations Committee Report on pages 126-127 • Audit, Risk and internal control - please read at Audit Committee Report on page 123, internal controls on page 116 and Review of principal risks on pages 34-39 • Remuneration - please read at Remuneration Committee report on pages 130-139 BOARD RESPONSIBILITIES AND ACTIVITIES The Board and management of EVRAZ aim to pursue objectives in the best interests of EVRAZ, its shareholders and other stakeholders, and particularly to create long- term value for shareholders. The EVRAZ Board is responsible for the following key aspects of governance and performance: • Financial and operational performance • Strategic direction • Major acquisitions and disposals • Overall risk management • Capital expenditure and operational budgeting • Business planning • Approval of internal regulations and policies During the year to 31 December 2019, the Board considered a wide range of matters, including: • The critical success factors for strategic development of the Group’s competitive advantages • HSE updates, including key initiatives and responses to significant incidents • The performance of key businesses, including commercial initiatives to improve operational performances and revenues, with particular emphasis on North America • The Group’s consolidated budget and budgets of individual business units • The interim and full-year results, and the 2018 annual report • The appropriateness of the going concern basis of financial reporting • The assumptions, stress-test scenarios and mitigating actions used in preparing the Company’s viability statement • Approval of two interim dividends during the year • Investment project reviews • Disposal of non-core businesses • Implementation throughout the Group over the next five years of the EVRAZ Business System to promote an operational culture of values and behaviours that support the drive for continuous improvement and business change • Linking succession planning to corporate strategy execution, and the need to look deeper into the Group for future leaders • Compliance with the Market Abuse Regulation in relation to managing inside information, share dealing by insiders and online training of all insiders • A review of the findings of the internally facilitated Board evaluation exercises and action plans resulting therefrom The Board discussed the proposals to pay: an interim dividend of US$0.40 per ordinary share, totalling US$577.3 million, paid on 29 March 2019; and an interim dividend of US$0.35 per share, totalling US$508.7 million, paid on 5 September 2019. The level of distributable reserves within the balance sheet was considered at each distribution, noting that it was sufficient to enable the dividend to be paid. The dividends paid were in line with the dividend policy previously agreed by the Board. In keeping with the requirements of the relationship agreements in place between the Company and its major shareholders, the independent non-executive directors of the Company have conducted an annual review to consider the continued good standing of the relationship agreements and are satisfied that the terms of the relationship agreements are being fully observed by all parties. In accordance with LR9.8.4R (14), it is confirmed that: • The Company has complied with the independence provisions of the relationship agreements; • So far as the Company is aware, Greenleas International Holdings Ltd., Abiglaze Ltd and Crosland Global Limited (or any of their associates) have complied with the independence provisions of the relationship agreements; and so far as the Company is aware, Greenleas International Holdings Ltd., Abiglaze Ltd and Crosland Global Limited have complied with the procurement obligations in the relationship agreements. Strategic report Business review CSR report Corporate governance Financial statements Additional information Principal decisions Decision: Context Stakeholder considerations Strategic Actions Supported by the Board Impact of these actions on the long-term success of the Company Outcome 2020 Business Plan and Budget The Business Plan and Budget sets the annual targets and the costs of the necessary resources to achieve these targets. It is developed considering in line with the overall strategy of the Group and considers any specific challenges faced by each division and its underlying business units, this includes any stakeholder related considerations. The Chief Executive supported by key members of the management presents the Plan and Budget for the Board’s challenge and approval. All executive management responsible for the key business units attend and present their budget to the Board. In reviewing the Business Plan and Budget, the Board considered the potential impact that each operation and project might have on its stakeholders (employees, local communities, government and regulators, contractors & suppliers, shareholders and customers) and the environment. The strategic actions of the Business Plan and Budget supported by the Board to generate value for stakeholders are: • Further HSE initiatives, which will be monitored by the HSE Committee, to improve performance and are detailed in the HSE Committee report on pages 128-129 • Approval of investment plans to further reduce Greenhouse Gas emissions, supporting government regulations • Continuing high standards of corporate governance and adherence to regulations • Approval of maintenance CAPEX to both improve business efficiency increasing value and improving working conditions for staff • Approval of investment plans, generating new projects that provide additional employment opportunities and supplier lines. The Business Plan and Budget creates a balance between current operating performance and considerations that matter to all stakeholders in the short and long-term such as health & safety, environmental performance and community relations. In December 2019 the Board discussed and approved the 2020 Business Plan and Budget. Decision: Context Stakeholder considerations Approval of various investment projects The business plan for each financial year contains a number of investment projects, involving sizeable capital expenditure amounts. These can be for a variety of different types of projects, including the replacement of time expired plant in existing facilities, or the construction of new plant to take advantage of new market opportunities. Shareholders • New plant to improve production efficiency and access markets for new products thereby improving shareholder value. Employees • Safer working conditions with modern plant in a better working environment Environment • Reduced Greenhouse gas emissions • Better waste water control • Improved energy efficiency. Impact of these actions on the long-term success of the Company Strategic Actions Supported by the Board Outcome The decision to invest demonstrates confidence in the long-term outlook for iron and steel products in the markets served by these production facilities; and Evraz commitment to sustainable growth for the benefit of all stakeholders. The strategic actions of the investment projects supported by the Board to generate value for stakeholders are: • Improved Health and Safety working conditions for staff • Reduced Greenhouse Gas emissions in line with government regulation • Improved operational efficiency increasing shareholder value • Supply opportunities for national and international contractors tendered for in a transparent manner. A number of investment projects were approved during the year. Chairman and chief executive The Board determines the division of responsibilities between the chairman and the chief executive officer (CEO). 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 Board is chaired by Alexander Abramov. The CEO is responsible for leading the Group’s operating performance, as well as for the day- to-day management of the Company and its subsidiaries. The Group’s CEO is Alexander Frolov. The CEO is supported by the executive team. 113 Annual report & accounts 2019Board meetings and composition EVRAZ plc held 10 scheduled Board meetings during 2019. In 2020, up to the date of this report’s publication, two Board meetings were held. The chief financial officer and the senior vice president for commerce and business development attended all Board meetings, with other members of senior management attending meetings by invitation to deliver presentations on the status of projects and performance of business units. The table on the next page sets out the attendance of each current director at scheduled EVRAZ plc Board and Board committee meetings in 2019. As at 31 December 2019, the Board comprised the chairman, one executive director, and seven non-executive directors, including a senior independent director. Olga Pokrovskaya, a former non-executive director, is invited to attend Board meetings in an advisory capacity and to attend Audit Committee meetings as an observer. The Board considers that five non-executive directors (Laurie Argo, Karl Gruber, Deborah Gudgeon, Alexander Izosimov, and Sir Michael Peat) are independent in character and judgement, and free from any business or other relationship that could materially interfere with the exercise of their independent judgement, in compliance with the UK Corporate Governance Code. In November 2019, Ms Gudgeon was appointed an independent non- executive director of Highland Gold Mining Ltd, Board composition Independent Non-Executive Director Non-Executive Director Chairman, Non-Executive Executive Director 56% 22% 11% 11% Board and AGM attendance by each director Total number of meetings Alexander Abramov Alexander Frolov Laurie Argo Karl Gruber Deborah Gudgeon Alexander Izosimov Sir Michael Peat Eugene Shvidler Eugene Tenenbaum HSE 2 2/2 2/2 Remco 4 4/4 4/4 4/4 Board 10 8/101 10/10 10/10 10/10 10/10 10/10 9/102 9/103 9/103 Audit Nomco AGM 10 10/10 10/10 9/10 3 3/3 3/3 3/3 3/3 3/3 1 1 1 1 1 1 1 1 1 1 a company that is partly owned by some of the significant shareholders of the Company. The Board has considered this appointment, and has concluded that as Highland Gold Mining Ltd operates in a different market from the Company and the remuneration received for the appointment is non-material, Ms Gudgeon’s independence is not compromised as a result. The independent non-executive directors comprise the majority (excluding the Health, Safety and Environment Committee) on and chair all Board Committees. Boardroom diversity EVRAZ recognises the importance of diversity both at the Board level and organisation-wide. The Group remains committed to increasing diversity throughout its global operations and takes diversity into account during each recruitment and appointment process, working to attract outstanding candidates with diverse backgrounds, skills, ideas and culture. As stated in the CSR report, EVRAZ sees diversity as a crucial business driver and strives to ensure that all employees’ rights receive equal protection, regardless of race, nationality, gender or sexual orientation. People with disabilities are given full consideration both during the recruitment process and once employed, to ensure that their unique aptitudes and abilities are taken into account. For more detailed information, read the Nominations Committee report and the CSR report. The Company believes that the Board composition provides an appropriate balance of skills, knowledge and experience. The Board members comprise a number of different nationalities with a wide range of skills, capabilities and experience from a variety of business backgrounds. Biographies of the Board members are provided in the Board of Directors section. 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. Non-executive directors assist the Board by constructively challenging and helping to develop strategy proposals. While most of the directors have been in post since the incorporation of EVRAZ plc in October 2011, the recruitment of new independent non-executive directors in recent years has strengthened the Board’s technical expertise and widened the skills base. The Nominations Committee will commence a process in early 2020 to identify suitable candidates for the role of independent non-executive director to replace those directors who will be required to stand down at the 2021 and 2022 AGM, having completed their nine-year terms. Induction and professional development The chairman is responsible for ensuring that there is a properly constructed and timely induction for new directors upon joining the Board. Directors have full access to a regular supply of financial, operational, strategic and regulatory information to help them discharge their responsibilities. For more detailed information, read the Nominations Committee report on pages 126-127. 1. 2. 3. Alexander Abramov was unable to attend one board meeting and conference call due to business travel and time zone clashes. Sir Michael Peat was unable to attend one conference call meeting as a result of being called overseas. Eugene Shvidler and Eugene Tenenbaum were unable to attend one conference call meeting due to a business commitment that arose unexpectedly. 114 Strategic report Business review CSR report Corporate governance Financial statements Additional information Performance evaluation An internally facilitated annual Board evaluation was conducted in 2019, following an externally evaluated review undertaken in 2017. The review was carried out at the initiative and with the participation of the Company’s Nominations Committee. Questionnaires were distributed to all Board directors for their response and comment. The results were discussed at three levels: (i) among the members of the Nominations Committee; (ii) between Sir Michael Peat (as chairman of the Nominations Committee) and Alexander Abramov (as chairman of the Board); and (iii) among the members of the Board as a whole. Board performance was deemed to be satisfactory. At its January 2020 meeting, the Board agreed an action plan for 2020 that would allow the Board to continue developing its involvement in reviewing and considering the management’s strategy proposals and to take into account stakeholder considerations, and to enhance its focus not only on the commercial issues but also on safety, environmental and other CSR issues, as well as on HR policy. Arising from the 2019 action plan, the Board noted that its members had spent more time considering the Group’s strategy plan and investment proposal arising from it. There has been more focus on succession planning for senior executives and significant changes in the North American business had been implemented. In addition the Board had been fully updated by the HSE Committee Chairman and the Vice President HSE on the new initiatives being implemented across the Group. The Company undertakes regular performance evaluations of the Board in line with the requirements of the UK Corporate Governance Code. An externally facilitated review is planned for 2020. Board committees The following principal committees support the Board in its work: the Audit Committee, the Remuneration Committee, the Nominations Committee, and the Health, Safety and Environment Committee. Each committee has written terms of reference, approved by the Board, summarising its role and responsibilities. The committees review their respective terms of reference each year and submit any recommended changes to the Board for approval. All terms of reference for the committees are available on the Group’s website: www.evraz.com. The Audit Committee consists of three non- executive directors, all independent, which complies with the Code, and the Board considers that, as a whole, the committee has competence relevant to the industry sector in which the Group operates. Specifically, Deborah Gudgeon has relevant recent financial experience. Board composition as at 31 December 2019 Name Executive director Alexander Frolov Non-executive directors Position CEO Alexander Abramov Eugene Shvidler Eugene Tenenbaum Chairman Director Director Independent non-executive directors Director Director Director Director Senior independent director Laurie Argo Karl Gruber Deborah Gudgeon Alexander Izosimov Sir Michael Peat Committee Membership Year of tenure HSEC – member NC – member NC – member None AC – member, RC – member HSEC – chairman, NC – member AC – chairman, RC – member RC – chairman, NC – member, AC – member NC – chairman, RC – member 8 8 8 8 1 8 4 7 8 Role and composition of each committee Committee name Audit Committee Nominations Committee Remuneration Committee HSE Committee Function Composition Audit, financial reporting, risk management and controls Selection and nomination of Board members Remuneration of Board members and top management HSE issues All four members are independent non-executive directors All five members are non-executive directors, of which three are independent All four members are independent non-executive directors Two of the three members are non-executive with an independent chairman who is also a non- executive director of the Company1 Link to committee report Read on pages Read on pages Read on pages Read on pages 1. The members of the Health, Safety and Environment Committee at 31 December 2019 were Karl Gruber (chairman), Alexander Frolov and Olga Pokrovskaya, who has continued as a non-executive member of the HSE Committee following her cessation as a Board member of the Company on 14 March 2016. With more than 50% of EVRAZ operations based in the Russian Federation, the committee continues to value the contribution she brings in terms of her technical and regional experience. 115 Annual report & accounts 2019RISK MANAGEMENT AND INTERNAL CONTROL EVRAZ maintains a comprehensive financial reporting procedures (FRP) manual detailing the Group’s internal control and risk management systems and activity. The manual was last updated in November 2019, in line with the Financial Reporting Council (FRC) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued in September 2014. The aim of the risk management process is to identify, evaluate and manage potential and actual threats to the Group’s ability to achieve its objectives. The EVRAZ Enterprise Risk Management (ERM) process is designed to identify, quantify and respond to these threats, as well as to monitor the Group’s prevention and mitigation system. The management maintains a risk register that encompasses both internal and external threats. The level of risk appetite approved by the Board is used to identify particular risks and uncertainties that require specific Board oversight. In 2019, the process in relation to principal risks and uncertainties was consistent with the UK Corporate Governance Code, the FRC Guidance on the Strategic Report issued in July 2018 and the abovementioned FRC guidance issued in September 2014. Executive management is responsible for both internal controls in place and mitigating actions related to risk management throughout EVRAZ business and operations. This serves to encourage a risk-conscious business culture. EVRAZ applies the following core principles to identifying, monitoring and managing risk throughout the organisation: • Risks are identified, documented, assessed and monitored, and their profile is communicated to the relevant levels of the management team, regularly. The business management team is primarily responsible for ERM and accountable for all risks assumed in the operations. • The Board is responsible for assessing the optimum balance of risk (risk appetite) through the alignment of business strategy and risk tolerance on an enterprise-wide basis. In addition, the Board oversees and approves risks above the Group’s defined risk appetite and reviews any significant internal control weaknesses. • The Group has established a reporting process involving business unit management teams and other relevant bodies at major enterprises. Its aim is to identify, evaluate and establish management actions for risk mitigation at a regional level, as well as at EVRAZ major steel and mining operations. The Risk Management Group maintains a corporate risk register representing a summary of this information. Business unit management teams and other relevant bodies are accountable to the Risk Management Group which consists of business unit and function vice-presidents. • All acquired businesses are brought within the Group’s system of internal control as soon as practicable. The Board has delegated primary oversight of the Group’s internal control process to the Audit Committee, which discuss any major internal control findings exceeding the Board’s risk appetite. The EVRAZ Business Security department is led by a senior vice president and has specific responsibility for preventing and detecting business fraud and malpractice, including fraudulent behaviour by employees, customers and suppliers. Robust internal controls help to minimise the risk, and the EVRAZ Business Security department ensures that appropriate processes are in place to protect the Group’s interests. Internal audit Internal audit is an independent appraisal function established by the Board to evaluate the adequacy and effectiveness of controls, systems and procedures at EVRAZ, which helps to reduce business risks to an acceptable level in a cost-effective manner. The Board approved the latest version of the internal audit charter on 27 February 2019. The internal audit function’s role in the Group is to provide an independent, objective, innovative, responsive and effective value- added internal audit service. This is achieved through a systematic and disciplined approach based on assisting the management in controlling risks and monitoring compliance, as well as improving the efficiency and effectiveness of internal control systems and governance processes. Once a year, the function provides an opinion of the overall effectiveness of the Group’s internal controls. During 2019, EVRAZ head of internal audit, as secretary of the Audit Committee, attended all the committee’s meetings and addressed any reported deficiencies in internal control as required by the committee. The internal audit planning process starts with the Group’s strategy; includes the formal risk assessment process, consideration of the results of the management’s internal control self-assessment, and the identification of management concerns based on the results of previous audits; and ends with an internal audit plan, which the Audit Committee approves. Audit resources are predominantly allocated to areas of higher risk and, to the extent considered necessary, to financial and business controls and processes, with appropriate resource reservation for ad hoc and follow-up assignments. In 2019, internal audit projects covered the following Group risks: • Cost effectiveness • Health, safety and environment • Capital projects and expenditure • Human resources • Compliance laws and regulations • Business interruption, and equipment and infrastructure downtime management • Transportation, sourcing, raw materials and energy supply • Digital effectiveness, and effective, efficient and continued IT service • Fraud, security, bribery and corruption • Quality EVRAZ internal audit function is structured on a regional basis, reflecting the geographic spread of the Group’s operations. The internal audit function aligns common internal audit practices throughout the Group via quality assurance and improvement programmes. Benchmarking with the leading internal audit functions in other companies is also being done in order to improve internal audit efficiency, effectiveness and value for the Group. 116 Strategic report Business review CSR report Corporate governance Financial statements Additional information Components of the internal control system Component Basis for assurance Action in 2019 Assurance framework – principal entity-level controls to prevent and detect error or material fraud, as well as to ensure effectiveness of operations and compliance with principal external and internal regulations • Annual self-assessment by management at all major operations of the internal control system using the EVRAZ Assurance Framework • Review of the self-assessment by the internal audit function • Assessment of the overall effectiveness of the governance, and risk and control framework In 2019, the internal audit function reviewed the result of the management’s internal control self- assessment and evaluated the overall effectiveness of the governance, risk management and internal control system. All major production sites were certified as having overall effective governance, risk management and internal control. Investment project management • Effectiveness of project management and management of project risks is monitored by established management committee and subcommittees • Reviewed by the internal audit function Operating policies and procedures • Implemented, updated and monitored by the management • Reviewed by the internal audit function Operating budgets Accounting policies and procedures as per the corporate accounting manual • Approved by the Board • Monitored by the controlling unit • Reviewed by the internal audit function • Developed and updated by the reporting department • Reviewed by the internal audit function Continuous enhancement of procedures regarding quality and reporting control, as well as other elements of the project oversight process. In 2019, various activities were implemented in order to further increase the efficiency and effectiveness of the project management process, for example by including functional experts (HR, legal, procurement, IT, etc) in the project management teams. Operating policies and procedures are updated as per the internal initiatives by the operational management and in response to recommendations from the internal audit function. The process of improving the internal regulation framework has been started in 2019 and continue in 2020. Operating budgets are prepared by executive management and approved by the Board. Accounting policies and procedures were updated as part of the standard annual review process. Approach to risk appetite Risk appetite is an important part of the risk management process that serves as a measure of the risks that EVRAZ management is willing to accept in pursuit of value. The Board has approved a risk appetite in accordance with the risk management methodology adopted by the Group. Risk appetite is considered in evaluating strategies and setting objectives within EVRAZ strategic and budgeting cycle, in decision making and in developing risk management actions and methods, as well as in identifying particular risks and uncertainties that require specific Board oversight. The Group’s strategic objectives are aligned with, and risk mitigation actions are reflective of, the risk appetite approved by the Board. The Group adopts a robust approach in relation to risk management. Risk appetite for some specific business processes (eg health and safety, fraud, security, bribery and corruption) is assessed, defined and evaluated separately from the rest of the processes. The management reassesses the risk appetite at least annually via the Risk Management Group, which reports on the analysis performed to the Audit Committee. The committee then makes recommendations to the Board regarding the level of risk appetite. The Risk Management Group and the Audit Committee last reviewed the Group’s risk profile in November 2019. Based on the results of the most recent review, the management concluded that the Group’s risk-acceptance approach had not changed and that the risk appetite remained the same as in the prior year. An appropriate recommendation regarding the level of risk appetite was made to the Audit Committee and to the Board on 26 February 2020. Objectives for 2020 Further development of the risk management system and risk management practices is planned for 2020. In 2019, the Group was focused on enhancing its health and safety risk management methodology; this work will continue in 2020. In 2020, in addition to continuing to implement ongoing initiatives focused on improving risk management (in HSE, equipment maintenance and repairs, procurement and other processes), the Group plans to focus more on addressing climate-related risks. While environmental risk has always been a topic of focus for the management and is recognised as a principal risk for the Group, the management plans to increase its focus on the climate-related aspects of this risk. In order to enhance its focus and control over the Environmental, Social and Governance risks, in 2020, the Group plans to initiate development of the related strategies and policies: Sustainability Strategy, Climate Change Strategy, Human Rights and Diversity Policy. This will provide more transparency on how the Group addresses the related risks. Further information regarding EVRAZ internal control and risk management processes can be found on the Group’s website. 117 Annual report & accounts 2019Stakeholder engagement Shareholders and investors • Disclosure of relevant financial and non- financial information • Participation in Russian and international investment conferences • Regularly hosting Capital Markets Days • Organising site visits • Day-to-day and ad-hoc engagement Employees • Direct engagement of dedicated Board members • Development of safety culture • Regular educational programmes to develop employees’ professional skills Internal portal for employees • Regular interaction with trade unions • • Annual employee engagement survey • Corporate newspapers • Hotline Read more on page 22 Read more on pages 77, 90 Customers • Regularly monitoring customer satisfaction levels • Meetings and feedback sessions with clients and EVRAZ management • Electronic platform for clients • Site visits to production assets Read more on pages 46, 54, 56, 64 Suppliers and contractors • Discussions with potential suppliers • Electronic platform for suppliers • Educational programmes for contractors to ensure high level of workplace safety Read more at p. 49, 59, 67 EVRAZ uses various communication channels in order to be sure that our stakeholder engagement approach covers all the stakeholder groups and facilitates two-way communication and feedback 118 Annual report & accounts 2019 Strategic report Business review CSR report Corporate governance Financial statements Additional information Our goal To build honest and supportive relationships with all stakeholders on our path towards sustainable development Local communities • Implementing various social, infrastructural and environmental projects based on local communities’ needs • Organising social events for populations of regions where EVRAZ operates • Holding direct dialogues with local communities Media • Hosting regular press conferences • Supporting and initiating mutual communication projects • Supporting regional TV channels and newspapers • Organising site visits • Day-to-day and ad-hoc engagement Read more on page 96 Read more on page 101 Government and regulatory authorities • Regular meetings with representatives of government and regulatory authorities at federal, regional and local levels • Disclosure of information concerning EVRAZ social, economic and environmental performance • Agreements on regional socio-economic Industry organisations • Organising and participating in conferences • as well as other industry events Initiating and supporting various social, economic, educational and environmental projects development Read more on page 96 Read more on page 96 119 Audit committee report Deborah Gudgeon Independent Non-Executive Director, Chairman of Audit Committee The role and responsibilities of the Audit Committee are delegated by the Board and set out in the written terms of reference https://www.evraz.com/en/company/governance/policies/#reference Dear shareholders, I am pleased to present the Audit Committee Report for the financial year ended 31 December 2019. As part of the Group’s efforts to increase engagement across the business, the Audit Committee held one of its meetings at EVRAZ Pueblo during 2019 and we plan to meet at another operation during 2020. In addition, I visited the Group’s steel mills at EVRAZ NTMK and the iron ore operations at Kachkanar. Once again, I would like to extend the thanks of the Committee to the executive and financial management of the Group, the internal audit department and EY, our external auditor, for their continuing diligence and valued contributions to the work of the Committee. ROLE AND RESPONSIBILITIES OF THE AUDIT COMMITTEE The Audit Committee minutes are tabled at Board meetings for consideration, and the Chairman updates the Board orally on the Committee proceedings, making recommendations on areas covered by its terms of reference if appropriate. The Audit Committee reviews the Group’s risk register and risk appetite proposed by management before they are considered by the Board. The Committee reviewed and updated its terms of reference in November 2019. I confirm on behalf of the Company its compliance, during the financial year commencing 1 January 2019, with the provisions of the Competition and Markets Authority Order 2014 on mandatory tendering and audit committee responsibilities. COMMITTEE MEMBERS AND ATTENDANCE The Audit Committee members are all independent non-executive directors. The Committee members have a wide range of skills and experience: Deborah Gudgeon has recent and relevant financial experience and Alexander Izosimov provides key strategic experience. Laurie Argo has extensive commercial and financial experience in the North American market. As disclosed in the Corporate Governance Report on page 114, Olga Pokrovskaya continues to attend Audit Committee meetings as an observer, providing additional technical expertise and valuable regional knowledge. Senior members of the Group’s finance function, the head of internal audit (who acts as secretary to the Audit Committee and Risk Management Group), and the external auditors also attend Committee meetings. 120 Strategic report Business review CSR report Corporate governance Financial statements Additional information Key members of the management team and Risk Management Group are also invited to attend Committee meetings when appropriate. In 2019, these included the CEO and vice presidents of strategy, steel, HSE, IT, security, legal, compliance and personnel, the CEO and CFO of EVRAZ North America plc (ENA) and the director of investor relations. Other members of the management team and internal audit function were also invited to attend Committee meetings as appropriate. The Audit Committee met ten times during 2019 and four times in early 2020 before the publication of this Annual Report. Two of the meetings in 2019 focused on the Group reorganisation as detailed on page 114. Most of the meetings are in person and attended by all the members of the Audit Committee. Details of committee attendance are set out on page 114. ACTIVITIES AND WORK OF THE COMMITTEE DURING 2019 The Audit Committee has continued to focus on the integrity of the Group’s financial reporting, the related internal control framework and risk management, including finance, operations, regulatory compliance and fraud. These areas were comprehensively reviewed, and the Committee received regular updates from the Group’s financial and operational management, internal audit, compliance officer and legal team, as well as the external auditors. The IT security of the Group was monitored by the Committee on an ongoing basis during 2019, including the results of external audit reviews, mitigation plans and the level of attempted attacks. A new information security assessment of the Russian business was undertaken by EY in November 2019 to test the effectiveness of the updated procedures and risk mitigation actions that had been implemented following the 2017 attack, and concluded that information security has improved. The Committee reviewed the detailed mitigation plan developed by the North American business following the IT risk assessment undertaken by EY in 2018 and will monitor progress in this area during 2020. Given the significance of IT security to the Group’s risk profile and resilience, and the level of digital transformation across the business, this will remain an area of focus for the Audit Committee in 2020 and beyond. The Audit Committee received regular updates from the vice-president of HSE on the development of the updated health and safety risk management methodology and significant findings from the industrial safety audit team. The new processes will be tested by internal audit in 2020 and the Committee will consider and monitor the mitigation of any findings. At the request of the Board, the Committee reviewed the reorganisation the group undertook during 2019 to streamline the corporate structure and optimise the capital efficiency of the business Note 3 of separate financial statements on page 241. In 2019, the Committee also received regular reports on a number of ongoing projects and monitored progress against objectives. These included the finance transformation project initiated in 2018, the procurement contract process and the plan to improve inventory and product shipment controls at one of the plants using innovative technology solutions. The repairs and maintenance transformation project developed by management in 2019 was also considered. These projects will remain an area of focus for the Committee in 2020. The Committee updated its terms of reference, and undertook a self-assessment to consider its performance. The internal audit charter and the Group’s financial reporting procedures (FRP) manual were also considered and updated. The effectiveness and status of the anti-corruption policy and sanctions risk compliance controls were reviewed throughout the course of the year, together with progress to meet the requirements of the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. At the request of the Board, the Audit Committee reviewed the proforma Viability Statement and supporting analysis produced by management and reviewed by the Risk Management Group. The Audit Committee considered the scenarios being tested in the context of the updated risk register, the assumptions and mitigating actions underpinning each scenario and the capital required for the effective operation of the business. Capital projects and expenditure are now classified as a principal risk as the Group moves into a major investment cycle. Compliance with trade regulations and sanctions regimes remains a principal risk for the business. As in 2018, the Risk Management Group consider the risk of sanctions being imposed on EVRAZ to be remote and the potential implications difficult to predict in the current environment. The Audit Committee reviewed this position again and agreed with the Risk Management Group. As a result, this scenario has not been modelled as part of the viability analysis in 2019. SIGNIFICANT FINANCIAL REPORTING ISSUES CONSIDERED BY THE AUDIT COMMITTEE IN 2019 The Audit Committee’s primary objective is to support the Board in ensuring the integrity of the Group’s financial statements and Annual Report, including review of: • Compliance with financial reporting standards and governance requirements • The material financial areas in which significant accounting judgements have been made • The critical accounting policies and substance, consistency and fairness of management estimates • The clarity of disclosures and • Whether the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Group’s performance, business model, strategy, principal risks and uncertainties 121 Annual report & accounts 2019Financial reporting standards and governance requirements The full financial statements can be found on pages 156-247. The Audit Committee considered several financial reporting issues in relation to the interim results for H1 2019 and the financial statements for 2019. These included the appropriateness of accounting policies adopted, disclosures and management’s estimates and judgements. The Committee considered papers produced by management on the key financial reporting judgements and reviewed reports by the external auditor on the full-year and half- year results which highlight any issues with respect to the audit work. The financial statements continue to be impacted by fluctuations in the key functional currencies of the business (primarily the Russian rouble) against the US dollar, the presentation currency of the financial statements, as set out in Note 2. As a result, the analysis of balance movements in the financial statements between reporting periods can be difficult although management although management separately reports the forex impact for key movements. Going concern (Note 2) EVRAZ is exposed to a wide range of risks and inherent uncertainties as set out on pages 34-39, many of which are outside the control of the Group. Market conditions were challenging in 2019 as steel margins narrowed and global metallurgical and vanadium supply/demand dynamics stabilised but there was a positive trend in pricing and demand in the Group’s key markets in the final quarter of the year. The Audit Committee reviewed management’s going concern analysis, which included both a base case and a flexed downside scenario based on forward pricing close to the bottom of the range of current investment analyst forecasts, as well as a reduction in the level of budgeted capital expenditure. The current impact of the COVID – 19 virus outbreak on steel and raw material supply and demand was considered together with the potential longer term implications for the Group’s market. The Committee carefully considered the projected use and sources of funds for the period to June 2021, which includes scheduled loan repayments, new committed funding, free cash flow after committed capital expenditure and the dividend policy. Given the volatility of the global supply and demand environment in which EVRAZ operates, the Committee again focused on the pessimistic downside case and the implications for free cash flow and compliance with financial covenants. Following these detailed considerations, the Audit Committee resolved to recommend the going concern basis of preparation for the Financial Statements as at 31 December 2019 to the Board. An impairment charge of US$442 million is recorded in the financial statements for 2019. This primarily relates to the large diameter pipe business in Canada where a goodwill impairment charge of $300 million has been recorded. This goodwill arose on the acquisition of the business in 2008. The Committee considered the continuing implications of trade barriers and the long term outlook for this business segment, as well as the growth achieved in 2019 and the strong order pipeline for 2020. Given the existence of a recent relevant market transaction, the Committee accepted management’s assumption that the value of the large diameter pipeline business be determined on the basis of fair value less cost of disposal and an impairment recognised. During 2019, management decided to postpone the reopening of the MUK-96 mine at Raspadskaya. Given the future uncertainty, the value of the mining assets relating to this mine was re-assessed and a fully impaired, with a charge of $84 million. Areas of significant accounting judgement and management estimates Impairment of goodwill and non- current assets (Notes 5 and 6) The Committee considered management’s impairment assessment in the context of the current and future trading environment for the Group, including assumptions as to the continuation of tariffs and duties in North America and their impact on the recoverable amount of the affected assets. Testing was undertaken as at 30 September 2019 and reassessed at 31 December 2019 when no further impairment triggers were identified. With the exception of large diameter pipes, the recoverable amounts for all cash generating units in 2019 were determined on the basis of their value-in-use. The recoverable amount for large diameter pipes was determined on the basis of fair value less cost of disposal (see below). The continued weakness of the rouble means that the carrying values of Russian cash-generating units remain low in US dollar terms and are largely not challenged by the value in use comparisons used to determine impairment, even if the pricing outlook were to deteriorate. Other matters The Committee reviewed, challenged and ultimately agreed with the accounting treatment and disclosure of several transactions during 2019, including: • the sale of property, plant and equipment and inventory of the Yartsevo rolling mill. The Group provided loans to Yartsevo in 2012 ahead of the privatisation of the mill. Due to the continuing bankruptcy proceedings at the mill, an impairment of $56 million was recognised in the 2019 interim financial statements to reduce the carrying value of this asset to the likely recoverable value from the liquidation. In November 2019, Evraz acquired the property, plant and equipment and inventory of Yartsevo for $22 million in the bankruptcy auction, the proceeds of which were used to partially repay the creditors of the mill, including Evraz Upon acquisition, the Yartsevo mill was classified as an asset held for sale. The assets of the Yartsevo mill were subsequently sold to a third party for $66 million and a gain of $40 million was recognised upon the disposal. At the moment of the acquisition, the Group did not have any arrangement for the sale of the Yartsevo mill so the purchase and sale arrangements are not treated as linked in the financial statements; 122 Strategic report Business review CSR report Corporate governance Financial statements Additional information • the new trading agreement for the supply of slab between EVRAZ North America and an independent supplier. Historically, the Group has been the major supplier of slab to the North American business; but to ensure the most competitive pricing and logistic and operational efficiency, management have been purchasing more actively in the market and have entered into an agreement with an independent supplier. This supplier contracts with both the Group as a supplier and ENA as a customer. There is no tri-partite agreement, put or call option which would require consideration of the supply and purchase as one transaction and the supplier carries the full inventory risk with each contract priced separately. On this basis, the contracts for the supply and purchase have been considered separately and no unrealised profit has been recognised by the Group on ENA stock of slab even if some of that slab was produced by other parts of the Group; • the sales of Stratcor Inc, Evraztrans Ukraine and Palini e Bertoli and the respective gains and losses on disposal as disclosed in Note 12; • the contract with Xcel Energy Inc for the construction of a solar power plant for the long term supply of electricity to EVRAZ Pueblo on a take-or-pay basis. The solar power plant will be owned and operated by a third party. The contract does not give the Group the right to use or operate the assets and the output will also be sold to unconnected third parties. On this basis, management concluded that this contract does not constitute a lease as defined by IFRS16 (Note 30); and • the contracts with Air Liquide and Praxair for the long-term supply of oxygen and other gases to the Group’s steel operations. As the Group does not control or manage the air separation plant and output will also be sold to unconnected third parties, management has concluded that neither of these contracts constitute a lease (Note 30). Fair, balanced and understandable In considering whether the Annual Report is fair, balanced and understandable, the Committee reviewed the information it had received, discussions held with management throughout the year and the preparation process adopted. Management agreed on the key overall messages of the Annual Report at an early stage to ensure a consistent message in both the narrative and financial reporting. Regular meetings were held to review the draft Annual Report and for management and Committee members to provide comments, and detailed review of the appropriate draft sections was undertaken by the relevant directors and external advisers. The Committee particularly considered whether the description of the business, principal risks and uncertainties, strategy and objectives were consistent with the understanding of the Board, and whether the controls over the consistency and accuracy of the information presented in the Annual Report are robust. Taking into account the disclosure implications of the issues discussed in this report, the Committee recommended to the Board that, taken as a whole, it should conclude that the Annual Report is fair, balanced and understandable. The Audit Committee recommended approval of the Group’s 2019 Consolidated Financial Statements by the Board. Both also recommended were accepted by the Board. OTHER MATTERS UK Bribery Act The Group’s Code of Conduct and Anti- Corruption Policy was updated during 2019 as set out on page 103. This was reviewed by the Audit Committee and approved by the Board in December 2019. The existing framework for monitoring compliance with EVRAZ anti-corruption policies and identifying risk was updated early in 2019 by the compliance, legal and internal audit teams to reflect the latest best practice. Using this framework, compliance was tested in late 2019 and the results reported to the Audit Committee in January 2020. Although the testing indicated further progress in reducing risk, the Committee asked the compliance team to provide further analysis of one specific risk area. Additional anti-corruption policies will be updated in 2020 to reflect best practice and the evolving compliance system. Anti-corruption training continued during 2019. Further 2,000 managers across the business completed the anti-corruption training programme developed by Thomson Reuters, bringing the total number of those trained to 13,000. The training will be extended to additional staff in 2020 and refresher training will continue. In addition, specific training modules will be developed in-house by management to supplement the Thomson Reuters programme during 2020. Sanctions compliance controls Compliance with the extended sanctions regime remained a key focus for the Committee throughout 2019. The Committee received regular updates from the Group’s external legal advisers and compliance officer on any extension or change to the evolving sanctions framework. The control processes, procedures and reporting framework are updated regularly to incorporate the latest guidance. There is a process of continuing education for compliance personnel and executive management in relation to sanctions. RISK MANAGEMENT AND INTERNAL CONTROL This should be read in conjunction with the Risk Management and Internal Control section on pages 116–117. EVRAZ has an integrated approach to risk management to ensure that the review and consideration of risks inform the management of the business at all levels, the design of internal controls and internal audit process. The Group’s financial reporting procedures, internal controls, risk management 123 Annual report & accounts 2019systems and activities are documented in a comprehensive FRP manual. The manual was updated and reviewed by the Audit Committee in November 2019. The Risk Management Group and the Audit Committee reviewed the Group’s risk profile in November 2019 and finalised the assessment in January 2020. The assessment includes the Risk Management Group’s recommendation on the level of risk appetite of the Group and how that appetite is applied to strategic and operational business decisions. This was reviewed by the Audit Committee, along with the draft Statement of Principal Risks and Uncertainties to be included in the Annual Report, prior to the Board’s consideration. Internal audit findings on control issues that exceed the Group’s risk appetite are reported to the Board by the Audit Committee and followed up by the Group’s Management Committee. Progress on the timely and effective resolution of issues is monitored regularly by the Committee. The Audit Committee continues to receive quarterly updates on whistleblowing reports together with a bi-annual security report on the progress of follow-up investigations and resulting actions in relation to fraud and theft. Any significant whistleblowing report is reported to the Committee on an ad hoc basis when it arises. Assessment of the Group’s risk profile and control environment Internal audit evaluates the overall effectiveness of the Group’s governance, risk and control environment annually and this is considered by the Risk Management Group and the Audit Committee. The chairman of the Audit Committee tables the internal audit report assessment of the governance, risk and control environment with the Board. The Audit Committee monitors the internal control environment throughout the year and engages with management to ensure the resolution of any deficiencies identified by internal audit. A particular area of focus during 2019 was the mitigation of health and safety risks across the business. The Committee reviewed reports from both internal audit and the industrial safety team on deficiencies and mitigation plans, as well as receiving regular updates from management. The Audit Committee continued to review the information security risks across the business by way of updated annual assessments and consideration of initiatives to mitigate the evolving risk environment. Progress on GDPR compliance, the process to standardise procurement contract documentation and the finance function development plan were also considered. Other areas reviewed were the repairs and maintenance transformation project across the Russian assets and the ongoing project to optimise product inventory and shipment control at one of the plants. The Audit Committee considered whether any of these matters had implications for the risk and control environment of the Group. INTERNAL AUDIT The Audit Committee receives quarterly internal audit reports detailing significant findings, progress on the timely and effective resolution of outstanding findings, the status of ad hoc projects and any revisions to the current year audit plan. The internal audit plan for 2020 was reviewed by the Audit Committee and certain revisions were recommended to reflect the updated risk profile of the business and to prioritise key business cycles and controls from a risk perspective. Overall, the Committee considers the current internal audit resource to be adequate for the internal control and risk management assurance requirements. The Audit Committee reviewed and updated the Internal Audit Charter and key performance indicators of the internal audit function in January 2020. An annual assessment of the effectiveness, independence and quality of the internal audit function was undertaken by way of a questionnaire to Committee members, management and the external auditors, and was again found to be very satisfactory. A scheduled external assessment of the internal audit function in Russia, the CIS and Europe will be undertaken in 2020. The head of internal audit is secretary to both the Audit Committee and Risk Management Group and prepares the minutes. EXTERNAL AUDIT The Audit Committee is responsible for monitoring the ongoing effectiveness and independence of the external auditor, as well as for making recommendations to the Board on the re-appointment of the auditor. Effectiveness and independence The Audit Committee has an established framework through which it monitors the effectiveness, independence, objectivity and compliance of the external auditor with ethical, professional and regulatory requirements. These include: • Review and approval of the external audit plan for the interim review and year-end audit, including consideration of the audit scope, key audit risks and audit materiality measures, and compliance with best practice • Review and approval of the external auditor’s engagement letter • Review of the FRC’s Quality Inspection Report July 2019 and EY’s response • Consideration of the external auditor’s report on the interim review, annual report and representation letters and • Review of the external auditor’s management letter on the 2018 audit with management, consideration of management’s response and proposed actions. The Audit Committee has monitored the enquiries into the independence of audit firms and effectiveness of the audit process during 2019 and noted the recommendations. The Revised Ethical Standard 2019 issued by the Financial Reporting Council in December 2019 has also been considered. There has been a constructive engagement with the external auditor to determine the implications of these recommendations on the EVRAZ audit process both in current and future years. The Audit Committee will review the process for monitoring the independence and effectiveness 124 Re-appointment of the external auditor Following a tender process in 2016, the Committee recommended the re-appointment of Ernst & Young LLP (EY) as external auditor for the years ended 31 December 2017 and 2018. After consideration of the UK Corporate Governance Code, EU legislation on audit regulation and the performance of EY, the Committee recommended in 2017 that, subject to the agreement of appropriate terms, a further tender to appoint an external auditor be deferred to 2021. The Committee has considered the latest regulatory guidance together with the terms agreed with EY in respect of the financial year ended 31 December 2020, as well as the performance of EY, and continues to recommend the deferral of the tender process. EY was appointed as external auditor of EVRAZ plc in 2011. The current audit engagement partner, Steven Dobson, assumed the role for the year ended 31st December 2016 and will continue up to and including the audit for the year ended 31 December 2020. The Audit Committee continues to consider EY to be effective and independent in their role as auditor and has provided the Board with its recommendation to the shareholders that EY be re-appointed as external auditor for the year ending 31 December 2020. of the external auditor to ensure it reflects the Revised Ethical Standard and finalised guidance from the other reviews. Management and members of the Audit Committee completed a questionnaire to assess the effectiveness and independence of the 2018 external audit process during 2019, which was found to be satisfactory. The Audit Committee holds regular meetings with the external auditor at which management is not present to consider the appropriateness of the Group’s accounting policies and audit process. During 2019, the external auditor confirmed that these policies and processes were appropriate. The Committee chairman also meets the Senior Statutory Auditor regularly outside of Audit Committee meetings. Engagement of the external auditor for non-audit services is currently managed in accordance with the Group’s policy, which can be found on the website: www. evraz. com. This policy identifies a range of non-audit services which are prohibited on the basis that they might compromise the independence of the external auditor, and establishes threshold limits for the level of non-audit fees relative to audit fees and authorisation processes for the approval of all audit and non-audit fees. This policy was updated in January 2019 to reflect the latest guidance and will be further updated in the first quarter of 2020 to reflect the FRC Revised Ethical Standard 2019. During 2019, non-audit fees totalled $1,178,000 and included $543,000 in respect of the interim review (2018 $1,202,000 including $459,000 in respect of the interim review). The balance in 2019 related to the Eurobond issue in March 2019 ($330,000) together with a number of assurance projects, ISO 27001 GAP analysis and penetration testing and vendor due diligence services in connection with the sale of Palini e Bertoli Srl. Non-audit fees were 40% of the 2019 audit fee of $3.0 million, compared with 41% of the 2018 audit fee. Irrespective of prior approval of the CFO and Audit Committee chairman, all fees are reported to the Audit Committee for noting and comment. Strategic report Business review CSR report Corporate governance Financial statements Additional information 125 Annual report & accounts 2019Nominations committee report Sir Michael Peat Senior Independent Non-Executive Director, Chairman of Nominations Committee The Board delegates the Nominations Committee’s role and responsibilities, which are set out in written terms of reference https://www.evraz.com/en/company/governance/policies/#reference The Nominations Committee has continued to review developments in Corporate Governance and to ensure that the Group adheres to best practice. It monitors the Board’s composition to ensure that it remains appropriate for the Company. Currently, two of the Board’s nine members are female, which is below the Hampton-Alexander review recommended level. This will be taken into account when the next director appointment is made. With three of the five independent non-executive directors likely to retire at the 2021 or 2022 AGM, having completed nine years on the Board, a search process will commence in 2020. ROLE The Nominations Committee is responsible for making recommendations to the Board on the structure, size and composition of the Board and its committees, and overseeing succession planning for directors and senior management. COMMITTEE MEMBERS AND ATTENDANCE The Nominations Committee members at 31 December 2019 were Sir Michael Peat, Alexander Izosimov, Karl Gruber, Alexander Abramov and Eugene Shvidler. Sir Michael Peat served as the chairman of the Nominations Committee throughout the year. Three of the five committee members were independent non-executive directors. The committee met on three occasions during 2019. As reported on page 114, all members were in attendance for all meetings. The CEO attended all meetings and the company secretary acted as the committee’s secretary. ACTIVITY DURING 2019 During 2019, the committee considered the following issues. Board and committee composition The Board agreed that the size of the Board and its committees was appropriate for the Group’s ongoing needs. The committee agreed that the Board represented a good mix of skills and experience, and that the Group had benefited from having a stable board and a group of people who interact well. Succession planning The committee considered succession planning for independent non-executive directors, in the context of the length of service of each of the current independent non-executive directors. With three of the five independent non-executive directors due to retire at the 2021 or 2022 AGMs, it was agreed that a search process for replacement non-executive directors would commence in 2020. The committee also paid close attention to senior management succession. Currently the Committee has not engaged any external search consultancies to assist in recruitment. Board performance evaluation In 2017, as required by the UK Corporate Governance code in effect at the time, the Company undertook a Board performance evaluation using an external facilitator, Lintstock LLP. In October 2019, the company secretary undertook a follow up internal evaluation under the guidance of the Nominations Committee. Following the 2019 review’s conclusion, the committee considered the outcome of the report and prepared an action plan for the Board to review and agree, which reflected continuing improvements to the Board process, information flow and induction. The outcome of the review and the action plan are described in the Corporate Governance section on page 115. 126 Independence of non-executive directors and educational and professional backgrounds, as disclosed in the CSR report on page 91. Strategic report Business review CSR report Corporate governance Financial statements Additional information The Nominations Committee and the Board are committed to meeting best practice standards in gender diversity. While the nature of the steel and mining industries makes this more challenging, it does not diminish the committee’s and the Board’s commitment. 2020 priorities The committee will continue to fulfil its general responsibilities with particular emphasis on compliance with the UK Corporate Governance Code, Board diversity and succession planning. The Committee will commence a search programme to ensure that it can replace those independent non-executive directors who will need to stand down at the 2021 or 2022 AGMs, having completed nine years as a director. In addition, the committee will continue to consider development and succession planning for senior management. The committee undertook a review of the independent status of the non-executive directors based on the provisions in the UK Corporate Governance Code. It confirmed the appropriateness of the independent status of each of the independent non- executive directors. The Committee noted that Ms Gudgeon had been appointed an independent non-executive director of Highland Gold Mining Ltd, the shareholders of which include some of the Group’s significant shareholders. It considered that as the companies operate in different markets and that as the level of remuneration is not material, the appointment does not compromise Ms Gudgeon’s independence. PERFORMANCE OF CHAIRMAN AND INDIVIDUAL DIRECTORS The senior independent non-executive director sought views from all directors about the performance and contribution of the chairman. The conclusions of this review were considered by the independent non-executive directors at a meeting on 12 December 2019. It was concluded, as previously, that the chairman continues to make an important contribution to the Group, including through his knowledge and experience of, and contacts in, the industry. It was noted that the chairman was not independent on appointment as required by Provision 9 of the UK Corporate Governance Code, but that in view of his experience and knowledge it was not considered that his independence of judgement would be impaired. The chairman of the Group and the chairman of the Nominations Committee discussed the performance of the individual directors, including time available to devote to the Group’s business, and noted no concerns. Diversity policy The Board’s diversity policy is to have Board membership that reflects the international nature of the Group’s operations and includes at least two women as board members. The Board currently meets these criteria. The committee continues to review and monitor the Group’s performance against its diversity policy, including aspects such as age, gender 127 Annual report & accounts 2019HSE Committee report Karl Gruber Independent Non-Executive Director, Chairman of Health, Safety and Environment Committee The Board delegates the HSE Committee’s role and responsibilities, which are set out in written terms of reference https://www.evraz.com/en/company/governance/policies/#reference. In 2019, EVRAZ faced a sharp rise in the number of fatalities, primarily due to an incident involving a crew bus that happened in February 2019 in which eight employees were fatally injured and another 16 people were seriously wounded. In total, 12 EVRAZ employees and four contractors lost their lives during 2019; most of the fatalities were caused by unsafe actions and risk identification failures during the stage of work planning. To improve the situation, EVRAZ launched a project aimed at implementing a new approach to safety culture improvement by engaging employees in the risk identification and mitigation process. The main idea is to switch the general attitude regarding shop floor workers from being subordinates to equal partners in the risk management process. Together with the HSE best practice initiatives launched in the previous years, we believe that this approach will yield good results in the future and will monitor the results to ensure that it is effective. ROLE AND RESPONSIBILITIES The Health, Safety and Environment (HSE) Committee reports to the Board of Directors on matters concerning employee wellbeing and occupational safety, as well as protecting the environment and local communities where EVRAZ operates. It receives monthly HSE updates and provides a quarterly report to the Board, and its tasks include: • Assessing the effects of the Group’s HSE initiatives on key stakeholder groups, such as employees and local residents, and on EVRAZ reputation • Liaising between the management and the Board when there have been fatalities or serious incidents in the workplace, including to ensure that remedial action is implemented effectively • Reviewing HSE strategy, monitoring pertinent parts of any independent operational audits and making recommendations for action or improvement as deemed necessary 128 COMMITTEE MEMBERS AND ATTENDANCE As of 31 December 2019, the members of the HSE Committee included chairman Karl Gruber, as well as Alexander Frolov and Olga Pokrovskaya, who has been asked to continue serving on the Committee since leaving the Board on 14 March 2016 due to her technical and regional experience. In 2019, the Committee held three meetings: regular meetings on 5 February and 30 July at the headquarters in Moscow, as well as one additional meeting on 16 October in London to review the Risk Management project implementation. All Committee meetings had a necessary quorum and were convened as required. The meetings included reviews of current issues and HSE initiatives at the divisional level. ACTIVITIES DURING 2019 Below is a summary of the HSE Committee’s performance of its duties in 2019. HSE performance review Throughout the year, the Committee applied the following criteria to review the HSE performance of EVRAZ operations: • Fatal incidents • Lost-time injuries (LTI) • Lost-time injury frequency rate (LTIFR), calculated as the number of injuries resulting in lost time per 1 million hours worked • Enforcement of cardinal safety rules • Progress of health and safety initiatives • Industrial safety risk assessment In addition, in September 2019, the Committee members took part in the EVRAZ HSE management committee and visited Urals production sites to review HSE practices and take part in the “HSE Risk Hunting” session. In the aftermath of every fatality, severe injury and incident involving significant damage to property at EVRAZ, the HSE Committee conducts an investigation to determine the root cause, as well as to establish courses of remedial action. This involves recording a detailed description of the scene, the sequence of events, root cause analysis and corrective measures implemented. The Committee applies the following criteria to evaluate the Group’s environmental performance: • Key air emissions, including nitrogen oxides (NOx), sulphur oxides (SOx), dust and volatile organic compounds • Carbon dioxide (CO2) equivalent (tCO2e) emission The Committee approved a new corporate HSE initiative called “Risk Management Project”. The project methodology consists of a set of existing, known HSE tools and best practices, which were tested during 2019. Additionally, the project’s approach fosters more intensive interaction among workers and their supervisors by means of health and safety training, safety conversations and using the motivational tools applied within the EVRAZ Business System. • Carbon dioxide (CO2) equivalent (tCO2e) per tonne of crude steel cast. • Non-mining waste and by-product generation, recycling and re-use • Fresh water intake and water management In addition, the Committee supported the management’s efforts in the following HSE initiatives, finding that the priorities are generally on track: • Implementation of a lockout-tagout (LOTO) aspects system • Non-compliance related environmental levies • Safety conversations and standard operating (taxes) and penalties procedures • EVRAZ environmental commitments • Assessment of the safety management and liabilities system • Major environmental litigation and claims • Asset coverage with environmental permits/ • Review of contractor management requirements licences • Public complaints • Material environmental incidents and preventative measures • Environmental risk assessment Additionally in 2019, the Committee reviewed the risks and control measures associated with the largest dams of EVRAZ. The information on dam safety issues has been publicly disclosed within the Investor Mining and Tailings Safety Initiative. HSE strategy review In 2019, the Committee reviewed the result of the diagnostic audit provided by external consultants in order to set the key areas for improvement of the safety culture. Based on these diagnostics, EVRAZ described its HSE Management system as consisting of six elements: • Policy, goals and programs • Leadership, engagement and responsibility • Risk management • Process management and compliance with standards • Trainings and competencies • Control and continuous improvements Every element is described as “where we are” and “where we want to be”, and then assessed based on the established criteria. The assessment of the safety management system highlighted leadership and risk management as the main areas for improvement. • Divisional health and safety initiatives • Environmental programmes, including air emission, water consumption and waste management initiatives The Committee discussed the challenges posed by global climate change and agreed that the Group should more deeply investigate possible ways to reduce greenhouse gas emissions and establish a corresponding strategy. EVRAZ experts participate in discussions of respective emissions regulations (including related legal acts) to develop emissions regulations in line with the Paris Agreement 2°C pathway. They also provide their professional opinions within respective working groups of various business associations, including the Russian Steel Association and the Russian Union of Industrialists and Entrepreneurs. These associations, in turn, aggregate the opinions held by industry representatives and provide them to the government and respective ministries. HSE regulatory changes In 2019, the HSE Committee evaluated the risks and opportunities related to the introduction of new regulation. Over the reporting period, EVRAZ reviewed drafts of HSE-related legislation for the Russian Steel Association’s HSE Committee, helping the steel industry to form positions in various areas, including: Strategic report Business review CSR report Corporate governance Financial statements Additional information • Russian and Canadian greenhouse gas regulations • The ResponsibleSteel Standard Initiative • Online emission and discharge monitoring • Transition to best available techniques (BAT) • Integrated Environmental Permit (IEP) The Committee acknowledges the risks involved and recommended a proactive approach in alliance with the business community and steel producers. HSE audit review In 2019, EVRAZ operations underwent compliance inspections of state supervisory agencies and internal HSE auditors, and the Committee reviewed: • The HQ Industrial Safety Department’s audits of processes and structural units at Group facilities • The environmental risks identified via the HQ Environmental Management Directorate’s internal audit and risk assessment process • The Internal Audit Department’s audits of the HSE function • External environmental inspections carried out by the environmental authorities, as well as the implementation of remedial action CSR review The HSE Committee’s CSR review for 2018–19 covered social programmes with the following priorities: • Local community quality of life • Initiatives supporting infrastructure, sports, education and culture • Special needs children • Environmental protection • Safety in the workplace and at home Following an annual reputation audit that engaged key stakeholders, including representatives of the business community, customers, media, government and local communities, the Committee rated the sustainability efforts of EVRAZ as satisfactory. Over the past three years, the Group’s score on the reputation index has indicated a sustainably high performance. For more details on HSE issues, read the Corporate Social Responsibility section on pages 76-103. 129 Annual report & accounts 2019Remuneration report Alexander Izosimov Independent Non-Executive Director, Chairman of the Remuneration Committee I am pleased to present EVRAZ annual report on directors’ remuneration and to confirm that the Committee has taken decisions fully in line with the shareholder-approved policy. This policy is designed to help to deliver the Group’s sustainable business objectives and maximise long-term rewards to shareholders. The Committee’s Terms of Reference have now been updated in line with the 2018 UK Corporate Governance Code. I would like to welcome Laurie Argo, who joined the Committee as a member on 13 December 2019. INTRODUCTION This report has been prepared in accordance with the Companies Act 2006 and Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”). It also meets the relevant requirements of the Financial Conduct Authority’s Listing Rules and describes how the Board has applied the principles of good governance as set out in the 2018 UK Corporate Governance Code (July 2018). This report contains both auditable and non- auditable information. The information subject to audit by the Group’s auditors, Ernst & Young LLP, is set out in the Annual Remuneration Report and has been identified accordingly. Directors’ remuneration policy The current Remuneration Policy was approved by shareholders at the Annual General Meeting (AGM) in June 2017. The Regulations require that shareholders formally approve the policy every three years and therefore the next occasion will be at the AGM in 2020. This policy is broadly the same as the previous version as, following a review by the Committee, it was felt to still be appropriate for the Group’s requirements. Annual remuneration report The second part of the report, the Annual Remuneration Report, sets out details of remuneration paid in 2019 and how the Group intends to apply its Remuneration Policy in 2020. This section will be put to an advisory shareholder vote at the forthcoming AGM. Key decisions taken during the year During the year, the Committee reviewed the suitability of the current policy, reflecting on how it had operated in the past and what was needed for the future. While the updated UK Corporate Governance Code required certain changes to be made, these are fairly minor in nature. The Committee operated under its terms of reference (as described on page 138) without conflicts of interest and having sought advice to determine the future policy. The Committee assessed performance of the CEO against predetermined KPIs and targets as well as the overall performance of the Group. From an operational and financial perspective the performance of the Group has been strong, meeting most of the set targets and showing good progress on strategic projects. During the year the Group significantly increased its focus on health and safety, placing the paramount importance on the measures aimed to improve the safety culture. However, taking into account the increase 130 Strategic report Business review CSR report Corporate governance Financial statements Additional information in fatalities in 2019, driven by the crew bus accident at Raspadskaya mine, after the discussion with and with the agreement of the CEO, the Committee decided not to award the CEO bonus. Although changes in behavior and practices take time to achieve improved safety figures, the CEO considers the increase in the number of fatalities unacceptable. Through the ongoing dialog with the management, the Committee maintained its thorough understanding of the operation of remuneration arrangements throughout the Group and under its amended terms of reference approved the remuneration of the senior executives operating immediately below the CEO. In line with its commitment to good corporate governance, the Group will continue to monitor investors’ views, best-practice developments and market trends on executive remuneration. These will be considered when deciding on executive remuneration at EVRAZ to ensure that its Remuneration Policy remains appropriate in the context of business performance and strategy. Link with business strategy EVRAZ actualised strategic priorities define the selection of KPIs for the CEO. These strategic priorities are reflected in the Group’s approach to executive remuneration and a large proportion of the CEO’s remuneration is linked to performance through the annual bonus. Achievement within the annual bonus is based on the Group’s key quantitative financial, operational and strategic measures to ensure focus is spread across the key aspects of Group’s performance and strategy. The exact measures and associated weighting are determined on an annual basis according to the Company’s strategic priorities for the year. For 2019, the following five indicators, each with an equal weighting of 20%, were considered when determining the CEO’s annual bonus: LTIFR, EBITDA, Free Cash Flow (adjusted), Cash Cost Index and the Committee’s assessment of overall performance against strategic objectives. The KPIs are specific and focus on deliverables to support the Group’s strategy. How business strategic priorities align to overall reward at EVRAZ CEO KPIs Weighting Sustainable development EVRAZ Business System Debt management and stable dividends Prudent CAPEX Retention of Low- cost position Development of product portfolio and customer base LTIFR EBITDA Adjusted FCF Cash Cost Index 20% 20% 20% 20% Strategic Objectives 20% X X X X X X X X X X X X X X X X X X X X POLICY REPORT Shareholder approval is to be sought at the 2020 AGM for an updated policy (which is outlined on pages 131-135) which will, subject to that shareholder approval. This updated policy contains the following key changes to the policy approved in 2017 by shareholders (which is available at https://ar2017.evraz.com/en/governance/ remuneration-report): • Future executive directors will receive a pension benefit no higher than that provided (as a percentage of salary) to the workforce level • Introduction of formal shareholding guidelines requiring any future executive director to build over time and then retain shares worth at least 200% of salary normally for the period of two years after ceasing to be an executive director • The ability for the Committee to reduce bonus payments to reflect EVRAZ overall performance, as well as safety record and procedures The Remuneration Policy’s primary objectives are to attract, retain and reward talented staff and management, by offering compensation that is competitive within the industry, motivates management to achieve the Group’s business objectives, encourages a high level of performance and aligns the interests of management with those of shareholders. The Committee reserves the right to make any remuneration payments and payments for loss of office that are not in line with the policy set out below where the terms of the payment were agreed before the policy came into effect or at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration of the individual becoming a director of the Company. The CEO’s incentive arrangements are subject to “malus”, under which the Committee may adjust bonus payments downwards to reflect the Group’s overall performance including safety underlying practices and resulting performance. The Committee does not operate clawback arrangements on directors’ remuneration on the basis that such arrangements would not be enforceable under the Russian Labour Code. The Committee will keep this under review and should the Russian Labour Code change, it will revisit the inclusion of such provisions in the Group’s variable remuneration plans in order to comply with the 2018 UK Corporate Governance Code. The Committee may make minor amendments to the Remuneration Policy set out below (for regulatory, exchange control, tax or administrative purposes, or to take account of a change in legislation) without obtaining shareholder approval for that amendment. 131 Annual report & accounts 2019Remuneration Policy Element Purpose and link to strategy Operation Executive director Maximum potential value Performance metrics Base salary Provides a level of base pay to reflect individual experience and role to attract and retain high calibre talent. Benefits To provide a market level of benefits, as appropriate for individual circumstances, to recruit and retain executive talent. Normally reviewed annually, considering individual and market conditions, including: size and nature of the role; relevant market pay levels; individual experience and pay increases for employees across the Group. For the current CEO, base salary incorporates a director’s fee (paid to all directors of the Company for participation in the work of the Board committees and Board meetings – see the section on Non-executive Director Remuneration Policy below). Where a salary is paid in a currency other than US dollars, the Committee may make additional payments to ensure that the total annual salary equals the level of annual salary in US dollars. Benefits currently include private healthcare. Other benefits (including pension benefits) may be provided if the Committee considers it appropriate. The current CEO does not participate in any pension scheme at this time. Generally, the maximum increase per year will be in line with the overall level of increases within the Group. None However, there is no overall maximum opportunity as increases may be made above this level at the Committee’s discretion, to take account of individual circumstances such as increases in scope and responsibility and to reflect the individual’s development and performance in the role. None The cost of benefits will generally be in line with that for the senior management team. However, the cost of insurance benefits may vary from year to year depending on the individual’s circumstances. In the event that an executive director is required by the Group to relocate, or following recruitment, benefits may include but are not limited to a relocation, housing, travel and education allowance. The overall benefit value will be set at a level the Committee considers proportionate and appropriate to reflect individual circumstances, in line with market practices. Annual bonus To align executive remuneration to Group strategy by rewarding the achievement of annual financial and strategic business targets. The Group operates an annual bonus arrangement under which awards are generally delivered in cash. Targets are reviewed annually and linked to corporate performance based on predetermined targets. There is no total maximum opportunity. Up to 200% of base salary in respect of any financial year of the Group. The bonus is based on achievement of the Group’s key quantitative financial, operational and strategic measures in the year to ensure focus is spread across the key aspects of Group performance and strategy. The exact measures and associated weighting will be determined on an annual basis, according to the Group’s strategic priorities, however at least 60% will be based on Group financial measures. For achievement of threshold performance, 0% of maximum will be paid, rising straight line to no more than 50% of maximum for target performance and 100% of maximum for outstanding performance. The Committee retains discretion to adjust bonus payments to reflect the Group’s overall performance. 132 Strategic report Business review CSR report Corporate governance Financial statements Additional information Element Purpose and link to strategy Operation Non-executive directors Maximum potential value Performance metrics Chairman and non-executive director remuneration To provide remuneration that is sufficient to attract and retain high calibre non- executive talent. Director fees are normally paid in the form of cash, but with the flexibility to forgo all or part of such fees (after deduction of applicable income tax and social taxes) to acquire shares in the Company should the non-executive director so wish. Non-executive director fees are reviewed from time to time. Non-executive directors receive an annual fee for Board membership. Additional fees are payable by reference to other Board responsibilities taken on by the non-executive directors (for example, membership and chairmanship of the Board committees). The chairman of the Board receives an all-inclusive annual fee. Costs incurred in the performance of non-executive directors’ duties for the Company may be reimbursed or paid for directly by the Company, including any tax due on the costs. This may include travel expenses, professional fees incurred in the furtherance of duties as a director, and the provision of training and development. In addition, the Company contributes an annual amount towards secretarial and administrative expenses of non-executive directors. Non-executive directors may not participate in the Company’s share incentive schemes or pension arrangements. Total fees paid to non-executive directors will remain within the limit stated in the Articles of Association. Performance measures and targets Annual bonus measures and targets are selected to provide an appropriate balance between incentivising the director to meet financial objectives for the year and achieving key operational objectives. The Remuneration Committee reviews them annually to ensure that the measures and weightings are in line with the strategic priorities and needs of the business. Remuneration arrangements throughout the Group This remuneration approach and philosophy is applied consistently at all levels, up to and including the executive director. This ensures that there is alignment with business strategy throughout the Group. Remuneration arrangements below Board level reflect the seniority of the role and local market practices, and therefore the components and remuneration levels for different employees may differ in parts from the policy set out above. For instance, in addition to a base salary, a performance-related bonus (calculated by reference to KPIs aligned with the Group’s strategy) and benefits, senior managers are also entitled to participate in a long-term incentive programme. This is designed to align the interests of these individuals to the delivery of long-term growth in shareholder value. The current CEO already holds a substantial shareholding in the Group and therefore does not participate in this plan. Illustration of the application of the Remuneration Policy The following chart provides an indication of what could be received by an executive director under the Remuneration Policy. In relation to any pension benefits, these will not exceed the percentage of salary earned by the majority of the workforce (either of the Group or the county in which the executive director works). Notwithstanding this, the Committee recognises that the Remuneration Policy set out above is tailored towards the only current executive director, the CEO, who has a significant shareholding in the Company. Any new executive director is likely to have a different fact-pattern to the current CEO, and thus the Committee believes it is important to retain the flexibility to be able to offer other elements, namely market-competitive, share- based incentive programmes, which are linked to the Group’s performance and designed to align the executive director’s interests to the delivery of growth in shareholder value. The maximum level of variable remuneration which may be granted in respect of recruitment (excluding any buyouts) will not exceed the ongoing policy of more than 200% of base salary, as described in the policy table above. This additional headroom has been capped at a level comparable with maximum award levels seen in conventional long-term incentive plans used in the wider UK-listed market. Application of the remuneration policy, US$ thousand Minimum 100% In line with expectations 50% Maximum 33% 0% 50% 67% 2,658 5,283 7,908 Base pay Annual bonus Policy on recruitment of executive directors This part of the Remuneration Policy has been developed to enable the Group to recruit the best candidate possible who will be able to contribute to the Group’s performance and will help to reach its goals. In the event of hiring a new executive director, remuneration would be determined in line with the following Remuneration Policy. So far as practicable and appropriate, the Remuneration Committee will seek to structure pay and benefits of any new executive directors in line with the current Remuneration Policy. 133 Annual report & accounts 2019The Committee’s intention would be for any share-based incentive awards to be subject to performance conditions. Where the intention is to grant regular long-term incentive awards to a candidate, the Committee would seek appropriate shareholder approval for a new share plan in accordance with the Listing Rules. When setting salaries for new hires, the Committee will consider all relevant factors, including the skills and experience of the individual, the market from which they are recruited, and the market rate for the role. For interim positions, a cash supplement may be paid rather than salary (for example, a non- executive director taking on an executive function on a short-term basis). To facilitate recruitment, the Committee may need to compensate an executive director for the loss of remuneration arrangements forfeited on joining the Company. In granting any buyout award, the Committee will consider relevant factors, including any performance conditions attached to the awards forfeited, the form in which they were granted (eg cash or shares) and the timeframe of the awards. The Committee will generally seek to structure the buyout on a comparable basis to awards forfeited. The overriding principle is that any buyout award would be at or below the commercial value of remuneration forfeited. The Committee retains the flexibility to alter the performance measures of the annual bonus for the first year of appointment, if it determines that the circumstances of the recruitment merit such alteration. Where an executive director is appointed from within the organisation, the normal policy is that any legacy arrangements would be honoured in line with the original terms and conditions. Similarly, if an executive director is appointed following an acquisition of, or merger with another company, legacy terms and conditions will be honoured. On the appointment of a new chairman or non- executive director, their remuneration will typically be in line with the Remuneration Policy as set out above. Any specific cash or share arrangements delivered to the chairman or non-executive directors will not include share options or any other performance-related elements. Policy on shareholdings of executive directors The Company’s policy is that executive directors should hold shares in the Company and any new executive director will be required to build and retain a level of shareholding in the Company. The application of this will be contained from time to time in the Annual Remuneration Report and is currently set at 200% of salary. This level of shareholding (or the actual level on departure if it is lower) will normally have to be retained for two years following ceasing to be an executive director. As the current executive director, the CEO, has a holding in excess of 9.69% of the Company and does not participate in share plans, this guideline does not apply to him. Executive director’s service contract and loss of office policy The CEO has a service contract with a subsidiary of EVRAZ plc. The CEO’s 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 from time to time (where the termination is at the Company’s initiative, the entitlement to pay in lieu of notice is currently limited to three months’ base salary). The Committee may determine that a termination payment of up to 12 months’ base salary should be paid, taking into consideration the circumstances Key terms of non-executive directors’ appointment letters of departure. Going forward, all new executive directors’ contracts will normally provide for a notice period of no more than 12 months and for any compensation provisions for termination without notice to be capped at 12 months’ base salary and contractual benefits. There is no automatic entitlement to annual bonus and executive directors would not normally receive a bonus in respect of the financial year of their cessation. However, where an executive director leaves by reason of death, disability, ill-health, or other reasons that the Committee may determine, a bonus may be awarded. Any such bonus would normally be subject to performance and time pro-rating, unless the Committee determines otherwise. Executive director Alexander V. Frolov Date of contract 31 December 2019 Notice period (months) N/A Non-executive directors’ letters of appointment Each non-executive director has a letter of appointment setting out the terms and conditions covering their appointment. They are required to stand for election at the first AGM 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. Letters of appointment do not provide for any payments in the event of loss of office. All directors are subject to annual reappointment and, accordingly, each non- executive director will stand for re-election at the AGM on 16 June 2020. Non-executive directors Alexander G. Abramov Karl Gruber Alexander Izosimov Sir Michael Peat Deborah Gudgeon Eugene Shvidler Eugene Tenenbaum Laurie Argo 134 Date of contract 14 October 2011 14 October 2011 28 February 2012 14 October 2011 31 March 2015 14 October 2011 14 October 2011 8 August 2018 Notice period Three months Three months Three months Three months Three months Three months Three months Three months Strategic report Business review CSR report Corporate governance Financial statements Additional information Copies of the directors’ letters of appointment or, in the case of the CEO, the service contract, are available for inspection by shareholders at the Group’s registered office. Consideration of conditions elsewhere in the Group Management prepares details of all employee pay and conditions, and the Committee considers them on an annual basis. The Committee takes this into account when setting the CEO’s remuneration. However, it does not consider any direct comparison measures between the executive director and wider employee pay. The Group does not formally consult with employees on executive director remuneration. Consideration of shareholder views When determining the Remuneration Policy, the Committee considers investor body guidelines and shareholder views. ANNUAL REMUNERATION REPORT This section summarises remuneration paid out to directors for the 2019 financial year, and details of how the Remuneration Policy will be implemented in the 2020 financial year. Executive director’s remuneration In 2019, the CEO, Alexander Frolov, was entitled to a base salary, a performance-related bonus and provision of benefits. As a member of the Board, he is also entitled to a director’s fee (US$150,000) and any applicable fees for participation in the work of the Board committees as laid out in the section below on non-executive director remuneration. However, the Committee considers these fees to be incorporated in his base salary. Alexander Frolov’s current shareholding (9.69% of issued share capital as of 31.12.2019) provides alignment with the delivery of long-term growth in shareholder value. As such, the Committee does not consider it necessary for the CEO to participate in any long-term incentive plans or to impose formal shareholding guidelines. However, the Committee will continue to review this on an ongoing basis. Annual bonus The CEO is eligible for a performance-related bonus that is paid in cash following the year- end, subject to the Committee’s agreement and the Board of Directors’ approval. The bonus is linked to achieving performance conditions based on predetermined targets set by the Board of Directors. The target bonus is 100% of base salary with a maximum potential of 200% of base salary. Single total figure of remuneration (audited) Annual bonus for 2019 (audited) Key elements of the CEO’s remuneration package received in relation to 2019 (compared with the prior year) Alexander V. Frolov Salary and director fees1 Benefits Bonus Total Base salary 2019 (US$) 2018 (US$) 2,625,000 2,500,000 32,970 0 2,657,970 33,506 2,860,378 5,393,884 The Committee approved the CEO’s current salary on 1 January 2019 at the level of US$2,625,000 (which includes, for the avoidance of doubt, the director’s fee, fees paid for committee membership and any salary from subsidiaries of EVRAZ plc). Pension and benefits (audited) The CEO does not currently receive any pension benefit or allowance. Benefits consist principally of private healthcare. The bonus is linked to the Group’s main quantitative financial, operational and strategic measures during the year to ensure alignment with the key aspects of Group performance and strategy. For 2019, the following five indicators, each with an equal weighting of 20%, were considered when determining the CEO’s annual bonus: LTIFR, EBITDA, Free Cash Flow (adjusted), Cash Cost Index and committee assessment of overall performance against strategic objectives. The Committee reviews the resulting bonus payout to ensure that it is appropriate considering the Group’s overall performance, as well as safety record and procedures. In 2019, EVRAZ reached or outperformed the threshold target for all of its operational and financial KPIs with the exception of LTIFR. Management has delivered a robust set of financial and operational results and continued to advance core strategic projects according to plan. In normal circumstances, such performance would warrant a payout ratio of 24.47% of the maximum possible payout. Details of the targets set for each KPI, the actual achievement in the year, and total payout level for the 2019 bonus KPIs Result measurement LTIFR EBITDA Adjusted FCF Cash cost index Discretion Total Threshold 2.0 US$2,574m US$1,426m 110% Planned level (% of target) 1.67 US$3,217m US$1,783m 100% Outstanding 1.34 US$3,860m US$2,140m 90% Remuneration Committee assessment of overall performance against strategic objectives 1. The salary is paid in roubles and the amounts paid in the year are reconciled at the year-end so as to equal US$2,625,000. Actual 2019 Bonus payout (% of max) 2.04 US$2,601m US$1,549m 99% 0% 2.1% 17.3% 53% 50% 24.47% 135 Annual report & accounts 2019Notwithstanding the significantly increased focus on health and safety in the year, the gravity of the increase in the number of fatalities, driven by the crew bus accident at Raspadskaya mine, required the Committee to reassess the overall performance. Whilst changes in behavior and practices take time to flow through to the achievement of improved safety figures, the CEO considers the increase in the number of fatalities unacceptable. After an extended deliberation, which included taking into account the CEO’s focus and expectations around safety, the Committee none the less decided not to award the CEO bonus. Annual bonus for 2020 For 2020, the bonus framework will be in line with 2019. The Board considers forward- looking targets to be commercially sensitive; however, they will generally be disclosed in the subsequent year. In line with previous years, a malus arrangement will apply under which bonus payouts may be adjusted downwards to reflect the Group’s overall performance including safety underlying practices and resulting performance. Non-executive directors’ remuneration Non-executive directors’ remuneration payable in respect of 2019 and 2018 is set out in the table below. 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 for chairmanship of the Audit Committee and US$50,000 for other committees). The fee for employee engagement responsibilities is also set at US$24,000. For reference, the fees payable for the chairmanship of a committee include the membership fee, and any director elected as chairman of more than one committee is generally entitled to receive fees in respect of one chairmanship only. The fee for the chairman of the Board amounts to US$750,000 from 1 March 2012 (this fee includes, for the avoidance of doubt, director’s fees and fees paid for committee membership). Fees will remain unchanged for 2020. Aggregate directors’ remuneration The aggregate amount of directors’ remuneration payable in respect of qualifying services for the year ended 31 December 2019 was US$5,116 thousand (2018: US$7,743 thousand). Share ownership by the Board of Directors (audited) There were no formal minimum shareholding requirements in place, reflecting the CEO’s current shareholding in EVRAZ. However, the proposed policy includes these in relation to any future appointments. The directors’ interests in EVRAZ shares as of 31 December 2019 were as follows. There have been no changes in the directors’ interests from 31 December 2019 through 26 February 2020. Single total figure of remuneration (audited) Non-executive director 2019 (US$ thousand) 2018 (US$ thousand) Total fees1 Admin2 Total Total fees1 Admin2 Alexander G. Abramov Alexander Izosimov Eugene Shvidler Eugene Tenenbaum Karl Gruber Sir Michael Peat Deborah Gudgeon Laurie Argo 750 248 174 150 224 224 274 174 30 30 30 30 30 30 30 30 780 278 204 180 254 254 304 204 750 248 174 150 238 224 274 51 30 30 30 30 30 30 30 30 Total 780 278 204 180 268 254 304 81 1. 2. Total fees include annual fees and fees for committee membership or chairmanship (pro rata working days). The Group contributes an annual amount of US$30,000 towards secretarial and administrative expenses of non-executive directors. In addition to the amounts disclosed above, the Group reimburses directors’ travel and accommodation expenses incurred in the discharge of their duties. 136 Strategic report Business review CSR report Corporate governance Financial statements Additional information The CEO holds shares to the value of 287 times his salary as at 31 December 2019. The shares held by Alexander Izosimov were acquired in 2012 when he was appointed as an independent non-executive director. 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. Other directors do not currently hold any shares in the Company. Policy on external appointments The Committee believes that the Group can benefit from executive directors holding approved non-executive directorships in other companies, offering executive directors the opportunity to broaden their experience and knowledge. EVRAZ policy is to allow executive directors to retain fees paid from any such appointment. The CEO does not currently hold a non-executive directorship of another company. Engagement with the workforce EVRAZ is committed to regularly engaging with its workforce and realises the value in listening to and acting on employee views across the organisation. These insights are vital to attracting and retaining employees, which is key to delivering and executing the Group’s vision and strategy. It also allows for informative decisions to be made throughout the business. Considering the views of the wider workforce has been in place at the Group for many years. Employees participate in an annual employee engagement survey aimed at gathering wider workforce views on various topics. The survey has historically been successful in driving numerous employee-focused initiatives and helps to set key priorities for the forthcoming year, aimed at improving the engagement of all employees. Directors’ interest in EVRAZ shares as of 31 December 2019 Directors Alexander Abramov Alexander Frolov Eugene Shvidler Alexander Izosimov Number of shares Total holding, ordinary shares, % 281,870,003 140,723,705 40,488,242 80,000 19.41 9.69 2.79 0.01 The Board reviews the engagement data and is therefore aware of any trends, comments or concerns in relation to executive pay. The Board also receives a quarterly summary report of complaints made on the EVRAZ employee telephone hotline. In 2018 the Board has appointed two non- executive directors to be involved in town- hall meetings with employees. During 2019, Alexander Izosimov visited Raspadskaya Coal Company in Novokuznetsk, Russia and Laurie Argo visited EVRAZ Portland’s rolling mill in North America for town-hall meetings with employees. During these visits, the two directors met with employees and learned what is important to them. This information was shared with the Committee and discussed. The Committee also considers executive remuneration in the context of the wider employee population and is kept regularly updated on pay and conditions across the Group. The proportion of variable pay increases with progression through management levels with the highest proportion of variable pay at executive director level, as defined by the Remuneration Policy. Variable pay cascades down through the next tiers of management with appropriate reductions in opportunity levels based on seniority. In addition, the Group operates pension arrangements in some of its businesses around the world, where this is relevant to the local conditions. The key element of remuneration for those below senior management grades is base salary and the Group’s policy is to ensure that base salaries are fair and competitive in the local markets. General pay increases take into account local salary norms, inflation and business conditions. Gender pay gap and CEO pay ratio EVRAZ had less than 10 UK employees during the year and does not therefore have any gender pay or CEO pay ratio to report under the Regulations. Relative importance of spend on pay The following table shows a comparison of the total cost of remuneration paid to all employees between current and previous years and financial metrics in US$ millions. EBITDA was chosen for the comparison as it is the KPI that best shows the Group’s financial performance. US$ million EBITDA Shares buyback Dividends Total employee pay 2019 2,601 0 1,086 1,464 2018 3,777 0 1,556 1,326 For more information on the definition of EBITDA, please read page 251. Performance graph The following graph shows the Group’s performance measured by total shareholder return compared with the performance of the FTSE 350 Basic Resources Index since EVRAZ plc’s admission to the premium listing segment of the London Stock Exchange on 7 November 2011. The FTSE 350 Basic Resources Index has been selected as an appropriate benchmark, as it is a broad- based index of which the Group is a constituent member. 137 Annual report & accounts 2019The following table shows as a single figure the CEO’s total remuneration over the past seven years, along with a comparison of variable payments as a percentage of the maximum bonus available. Percentage change in remuneration The following table sets out the percentage change in the elements of remuneration for the director undertaking the role of CEO compared with average figures for Russia-based administrative personnel. This group of employees has been selected as an appropriate comparator, as they are based in the same geographic market as the CEO, and so are subject to a similar external environment and pressures. Total shareholder return performance, % The population of employees the calculation has been performed for includes the administrative personnel in Head Office and the Ural and Siberia management companies. This provides a more representative calculation across the Russian businesses than in previous years. Percentage change in the elements of remuneration for the director undertaking the role of CEO compared with average figures for Russia-based administrative personnel CEO Russia-based administrative personnel Salary Benefits Annual bonus 5% 2% (100%) 5% 21% 0% 200 150 100 50 0 07.11.2011 30.12.2011 31.12.2012 31.12.2013 31.12.2014 31.12.2015 31.12.2016 31.12.2017 31.12.2018 31.12.2019 FTSE 350 Basic Resources Index EVRAZ CEO’s total remuneration paid in 2013–2019 CEO single figure of total remuneration Annual bonus payout (as a % of maximum opportunity) 2,657,970 5,393,884 5,516,553 4,560,054 3,186,585 5,808,752 4,894,286 0% 57,21% 59,82% 40,78% 13,33% 77,00% 50,00% (US$) 2019 2018 2017 2016 2015 2014 2013 138 Committee composition This section details the Remuneration Committee’s composition and activities undertaken over the past year. Committee members The Committee’s composition was changed during the year with the appointment of Laurie Argo as a member on 13 December 2019 and its current members are: • Alexander Izosimov • Deborah Gudgeon • Sir Michael Peat • Laurie Argo No directors are involved in deciding their own remuneration. The Committee may invite other individuals to attend all or part of any committee meeting, as and when appropriate and necessary, in particular the CEO, the head of human resources and external advisers. Role 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, which were reviewed and updated in the year to reflect changes made to the UK Corporate Governance Code. A copy can be found on the Group’s website. The Committee’s main responsibilities are to: • Set and implement the Remuneration Policy covering the chairman of the Board, the CEO, the company secretary and other senior executives • Take into account all factors that it deems necessary to determine, such as framework or policy, including all relevant legal and regulatory requirements, the provisions and recommendations of the 2018 UK Corporate Governance Code and associated guidance • Review and consider remuneration trends across the Group and the alignment of incentives and rewards with culture when setting the Remuneration Policy • Review regularly the Remuneration Policy’s appropriateness and relevance • Determine the total individual remuneration package of the chairman of the Board, the company secretary and other senior executives, including pension rights, bonuses, benefits in kind, incentive payments and share options, or other share-based remuneration within the terms of the agreed policy • Approve awards for participants where existing share incentive plans are in place • Review and approve any compensation payable to executive directors and other senior executives in connection with any dismissal, loss of office or termination (whether for misconduct or otherwise) to ensure that such compensation is determined in accordance with the relevant contractual terms and Remuneration Policy, and that such compensation is otherwise fair and not excessive for the Group • Oversee any major changes in employee benefits structures throughout the Group and report on what engagement has taken place with the workforce on executive pay During 2019, the Committee met four times. The main purpose of the meetings was to consider and make recommendations to the Board in relation to the remuneration packages of the executive director and key senior managers; to approve the annual bonus for the 2018 results; to approve the 2019 long- term incentive plan (LTIP) awards for key senior management; and to agree the proposed new directors’ remuneration policy. Advisers The Committee has appointed Korn Ferry (UK) Limited (Korn Ferry) to provide independent remuneration consultancy services to the Group. Korn Ferry is a member of the Remuneration Consultants’ Group and, as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The code of conduct can be found at www.remunerationconsultantsgroup.com. During the year, Korn Ferry principally advised the Committee on developments in the regulatory environment and market practice, on the development and disclosure of the Group’s pay arrangements and on the proposed new policy. The total fee for advice provided to the Committee during the year was £36,527. The Committee is satisfied that the advice it has received has been objective and independent. Shareholder considerations EVRAZ remains committed to ongoing shareholder dialogue and takes an active interest in feedback received from its shareholders and from voting outcomes. Where there are substantial votes against resolutions in relation to directors’ remuneration, the Group shall seek to understand the reasons for any such vote and will detail any actions in response to these. Actual voting results from the AGM, which was held, in respect of the previous remuneration report and Remuneration Policy Number of votes For Against Withheld Total votes as % of issued share capital To receive the Directors’ report and the accounts for the Company for the year ended 31 December 2018 To approve the Annual Remuneration Report set out on pages 120–127 of the Annual Report and Accounts 2018 1,179,677,802 1,644,619 347,138 81.36% (99.86%)1 (0.14%) 1,128,595,317 53,060,034 14,208 81.39% (95.51%) (4.49%) 1. Percentage of votes cast. Strategic report Business review CSR report Corporate governance Financial statements Additional information Signed on behalf of the Board of Directors, Alexander Izosimov Chairman of the Remuneration Committee 26 February 2020 139 Annual report & accounts 2019Directors report Introduction In accordance with section 415 of the Companies Act 2006, the Directors of EVRAZ plc present their report to shareholders for the financial year ended 31 December 2019, which they are required to produce by applicable UK company law. The Directors’ Report comprises the Directors’ Report section of this report, together with the sections of the annual report incorporated by reference. As permitted by legislation, some of the matters normally included in the Directors’ Report have instead been included in other sections of the annual report, as indicated below. The Company was incorporated under the name EVRAZ plc as a public company limited by shares on 23 September 2011 under registered number 7784342. EVRAZ plc listed on the London Stock Exchange in November 2011 and is a member of the FTSE 100 Index. The underlying cash flow generation and continuing success with deleveraging have allowed the Company to continue to pay dividends in line with its dividend policy. Please read page 22 for details. The Company paid an interim dividend of US$0.40 per ordinary share, totalling US$577.34 million, on 29 March 2019 to shareholders on the register as of 8 March 2019. The Company paid an interim dividend of US$0.35 per ordinary share, totalling US$508.7 million, on 5 September 2019 to shareholders on the register as of 16 August 2019. The Board of Directors have declared an interim dividend of US$0.40 per share, totalling US$580.8 million, to be paid on 27 March 2020 to shareholders on the register as of 6 March 2020. During February 2020 the directors became aware that certain dividends paid in 2018 and 2019 totalling $1,447 million had been made otherwise than in accordance with the Companies Act 2006. The directors duly checked the sufficiency of distributable reserves before each distribution, but due to an administrative error the interim accounts were not filed at Companies House prior to payment. To rectify these breaches, in February 2020 the Company filed the interim accounts in respect of each dividend payment. A special resolution will be proposed at the Annual General Meeting of the Company’s shareholders in June 2020 to authorise the appropriation of distributable profits to the payment of the relevant dividends and remove any right for the Company to pursue shareholders or directors (the ‘Director Release’) for repayment. The Director Release will constitute a related party transaction under the Listing Rules of the UK Listing Authority and under IFRS. The overall effect of the special resolution being passed will be to return all parties to the position they would have been in had the relevant dividends been made in full compliance with the Companies Act 2006. Details of the Company’s share capital are set out in Note 20 to the Consolidated Financial Statements, including details on the movements in the Company’s issued share capital during the year. As of 31 December 2019, the Company’s issued share capital consisted of 1,506,527,294 ordinary shares, of which 54,619,521 shares are held in Treasury. Therefore, the total number of voting rights in the Company is 1,451,907,773. 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. The authority given at the 2019 AGM for the Company to make market purchases of 144,355,081 of its shares, representing 10% of the issued share capital (excluding shares held in treasury), expires on the earlier of the 2020 AGM or 30 June 2020. We will ask shareholders to give a similar authority at the 2020 AGM. During 2019, no shares were purchased under this authority. Details of the Company’s authority to purchase its own shares, which will be sought at the Company’s forthcoming annual general meeting (AGM), will be set out in the notice of meeting for that AGM. On 30 April 2019, the Company transferred 8,556,954 ordinary shares out of treasury to the Company’s Employee Share Trust. Details are set out in Note 20 to the Consolidated Financial Statements. Biographies of the directors who served on the Board during the year are provided in the Governance section on pages 106–109. The Board has 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 Company’s Articles of Association. Any person so appointed by the directors will retire at the next AGM and then be eligible for election. In accordance with the UK Corporate Governance Code, the directors are subject to annual re-election by shareholders. For additional information about directors’ appointment and resignation, read the Corporate Remuneration on page 134. All of the continuing directors intend to stand for re-election at the 2020 AGM to be held later this year. Information on share ownership by directors can be found in this Report and in the Remuneration Report on page 137. As at the date of this report, the Company has granted qualifying third-party indemnities to each of its directors against any liability that attaches to them in defending proceedings brought against them, to the extent permitted by the Companies Act. In addition, directors and officers of the Company and its subsidiaries have been and continue to be covered by director and officer liability insurance. 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’s power to borrow money and 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 the AGM. Dividends Distributions Share capital Authority to purchase own shares and transfer of treasury shares to Company’s Employee Share Trust Directors Directors’ appointment and re-election Directors’ interests Directors’ indemnities and director and officer liability insurance Powers of directors 140 Strategic report Business review CSR report Corporate governance Financial statements Additional information Major interests in shares Research and development EVRAZ is constantly engaged in process and product innovation. EVRAZ research and development centres located at the Company’s Notifiable major share interests of which the Company has been made aware are set out in this Directors’ Report. production sites improve and develop high-quality steel products to better meet customers’ needs and to ensure that the Company remains competitive in the global and local markets. For examples of the Company’s efforts in research and development in different operations, please refer to the Business Review on pages 62–63. 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. Details of the Company’s policies and performance are provided in the Corporate Social Responsibility section on pages 76–103. EVRAZ published its 2018 report on payments to governments in June 2019. The report provides citizens, authorities and independent users with information on payments made to governments where the Company conducts its extractive activities. The report is prepared in accordance with the requirements of the Disclosure Guidance and Transparency Rules Instrument 2014 “Report on payments to governments”, issued by the UK Financial Conduct Authority. The report is available on the Company’s website at www.evraz.com. No political contributions were made in 2019. Sustainable development Payments to governments Political donations Greenhouse gas emissions In 2019, in accordance with the requirements of the Companies Act 2006 (Strategic and Directors’ Report) Regulations 2013, Employees Overseas branches Financial risk management and financial instruments Going concern Auditor Future developments Events since the reporting date Annual general meeting (AGM) Electronic communications Corporate governance statement Section 172 Statement Employee engagement Stakeholder engagement on key decisions EVRAZ undertook to assess full emissions of greenhouse gases (GHGs) from facilities under its control. Details can be found in the Corporate Social Responsibility section on page 83. Information regarding the Company’s employees can be found in the Our People section on pages 90–95. EVRAZ does not have any branches. A full list of the Group’s controlled subsidiaries is disclosed in Note 34 of the Consolidated Financial Statements. Information regarding the financial risk management and internal control processes and policies, as well as details of hedging policy and exposure to the risks associated with financial instruments, can be found in Note 28 to the Consolidated Financial Statements, the Corporate Governance, Risk Management and Internal Control section on pages 112–117 and the Financial Review section on pages 28–33. 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 28–33. Based on the currently available facts and circumstances, the directors and management have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. More details are provided in Note 2 to the consolidated financial statements on page 164. The Audit Committee conducted a tender for the external audit of the Group in July 2016. Ernst & Young LLP were selected to undertake the audits for the financial years ended December 2017 and 2018 (subject to shareholder approval at the respective AGM). The Board has agreed that subject to satisfactory commercial terms being agreed with Ernst & Young LLP, no re-tender will take place until the conclusion of the 2020 financial year. A decision on whether to re-tender will be taken thereafter. Ernst & Young LLP have indicated their willingness to continue in office and a resolution seeking to re-appoint them will be proposed at the forthcoming AGM. Information on the Group and its subsidiaries’ future developments is provided in the Strategic Report on pages 6-43. The major events after 31 December 2019 are disclosed in Note 33 to the Consolidated Financial Statements on page 230. The 2020 AGM will be held later this year 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 the 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 will be available on the Company’s website at www.evraz.com. A copy of the 2019 annual report, the Notice of the AGM and other corporate publications, reports and announcements will be available on the Company’s website at the following link: https://www.evraz.com/en/investors/ 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. The Disclosure Guidance and Transparency Rules (DTR7.2) require certain information to be included in a corporate governance statement set out in a company’s Directors’ Report. In common with many companies, EVRAZ has an existing practice of issuing, within its annual report, a Corporate Governance Report that is separate from its Directors’ Report. The information that fulfils the requirement of DTR7.2 is located in the EVRAZ Corporate Governance Report (and is incorporated into this Directors’ Report by reference), with the exception of the information referred to in DTR7.2.6, which is located in this Directors’ Report. The Company’s Section 172 Statement can be found in the Strategic Report on page 41. Details of how the Company engages with its workforce can be found in the Strategic Report on page 41. Details of the key decisions and discussions of the Board during the year and the main stakeholder inputs into those decision are set out in the Corporate Governance Report on page 112-113. 141 Annual report & accounts 2019MAJOR SHAREHOLDINGS The Company’s issued share capital as of 31 December 2019 was 1,506,527,294 ordinary shares, of which 54,619,5211 shares are held in Treasury. Therefore, the total number of voting rights in the Company is 1,451,907,773. As of 31 December 2019, the following significant holdings of voting rights in the Company’s share capital were disclosed to the Company under Disclosure and Transparency Rule 5. Greenleas International Holdings Ltd.2 Abiglaze Ltd3 Crosland Global Limited4 Kadre Enterprises Ltd5 Number of ordinary shares % of voting rights 417,767,314 281,870,003 140,723,705 83,751,827 28.77 19.41 9.69 5.77 1. 2. 3. 4. 5. The number of shares differs from the figure in the Financial statements by the amount of shares held in Trust. The Company understands that Roman Abramovich has an indirect economic interest in the 417,767,314 shares held by Greenleas International Holdings Ltd. The Company understands that Alexander Abramov has an indirect economic interest in the 281,870,003 shares held by Abiglaze Ltd. The Company understands that Alexander Frolov has an indirect economic interest in the 140,723,705 shares held by Crosland Global Limited. Includes shares held by Gennady Kozovoy, Kadre’s shareholder, both indirectly through Kadre and directly. The number of shares is as per TR-1 Form: Notification of major interest in shares dated 6 February 2013. The Company is aware of the following individuals who each have a beneficial interest in three percent or more of EVRAZ plc’s issued share capital (in each case, except for Gennady Kozovoy, held indirectly) as of 31 December 2019: Roman Abramovich Alexander Abramov Alexander Frolov Gennady Kozovoy Number of ordinary shares % of voting rights 417,767,314 281,870,003 140,723,705 83,751,827 28.77 19.41 9.69 5.77 There have been no changes in the Company’s issued share capital and the Company has not received any notifications under Disclosure Guidance and Transparency Rule 5, from 31 December 2019 through 26 February 2020. LISTING RULE DISCLOSURES For the purposes of LR9.8.4CR, the information required to be disclosed by LR9.8.4R can be found in the following locations: Interest capitalised Note 9 to the Consolidated Financial Statements Non pre-emptive issues of equityfor cash None Contracts of significance with a controlling shareholder Relationship Agreement section Publication of unaudited financial information Not applicable Detail of long-term incentive schemes Note 21 to the Consolidated Financial Statements, Remuneration Report Waiver of emoluments by a director None Waiver of future emoluments by a director None Non pre-emptive issues of equity for cash in relation to major subsidiary undertakings None Parent participation in a placing by a listed subsidiary None Contract of significance in which a director is interested None Provision of services by a controlling shareholder None Shareholder waiver of dividends None Shareholder waiver of future dividends None Agreements with controlling shareholder Relationship Agreement section below 142 SIGNIFICANT CONTRACTUAL ARRANGEMENTS Relationship agreements The Company has entered into relationship agreements (the “Relationship Agreements”) with each of Greenleas International Holdings Ltd., Abiglaze Ltd and Crosland Global Limited (the “Controlling Shareholders”) that regulate the ongoing relationship between the Controlling Shareholders and the Company. This ensures that the Company is in compliance with the provisions of the Listing Rules and capable of carrying on its business independently of the Controlling Shareholders, and ensures that any transactions and relationships between the Company and the Controlling Shareholders are at arm’s length and on normal commercial terms. These Relationship Agreements were last amended and restated (or, in the case of Abiglaze Ltd, first entered into) in January 2019 reflecting changes in the Company’s shareholder structure that took place in December 2018. The Relationship Agreements terminate if the Controlling Shareholders cease to own or control (directly or indirectly) in aggregate at least 30% of the issued ordinary shares in the Company (or at least 30% of the aggregate voting rights in the Company). Under the Relationship Agreements, the Controlling Shareholders and the Company agree that: • The Controlling Shareholders have the right to appoint the maximum number of non- executive directors that may be appointed while ensuring that the composition of the Board remains compliant with the UK Corporate Governance Code for so long as the Controlling Shareholders hold in aggregate an interest of 30% or more of the Company (or holds 30% or more of the aggregate voting rights in the Company) with each appointee being a “Shareholder Director”; • The Controlling Shareholders and their associates shall not take any action that would have the effect of preventing the Company from complying with its obligations under the Companies Act, the Listing Rules and the Disclosure Guidance and Transparency Rules/ • Neither the Controlling Shareholders nor any of their associates will propose or procure the proposal of any shareholder resolution that is intended or appears to be intended to circumvent the proper application of the Listing Rules. • Transactions, relationships and agreements between the Company and/or its subsidiaries (on the one hand) and the Controlling Shareholders shall be entered into and conducted on arm’s length terms and on a 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 the UK Corporate Governance Code (the “Independent Committee”). • The Controlling Shareholders shall, insofar as it is legally able to do so, exercise their powers, and shall procure that each member of the respective Controlling Shareholder group does the same, so that the Company is managed in accordance with the principles of good governance set out in the UK Corporate Governance Code, save as agreed in writing by a majority of the Independent Committee. • The Controlling Shareholders will, and will procure (as far as is reasonably possible) that each member of the respective Controlling Shareholder group will, treat as confidential all information (subject to certain exceptions) acquired relating to the Company and its subsidiaries. • The provision of, access to and use of information pursuant to the Relationship Agreements is governed by applicable laws relating to insider information, including, without limitation, the Disclosure Guidance and Transparency Rules. • The Controlling Shareholders shall not, and shall procure, insofar as they are legally able to do so, that each member of the respective Controlling Shareholder group shall not, take any action that precludes or inhibits the Company and/or any of its subsidiaries from carrying on its business independently of the Controlling Shareholders or any member of the respective Controlling Shareholder group. • The quorum for any Board meeting of the Company shall be three, of which at least one must be a Shareholder Director appointed by Greenleas International Holdings Ltd., at least one must be a Shareholder Director appointed by Abiglaze Ltd and/or Crosland Global Limited and at least one must be a non- executive director whom the Board considers to be independent in accordance with the UK Corporate Governance Code. • The Controlling Shareholders shall not, and shall procure, insofar as they are legally able to do so, that each member of the respective Controlling Shareholder group shall not, exercise any of their voting or other rights and powers to procure any amendment to the Memorandum and Articles that would be inconsistent with, undermine or breach any of the provisions Strategic report Business review CSR report Corporate governance Financial statements Additional information of the Relationship Agreements, and will abstain from voting on, and will procure that the Controlling Shareholder Directors abstain from voting on, any resolution to approve a transaction with a related party (as defined in the Listing Rules) involving the Controlling Shareholders or any member of the respective Controlling Shareholder group. • In any matter that, in the opinion of an independent director, gives rise to a potential conflict of interest between the Company and/or any of its subsidiaries (on the one hand) and the Shareholder Directors, the Controlling Shareholders or any member of the respective Controlling 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. • For so long as Greenleas International Holdings Ltd. (and its affiliates) holds in aggregate an interest of 25% or more in the Company, Greenleas International Holdings Ltd. undertakes that it will not become, and will use its reasonable endeavours to procure that no other member of its group becomes, involved in any competing business (subject to certain exceptions) in Russia, Ukraine or the CIS without giving the Company the opportunity to participate in the relevant competing business; • For so long as Abiglaze Ltd and Crosland Global Limited (and their respective affiliates) hold in aggregate an interest of 25% or more in the Company, Abiglaze Ltd and Crosland Global Ltd undertake that they will not become, and will use their reasonable endeavours to procure that no other member of the respective Controlling Shareholder group becomes, involved in any competing business (subject to certain exceptions) in Russia, 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 Controlling Shareholders and that the Board makes its decisions in a manner consistent with its duties to the Company and stakeholders of EVRAZ plc. Other agreements The change of control provisions contained in several loan agreements with a total principal amount of US$789 million outstanding as of 31 December 2019 specify that if a change of control occurs, each lender under these agreements has a right to cancel their commitments and request prepayment of their portion of the respective loans. 143 Annual report & accounts 2019ARTICLES OF ASSOCIATION The Company’s Articles of Association were adopted with effect from June 2012 and contain, among others, provisions on the rights and obligations attaching to the Company’s shares, including the redeemable non-voting preference shares and the subscriber shares. The Articles of Association may only be amended by special resolution at a general meeting of the shareholders. SHARE RIGHTS Without prejudice to any rights attached to any existing shares, the Company may issue shares with rights or restrictions as determined by either the Company by ordinary resolution or, if the Company passes a resolution, the directors. The Company may also issue shares that are, or are liable to be, redeemed at the option of the Company or the holder and the directors may determine the terms, conditions and manner of redemption of any such shares. VOTING RIGHTS There are no other restrictions on voting rights or transfers of shares in the Articles other than those described in these paragraphs. Details of deadlines for exercising voting rights and proxy appointment will be set out in the Notice of the 2020 AGM. 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 that he or she holds. 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 or her 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. 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. AUDIT INFORMATION Each of the Directors who were members of the Board at the date of the approval of this report confirms that: • So far as he or she is aware, there is no relevant audit information of which the Company’s auditors are unaware; • He or she has taken all the reasonable steps that he or she ought to have taken as a Director to make him or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of the information. A proxy is not entitled to vote where the member appointing the proxy would not have been entitled to vote on the resolution had he or she been present in person. Unless The confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. The EVRAZ Directors’ Report has been prepared in accordance with applicable UK company law and was approved by the Board on 26 February 2020. By the order of the Board Alexander Frolov Chief Executive Officer EVRAZ plc 26 February 2020 144 Directors responsibility statement Strategic report Business review CSR report Corporate governance Financial statements Additional information Responsibility Statement under the Disclosure Guidance and Transparency Rules Each of the directors whose names and functions are listed on pages 106–109 confirm that to the best of their knowledge: • The consolidated financial statements of EVRAZ plc, prepared in accordance with International Financial Reporting Standards (IFRSs) 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”); • The annual report and accounts, including the Strategic Report, 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. Statement Under the UK Corporate Governance Code The Board considers that the report and accounts taken as a whole, which incorporates the Strategic Report and Directors’ Report, is fair, balanced and understandable, and that it provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. Statement of Directors’ Responsibilities in Relation to the annual report and 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 the Companies Act 2006, 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: • Present fairly the financial position, financial performance and cash flows of the Group and parent company • Select suitable accounting policies in accordance with IAS8 (Accounting Policies, Changes in Accounting Estimates and Errors) and then apply them consistently • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information • Make judgements and estimates that are reasonable • 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 • 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 Strategic Report, the Directors’ 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 Guidance 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 the order of the Board Alexander Frolov Chief Executive Officer EVRAZ plc 26 February 2020 145 Annual report & accounts 2019Financial statements Cosmodrome “Vostochniy” Amur region, Russia CONTENTS Independent auditor’s report to the members of EVRAZ PLC EVRAZ plc Consolidated Financial Statements for the year ended 31 December 2019 Consolidated Statement of Operations Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Corporate Information Significant Accounting Policies Segment Information Changes in the Composition of the Group Goodwill Impairment of Assets Income and Expenses Income Taxes Property, Plant and Equipment Intangible Assets Other Than Goodwill Investments in Joint Ventures and Associates Disposal Groups Held for Sale Other Non-Current Assets Inventories Trade and Other Receivables Related Party Disclosures Other Taxes Recoverable Other Current Financial Assets Cash and Cash Equivalents Equity Share-Based Payments Loans and Borrowings Employee Benefits Provisions Lease and Other Long-Term Liabilities Trade and Other Payables Other Taxes Payable Financial Risk Management Objectives and Policies Non-Cash Transactions Commitments and Contingencies Auditor’s Remuneration Material Partly-Owned Subsidiaries Subsequent Events List of Subsidiaries and Other Significant Holdings EVRAZ plc Separate Financial Statements Separate Statement of Comprehensive Income Separate Statement of Financial Position Separate Statement of Cash Flows Separate Statement of Changes in Equity EVRAZ plc Notes to the separate financial statements 148 156 156 157 158 159 161 164 164 164 177 184 185 186 188 190 192 195 198 197 200 200 201 201 203 203 203 204 205 206 208 216 217 219 219 219 226 226 228 228 230 231 236 236 237 238 239 240 Independent auditor’s report to the members of EVRAZ PLC Our opinion on the Financial Statements In our opinion: • EVRAZ plc’s Group financial statements and Parent Company financial statements (the “Financial Statements”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s and the Parent Company’s profit for the year then ended; • the Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and • the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Consolidated Financial Statements, Article 4 of the IAS Regulation. We have audited the financial statements of EVRAZ plc which comprise: Group Parent company the Consolidated Statement of Operations, the Consolidated Statement of Comprehensive Income; the Separate 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 34. 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 11. 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages 34-39 that describe the principal risks and explain how they are being managed or mitigated; • the directors’ confirmation set out on page 35 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the directors’ statement set out on page 164 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or • the directors’ explanation set out on page 40 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. 148 Strategic report Business review CSR report Corporate governance Financial statements Additional information Overview of our audit approach Key audit matters • Goodwill and non-current asset impairment • Completeness of related party transactions • Parent company – Investment in subsidiaries impairment considerations and determination of distributable reserves Audit scope • We performed an audit of the complete financial information of seven components, audit procedures on specific balances for a further two components, review procedures on two components and specified procedures on four components. • The nine reporting components where we performed full or specific audit procedures accounted for 72% of the Group’s EBITDA and 84% of the Group’s revenue (with 53% and 83% respectively representing seven full scope components and 19% and 1% respectively two specific scope components). • For the remaining 43 reporting components of the Group representing 28% of the Group’s EBITDA and 16% of the Group’s revenue we have performed other procedures appropriate to respond to the risk of material misstatement. • We have obtained an understanding of the entity-level controls of the Group which assisted us in identifying and assessing risks of material misstatement due to fraud Materiality What has changed or error, as well as assisting us in determining the most appropriate audit strategy. • Overall Group materiality of $75 million (2018: $110 million), which represents approximately 3% (2018: 3%) of EBITDA. • Due to a Group reorganisation and related transactions in the year there is increased judgement in respect of parent company investment impairment considerations. This restructure resulted in an increase in the amount of the parent company investment in subsidiaries. Because of this increase and the reduction in distributable reserves as a result of distributions made in the year, we consider the risk in this area to have increased. We have therefore included impairment considerations for parent company investments in subsidiaries and determination of distributable reserves as a Key Audit Matter for the first time. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Area of focus Our audit approach What we reported to the Audit Committee Goodwill and non-current asset impairment Refer to the Group Audit Committee report on page 122, the estimates and judgements on pages 167-168 and the disclosures of impairment in note 6 of the Consolidated Financial Statements Risk direction At 31 December 2019 the carrying value of goodwill was $594 million (2018: $864 million). The Group recognised a net impairment charge in respect of Goodwill of $300 million (2018: $Nil) and $142 million in respect of items of PP&E during the year (2018: $30 million). In addition to CGUs containing goodwill, we focused our work on areas of increased risk. In spite of the generally positive price outlook and removal of US import tariffs in May 2019 the continued unstable economic and geopolitical environment and in particular uncertainty around the duration and impact of anti-dumping duties between USA and Canada led us to conclude that risk had remained at the same level in respect of assets located in those countries. In accordance with IAS 36 management disclosed that, in addition to the impairment charge already recognised, a reasonably possible change in discount rates, sales prices, sales volumes and cost control measures, would not lead to impairments in CGUs where no impairment is currently recognised. We focused on this area due to the significance of the carrying value of the assets being assessed, the number and size of recent impairments, the recent economic environment in the Group’s operating jurisdictions and because the assessment of the recoverable amount of the Group’s Cash Generating Units (“CGUs”) involves significant judgements about the future results of the business and the discount rates applied to future cash flow forecasts. In particular we focused our effort on those CGUs with the largest carrying values and those with the lowest headroom (EVRAZ North America CGUs). Due to challenges raised through our audit process management changed a number of their assumptions resulting in the recognition of an impairment in the Large Diameter Pipe CGU of $300 million and the modification of certain sensitivity disclosures for other CGUs. We consider management’s final estimates to be reasonable for the current year with assumptions within an acceptable range where appropriate. Management has reflected known changes in the circumstances of each CGU in its forecasts for forthcoming periods, including their best estimate of the North American tariffs’ impact. After modifications were made as a result of our challenges we concluded that the related disclosures provided in the Consolidated Financial Statements are appropriate. Given the inherent uncertainty of management’s assumptions on anti- dumping duties (especially for Large Diameter Pipe CGU), we ensured that the importance of anti-dumping duties is appropriately disclosed. Our audit procedures were performed mainly by the Group audit team with the assistance of our valuation specialists with the exception of certain location specific inputs to management’s models, which were assessed by the component teams. Our audit procedures included the evaluation of management’s assumptions used in their impairment models. The assumptions to which the models were most sensitive and most likely to lead to further impairments were: • decreases in steel prices; • increases in production costs; • discount rates; • capex; • sales volumes and • terminal growth rate. We challenged management’s assumptions with reference to historical data and, where applicable, external benchmarks. In instances where management’s assumptions fell outside an acceptable range we considered the impact on headroom in the models and disclosures ensuring adjustments were made where necessary. We performed an independent estimate of key assumptions and in some instances applied our own valuation methodology to determine our own range of potential recoverable values of the North American CGUs comparing to management’s assumptions and making adjustments when appropriate. We have discussed, tested and corroborated management’s assumptions that the North American anti-dumping duties will stay in place until 2024 and the resultant impact on other key assumptions in the model noted above. For external market information, we compared management’s assumptions to those of our local specialists and have not identified evidence to suggest that management’s assumptions on anti- dumping duties are unreasonable. We tested the integrity of management’s models, recalculated their sensitivity calculations and with the help of our specialists ran our own sensitivity calculations. We compared the historical accuracy of management’s budgets and forecasts to actual results, sought appropriate evidence for any anticipated improvements and considered the presence of any contrary evidence in major assumptions such as production volumes, EBITDA per ton, CAPEX assumptions or cost reductions. We corroborated previous forecasts with actual data. We tested the appropriateness of the related disclosures provided in the Consolidated Financial Statements. In particular we tested the adequacy of the disclosures regarding those CGUs with material goodwill balances and where a reasonably possible change in certain variables could lead to impairment charges. 149 Annual report & Accounts 2019What we reported to the Audit Committee Risk direction Based on our procedures performed we have not identified any related party transactions or balances omitted from disclosure. We concluded that the related disclosures provided in the Consolidated Financial Statements are appropriate. Risk direction As noted above, due to challenges raised through our audit process management recognized an additional goodwill impairment. This additionally resulted in an impairment of the parent company investment in EGSA and subsequent impact on distributable reserves of $316 million. Following the recorded adjustment, we consider management’s estimate of the recoverable amount of its investments in subsidiaries to be reasonable and the impairment recognized in EGSA to be appropriate. We consider the impact of the various transactions during the year on distributable reserves to be appropriately considered and the reserves available to be satisfactorily disclosed. We considered disclosures made in respect of the failure to file relevant accounts for the interim dividend distributions and concluded these are appropriate. Area of focus Our audit approach Completeness of related party transactions Refer to note 16 of the Consolidated Financial Statements During 2015, management discovered historic transactions with a company controlled by a key management person had been erroneously omitted from the prior year’s disclosures of related party transactions in the Consolidated Financial Statements, leading to us assessing the completeness of related party transactions as a significant risk. There have been no misstatements of related party transactions/disclosures since 2015, and therefore we have deemed completeness of related party transactions to no longer be an area of significant risk. It remains, however a key audit matter due to the sensitivity of this matter and we believe that it requires special audit consideration. We considered the elevated risk to be limited to the Russian entities within the Group where external business interests, especially in relation to local product suppliers, are more common amongst members of key management. At both a component team and group level, we have understood and tested management’s process for identifying related parties, and for recording and disclosure of related party transactions. Across the Russian components we obtained an understanding of unusual or high value transactions with new counterparties. We also performed analytical reviews of transactions and balances with customers and suppliers to assess whether there are any significant changes in trading activity indicating undisclosed related parties. We selected all directors together with a sample of key management personnel based on the risk assessment and ran a search for any companies controlled by those individuals (the search was performed via an independent register of all companies based in the CIS and their directors or shareholders). We compared the results of the research made with the list of entities included in the related party listing provided to us by management and investigated the differences between the listings. We assessed management’s evaluation that the transactions were on an arm’s length basis by reviewing a sample of agreements and comparing the related party transaction prices to those quoted by comparable unrelated companies. Investment in subsidiaries impairment considerations and determination of distributable reserves Refer to notes 3 and 4 of the Separate Financial Statements This Key Audit Matter relates to the parent company only. Our audit procedures were performed mainly by the Group audit team with the assistance of our valuation specialists. Investment impairment considerations Investment impairment considerations We assessed the investments in NTMK and Raspadskaya for impairment indicators including reference to external data. For the investment in EGSA, we tested the integrity of management’s models and with the help of our specialists ran our own sensitivity calculations. We challenged management on their calculation of the recoverable amount of the investment in EGSA by incorporating the results of our work on the North American CGUs from our Group impairment work. Distributable reserves We analysed transactions that impacted significantly the retained earnings of the parent company and subsidiary entities paying significant dividends and considered whether any of these transactions did not meet the criteria of distributable profits or losses. We have reviewed the accounting entries recorded for the distribution of dividends from EGSA and agreed with management that the income does not represent ‘qualifying consideration’ under the meaning of the Companies Act. These have therefore been appropriately treated and disclosed as an unrealised profit within EVRAZ plc. We compared the dividends distributed throughout the year with the available distributable reserves at the date of declaration and are satisfied the reserves were sufficient at the dates of distribution. In respect of the interim dividend distributed during the year we identified that management had declared a dividend without complying with the Companies Act requirement to file relevant accounts filed with the registrar. This issue was also noted in respect of interim dividends declared in August and November 2018. We reviewed disclosures made in respect of this matter for appropriateness. We reviewed management’s analysis of profits available for distribution in the parent company comparing this to the proposed year end dividend declaration and agree the dividend is permissible. We also reperformed the calculation of parent company distributable profits available for distribution and audited the roll-forward of profits available for distribution from 1 January to 31 December 2019. We were satisfied that the impairment of the investment in EGSA was appropriately recognised within this calculation. At 31 December 2019 the carrying value of investments in subsidiaries was $15,095 million (2018: $3,197 million). The Group has undertaken a reorganisation during the year to move the ownership of Raspadskaya and NTMK from EVRAZ Group S.A (“EGSA”) to EVRAZ plc. EGSA made a gain on this transaction which was passed onto EVRAZ plc in the form of a dividend. Following the transfer of the NTMK and Raspadskaya groups and subsequent declaration of the dividends, management assessed the recoverable amount of EVRAZ plc’s investment in EGSA based on an aggregation of the fair values of the various business units owned by EGSA, including those within the Group’s North American Business. Distributable reserves At 31 December 2019, EVRAZ plc had $386 million of distributable profits (2018: $809 million). In 2019, EVRAZ distributed $1,086 million of dividends. The Group introduced its current dividend policy in 2018 and although annual profits have been made by the Group since 2017, the Company needs to ensure it has sufficient distributable reserves within the stand-alone parent to declare dividends in accordance with the policy. The legal framework applicable to UK companies for determining profits available for distribution is contained in both the Companies Act 2006 and complementary technical guidance. Under this framework, distributions are made by individual companies and not by groups. The EVRAZ consolidated financial statements are therefore not relevant for the purposes of determining EVRAZ’s profits available for distribution. Whether or not a distribution may be made should be determined by reference to EVRAZ’s ‘relevant accounts’, being the parent company financial statements. Given the judgements in respect of impairment considerations and the reduction in distributable reserves as a result of distributions made in the year we consider the risk in this area to have increased and have therefore included this as a Key Audit Matter for the first time. 150 Strategic report Business review CSR report Corporate governance Financial statements Additional information An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enable us to form an opinion on the Consolidated Financial Statements. We take into account size, risk profile, changes in the business environment and other factors when assessing the level of work to be performed at each entity. The EVRAZ Group has centralised processes and controls over the key areas of our audit focus with responsibility lying with group management for the majority of estimation processes and significant risk areas. We have tailored our audit response accordingly and thus for the majority of our focus areas, audit procedures were undertaken directly by the Group audit team with testing undertaken by the component audit teams on the verification of operational data and other routine processes. In assessing the risk of material misstatement to the Consolidated Financial Statements, and to ensure we had adequate quantitative coverage of significant accounts, of the 52 reporting components of the Group we selected 15 components covering entities within Russia, Switzerland, Canada, Luxembourg, the UK and the USA, which represent the principal business units within the Group. Of the 15 components selected, we performed an audit of the complete financial information of seven components (full scope components), which were selected based on their size or risk characteristics. For the two selected components (specific scope components) we performed audit procedures on specific accounts within the component that we considered had the potential for the greatest impact on the amounts in the Consolidated Financial Statements either because of the size of these accounts or their risk profile. The extent of our audit work on the specific scope accounts was similar to that for a full scope audit. For the two review scope components, the primary team performed analytical review procedures to obtain an understanding of the business, the industry and the environment in which the components operate sufficient to identify the risks of material misstatement. This included considering the component’s organization, its accounting systems and other matters relevant to the financial data presented in the reporting package. For the remaining four components (“specified procedures”), the primary team performed procedures directly focussing on the specific accounts. The nine reporting components where we performed full or specific scope procedures accounted for 72% (2018: 78%) of the Group EBITDA, 84% (2018: 83%) of the Group’s revenue and 84% (2018: 82%) of the Group’s total assets. For the current year, the full scope components contributed 53% (2018: 68%) of the Group EBITDA, 83% (2018: 75%) of the Group’s revenue and 80% (2018: 62%) of the Group’s total assets. The specific scope components contributed 19% (2018: 10%) of the Group EBITDA, 1% (2018: 8%) of the Group’s revenue and 4% (2018: 20%) of the Group’s total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. A further breakdown of the size of these components compared to key metrics of the Group is provided below. EBITDA Revenue Total assets Full Specific Specified Procedures Review Other 53% 19% 0% 18% 10% Full Specific Specified Procedures Review Other 83% 1% 1% 1% 14% Full Specific Specified Procedures Review Other 80% 4% 0% 3% 13% For the remaining 43 components of the Group we performed other procedures, including analytical review, review of internal audit reports, testing of consolidation journals, cross check of the related party list against journals, intercompany eliminations and foreign currency translation recalculations to respond to any potential significant risks of material misstatement to the Consolidated Financial Statements. We have obtained an understanding of the entity-level controls of the Group as a whole which assisted us in identifying and assessing risks of material misstatement due to fraud or error, as well as assisting us in determining the most appropriate audit strategy. 151 Annual report & Accounts 2019Changes from the prior year Our scope allocation in the current year is broadly consistent with 2018 in terms of overall coverage of the Group and the number of full and specific scope entities except for the following changes: • Sibmetinvest component for which specified procedures were performed last year was moved to other scope in the current year as it is not significant in terms of risk/size and no specific risks are associated with the component in the current year; • Metallenergofinance moved from other scope to specified procedures scope in the current year due to an increase of revenue from rendering of services; • EVRAZ plc and EICA Group assessed as full scope components in the current year (specific scope last year) as we planned to perform the same extent of procedures for these components as for full scope components, given the requirement for EVRAZ plc standalone audit and ENA Consolidated Financial Statements respectively; and • EMNA and KGOK components that were assessed as other scope last year were moved to review scope this year (KGOK - due to an increase in its share of the Group’s EBITDA, EMNA – as required for EVRAZ North America Consolidated Financial Statements, a subgroup of EVRAZ plc). This led to the increased revenue coverage for full and specific scope components as indicated above. Integrated team structure The overall audit strategy is determined by the senior statutory auditor. The senior statutory auditor is based in the UK but, since Group management and many operations reside in Russia, the Group audit team includes members from both the UK and Russia. The senior statutory auditor visited Russia five times during the current year’s audit and members of the Group audit team in both jurisdictions work together as an integrated team throughout the audit process. Whilst in Russia, he focused his time on the significant risks and judgemental areas of the audit. He attended management’s going concern, impairment and significant estimates and judgements presentations to the Audit Committee. During the current year’s audit he reviewed key working papers and met, or held conference calls, with representatives of the component audit team for all Russian based full scope components including internal valuation specialists used in the audit to discuss the audit approach and issues arising from their work. Involvement with component teams In establishing our overall approach to the Group audit we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team or by component auditors from other EY global network firms operating under our instruction. Of the seven full scope components, audit procedures were performed on all of these by the relevant component audit teams. Of the two specific scope components selected, audit procedures were performed on one of these directly by the primary audit team. For the components where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. During the current year’s audit cycle visits were undertaken by the primary audit team to component teams in Russia and the USA. The senior statutory auditor visited Russia and the USA. These visits involved discussing the audit approach with the component teams and any issues arising from their work. The primary audit team participated in key discussions, via conference calls with all full and specific scope locations. The primary audit team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at group level, gave us appropriate audit evidence for our opinion on the Consolidated Financial Statements. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. As we develop our audit strategy, we determine materiality at the overall level and at the individual account level (referred to as our ‘performance materiality’). Materiality $75 million Performance materiality $37.5 million Reporting threshold $3.8 million Materiality The magnitude of an omission or misstatement that, individually or in the aggregate could reasonably be expected to influence the economic decisions of the users of the Financial Statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be $75.0 million (2018: $110.0 million), which is set at approximately 3.0% (2018: 3.0%) of EBITDA. Materiality is assessed on both quantitative and qualitative grounds. With respect to disclosure and presentational matters, amounts in excess of the quantitative thresholds above may not be adjusted if their effect is not considered to be material on a qualitative basis. 152 Strategic report Business review CSR report Corporate governance Financial statements Additional information We determined materiality for the Parent Company to be $8.7 million (2018: $19.3 million), which is 1.5% (2018: 2.0%) of Equity adjusted for the impact of the reorganisation of Raspadskaya and NTMK investments which are considered to be one-off items. We reverted to using 1.5% which we had previously used due to the issuance of bonds with covenants listed on ISE by the Parent Company during the year. Rationale for Group basis We have used an earnings based measure as our basis of materiality. It was considered inappropriate to calculate materiality using Group profit before tax due to the historic volatility of this metric. EBITDA is a key performance indicator for the Group and is also a key metric used by the Group in the assessment of the performance of management. We also noted that market and analyst commentary on the performance of the Group uses EBITDA as a key metric. We therefore, considered EBITDA to be the most appropriate performance metric on which to base our materiality calculation as we considered that to be the most relevant performance measure to the stakeholders of the entity. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessment, together with our assessment of the Group’s overall control environment, our judgment was that given the number and monetary amounts of individual misstatements (corrected and uncorrected) identified in prior periods as well as the nature of the misstatements, overall performance materiality for the Group should be 50% (2018: 50%) of materiality, namely $37.5 million (2018: $55.0 million). Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year the range of performance materiality allocated to components was $7.5 million to $24.4 million. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $3.8 million (2018: $5.5 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Other information The other information comprises the information included in the annual report set out on pages 1 to 145, including the Strategic report, Business review, CSR report and Corporate Governance sections (including Corporate governance report, Remuneration report, Directors’ Report and Directors’ Responsibility statement), other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 145 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting set out on page 120 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on page 145 – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. 153 Annual report & Accounts 2019Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • 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 • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 145, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and determined that the most significant which are directly relevant to specific assertions in the financial statements are those related to the report framework (IFRS, the Companies act 2006 and UK Corporate Governance Code) and the relevant tax compliance regulations in Russia. • We have considered the impact of the sanctions against Russia on the group’s operations, customer base and credit risk as well as the possibility of further more restrictive sanctions being imposed and nothing has come to our attention to suggest that the operations or the liquidity of the group have been adversely affected directly by the current political and economic situation other than the negative impact on capital markets and the financing options available to management. We reviewed management’s assessment of the sanctions impact on the group’s operations and the external advice received by the Group. • We understood how EVRAZ plc is complying with those legal and regulatory frameworks by making enquiries to management, internal audit, those responsible for legal and compliance procedures and the company secretary. We corroborated our enquiries through our review of board minutes 154 Strategic report Business review CSR report Corporate governance Financial statements Additional information and papers provided to the Audit Committee We reviewed legal advice obtained by the Company in respect of the impact of the dividends made otherwise than in accordance with the Companies Act (see note 4 to the separate financial statements) and considered the issue appropriately disclosed. • We assessed the susceptibility of the group’s financial statements to material misstatement, including how fraud might occur by meeting with management from various parts of the business to understand where it is considered there was a susceptibility of fraud. We also considered performance targets and their propensity to influence on efforts made by management to manage earnings. We considered the programs and controls that the group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how senior management monitors those programs and controls. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free of fraud or error. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters we are required to address • We were appointed by the company in 2011 to audit the financial statements for the year ended 31 December 2011 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is nine years, covering periods from our initial appointment in 2011 through to the year ended 31 December 2019. • The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the group and the parent company in conducting the audit. • The audit opinion is consistent with the additional report to the audit committee. Use of our report 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. Steven Dobson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 26 February 2020 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. 155 Annual report & Accounts 2019EVRAZ plc Consolidated Financial Statements for the year ended 31 December 2019 Сonsolidated statement of operations (in millions of US dollars, except for per share information) CCoonnttiinnuuiinngg ooppeerraattiioonnss RReevveennuuee Sale of goods Rendering of services Cost of revenue GGrroossss pprrooffiitt Selling and distribution costs General and administrative expenses Social and social infrastructure maintenance expenses Gain/(loss) on disposal of property, plant and equipment, net Impairment of non-financial assets Foreign exchange gains/(losses), net Other operating income Other operating expenses PPrrooffiitt ffrroomm ooppeerraattiioonnss Interest income Interest expense Share of profits/(losses) of joint ventures and associates Impairment of non-current financial assets Gain/(loss) on financial assets and liabilities, net Gain/(loss) on disposal groups classified as held for sale, net Other non-operating gains/(losses), net PPrrooffiitt bbeeffoorree ttaaxx Income tax expense NNeett pprrooffiitt Attributable to: Equity holders of the parent entity Non-controlling interests EEaarrnniinnggss ppeerr sshhaarree ffoorr pprrooffiitt aattttrriibbuuttaabbllee ttoo eeqquuiittyy hhoollddeerrss ooff tthhee ppaarreenntt eennttiittyy,, UUSS ddoollllaarrss:: Basic Diluted YYeeaarr eennddeedd 3311 DDeecceemmbbeerr NNootteess 22001199 22001188 22001177 33 33 77 77 77 66 77 77 77 1111 1133 77 1122 88 2200 2200 $$ 1111,,556699 333366 1111,,990055 ((88,,227733)) 33,,663322 ((996666)) ((661111)) ((2266)) 33 ((444422)) ((334411)) 2222 ((5544)) $ 12,525 311 12,836 (8,011) 4,825 (1,013) (546) (27) (11) (30) 361 24 (55) $ 10,520 307 10,827 (7,485) 3,342 (717) (540) (31) (4) 12 (54) 39 (61) 11,,221177 3,528 1,986 88 ((333366)) 99 ((5566)) 1177 2299 1144 990022 ((553377)) $$ 336655 $$ 332266 3399 $$ 336655 $$00..2233 $$00..2222 18 (359) 9 – 13 (10) 2 14 (437) 11 – (57) (360) (2) 3,201 1,155 (731) $ 2,470 (396) $ 759 $ 2,406 64 $ 2,470 $ 1.67 $ 1.65 $ 699 60 $ 759 $ 0.49 $ 0.48 The accompanying notes form an integral part of these consolidated financial statements. 156 10 Strategic report Business review CSR report Corporate governance Financial statements Additional information Сonsolidated statement of comprehensive income (in millions of US dollars) NNeett pprrooffiitt OOtthheerr ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr NNootteess 22001199 $$ 336655 22001188 $ 2,470 22001177 $ 759 OOtthheerr ccoommpprreehheennssiivvee iinnccoommee ttoo bbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss iinn ssuubbsseeqquueenntt ppeerriiooddss Exchange differences on translation of foreign operations into presentation currency Exchange differences recycled to profit or loss on disposal of foreign operations Net gains/(losses) on cash flow hedges Net (gains)/losses on cash flow hedges recycled to profit or loss Effect of translation to presentation currency of the Group’s joint ventures and associates IItteemmss nnoott ttoo bbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss iinn ssuubbsseeqquueenntt ppeerriiooddss Net gains/(losses) on equity instruments at fair value through other comprehensive income Gains/(losses) on re-measurement of net defined benefit liability Income tax effect 44,,1122 2255 77,, 2255 1111 1133 2233 88 775577 3311 2277 ((3333)) 778822 88 88 –– ((1155)) ((11)) ((1166)) TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) TToottaall ccoommpprreehheennssiivvee iinnccoommee,, nneett ooff ttaaxx Attributable to: Equity holders of the parent entity Non-controlling interests 777744 (992) $$ 11,,113399 $ 1,478 $$ 11,,007788 6611 $$ 11,,113399 $ 1,441 37 $ 1,478 The accompanying notes form an integral part of these consolidated financial statements. 11 (1,120) 63 (3) – 266 747 9 – (1,060) 1,022 (13) (13) 59 28 (6) 22 4 4 30 26 (15) 11 1,067 $ 1,826 $ 1,762 64 $ 1,826 157 Annual report & Accounts 2019 Сonsolidated statement of financial position (in millions of US dollars) The financial statements of EVRAZ plc (registered number 7784342) on pages 156-235 were approved by the Board of Directors on 26 February 2020 and signed on its behalf by Alexander Frolov, Chief Executive Officer. NNootteess 22001199 22001188 22001177 3311 DDeecceemmbbeerr AASSSSEETTSS NNoonn--ccuurrrreenntt aasssseettss 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 CCuurrrreenntt aasssseettss 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 TToottaall aasssseettss EEQQUUIITTYY AANNDD LLIIAABBIILLIITTIIEESS EEqquuiittyy EEqquuiittyy aattttrriibbuuttaabbllee ttoo eeqquuiittyy hhoollddeerrss ooff tthhee ppaarreenntt eennttiittyy Issued capital Treasury shares Additional paid-in capital Revaluation surplus Unrealised gains and losses Accumulated profits Translation difference NNoonn--ccoonnttrroolllliinngg iinntteerreessttss NNoonn--ccuurrrreenntt lliiaabbiilliittiieess Long-term loans Deferred income tax liabilities Employee benefits Provisions Lease liabilities Other long-term liabilities Amounts payable under put options for shares in subsidiaries CCuurrrreenntt lliiaabbiilliittiieess Trade and other payables Contract liabilities Short-term loans and current portion of long-term loans Lease liabilities Payables to related parties Income tax payable Other taxes payable Provisions Amounts payable under put options for shares in subsidiaries TToottaall eeqquuiittyy aanndd lliiaabbiilliittiieess 99 1100 55 1111 88 1133 1133 1144 1155 1166 1177 1188 1199 2200 2200 1133,,2255 3322 2222 88 2233 2244 2255 2255 44 2266 2222 2255 1166 2277 2244 44 $$ 44,,992255 $ 4,202 $ 4,933 118855 559944 9922 115522 4400 5555 66,,004433 11,,448800 553344 9933 3322 1100 5533 117755 44 11,,442233 33,,880044 $$ 99,,884477 $$ 7755 ((116699)) 22,,449922 110099 –– 22,,221177 ((33,,004488)) 11,,667766 225522 11,,992288 206 864 74 92 91 44 5,573 1,474 835 113 29 11 35 201 35 1,067 3,800 $ 9,373 $ 75 (196) 2,480 110 6 3,026 (3,820) 1,681 257 1,938 259 917 79 173 151 39 6,551 1,198 731 89 11 12 50 225 47 1,466 3,829 $ 10,380 $ 1,507 (231) 2,500 111 39 635 (2,777) 1,784 242 2,026 44,,559999 4,186 5,243 335522 227711 332211 8833 4400 –– 55,,666666 11,,337788 334488 114400 3344 1199 7799 115533 3333 6699 258 226 222 – 38 – 4,930 1,216 320 377 – 122 104 266 35 65 328 284 269 – 54 61 6,239 1,128 272 148 – 256 67 212 32 – 22,,225533 $$ 99,,884477 2,505 $ 9,373 2,115 $ 10,380 The accompanying notes form an integral part of these consolidated financial statements. 158 12 Сonsolidated statement of cash flows (in millions of US dollars) CCaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess Net profit Adjustments to reconcile net profit to net cash flows from operating activities: Deferred income tax (benefit)/expense (Note 8) Depreciation, depletion and amortisation (Note 7) (Gain)/loss on disposal of property, plant and equipment, net Impairment of non-financial assets Foreign exchange (gains)/losses, net Interest income Interest expense Share of (profits)/losses of associates and joint ventures Impairment of non-current financial assets (Gain)/loss on financial assets and liabilities, net (Gain)/loss on disposal groups classified as held for sale, net Other non-operating (gains)/losses, net Allowance for expected credit losses Changes in provisions, employee benefits and other long-term assets and liabilities Expense arising from equity-settled awards (Note 21) 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 Contract liabilities Taxes payable Other liabilities NNeett ccaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess Strategic report Business review CSR report Corporate governance Financial statements Additional information YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 22001188 22001177 $$ 336655 55 557788 ((33)) 444422 334411 ((88)) 333366 ((99)) 5566 ((1177)) ((2299)) ((1144)) 33 –– 1133 ((22)) 22,,005577 6611 330044 2266 ((111144)) 2299 ((11)) 221199 1133 ((115555)) ((99)) $ 2,470 48 542 11 30 (361) (18) 359 (9) – (13) 10 (2) (1) (16) 15 (2) 3,063 (482) (128) (48) (58) (24) – 108 63 148 (9) $ 759 (89) 561 4 (12) 54 (14) 437 (11) – 57 360 2 10 (26) 17 2 2,111 (199) (201) (27) 24 (32) (2) 150 19 123 (9) 22,,443300 2,633 1,957 CCaasshh fflloowwss ffrroomm iinnvveessttiinngg aaccttiivviittiieess Issuance of loans receivable to related parties Issuance of loans receivable Proceeds from repayment of loans receivable, including interest Purchases of subsidiaries, net of cash acquired (Note 4) Purchases of disposal groups held for sale (Note 12) Investments in associates and joint ventures (Note 11) Sale of associates (Note 16) Proceeds from sale of other investments (Notes 18 and 13) 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 (Notes 11 and 16) Other investing activities, net NNeett ccaasshh fflloowwss uusseedd iinn iinnvveessttiinngg aaccttiivviittiieess Continued on the next page The accompanying notes form an integral part of these consolidated financial statements. – ((99)) 22 ((33)) ((2222)) ((33)) 55 3322 77 ((776622)) 1166 4444 99 1199 ((666655)) (1) (1) 2 – – – – 92 11 (521) 4 52 6 (22) (378) (2) (2) 4 (5) – – – – 7 (595) 15 412 1 (2) (167) 159 13 Annual report & Accounts 2019Сonsolidated statement of cash flows (continued) (in millions of US dollars) CCaasshh fflloowwss ffrroomm ffiinnaanncciinngg aaccttiivviittiieess Purchases of non-controlling interests (Note 4) Contributions of non-controlling shareholders to the Group’s subsidiaries Payments for investments on deferred terms (Note 11) 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 (Note 22) Repayment of bank loans and notes, including interest (Note 22) Net proceeds from/(repayment of) bank overdrafts and credit lines, including interest (Note 22) Restricted deposits at banks in respect of financing activities Realised gains/(losses) on derivatives not designated as hedging instruments (Note 25) Realised gains/(losses) on hedging instruments (Note 25) Payments under leases, including interest (Note 25) Other financing activities, net NNeett ccaasshh fflloowwss uusseedd iinn ffiinnaanncciinngg aaccttiivviittiieess Effect of foreign exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt tthhee bbeeggiinnnniinngg ooff tthhee yyeeaarr CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt tthhee eenndd ooff tthhee yyeeaarr Supplementary cash flow information: CCaasshh fflloowwss dduurriinngg tthhee yyeeaarr:: Interest paid Interest received Income taxes paid The accompanying notes form an integral part of these consolidated financial statements. YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 22001188 22001177 $$ ((7711)) –– ((88)) ((11,,008866)) ((55)) 22,,880055 ((33,,003355)) 2222 –– 2222 ((2233)) ((3377)) 11 ((11,,441155)) 66 335566 11,,006677 $$ 11,,442233 $$ ((228833)) 77 ((558811)) $ (24) – (11) (1,556) (1) 1,412 (2,459) – 12 11 11 – (1) (2,606) (48) (399) 1,466 $ 1,067 $ (320) 9 (623) $ – 2 (11) (430) – 2,441 (3,344) (139) (13) 2 14 – (1) (1,479) (2) 309 1,157 $ 1,466 $ (405) 8 (427) 160 14 Strategic report Business review CSR report Corporate governance Financial statements Additional information Сonsolidated statement of changes in equity (in millions of US dollars) AAttttrriibbuuttaabbllee ttoo eeqquuiittyy hhoollddeerrss ooff tthhee ppaarreenntt eennttiittyy AAddddiittiioonnaall IIssssuueedd ccaappiittaall TTrreeaassuurryy sshhaarreess ppaaiidd--iinn ccaappiittaall RReevvaalluuaattiioonn ssuurrpplluuss UUnnrreeaalliisseedd ggaaiinnss aanndd lloosssseess AAccccuummuullaatteedd pprrooffiittss TTrraannssllaattiioonn ddiiffffeerreennccee TToottaall NNoonn-- ccoonnttrroolllliinngg iinntteerreessttss TToottaall eeqquuiittyy $$ 7755 –– –– $$ ((119966)) –– –– $$ 22,,448800 –– –– $$ 111100 –– –– $$ 66 –– ((66)) $$ 33,,002266 332266 ((1144)) $$ ((33,,882200)) $$ 11,,668811 332266 775522 –– 777722 $$ 225577 3399 2222 $$ 11,,993388 336655 777744 –– –– –– –– –– –– –– –– –– –– –– –– 2277 –– –– –– –– ((11)) ((11)) –– –– 1133 –– –– ((11)) –– ((11)) –– –– –– –– –– –– –– 11 11 –– –– –– –– –– –– –– –– ((66)) 331144 777722 11,,007788 6611 11,,113399 –– –– –– –– –– ((1100)) ((2277)) –– ((11,,008866)) –– –– –– –– –– –– ((1100)) ((6611)) ((7711)) –– 1133 ((11,,008866)) –– –– –– –– 1133 ((11,,008866)) –– ((55)) ((55)) AAtt 3311 DDeecceemmbbeerr 22001188 Net profit Other comprehensive income/(loss) Reclassification of revaluation surplus to accumulated profits in respect of the disposed items of property, plant and equipment Reclassification of additional paid-in capital in respect of the disposed subsidiaries Total comprehensive income/(loss) for the period Acquisition of non-controlling interests in subsidiaries (Note 4) Transfer of treasury shares to participants of the Incentive Plans (Notes 20 and 21) Share-based payments (Note 21) Dividends declared by the parent entity to its shareholders (Note 20) Dividends declared by the Group’s subsidiaries to non-controlling shareholders AAtt 3311 DDeecceemmbbeerr 22001199 $$ 7755 $$ ((116699)) $$ 22,,449922 $$ 110099 $$ –– $$ 22,,221177 $$ ((33,,004488)) $$ 11,,667766 $$ 225522 $$ 11,,992288 The accompanying notes form an integral part of these consolidated financial statements. 15 161 Annual report & Accounts 2019 Сonsolidated statement of changes in equity (continued) (in millions of US dollars) AAttttrriibbuuttaabbllee ttoo eeqquuiittyy hhoollddeerrss ooff tthhee ppaarreenntt eennttiittyy AAddddiittiioonnaall IIssssuueedd ccaappiittaall TTrreeaassuurryy sshhaarreess ppaaiidd--iinn ccaappiittaall RReevvaalluuaattiioonn ssuurrpplluuss UUnnrreeaalliisseedd ggaaiinnss aanndd lloosssseess AAccccuummuullaatteedd pprrooffiittss TTrraannssllaattiioonn ddiiffffeerreennccee TToottaall NNoonn-- ccoonnttrroolllliinngg iinntteerreessttss TToottaall eeqquuiittyy $ 1,507 – – $ (231) – – $ 2,500 – – $ 111 – – $ 39 – 56 $ 635 2,406 22 $ (2,777) $ 1,784 2,406 (965) – (1,043) $ 242 64 (27) $ 2,026 2,470 (992) – – – – (1,432) – – – – – – – – – – – 35 – – – – – (35) (35) – – – 15 – – (1) – (1) – – – – – – – (89) 89 – – 1 35 – – – – – – – – – – – – (33) – 2,553 1,432 (1,043) – 1,441 – 37 – 1,478 – – – – – – (3) (35) – (1,556) – – – – – – (3) (21) (24) – 15 (1,556) – – – – 15 (1,556) – (1) (1) AAtt 3311 DDeecceemmbbeerr 22001177 Net profit Other comprehensive income/(loss) Transfer of realised gains on sold equity instruments to accumulated profits (Note 13) Reclassification of revaluation surplus to accumulated profits in respect of the disposed items of property, plant and equipment Reclassification of additional paid-in capital in respect of the disposed subsidiaries Total comprehensive income/(loss) for the period Reduction in par value of shares (Note 20) Acquisition of non-controlling interests in subsidiaries (Note 4) Transfer of treasury shares to participants of the Incentive Plans (Notes 20 and 21) Share-based payments (Note 21) Dividends declared by the parent entity to its shareholders (Note 20) Dividends declared by the Group’s subsidiaries to non-controlling shareholders AAtt 3311 DDeecceemmbbeerr 22001188 $ 75 $ (196) $ 2,480 $ 110 $ 6 $ 3,026 $ (3,820) $ 1,681 $ 257 $ 1,938 The accompanying notes form an integral part of these consolidated financial statements. 162 16 Strategic report Business review CSR report Corporate governance Financial statements Additional information Сonsolidated statement of changes in equity (continued) (in millions of US dollars) AAttttrriibbuuttaabbllee ttoo eeqquuiittyy hhoollddeerrss ooff tthhee ppaarreenntt eennttiittyy AAddddiittiioonnaall IIssssuueedd ccaappiittaall TTrreeaassuurryy sshhaarreess ppaaiidd--iinn ccaappiittaall RReevvaalluuaattiioonn ssuurrpplluuss UUnnrreeaalliisseedd ggaaiinnss aanndd lloosssseess AAccccuummuullaatteedd pprrooffiittss TTrraannssllaattiioonn ddiiffffeerreennccee TToottaall NNoonn-- ccoonnttrroolllliinngg iinntteerreessttss TToottaall eeqquuiittyy $ 1,507 – – $ (270) – – $ 2,517 – – $ 112 – – $ – – 39 $ 415 699 11 $ (3,790) – 1,013 $ 491 699 1,063 $ 186 60 4 $ 677 759 1,067 – – – – – – – – – – – – – – – – – 39 – – – – (34) (34) – – – – 17 – – (1) – (1) – – – – – – – – – – 1 34 – – – – – – – – – – – – 39 745 1,013 1,762 64 1,826 – – – – – – – (56) – (39) – (430) – – – – – – – (56) – – 17 (430) (6) (4) 2 – – – (6) (60) 2 – 17 (430) $ 1,507 $ (231) $ 2,500 $ 111 $ 39 $ 635 $ (2,777) $ 1,784 $ 242 $ 2,026 AAtt 3311 DDeecceemmbbeerr 22001166 Net profit Other comprehensive income/(loss) Transfer of realised gains on sold equity instruments to accumulated profits (Note 13) Reclassification of revaluation surplus to accumulated profits in respect of the disposed items of property, plant and equipment Reclassification of additional paid-in capital in respect of the disposed subsidiaries Total comprehensive income/(loss) for the period Derecognition of non-controlling interests on sale of subsidiaries (Note 12) Derecognition of non-controlling interests under put options (Note 4) Contribution of a non-controlling shareholder to share capital of the Group’s subsidiary Transfer of treasury shares to participants of the Incentive Plans (Notes 20 and 21) Share-based payments (Note 21) Dividends declared by the parent entity to its shareholders (Note 20) AAtt 3311 DDeecceemmbbeerr 22001177 The accompanying notes form an integral part of these consolidated financial statements. 17 163 Annual report & Accounts 2019 Notes to the consolidated financial statements Year ended 31 December 2019 1. CORPORATE INFORMATION These consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 26 February 2020. EVRAZ plc (“EVRAZ plc” or “the Company”) was incorporated on 23 September 2011 as a public company limited by shares under the laws of the United Kingdom. The Company was incorporated under the Companies Act 2006 with the registered number in England 7784342. Until 1 August 2019 the registered address of EVRAZ plc was 5th Floor, 6 St. Andrew Street, London, EC4A 3AE, United Kingdom. The new Company’s address is 2 Portman street, London, W1H 6DU, United Kingdom. The Company is a holding company which owns steel, mining and trading companies. The Company, together with its subsidiaries (the “Group”), is involved in the production and distribution of steel and related products, vanadium products and coal and iron ore mining. The Group is one of the largest steel producers globally. Until 3 September 2018 Lanebrook Limited (“Lanebrook”) registered in Cyprus was the ultimate controlling party of the Group. On that date Lanebrook distributed all its ownership interest in EVRAZ plc to its direct shareholders in proportion to their holdings in Lanebrook. At 31 December 2019 and 2018, EVRAZ plc was jointly controlled by a group of 3 shareholders: Greenleas International Holdings Limited (BVI), Abiglaze Limited (Cyprus) and Crosland Global Limited (Cyprus). The major subsidiaries included in the consolidated financial statements of the Group were as follows at 31 December: SSuubbssiiddiiaarryy EEffffeeccttiivvee oowwnneerrsshhiipp iinntteerreesstt,, %% 22001199 22001188 22001177 BBuussiinneessss aaccttiivviittyy LLooccaattiioonn EVRAZ Nizhny Tagil Metallurgical Plant 110000..0000 100.00 100.00 Steel production Russia EVRAZ Consolidated West-Siberian Metallurgical Plant 110000..0000 100.00 100.00 Steel production Russia EVRAZ Dneprovsk Metallurgical Plant –– – 97.73 Steel production Ukraine EVRAZ Inc. NA EVRAZ Inc. NA Canada Raspadskaya Yuzhkuzbassugol 110000..0000 100.00 100.00 Steel production USA 110000..0000 100.00 100.00 Steel production Canada 8888..1177 83.84 81.95 Coal mining 110000..0000 100.00 100.00 Coal mining Russia Russia Russia EVRAZ Kachkanarsky Mining-and-Processing Integrated Works 110000..0000 100.00 100.00 Ore mining & processing Evrazruda (in 2018 merged with EVRAZ Consolidated West-Siberian Metallurgical Plant) –– – 100.00 Ore mining Russia The full list of the Group’s subsidiaries and other significant holdings as of 31 December 2019 is presented in Note 34. 2. SIGNIFICANT ACCOUNTING POLICIES BBaassiiss ooff PPrreeppaarraattiioonn 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 for the annual periods beginning on or after 1 January 2019, but not adopted by the European Union, do not have any significant impact on the Group’s consolidated financial statements. 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, equity instruments 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. Going Concern These consolidated financial statements have been prepared on a going concern basis. 164 18 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES CChhaannggeess iinn AAccccoouunnttiinngg PPoolliicciieess NNeeww//RReevviisseedd SSttaannddaarrddss aanndd IInntteerrpprreettaattiioonnss AAddoopptteedd iinn 22001199::  IFRS 16 “Leases” IFRS 16 supersedes IAS 17 “Leases”, IFRIC 4 “Determining whether an Arrangement contains a Lease”, SIC-15 “Operating Leases-Incentives” and SIC- 27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease”. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. The Group applied IFRS 16 “Leases” from 1 January 2019 using the modified retrospective approach, i.e. the comparative information was not restated. Under this approach both lease liabilities and right-of-use assets were recognised at the date of transition to IFRS 16. They were included within the Lease liabilities and Property, plant and equipment captions of the consolidated statement of financial position. Long-term finance lease liabilities, which were previously presented in Other long-term liabilities, and short-term finance lease liabilities, which were previously presented in Trade and other payables ($3 million and $3 million at 31 December 2018, respectively), were reclassified to the Lease liabilities caption from 1 January 2019. The Group has elected to use the following practical expedients proposed by the standard:     on initial application IFRS 16 was applied only to contracts that were previously classified as leases; on initial application initial direct costs are excluded from the measurement of the right-of-use asset; for all classes of underlying assets each lease component and any associated non-lease components were accounted as a single lease component; and lease payments for contracts with a duration of 12 months or less or leases for which the underlying assets are of low value continue to be expensed to the statement of operations on a straight-line basis over the lease term. The main categories of contracts, which were affected by the requirements of IFRS 16, are operating leases of gondola cars, land underneath production facilities and certain items of machinery and equipment. At 1 January 2019, as a result of the application of the new standard, the Group recognised $127 million of right-of-use assets (including $7 million of property, plant and equipment previously recognised under the finance lease contracts and $2 million of prepayments under lease contracts, which were both reclassified from the respective accounts), and $124 million of lease liabilities (including $6 million recorded as finance lease liabilities at 31 December 2018). These lease liabilities consisted of non-current portion ($90 million) and current portion ($34 million). The Group’s weighted average incremental borrowing rates applied to lease liabilities recognised in the statement of financial position at the date of initial application were 8.7% for rouble-denominated liabilities and 4.2% for USD-denominated liabilities. In previous years the majority of the Group’s outstanding short and long-term lease agreements were cancellable. IAS 17 required disclosing operating lease commitments only for non-cancellable leases, consequently, the Group did not disclose commitments under non-cancellable operating leases based on materiality grounds. However, under IFRS 16 the Group is also required to include in lease liabilities the contracts with an option to terminate the lease if the lessee is reasonably certain not to exercise that option. This has resulted in the recognition of lease liabilities of $118 million on transition.  Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 “Investments in Associates and Joint Ventures”. These amendments had no impact on the consolidated financial statements as the Group does not have such long term interests in its associate and joint venture. 19 165 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CChhaannggeess iinn AAccccoouunnttiinngg PPoolliicciieess ((ccoonnttiinnuueedd)) NNeeww//RReevviisseedd SSttaannddaarrddss aanndd IInntteerrpprreettaattiioonnss AAddoopptteedd iinn 22001199 ((ccoonnttiinnuueedd))  Amendments to IFRS 9 – Prepayment Features with Negative Compensation Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are “solely payments of principal and interest on the principal amount outstanding” (the “SPPI criterion”) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. These amendments had no impact on the consolidated financial statements of the Group.  IFRIC 23 “Uncertainty over Income Tax Treatments” The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. The Interpretation specifically addresses the following:  whether an entity considers uncertain tax treatments separately;    the assumptions an entity makes about the examination of tax treatments by taxation authorities; how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; how an entity considers changes in facts and circumstances. The Interpretation establishes that an entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed. The Group applies significant judgements in identifying uncertainties over income tax treatments. Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions. The Group determined that it is probable that its tax treatments will be accepted by the taxation authorities. The interpretation did not have an impact on the consolidated financial statements of the Group.  Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability or asset reflecting the benefits offered under the plan and the plan assets after that event. An entity is also required to determine the net interest for the remainder of the period after the plan amendment, curtailment or settlement using the net defined benefit liability or asset reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net defined benefit liability or asset. These amendments had no impact on the consolidated financial statements of the Group as it did not have any plan amendments, curtailments, or settlements during the period.  Annual Improvements to IFRSs 2015-2017 Cycle The amendments relate to IFRS 3 “Business Combinations”, IFRS 11 “Joint Arrangements”, IAS 12 “Income Taxes” and IAS 23 "Borrowing Costs”. The application of these amendments had no effect on the Group’s financial position, performance or the disclosures as the Group followed the same principles in prior periods. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. SSttaannddaarrddss IIssssuueedd BBuutt NNoott YYeett EEffffeeccttiivvee iinn tthhee EEuurrooppeeaann UUnniioonn SSttaannddaarrddss nnoott yyeett eeffffeeccttiivvee ffoorr tthhee ffiinnaanncciiaall ssttaatteemmeennttss ffoorr tthhee yyeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199       Amendments to IAS 1 and IAS 8 – Definition of Material Amendments to References to the Conceptual Framework in IFRS Standards Amendment to IFRS 3 – Definition of Business Amendments to IFRS 9, IAS 39, IFRS 7 (Interest Rate Benchmark Reform) IFRS 17 “Insurance Contracts” Amendments to IAS 1 – Classification of Liabilities as Current or Non-current EEffffeeccttiivvee ffoorr aannnnuuaall ppeerriiooddss bbeeggiinnnniinngg oonn oorr aafftteerr 1 January 2020 1 January 2020 1 January 2020* 1 January 2020 1 January 2021* 1 January 2022* *Subject to EU endorsement 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. 166 20 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SSiiggnniiffiiccaanntt AAccccoouunnttiinngg JJuuddggeemmeennttss aanndd EEssttiimmaatteess AAccccoouunnttiinngg JJuuddggeemmeennttss 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:     In 2015, following the placement of Highveld Steel and Vanadium Limited under the business rescue procedures, the Group lost control over the subsidiary and it is not expected that it will re-obtain control in the future. As a result, the Group ceased to consolidate this entity from 14 April 2015. The Group determined based on the criteria in IFRIC 4 “Determining whether an Arrangement Contains a Lease” (before 2019) and IFRS 16 “Leases” (from 2019) that the supply contracts with PraxAir and Air Liquide do not contain a lease. These contracts include the construction of air separation plants by PraxAir and Air Liquide to be owned and operated by them and the supply of oxygen and other industrial gases produced by the entities to the Group’s steel plants for a long-term period on a take or pay basis. Management believes that these arrangements do not convey a right to the Group to use the assets as the Group does not have an ability to operate the assets or to direct other parties to operate the assets; it does not control physical access to the assets; and it is expected that more than an insignificant amount of the assets’ output will be sold to the parties unrelated to the Group. The commitments under the contracts are disclosed in Note 30. In 2019, an independent trader concluded contracts with two Group’s subsidiaries: for the purchase of semi-finished steel products with one subsidiary of the Steel segment and for the sale of semi-finished steel products with another subsidiary of the Steel North America segment. The Group analysed the nature of the contracts and determined that they require a separate recognition of the sales and purchase transactions as there is neither a tripartite agreement, nor a call or put option, which would require to treat these contracts as a single arrangement. Specifically, the trader bears full inventory and market risks, it has a full discretion in establishing prices for each contract separately based on prevailing market conditions. In 2019, the Group sold to the independent trader 330 thousand metric tonnes of slabs ($161 million) and purchased from it 192 thousand metric tonnes ($108 million). In 2019, the Group concluded a contract with Xcel Energy Inc. for the construction of a solar power plant to be owned and operated by a third party and for the supply of electricity to the Group’s steel plant for a long-term period on a take-or-pay basis. The Group determined based on the criteria in IFRS 16 “Leases” that the supply contract with Xcel Energy Inc. does not contain a lease. Management believes that this arrangement does not convey a right to the Group to use the assets as the Group does not have an ability to operate the assets or to direct other parties to operate the assets; it does not control physical access to the assets; and it is expected that more than an insignificant amount of the assets’ output will be sold to the parties unrelated to the Group. The commitments under the contract are disclosed in Note 30. EEssttiimmaattiioonn UUnncceerrttaaiinnttyy 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 set out 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 2019, 2018 and 2017, the Group recognised a net impairment reversal/(loss) of $(142) million, $(30) million and $20 million, respectively (Notes 6 and 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. 21 167 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SSiiggnniiffiiccaanntt AAccccoouunnttiinngg JJuuddggeemmeennttss aanndd EEssttiimmaatteess ((ccoonnttiinnuueedd)) EEssttiimmaattiioonn UUnncceerrttaaiinnttyy ((ccoonnttiinnuueedd)) 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 2019, 2018 and 2017 was $594 million, $864 million and $917 million, respectively. In 2019, the Group recognised a $300 million impairment loss in respect of goodwill. 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 6. Mineral Reserves Mineral reserves and the associated mine plans 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. The changes in the pricing environment and geology-related risk factors may lead to a revision of mining plans, decisions to abandon or to mothball certain parts of a mine, to a reassessment of the capital expenditures required for the extraction of the proved and probable reserves, as well as to the changes in the resources classified as proved and probable reserves. As the value of the Group’s mining assets is very significant (Note 9), these changes may have a material impact on the depletion charge and impairment, which may arise as a result of a decline in the recoverable amounts of the affected mines. 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.). More details are provided in Note 23. FFoorreeiiggnn CCuurrrreennccyy TTrraannssaaccttiioonnss The presentation currency of the Group is the US dollar because presentation in US dollars is most relevant 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, Canadian dollar and Ukrainian hryvnia. At the reporting date, the assets and liabilities of the subsidiaries with functional currencies other than the US dollar are translated into thepresentation 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. The following exchange rates were used in the consolidated financial statements: USD/RUB EUR/USD USD/CAD USD/UAH 22001199 22001188 22001177 3311 DDeecceemmbbeerr AAvveerraaggee 3311 DDeecceemmbbeerr aavveerraaggee 3311 DDeecceemmbbeerr 6611..99005577 11..11223344 11..22996688 nn//aa 6644..77336622 11..11119955 11..33226699 2266..11333377 69.4706 1.1450 1.3658 27.6883 62.7078 1.1810 1.2962 27.2029 57.6002 1.1993 1.2530 28.0672 aavveerraaggee 58.3529 1.1297 1.2979 26.5947 Transactions in foreign currencies in each subsidiary of the Group are initially recorded in the functional currency at the rate ruling at the date of the transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the end of the reporting period. All resulting differences are taken to the statement of operations. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate. 168 22 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BBaassiiss ooff CCoonnssoolliiddaattiioonn Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than 50% of the voting rights and over which the Group has control, 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 IFRS 9 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. 169 23 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IInnvveessttmmeennttss iinn AAssssoocciiaatteess 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. IInntteerreessttss iinn JJooiinntt VVeennttuurreess The Group’s interest in its joint ventures is accounted for under the equity method of accounting whereby an interest in jointly ventures 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. PPrrooppeerrttyy,, PPllaanntt aanndd EEqquuiippmmeenntt 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 UUsseeffuull lliivveess ((yyeeaarrss)) WWeeiigghhtteedd aavveerraaggee rreemmaaiinniinngg uusseeffuull lliiffee ((yyeeaarrss)) 15–60 4–45 7–20 3–15 18 9 7 4 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. The depletion calculation takes into account future development costs for reserves which are in the production phase. 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. 170 24 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EExxpplloorraattiioonn aanndd EEvvaalluuaattiioonn EExxppeennddiittuurreess 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. LLeeaasseess Group as a Lessee The determination of whether an arrangement is, or contains, a lease is done at contract inception and includes the assessment of whether the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term or exercise a purchase option, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Otherwise, the lessee depreciates the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Right-of-use assets are subject to impairment. The right-of-use assets are included in the Property, plant and equipment caption of the statement of financial position (Note 9). At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense (unless they are incurred to produce inventories) in the period on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The incremental borrowing rate is determined based on the Group’s borrowing rates for similar terms and currencies in an economic environment, in which the lessee operates. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment of plans to purchase the underlying asset. The lease term is a non-cancellable period for which a lessee has the right to use an underlying asset, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease if it is reasonably certain not to be exercised. The lease term of cancellable or renewable leases is dependent of the enforceability of the contract beyond the date on which it can be terminated. The contract is enforceable if only one party of the lease contract has the right to terminate the lease without permission from the other party with no more than an insignificant penalty. In this case the Group, as a lessee, assesses whether it is reasonably certain to exercise an extension option, or not to exercise a termination option. Lease payments for contracts with a duration of 12 months or less or leases for which the underlying assets are of low value are not recognised as lease liabilities. They are expensed to the statement of operations on a straight-line basis over the lease term and included in cost of revenues, selling, general and administrative expenses. Information about lease arrangements is disclosed in Note 25. Group as a Lessor Finance leases, in which the Group acts as a lessor, when substantially all the risks and benefits incidental to ownership of the leased item are transferred to the lessee, are recognised as net investments in finance lease from the commencement of the lease term at the present value of the minimum lease payments. Lease payments are apportioned between the finance income and reduction of the lease receivable so as to achieve a constant rate of interest on the remaining balance of recevables. Finance income is included in the interest income caption. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases (Note 9). Operating lease income is recognised within the rendering of services caption on a straight-line basis over the lease term. 25 171 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LLeeaasseess ((ccoonnttiinnuueedd)) Accounting for Leases before 2019 Before 1 January 2019 the Group recognised as liabilities only finance lease arrangements. Finance leases, which involved the transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, were 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 were 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 were charged to interest expense. Leases where the lessor retained substantially all the risks and benefits of ownership of the asset were classified as operating leases. Operating lease payments were recognised as an expense in the statement of operations on a straight-line basis over the lease term. GGooooddwwiillll 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. IInnttaannggiibbllee AAsssseettss OOtthheerr TThhaann GGooooddwwiillll Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Expenditures on internally generated intangible assets, excluding capitalised development costs, are expensed as incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortised, they are tested for impairment annually either individually or at the cash-generating unit level. The table below presents the useful lives of intangible assets. Customer relationships Contract terms Other UUsseeffuull lliivveess ((yyeeaarrss)) WWeeiigghhtteedd aavveerraaggee rreemmaaiinniinngg uusseeffuull lliiffee ((yyeeaarrss)) 1–15 10 5–19 4 4 5 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). 172 26 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FFiinnaanncciiaall AAsssseettss Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income, and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them, i.e. how the Group manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. With the exception of trade and other receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. The Group measures financial assets at amortised cost if both of the following conditions are met:   The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. Trade and Other Accounts Receivable Trade and other receivables are recognised at their transaction price as defined in IFRS 15 “Revenue” if they do not contain a significant financing component or if the Group expects, at contract inception, that the period between when the Group transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. For trade and other receivables, the Group applies a simplified approach for calculating the expected credit losses. Therefore, the Group does not track changes in credit risk, but, instead, it recognises a loss allowance based on the lifetime expected credit losses at each reporting date. The Group separately determines the expected credit losses for individually significant balances or collectively for trade and other receivables that are not individually significant. The expected credit losses for individually significant balances are estimated using debtors’ historical credit loss experience adjusted for forward- looking factors specific to the debtors and economic environment. IInnvveennttoorriieess 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. VVaalluuee AAddddeedd TTaaxx 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. CCaasshh aanndd CCaasshh EEqquuiivvaalleennttss Cash and cash equivalents comprise cash at bank and in hand and deposits with an original maturity of three months or less. BBoorrrroowwiinnggss 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). 27 173 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EEqquuiittyy Share Capital Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares are shown as a deduction in equity from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital. Treasury Shares Own equity instruments which are acquired by the Group (treasury shares) are deducted from equity. No gain or loss is recognised in statement of operations on the purchase, sale, issue or cancellation of the treasury shares. Any difference between the carrying amount and the consideration, if reissued, is recognised in additional paid-in capital. Dividends Dividends are recognised as a liability and deducted from equity only if they are declared before 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. PPrroovviissiioonnss 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. 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”. Provisions for site restoration costs are capitalised within property, plant and equipment. EEmmppllooyyeeee BBeenneeffiittss Social and Pension Contributions Defined contributions are made by the Group to the Russian and Ukrainian state pension, social insurance and medical insurance 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. 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 cost of providing benefits under the defined benefit plan is determined using the projected unit credit method. Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding net interest and the return on plan assets (excluding net interest), are recognised immediately in the statement of financial position with a corresponding debit or credit to retained earnings through other comprehensive income in the period in which they occur. Re-measurements are not reclassified to profit or loss in subsequent periods. Past service costs are recognised in profit or loss on the earlier of the date of the plan amendment or curtailment, and the date that the Group recognises restructuring-related costs. Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. It is recorded within interest expense in the consolidated statement of operations. The Group recognises current service costs, past-service costs, gains and losses on curtailments and non-routine settlements in the consolidated statement of operations within “cost of sales”, “general and administrative expenses” and “selling and distribution expenses”. 174 28 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EEmmppllooyyeeee BBeenneeffiittss ((ccoonnttiinnuueedd)) 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 21), 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. 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 if EBITDA-related conditions are not satisfied or participants lose the entitlement for the shares due to the termination of their employment. Accumulated share-based expense is adjusted to reflect the number of share options that eventually vest. For market-related performance conditions, such as TSR (Note 21), if the conditions are not met and the share options do not vest, then no reversal is made for the share-based expense previously recognised. The TSR-related vesting condition of Incentive Plans adopted in 2017, 2018 and 2019 was considered by the Group as a market condition. As such, it was included in the estimation of the fair value of the granted shares and will not be subsequently revised. Vesting condition related to EBITDA was not taken into account when estimating the fair value of the share options at the grant date. Instead, this will be taken into account by adjusting the share- based expense based on the number of share options that eventually vest. 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. The dilutive effect of outstanding share-based awards is reflected as additional share dilution in the computation of earnings per share (Note 20). RReevveennuuee 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. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods The Group recognises revenues from sales of goods at the point in time when control of the asset is transferred to the customer and it is probable that the amount of consideration is collectible. The moment of transfer of control is determined by the contract terms and usually occurs at the date of shipment. Some contracts with customers provide a right of return, trade discounts or volume rebates. The Group recognises revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of the estimated returns and price concessions, trade discounts and volume rebates. The variable consideration is recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Group enters into contracts with its customers, under which the Group provides transportation and handling services using third party providers (i.e. the Group selects suitable firms and manages the shipment and delivery). These services are provided to the customers before, or after, they obtain control over the goods. The cost of services is included in the contract price. Under IFRS 15, transportation and handling services rendered by the Group before control over the goods is transferred to the customers do not represent a separate performance obligation. Therefore, the Group recognises these services at the moment when control over the goods is passed to the customers. With respect to the contracts when the Group provides transportation and handling services after obtaining control over the goods by the customers, the Group concluded that these services represent a separate performance obligation and the Group acts as a principal rather than an agent. Consequently, the control over its services is transferred over time. Transportation and handling services rendered by the Group in contracts, in which it acts as a principal, are presented within the caption ”Sales of goods” in the consolidated statement of operations. 29 175 Annual report & Accounts 2019 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Rendering of Services The Group’s revenues from rendering of services include electricity, transportation, port and other services. The pattern of revenue recognition reflects the transfer of services to customers and may occur at a point in time or over time. Advances from Customers The Group receives only short-term advances from its customers. The Group uses the practical expedient provided in IFRS 15, which allows not to adjust the promised amount of consideration for the effects of a significant financing component in the contracts where the Group expects, at contract inception, that the period between the Group’s transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Therefore, for short-term advances, the Group does not account for a financing component even if it is significant. 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. CCuurrrreenntt IInnccoommee TTaaxx 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 tax 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. DDeeffeerrrreedd IInnccoommee TTaaxx 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 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. 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, tax legislation and tax planning strategies. 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. 176 30 Strategic report Business review CSR report Corporate governance Financial statements Additional information 3. SEGMENT INFORMATION For management purposes the Group has four reportable operating segments:     Steel segment includes production of steel and related products at all mills except for those located in North America. Extraction of vanadium ore and production of vanadium products, iron ore mining and enrichment and certain energy-generating companies are also included in this segment as they are closely related to the main process of steel production. Steel, North America is a segment, which includes production of steel and related products in the USA and Canada. Coal segment includes coal mining and enrichment. It also included operations of Nakhodka Trade Sea Port (sold in June 2017) as it was used to a significant extent for shipping of products of the coal segment to the Asian markets. Other operations include energy-generating companies, shipping and railway transportation companies. Management and investment companies are not allocated to any of the segments. Operating segments have been aggregated into reportable segments if they show a similar long-term economic performance, have comparable production processes, customer industries and distribution channels, operate in the same regulatory environment, and are generally managed and monitored together. 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 (see below). This performance indicator is calculated based on management accounts that differ from the IFRS consolidated financial statements for the following reasons: 1) certain subsidiaries of the Group are not consolidated in the management accounts; 2) for the last month of the reporting period, the management accounts for each operating segment are prepared using a forecast for that month; 3) the statement of operations is based on local GAAP figures with the exception of depreciation and repair expenses which are adjusted to approximate the amount under IFRS; 4) in case of volatility of functional currencies the IFRS statements of operations are translated at the exchange rates that approximate the exchange rates at the dates of the transactions (quarterly, semi-annual averages, etc.) while in management accounts simple average for the whole accounting period is used. 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 to it on a reasonable basis, 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 to it on a reasonable basis, including expenses relating to external counterparties and expenses relating to transactions with other segments. Segment expense does not include social and social infrastructure maintenance expenses. Segment result is segment revenue less segment expense that is equal to earnings before interest, tax, depreciation and amortisation (“EBITDA”) for that segment. Segment EBITDA is determined as a segment’s profit/(loss) from operations adjusted for social and social infrastructure maintenance expenses, 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. Management believes that this measure is useful and relevant for the users and gives a better comparison with the Russian steel peers. The following tables present measures of segment profit or loss based on management accounts. 31 177 Annual report & Accounts 2019 3. SEGMENT INFORMATION (CONTINUED) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million Revenue Sales to external customers Inter-segment sales TToottaall rreevveennuuee SStteeeell NNoorrtthh AAmmeerriiccaa CCooaall ooppeerraattiioonnss EElliimmiinnaattiioonnss TToottaall SStteeeell,, OOtthheerr $$ 77,,990033 117755 88,,007788 $$ 22,,551177 –– 22,,551177 $$ 11,,227733 773355 22,,000088 $$ 118866 330033 448899 $$ –– ((11,,221133)) ((11,,221133)) $$ 1111,,887799 –– 1111,,887799 SSeeggmmeenntt rreessuulltt –– EEBBIITTDDAA $$ 11,,666688 $$ 3388 $$ 888833 $$ 1199 $$ 3322 $$ 22,,664400 YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million Revenue Sales to external customers Inter-segment sales TToottaall rreevveennuuee SStteeeell NNoorrtthh AAmmeerriiccaa CCooaall SStteeeell,, $ 8,373 343 8,716 $ 2,593 – 2,593 $ 1,533 1,322 2,855 OOtthheerr ooppeerraattiioonnss $ 214 279 493 EElliimmiinnaattiioonnss TToottaall $ – (1,944) (1,944) $ 12,713 – 12,713 SSeeggmmeenntt rreessuulltt –– EEBBIITTDDAA $ 2,701 $ 18 $ 1,180 $ 17 $ (14) $ 3,902 YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million Revenue Sales to external customers Inter-segment sales TToottaall rreevveennuuee SStteeeell SStteeeell,, NNoorrtthh AAmmeerriiccaa $ 8,093 295 8,388 $ 1,868 – 1,868 CCooaall $ 796 1,142 1,938 SSeeggmmeenntt rreessuulltt –– EEBBIITTDDAA $ 1,567 $ 77 $ 1,164 OOtthheerr ooppeerraattiioonnss EElliimmiinnaattiioonnss TToottaall $ 87 301 388 $ 20 $ – (1,738) (1,738) $ 10,844 – 10,844 $ (24) $ 2,804 178 32 Strategic report Business review CSR report Corporate governance Financial statements Additional information 3. SEGMENT INFORMATION (CONTINUED) 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. YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million RReevveennuuee Reclassifications and other adjustments RReevveennuuee ppeerr IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss EEBBIITTDDAA Unrealised profits adjustment Reclassifications and other adjustments SStteeeell,, OOtthheerr SStteeeell NNoorrtthh AAmmeerriiccaa CCooaall ooppeerraattiioonnss EElliimmiinnaattiioonnss TToottaall $$ 88,,007788 $$ 22,,551177 $$ 22,,000088 6655 ((1177)) 1133 $$ 88,,114433 $$ 22,,550000 $$ 22,,002211 $$ 448899 ((66)) $$448833 $$((11,,221133)) $$ 1111,,887799 ((2299)) 2266 $$((11,,224422)) $$ 1111,,990055 $$ 11,,666688 $$ 3388 $$ 888833 $$ 1199 $$ 3322 $$ 22,,664400 8811 4466 112277 –– –– –– 4411 ((8811)) ((4400)) –– ((11)) ((11)) 1177 ((11)) 1166 113399 ((3377)) 110022 EEBBIITTDDAA bbaasseedd oonn IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss $$ 11,,779955 $$ 3388 $$ 884433 $$ 1188 $$ 4488 $$ 22,,774422 ((1177)) ((225544)) ((2266)) 11 ((1100)) –– ((114477)) ((330099)) 44 4466 ((33)) ((116688)) ((110077)) ((33)) ((3300)) $$ 11,,448899 $$ ((336688)) $$ 553322 –– ((44)) –– –– 1100 $$ 2244 –– –– –– –– –– $$ 4488 Unallocated subsidiaries Social and social infrastructure maintenance expenses Depreciation, depletion and amortisation expense Impairment of assets Gain on disposal of property, plant and equipment and intangible assets Foreign exchange gains/(losses), net Unallocated income/(expenses), net PPrrooffiitt//((lloossss)) ffrroomm ooppeerraattiioonnss Interest income/(expense), net Share of profits/(losses) of joint ventures and associates Impairment of non-current financial assets Gain/(loss) on financial assets and liabilities Gain/(loss) on disposal groups classified as held for sale Other non-operating gains/(losses), net PPrrooffiitt//((lloossss)) bbeeffoorree ttaaxx ((114411)) $$ 22,,660011 ((2200)) ((557733)) ((444422)) 22 1166 $$ 11,,558844 ((336677)) $$ 11,,221177 ((332288)) 99 ((5566)) 1177 2299 1144 $$ 990022 33 179 Annual report & Accounts 2019 3. SEGMENT INFORMATION (CONTINUED) Year ended 31 December 2018 US$ million RReevveennuuee Reclassifications and other adjustments RReevveennuuee ppeerr IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss EEBBIITTDDAA Unrealised profits adjustment Reclassifications and other adjustments EEBBIITTDDAA bbaasseedd oonn IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss Unallocated subsidiaries Social and social infrastructure maintenance expenses Depreciation, depletion and amortisation expense Impairment of assets Loss on disposal of property, plant and equipment and intangible assets Foreign exchange gains/(losses), net Unallocated income/(expenses), net PPrrooffiitt//((lloossss)) ffrroomm ooppeerraattiioonnss 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 PPrrooffiitt//((lloossss)) bbeeffoorree ttaaxx SStteeeell,, OOtthheerr SStteeeell NNoorrtthh AAmmeerriiccaa CCooaall ooppeerraattiioonnss EElliimmiinnaattiioonnss TToottaall $ 8,716 163 $ 8,879 $ 2,701 (46) 17 (29) $ 2,672 (25) (239) (18) (3) 31 $ 2,418 $ 2,593 (10) $ 2,583 $ 18 – (4) (4) $ 14 – (137) (2) (2) (72) $ (199) $ 2,855 (518) $ 2,337 $ 1,180 (25) 63 38 $ 1,218 (2) (158) (10) (6) 30 $ 1,072 $ 493 (21) $ 472 $ 17 – – – $ 17 – (3) – – (2) $ 12 $(1,944) 509 $(1,435) $12,713 123 $12,836 $ (14) 4 1 5 $ (9) – – – – – $ (9) $ 3,902 (67) 77 10 $ 3,912 (135) $ 3,777 (27) (537) (30) (11) (13) $ 3,159 369 $ 3,528 (341) 9 13 (10) 2 $ 3,201 180 34 3. SEGMENT INFORMATION (CONTINUED) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million RReevveennuuee Reclassifications and other adjustments RReevveennuuee ppeerr IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss EEBBIITTDDAA Unrealised profits adjustment Reclassifications and other adjustments SStteeeell $ 8,388 (645) $ 7,743 $ 1,567 (49) (35) (84) EEBBIITTDDAA bbaasseedd oonn IIFFRRSS ffiinnaanncciiaall ssttaatteemmeennttss $ 1,483 Unallocated subsidiaries (29) (255) 31 4 (31) Social and social infrastructure maintenance expenses Depreciation, depletion and amortisation expense Impairment of assets Loss on disposal of property, plant and equipment and intangible assets Foreign exchange gains/(losses), net Unallocated income/(expenses), net PPrrooffiitt//((lloossss)) ffrroomm ooppeerraattiioonnss 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 PPrrooffiitt//((lloossss)) bbeeffoorree ttaaxx Strategic report Business review CSR report Corporate governance Financial statements Additional information SStteeeell,, NNoorrtthh AAmmeerriiccaa $ 1,868 (4) $ 1,864 CCooaall $ 1,938 276 $ 2,214 OOtthheerr ooppeerraattiioonnss $ 388 74 $ 462 EElliimmiinnaattiioonnss TToottaall $(1,738) $ 10,844 282 (17) $(1,456) $ 10,827 $ 77 – (19) (19) $ 58 – (132) (19) – 25 $ 1,164 $ 20 $ (24) $ 2,804 (4) 66 62 – 1 1 (9) – (9) (62) 13 (49) $ 1,226 $ 21 $ (33) $ 2,755 (1) (167) – (7) 20 – (3) – (1) – – – – – – (131) $ 2,624 (30) (557) 12 (4) 14 $ 1,203 $ (68) $ 1,071 $ 17 $ (33) $ 2,059 (73) $ 1,986 (423) 11 (57) (360) (2) $ 1,155 35 181 Annual report & Accounts 2019 3. SEGMENT INFORMATION (CONTINUED) The revenues from contracts with external customers for each group of similar products and services and rental income are presented in the following table: US$ million SStteeeell Construction products Flat-rolled products Railway products Semi-finished products Other steel products Other products Iron ore Vanadium in slag Vanadium in alloys and chemicals Rendering of services SStteeeell,, NNoorrtthh AAmmeerriiccaa Construction products Flat-rolled products Railway products Tubular products Other products Rendering of services CCooaall Coal Other products Rendering of services OOtthheerr ooppeerraattiioonnss Rendering of services 22001199 22001188 22001177 $$ 22,,116666 338866 11,,118811 22,,552288 337777 336655 119900 110099 553399 110033 77,,994444 220000 551188 440055 11,,112288 221111 3388 22,,550000 11,,225511 1155 2211 11,,228877 117744 117744 $ 2,280 415 965 2,521 399 545 158 228 922 71 8,504 247 597 380 1,167 168 24 2,583 1,506 27 25 1,558 191 191 $ 2,171 313 863 2,523 349 440 191 77 466 30 7,423 159 427 309 875 67 26 1,863 1,266 24 93 1,383 158 158 $$ 1111,,990055 $ 12,836 $ 10,827 Revenue from rendering of services included rental income, which was mainly attributable to the subsidiaries of the steel segment. US$ million Revenues from contracts with customers Rental income 22001199 $$ 1111,,887733 3322 $$ 1111,,990055 22001188 $ 12,822 14 $ 12,836 22001177 $ 10,821 6 $ 10,827 182 36 3. SEGMENT INFORMATION (CONTINUED) Distribution of the Group’s revenues by geographical area based on the location of customers for the years ended 31 December was as follows: Strategic report Business review CSR report Corporate governance Financial statements Additional information US$ million CCIISS Russia Kazakhstan Ukraine Uzbekistan Belarus Kyrgyzstan Others AAmmeerriiccaa USA Canada Mexico Others AAssiiaa Taiwan China Philippines Republic of Korea Thailand Indonesia Japan United Arab Emirates Mongolia Vietnam India Singapore Others EEuurrooppee European Union Turkey Others AAffrriiccaa Kenya Egypt Others OOtthheerr ccoouunnttrriieess 22001199 22001188 22001177 $$ 44,,337733 $ 4,564 $ 4,255 229977 229911 8811 7711 4499 7766 55,,223388 11,,770011 884477 111199 4422 22,,770099 668800 447788 338877 228822 224477 224444 224433 112244 6611 5577 4422 55 4433 22,,889933 776677 116666 2233 995566 6633 2277 1177 110077 22 237 480 32 72 50 65 5,500 2,226 537 154 92 3,009 433 114 631 409 225 346 186 5 58 35 60 133 81 2,716 1,146 254 26 1,426 77 86 16 179 6 254 368 37 62 36 55 5,067 1,465 546 156 34 2,201 468 145 345 321 189 330 149 25 28 44 19 41 58 2,162 775 328 25 1,128 106 100 58 264 5 None of the Group’s customers amounts to 10% or more of the consolidated revenues. $$1111,,990055 $ 12,836 $ 10,827 37 183 Annual report & Accounts 2019 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 Canada USA Ukraine Kazakhstan Czech Republic Italy Other countries 22001199 $ 3,967 981 827 –– 38 35 –– 3 22001188 $ 3,258 1,221 791 – 41 35 41 3 22001177 $ 3,879 1,332 818 61 51 37 45 4 $ 5,851 $ 5,390 $ 6,227 4. CHANGES IN THE COMPOSITION OF THE GROUP BBuussiinneessss CCoommbbiinnaattiioonnss In November 2019, the Group acquired 100% share in Metservice, which provides warehousing and related services in Nizhny Tagil (Russia). The consideration amounted to $3 million in cash. At the date of business combination the fair value of net assets of the acquired company was $3 million. In June 2017, the Group purchased the business of Western Canada Machining Inc. (Alberta, Canada), which produces couplings for use in the oil and gas industry. The consideration amounted to $5 million in cash. At the date of business combination the fair value of net assets of the acquired company was $5 million. PPuurrcchhaassee ooff NNoonn--ccoonnttrroolllliinngg IInntteerreessttss Raspadskaya In 2019, the Group acquired an additional 1.8% ownership interest in Raspadskaya, a subsidiary of the Group, for cash consideration of $25 million. The excess of consideration over the carrying values of non-controlling interests acquired amounting to $3 million was charged to accumulated profits. In addition, in June 2019 Raspadskaya purchased its own shares in course of the tender offer for cash consideration of $46 million. The Group derecognised 2.53% of non-controlling interests and charged to accumulated profits $7 million representing the excess of consideration over the carrying values of non-controlling interests acquired. In the course of the closed subscription in September 2019 Raspadskaya issued 80,285 new shares, and Evraz Group S.A. acquired 80,284 shares, thus increasing the Group’s stake in the subsidiary by 0.0014%. In 2018, the Group acquired an additional 1.89% ownership interest in Raspadskaya for cash consideration of $24 million. The excess of consideration over the carrying values of non-controlling interests acquired amounting to $3 million was charged to accumulated profits. Mezhegeyugol On 14 March 2017, the Group signed an option agreement with a non-controlling shareholder in respect of shares of Mezhegeyugol, a coal mining subsidiary of the Group. Under the agreement, the non-controlling shareholder has the right to sell to the Group (the put option) all its shares in Mezhegeyugol (39.9841%) for $39 million and to settle the loan payable to the Group for $25 million. As a result, the Group would hold 100% ownership interest in the subsidiary. The option can be exercised from 1 December 2019 to 1 December 2020. The Group determined that the terms of the option agreement give the Group the rights to the beneficial interests in Mezgegeyugol and derecognised the non-controlling interests and recognised a liability under the put option. The difference between the discounted value of the liability under the put option ($60 million) and the carrying value of non-controlling interest in the amount of $56 million was charged to the accumulated profits of the Group. In 2019, 2018 and 2017, the Group accrued $3 million, $4 million and $1 million interest on this liability. Sale of Subsidiaries In 2019, the Group sold EVRAZ Stratcor Inc, EVRAZ Palini e Bertoli, and Evraztrans-Ukraine. In 2018, the Group sold Dneprovsk Metallurgical Plant. Further details of these transactions are disclosed in Note 12. 184 38 5. GOODWILL Goodwill relates to the assembled workforce and synergy from integration of the acquired subsidiaries into the Group. The table below presents movements in the carrying amount of goodwill. Strategic report Business review CSR report Corporate governance Financial statements Additional information US$ million AAtt 3311 DDeecceemmbbeerr 22001166 Sale of subsidiaries (Note 12) Translation difference AAtt 3311 DDeecceemmbbeerr 22001177 Sale of subsidiaries (Note 12) Translation difference AAtt 3311 DDeecceemmbbeerr 22001188 Sale of subsidiaries (Note 12) Impairment of Large diameter pipes Translation difference AAtt 3311 DDeecceemmbbeerr 22001199 GGrroossss aammoouunntt $$ 22,,336677 (22) 58 $$ 22,,440033 (112) (70) $$ 22,,222211 (63) – 34 IImmppaaiirrmmeenntt lloosssseess $$ ((11,,448877)) 16 (15) $$ ((11,,448866)) 112 17 $$ ((11,,335577)) 63 (300) (4) $$ 22,,119922 $$ ((11,,559988)) CCaarrrryyiinngg aammoouunntt $$ 888800 (6) 43 $$ 991177 – (53) $$ 886644 – (300) 30 $$ 559944 The carrying amount of goodwill was allocated among cash-generating units as follows at 31 December: US$ million 22001199 22001188 22001177 EVRAZ Inc. NA/EVRAZ Inc. NA Canada Large diameter pipes Oil Country Tubular Goods Long products EVRAZ Vanady-Tula EVRAZ Nikom, a.s. Others $$ 552255 6688 114411 331166 3322 3333 44 $$ 559944 $ 799 349 134 316 29 33 3 $ 864 $ 843 381 146 316 35 35 4 $ 917 39 185 Annual report & Accounts 2019 6. IMPAIRMENT OF ASSETS A summary of impairment losses recognition and reversals is presented below. YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million EVRAZ Inc. NA Canada Raspadskaya EVRAZ Consolidated West-Siberian Metallurgical Plant Yuzhkuzbassugol EVRAZ Nizhny Tagil Metallurgical Plant EVRAZ Inc. NA Others, net RReeccooggnniisseedd iinn pprrooffiitt oorr lloossss YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million EVRAZ Stratcor Inc. Yuzhkuzbassugol Evrazruda Others, net RReeccooggnniisseedd iinn pprrooffiitt oorr lloossss YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million EVRAZ Inc. NA EVRAZ Inc. NA Canada Raspadskaya EVRAZ Palini e Bertoli Yuzhkuzbassugol Evrazruda Others, net RReeccooggnniisseedd iinn pprrooffiitt oorr lloossss GGooooddwwiillll aanndd iinnttaannggiibbllee aasssseettss PPrrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt TTaaxxeess rreecceeiivvaabbllee $$ ((330000)) –– –– –– –– –– $$ ((330000)) ((330000)) $$ ((11)) ((9922)) ((1188)) ((1155)) ((1111)) ((88)) 33 $$ ((114422)) ((114422)) $$ –– –– –– –– –– –– –– $$ –– –– GGooooddwwiillll aanndd iinnttaannggiibbllee aasssseettss PPrrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt TTaaxxeess rreecceeiivvaabbllee $ – – – – $ – – $ (12) (6) (4) (8) $ (30) (30) $ – – – – $ – – GGooooddwwiillll aanndd iinnttaannggiibbllee aasssseettss PPrrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt TTaaxxeess rreecceeiivvaabbllee $ (13) – – – – – – $ (13) (13) $ 6 (12) 9 20 (9) 8 (2) $ 20 20 $ – – – – – – 5 $ 5 5 TToottaall $$ ((330011)) ((9922)) ((1188)) ((1155)) ((1111)) ((88)) 33 $$ ((444422)) ((444422)) TToottaall $ (12) (6) (4) (8) $ (30) (30) TToottaall $ (7) (12) 9 20 (9) 8 3 $ 12 12 In 2017-2019, the Group recognised impairment losses as a result of impairment testing at the level of cash-generating units. In addition, the Group made a write-off of certain functionally obsolete items of property, plant and equipment and recorded an impairment relating to VAT with a long-term recovery. In 2019, the Group decided to postpone reopening of a coal mine MUK-96, a subsidiary of Raspadskaya. In connection with this decision the recoverable amount of mining assets relating to this mine ($84 million) was reassessed and fully impaired. For the purpose of the impairment testing the Group assessed the recoverable amount of each cash-generating unit to which goodwill was allocated or where indicators of impairment were identified. In 2017-2019, the impairment tests were performed as of 30 September, the conclusions were reassessed at 31 December and no further impairment triggers were identified. The recoverable amounts for all cash-generating units, except for Large diameter pipes in 2019, have been determined based on the calculation of value-in-use. This valuation technique uses cash flow projections based on the actual operating results and business plans approved by management and appropriate discount rates reflecting the 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 results of the respective business plans using a zero real growth rate. In 2019, the recoverable amount of Large diameter pipes has been determined based on the calculation of fair value less costs of disposal as it was deemed to produce a more reliable result. This valuation method was based on unobservable inputs (discounted cash flows), which represent Level 3 of the fair value hierarchy. 186 40 Strategic report Business review CSR report Corporate governance Financial statements Additional information 6. IMPAIRMENT OF ASSETS (CONTINUED) The key assumptions used by management in the impairment tests with respect to the cash-generating units to which the goodwill was allocated or units containing intangible assets with indefinite useful lives are presented in the table below. CCoommmmooddiittyy PPeerriioodd ooff ffoorreeccaasstt,, yyeeaarrss PPrree--ttaaxx ddiissccoouunntt rraattee,, %% ppeerr ttoonnnnee iinn tthhee nneexxtt rreeppoorrttiinngg yyeeaarr AAvveerraaggee pprriiccee ooff ccoommmmooddiittyy RReeccoovveerraabbllee aammoouunntt ooff CCGGUU,, CCaarrrryyiinngg aammoouunntt ooff CCGGUU bbeeffoorree iimmppaaiirrmmeenntt,, UUSS$$ mmiilllliioonn UUSS$$ mmiilllliioonn 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 22001199 22001188 Steel North America Large diameter pipes steel products Oil Country Tubular Goods steel products Long products EVRAZ Vanady-Tula EVRAZ Nikom, a.s. steel products vanadium products ferrovanadium products 5 5 5 5 5 5 5 5 9.32 9.65 9.90 9.37 9.96 9.26 $1,112 $1,129 $1,127 $1,245 $720 $745 567 464 623 903 441 582 5 12.55 12.74 $21,452 $46,494 712 1,140 5 10.48 10.45 $21,371 $48,991 56 40 867 356 528 55 35 900 365 501 57 36 In addition, the Group determined that there were indicators of impairment in other cash generating units, which do not contain goodwill or intangible assets with indefinite useful lives, and tested them for impairment using the following assumptions. Steel North America Flat-rolled products Seamless pipes PPeerriioodd ooff ffoorreeccaasstt,, yyeeaarrss PPrree--ttaaxx ddiissccoouunntt rraattee,, %% AAvveerraaggee pprriiccee ooff ccoommmmooddiittyy ppeerr ttoonnnnee iinn tthhee nneexxtt rreeppoorrttiinngg yyeeaarr CCoommmmooddiittyy 5 5 9.37 9.82 steel products steel products $ 607 $ 1,224 The impairment test models take into account the impact of Section 232 tariffs imposed on imports to the US and anti-dumping duties imposed by the US against Canada on large-diameter pipes (Note 30). The effect of the anti-dumping duties is expected to last until 2024 when it will be subject to a five-year (sunset) review by the US Department of Commerce. The Section 232 tariffs are expected to last until 2023. As a result of impairment testing, in 2019, the Group recognised a $300 million impairment loss with respect to goodwill allocated to the Large diameter pipes cash-generating unit. The impairment was caused by the use of a more conservative valuation model due to the increased current market volatility. The estimations of recoverable amounts 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 Large diameter pipes. If discount rates were 10% higher, this would lead to an additional impairment of $88 million. Sales and Purchases Prices The price assumptions for the products sold and purchased by the Group were estimated based on industry research using analysts’ views published by Goldman Sachs, J.P. Morgan, Renaissance Capital, UBS, CRU, Sberbank, Morgan Stanley, Bank of America, Citi, Deutsche Bank, HSBC, VTB Capital, KPMG during the period from July to November 2019. The Group expects that the nominal prices will fluctuate with a compound annual growth rate of (7.7)%-4.3% in 2020 – 2024 and 2% in 2025 and thereafter. Reasonably possible changes in sales and purchases prices could lead to an additional impairment at Large diameter pipes. If the prices assumed for 2020 and 2021 in the impairment test were 10% lower, this would lead to an additional impairment of $50 million. Sales Volumes Management assumed that the sales volumes of steel products in 2020 will change by (4)-21% and future dynamics will be driven by a gradual market recovery and removal of anti-dumping duties allowing the Group to utilise assets’ capacities to a greater extent. Reasonably possible changes in sales volumes could lead to an additional impairment at Large diameter pipes. If the sales volumes were 10% lower than those assumed for 2020 and 2021 in the impairment test, this would lead to an additional impairment of $22 million. 187 41 Annual report & Accounts 2019 6. IMPAIRMENT OF ASSETS (CONTINUED) Cost Control Measures The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonably possible deviation in cost from these plans could lead to an additional impairment at Large diameter pipes. If the actual costs were 10% higher than those assumed for 2020 and 2021 in the impairment test, this would lead to an additional impairment of $127 million. Sensitivity Analysis There were no cash-generating units, which were not impaired in the reporting period and for which the reasonably possible changes could lead to impairment. Consequently, information on changes in the assumptions used to measure the recoverable amounts that could lead that the recoverable amounts would become equal to their carrying amounts is not disclosed. 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 22001199 $$ ((44,,559955)) ((11,,446644)) ((557788)) 22001188 $ (4,580) (1,326) (542) 22001177 $ (4,181) (1,364) (561) In 2019, 2018 and 2017, the Group recognised expense on allowance for net realisable value in the amount of $(4) million, $Nil and $(4) million, respectively. Staff costs include the following: US$ million Wages and salaries Social security costs Net benefit expense Share-based awards Other compensations 22001199 $$ 11,,004477 227744 4422 1133 8888 22001188 $ 968 245 38 15 60 22001177 $ 1,000 246 42 17 59 $$ 11,,446644 $ 1,326 $ 1,364 188 42 Strategic report Business review CSR report Corporate governance Financial statements Additional information 7. INCOME AND EXPENSES (CONTINUED) The average number of staff employed under contracts of service was as follows: Steel Steel, North America Coal 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 Other Interest expense consisted of the following for the years ended 31 December: US$ million Bank interest Interest on bonds and notes Interest on lease liabilities (Note 25) Net interest expense on employee benefits obligations (Note 23) Discount adjustment on provisions (Note 24) Other Interest income consisted of the following for the years ended 31 December: US$ million Interest on bank accounts and deposits Interest on loans and accounts receivable Other 22001199 4444,,551122 44,,229955 1144,,665555 992277 22,,334455 6666,,773344 22001199 $$ ((2200)) ((33)) ((3311)) $$ ((5544)) 22001199 $$ ((6600)) ((223311)) ((88)) ((1133)) ((1188)) ((66)) $$ ((333366)) 22001199 $$ 77 11 –– $$ 88 Gain/(loss) on financial assets and liabilities included the following for the years ended 31 December: US$ million Loss on extinguishment of debts (Note 22) Gain/(loss) on derivatives not designated as hedging instruments (Note 25) Realised gain/(loss) on hedging instruments (Note 25) Net gains/(losses) on cash flow hedges recycled to profit or loss Other 22001199 $$ ((2277)) 3388 ((2233)) 3333 ((44)) $$ 1177 22001188 45,282 3,877 13,505 882 2,344 65,890 22001188 $ (17) (3) (35) $ (55) 22001188 $ (74) (248) – (13) (16) (8) $ (359) 22001188 $ 9 7 2 $ 18 22001188 $ (1) 3 11 – – $ 13 22001177 54,737 3,395 14,629 523 2,736 76,020 22001177 $ (26) (2) (33) $ (61) 22001177 $ (115) (279) – (19) (16) (8) $ (437) 22001177 $ 8 6 – $ 14 22001177 $ (78) 4 14 – 3 $ (57) 189 43 Annual report & Accounts 2019 8. INCOME TAXES The Group’s income was subject to tax at the following tax rates: Russia Canada Cyprus Czech Republic Italy Switzerland Ukraine United Kingdom USA 22001199 22001188 22001177 2200..0000%% aanndd 1166..5500%% 20.00% and 16.50% 2266..0088%% 1122..5500%% 1199..0000%% 2277..9900%% 99..6622%% 1188..0000%% 1199..0000%% 2244..8877%% 26.32% 12.50% 19.00% 27.90% 9.18% 18.00% 19.00% 24.69% 20.00% 26.25% 12.50% 19.00% 27.90% 9.43% 18.00% – 37.83% In 2018, EVRAZ Nizhny Tagil Metallurgical Plant completed capital construction works, which make it eligible for investment tax credit from the regional government. Income tax rate was reduced from 20% to 16.5% for a period from 2018 to 2022. The Group determined that the investment tax credit is in the scope of IAS 12 “Income taxes”. As a result, in 2019 and 2018, EVRAZ Nizhny Tagil Metallurgical Plant and other subsidiaries included in the group of consolidated taxpayers received a current income tax benefit amounting to $33 million and $37 million, respectively. In December 2017, new tax legislation has been adopted in the USA, which introduced a reduction in federal income tax rate from 35% to 21% starting from 1 January 2018. The Group’s subsidiaries measured the respective deferred tax assets and liabilities at 31 December 2017 using the enacted tax rates. Major components of income tax expense for the years ended 31 December were as follows: US$ 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 Deferred income tax recognised directly in other comprehensive income Income tax (expense)/benefit reported in the consolidated statement of operations 22001199 $$ ((554400)) 88 ((66)) 11 $$ ((553377)) 22001188 $ (679) (4) (54) 6 $ (731) 22001177 $ (484) (1) 74 15 $ (396) 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 Current income tax benefit from investment tax credit Deferred income tax expense resulting from the changes in tax rates and laws Current tax on dividends distributed by the Group’s subsidiaries Change in deferred tax on undistributed earnings of the Group’s subsidiaries 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 Share of profits in joint ventures and associates Income tax (expense)/benefit reported in the consolidated statement of operations 22001199 $$ 990022 ((118800)) 88 3333 –– ((117788)) ((1199)) ((9966)) ((113300)) 2233 22 22001188 $ 3,201 (640) (4) 37 – (53) (35) (37) (58) 57 2 22001177 $ 1,155 (231) (1) – (6) (26) – (254) 100 20 2 $$ ((553377)) $ (731) $ (396) In 2017, the higher amount of non-deductible expenses and unrecognised temporary differences was mostly caused by the significant losses on sale of subsidiaries (Note 12), which either cannot be utilised or cannot be deductible for tax purposes. As of 31 December 2019, the Group accrued deferred income taxes in respect of undistributed earnings of the Group’s subsidiaries in the amount of $54 million (2018: $35 million, 2017: $Nil). The current tax rate on intra-group dividend income varies from 0% to 15%. The temporary differences associated with investments in subsidiaries were not recognised as the Group is able to control the timing of the reversal of these temporary differences and does not intend to reverse them in the foreseeable future. At 31 December 2019, the aggregate amount of such temporary differences, for which deferred tax liabilities have not been recognised, amounted to $59 million (2018: $101 million, 2017: $1,439 million). The decrease in these temporary differences in 2018 was caused by the changes in the Russian tax regulations, which modified the rules for using zero tax rate in relation to capital gains of the Russian parent entities, if certain conditions are met. 190 44 Strategic report Business review CSR report Corporate governance Financial statements Additional information 8. INCOME TAXES (CONTINUED) In the context of the Group’s current structure, tax losses and current tax assets of the different companies may not be set off against current tax liabilities and taxable profits of other companies in the same jurisdiction, except for the companies registered in Cyprus, Russia and the United Kingdom where group relief and tax consolidation can be applied. As of 31 December 2019, the unused tax losses carried forward approximated $8,620 million (2018: $9,321 million, 2017: $9,893 million). The Group recognised deferred tax assets of $234 million (2018: $199 million, 2017: $267 million) in respect of unused tax losses. Deferred tax assets in the amount of $1,878 million (2018: $2,287 million, 2017: $2,339 million) have 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 $7,592 million (2018: $8,492 million, 2017: $8,711 million) for which deferred tax assets were not recognised arose in companies registered in Canada, Cyprus, Italy, Kazakhstan, Luxembourg, Russia, Ukraine, the United Kingdom and the USA. Losses in the amount of $7,499 million (2018: $8,399 million, 2017: $8,664 million) are available indefinitely for offset against future taxable profits of the companies in which the losses arose and $93 million will expire within 10 years (2018: $93 million, 2017: $47 million). Deferred income tax assets and liabilities and their movements for the years ended 31 December were as follows: YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million Deferred income tax liabilities: Valuation and depreciation of property, plant and equipment Valuation and amortisation of intangible assets Other Deferred income tax assets: Tax losses available for offset Accrued liabilities Impairment of accounts receivable Other Net deferred income tax asset Net deferred income tax liability CChhaannggee rreeccooggnniisseedd iinn ssttaatteemmeenntt ooff ooppeerraattiioonnss CChhaannggee rreeccooggnniisseedd iinn ootthheerr ccoommpprreehheennssiivvee iinnccoommee CChhaannggee dduuee ttoo ddiissppoossaall ooff ssuubbssiiddiiaarriieess TTrraannssllaattiioonn ddiiffffeerreennccee OOtthheerr mmoovveemmeennttss ((33)) ((99)) 4433 3311 2299 1144 1111 ((2288)) 2266 5555 6600 –– –– –– –– –– ((11)) –– –– ((11)) ((11)) –– ((66)) –– –– ((66)) ((77)) ((11)) –– 11 ((77)) ((11)) –– 4466 22 77 5555 1133 99 11 55 2288 77 3344 1133 –– –– 1133 –– –– 1133 –– –– 1133 –– –– 22001199 $$ 551199 4433 114466 770088 223344 112299 1155 113300 550088 115522 $$ 335522 Other movements in deferred tax assets and liabilities represent adjustments in connection with the adoption of IFRS 16 “Leases” (Note 2). YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million Deferred income tax liabilities: Valuation and depreciation of property, plant and equipment Valuation and amortisation of intangible assets Other Deferred income tax assets: Tax losses available for offset Accrued liabilities Impairment of accounts receivable Other Net deferred income tax asset Net deferred income tax liability 22001188 $ 469 50 96 615 199 95 3 152 449 92 $ 258 CChhaannggee rreeccooggnniisseedd iinn ssttaatteemmeenntt ooff ooppeerraattiioonnss CChhaannggee rreeccooggnniisseedd iinn ootthheerr ccoommpprreehheennssiivvee iinnccoommee CChhaannggee dduuee ttoo ddiissppoossaall ooff ssuubbssiiddiiaarriieess TTrraannssllaattiioonn ddiiffffeerreennccee OOtthheerr mmoovveemmeennttss – – – – – (6) – – (6) (4) 2 – – – (1) – – – (1) (1) – (73) (4) (11) (88) (25) (10) (2) (7) (44) (11) (55) – – – – – – – – – – – – (4) (8) 27 15 (42) (15) (7) 31 (33) (65) (17) 45 22001188 $$ 446699 5500 9966 661155 119999 9955 33 115522 444499 9922 $$ 225588 22001177 $ 546 62 80 688 267 126 12 128 533 173 $ 328 191 Annual report & Accounts 2019 CChhaannggee rreeccooggnniisseedd iinn ssttaatteemmeenntt ooff ooppeerraattiioonnss CChhaannggee rreeccooggnniisseedd iinn ootthheerr ccoommpprreehheennssiivvee iinnccoommee CChhaannggee dduuee ttoo ddiissppoossaall ooff ssuubbssiiddiiaarriieess TTrraannssllaattiioonn ddiiffffeerreennccee OOtthheerr mmoovveemmeennttss 8. INCOME TAXES (CONTINUED) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million Deferred income tax liabilities: Valuation and depreciation of property, plant and equipment Valuation and amortisation of intangible assets Other Deferred income tax assets: Tax losses available for offset Accrued liabilities Impairment of accounts receivable Other Net deferred income tax asset Net deferred income tax liability 22001177 $ 546 62 80 688 267 126 12 128 533 173 $ 328 (36) (21) 19 (38) 55 8 1 (13) 51 47 (42) – – – – – (15) – – (15) (10) 5 (10) (1) (1) (12) (25) (8) – – (33) (24) (3) 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including right-of-use assets, 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 Government grants 22001199 $$ 110022 11,,889999 44,,775588 336699 22,,446688 3344 668811 1100,,331111 ((994433)) ((22,,990044)) ((220000)) ((11,,330088)) ((2255)) ((55,,338800)) ((66)) 22001166 $ 567 81 58 706 226 138 10 140 514 156 $ 348 25 3 4 32 11 3 1 1 16 4 20 22001188 $ 100 1,752 4,302 226 2,084 35 378 8,877 (857) (2,647) (145) (998) (28) (4,675) – – – – – – – – – – – – 22001177 $ 107 1,894 4,812 255 2,461 37 549 10,115 (968) (2,906) (168) (1,112) (28) (5,182) – $$ 44,,992255 $ 4,202 $ 4,933 192 46 Strategic report Business review CSR report Corporate governance Financial statements Additional information 9. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The movement in property, plant and equipment, including right-of-use assets, was as follows: YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million At 31 December 2018, cost, net of accumulated depreciation IFRS 16 adoption: recognition of right-of- use assets (Note 2) At 1 January 2019, cost, net of accumulated depreciation Additions Assets put into operation Assets acquired in business combinations 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 Government grants Translation difference At 31 December 2019, cost, net of accumulated depreciation YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million At 31 December 2017, cost, net of accumulated depreciation 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 2018, cost, net of accumulated depreciation YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million At 31 December 2016, cost, net of accumulated depreciation Assets acquired in business combinations 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 2017, cost, net of accumulated depreciation BBuuiillddiinnggss aanndd ccoonnssttrruuccttiioonnss MMaacchhiinneerryy aanndd eeqquuiippmmeenntt TTrraannssppoorrtt aanndd mmoottoorr vveehhiicclleess MMiinniinngg aasssseettss OOtthheerr aasssseettss AAsssseettss uunnddeerr ccoonnssttrruuccttiioonn LLaanndd TToottaall $$ 110000 $$ 889955 $$ 11,,665555 $$ 8811 $$ 11,,008866 –– 1122 4400 6688 –– $$ 110000 $$ 990077 $$ 11,,669955 $$ 114499 $$ 11,,008866 11 –– 44 ((33)) –– –– –– ((44)) –– –– 44 –– 5500 –– ((11)) ((8822)) ((1133)) 11 ((88)) 1122 –– 9900 1111 338877 –– ((66)) ((333311)) ((2255)) 22 ((2255)) 33 –– 114433 44 4466 –– –– ((4466)) –– –– ((22)) –– –– 1188 –– 6666 –– –– ((8877)) ((110011)) 11 –– 6644 –– 113311 $$ 77 –– $$ 77 –– 66 –– –– ((44)) –– –– –– –– –– –– $$ 337788 $$ 44,,220022 –– 112200 $$ 337788 $$ 44,,332222 882288 ((555555)) –– ((44)) –– ((1100)) 33 –– –– ((66)) 4411 884444 –– 44 ((1144)) ((555500)) ((114499)) 77 ((3399)) 7799 ((66)) 442277 $$ 110022 $$ 995566 $$ 11,,885544 $$ 116699 $$ 11,,116600 $$ 99 $$ 667755 $$ 44,,992255 BBuuiillddiinnggss aanndd ccoonnssttrruuccttiioonnss MMaacchhiinneerryy aanndd eeqquuiippmmeenntt TTrraannssppoorrtt aanndd mmoottoorr vveehhiicclleess MMiinniinngg aasssseettss OOtthheerr aasssseettss AAsssseettss uunnddeerr ccoonnssttrruuccttiioonn LLaanndd TToottaall $ 107 $ 926 $ 1,906 $ 87 $ 1,349 $ 9 $ 549 $ 4,933 – – – – – – – – – 224 (1) (80) (4) – (20) (5) (7) $ 100 (145) $ 895 350 (15) (313) (10) 1 (35) 1 (230) $ 1,655 – 31 (1) (23) – – – – – 58 (2) (82) (15) 6 – (1) (13) $ 81 (227) $ 1,086 – 2 – (3) – – – – (1) $ 7 579 (665) – – (8) – (10) – (67) 579 – (19) (501) (37) 7 (65) (5) (690) $ 378 $ 4,202 BBuuiillddiinnggss LLaanndd aanndd ccoonnssttrruuccttiioonnss MMaacchhiinneerryy aanndd eeqquuiippmmeenntt TTrraannssppoorrtt aanndd mmoottoorr vveehhiicclleess MMiinniinngg aasssseettss OOtthheerr aasssseettss AAsssseettss uunnddeerr ccoonnssttrruuccttiioonn TToottaall $ 100 $ 883 $ 1,809 $ 79 $ 1,347 $ 10 $ 424 $ 4,652 3 – – (1) – (1) 3 – – 3 1 – 74 (3) (84) (2) 9 (6) 8 46 3 7 344 (11) (325) (13) 25 (11) – 78 – – 32 (2) (25) – – (1) – 4 – – 50 (3) (85) (21) 30 (76) 36 71 – – 2 – (3) – – – – – – 622 (502) – – (11) 1 (10) – 25 7 629 – (20) (522) (48) 68 (104) 44 227 $ 107 $ 926 $ 1,906 $ 87 $ 1,349 $ 9 $ 549 $ 4,933 193 47 Annual report & Accounts 2019 9. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Assets under construction include prepayments to constructors and suppliers of property, plant and equipment in the amount of $77 million, $36 million and $60 million as of 31 December 2019, 2018 and 2017, respectively. Impairment losses were identified in respect of certain items of property, plant and equipment that were recognised as functionally obsolete or as a result of the testing at the level of cash-generating units (Note 6). The amount of borrowing costs capitalised during the year ended 31 December 2019 was $Nil (2018: $1 million, 2017: $6 million). Right-of-Use Assets In 2019, the movement in right-of-use assets were as follows: US$ million At 1 January 2019, assets under finance leases, cost, net of accumulated depreciation Newly recognised right-of-use assets Total right-of-use assets at 1 January 2019 Additions Purchase of right-of-use assets Depreciation charge Transfer to assets held for sale Translation difference At 31 December 2019, cost, net of accumulated depreciation BBuuiillddiinnggss LLaanndd aanndd ccoonnssttrruuccttiioonnss MMaacchhiinneerryy aanndd eeqquuiippmmeenntt TTrraannssppoorrtt aanndd mmoottoorr vveehhiicclleess TToottaall $$ 33 –– $$ 33 –– ((33)) –– –– –– $$ 11 1122 $$ 1133 –– ((11)) ((11)) –– –– $$ 33 4400 $$ 4433 1111 –– ((77)) –– 11 $$ –– 6688 $$ 77 112200 $$ 6688 $$ 112277 44 –– ((2222)) ((22)) 88 1155 ((44)) ((3300)) ((22)) 99 $$ –– $$ 1111 $$ 4488 $$ 5566 $$ 111155 The liabilities related to the right-of-use assets are disclosed in Note 25. Assets in Operating Lease The Group acts as a lessor in some operating lease contracts. The carrying value of assets in operating lease at 31 December 2019 was $66 million, including $51 million of right-of-use assets in sublease representing railroad cars. US$ million LLaanndd BBuuiillddiinnggss aanndd ccoonnssttrruuccttiioonnss MMaacchhiinneerryy aanndd eeqquuiippmmeenntt TTrraannssppoorrtt aanndd mmoottoorr vveehhiicclleess TToottaall At 31 December 2019, cost, net of accumulated depreciation $$ 11 $$ 55 $$ 88 $$ 5522 $$ 6666 In 2019, rental income amounted to $32 million, including $25 million of income from subleasing of right-of-use assets. At 31 December 2019, the undiscounted lease payments to be received under operating leases were as follows: US$ million 22002200 22002211 22002222 22002233 22002244 AAfftteerr 55 yyeeaarrss ffrroomm tthhee rreeppoorrttiinngg ddaattee TToottaall Lease payments under operating leases $ 25 $ 26 $ 15 $ 3 $ 3 $ 20 $ 92 194 48 10. INTANGIBLE ASSETS OTHER THAN GOODWILL Intangible assets consisted of the following as of 31 December: US$ million Cost: Customer relationships Water rights and environmental permits Contract terms Other Accumulated amortisation and impairment: Customer relationships Water rights and environmental permits Contract terms Other Strategic report Business review CSR report Corporate governance Financial statements Additional information 22001199 $$ 667788 5577 2244 6677 882266 ((556677)) ((1133)) ((1155)) ((4466)) ((664411)) 22001188 $ 656 57 21 64 798 (525) (13) (11) (43) (592) $$ 118855 $ 206 22001177 $ 693 57 26 65 841 (513) (13) (11) (45) (582) $ 259 As of 31 December 2019, 2018 and 2017, water rights and environmental permits with a carrying value of $44 million had an indefinite useful life. The movement in intangible assets was as follows: YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million At 31 December 2018, cost, net of accumulated amortisation Additions Amortisation charge Translation difference CCuussttoommeerr rreellaattiioonnsshhiippss $$ 113311 –– ((2266)) 66 WWaatteerr rriigghhttss aanndd eennvviirroonnmmeennttaall ppeerrmmiittss $$ 4444 –– –– –– At 31 December 2019, cost, net of accumulated amortisation $$ 111111 $$ 4444 YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million At 31 December 2017, cost, net of accumulated amortisation Additions Amortisation charge Translation difference CCuussttoommeerr rreellaattiioonnsshhiippss $ 180 – (36) (13) WWaatteerr rriigghhttss aanndd eennvviirroonnmmeennttaall ppeerrmmiittss $ 44 – – – CCoonnttrraacctt tteerrmmss $$ 1100 –– ((22)) 11 $$ 99 CCoonnttrraacctt tteerrmmss $ 15 – (2) (3) At 31 December 2018, cost, net of accumulated amortisation $ 131 $ 44 $ 10 YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million At 31 December 2016, cost, net of accumulated amortisation Additions Amortisation charge Impairment losses recognised in statement of operations Translation difference At 31 December 2017, cost, net of accumulated amortisation CCoonnttrraacctt tteerrmmss $ 17 – (3) – 1 $ 15 CCuussttoommeerr rreellaattiioonnsshhiippss WWaatteerr rriigghhttss aanndd eennvviirroonnmmeennttaall ppeerrmmiittss $ 57 – – (13) – $ 44 $ 203 – (36) – 13 $ 180 49 OOtthheerr $$ 2211 66 ((66)) –– TToottaall $$ 220066 66 ((3344)) 77 $$2211 $$ 118855 OOtthheerr $ 20 10 (6) (3) $ 21 OOtthheerr $ 20 5 (5) – – $ 20 TToottaall $ 259 10 (44) (19) $ 206 TToottaall $ 297 5 (44) (13) 14 $ 259 195 Annual report & Accounts 2019 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 IInnvveessttmmeenntt aatt 3311 DDeecceemmbbeerr 22001166 Additional investments Share of profit/(loss) Dividends paid Translation difference IInnvveessttmmeenntt aatt 3311 DDeecceemmbbeerr 22001177 Share of profit/(loss) Dividends paid Translation difference IInnvveessttmmeenntt aatt 3311 DDeecceemmbbeerr 22001188 Additional investments Share of profit/(loss) Dividends paid Translation difference IInnvveessttmmeenntt aatt 3311 DDeecceemmbbeerr 22001199 TTiimmiirr IIrroonn OOrree PPrroojjeecctt TTiimmiirr SSttrreeaammccoorree OOtthheerr aassssoocciiaatteess $ 19 – 1 – 1 $$ 2211 (1) – (3) $$ 1177 – (1) – 1 $$ 1177 $ 37 – 8 – 2 $$ 4477 9 – (9) $$ 4477 3 7 – 6 $$ 6633 $ 8 1 2 (1) 1 $$ 1111 1 (1) (1) $$ 1100 – 3 (2) 1 $$ 1122 TToottaall $ 64 1 11 (1) 4 $$ 7799 9 (1) (13) $$ 7744 3 9 (2) 8 $$ 9922 In 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. Under the joint venture agreement major operating and financial decisions are made by unanimous consent of the Group and Alrosa, and no single venturer is in a position to control the activity unilaterally. Consequently, the Group accounts for its interest in Timir under the equity method. The Group’s consideration for this stake amounted to 4,950 million roubles ($159 million at the exchange rate as of the date of the transaction) payable in instalments to 15 July 2014. The consideration was measured as the present value of the expected cash outflows. In 2014 and 2015, the parties amended the payment schedule. The latest schedule provided for an execution of payments of 500 million roubles in each of January 2017 and 2018 and 480 million roubles in 2019. From the dates of the amendments the Group incurred interest charges on the unpaid liability. In 2019, 2018 and 2017, the Group paid 480 million roubles ($8 million), 500 million roubles ($9 million) and 500 million roubles ($8 million), respectively, of purchase consideration and $1 million and $2 million, respectively, of interest charges. Previously, the Group paid the principal of 3,470 million roubles ($96 million) in total. In addition, the Group paid interest charges on the liability. At 31 December 2018 and 2017, trade and other accounts payable included liabilities relating to this acquisition in the amount of $8 million, and $19 million, respectively. In January 2019, the liability was fully settled. The table below sets out Timir’s assets and liabilities as of 31 December: US$ million Mineral reserves and property, plant and equipment Other non-current assets TToottaall aasssseettss Non-current liabilities Current liabilities TToottaall lliiaabbiilliittiieess NNeett aasssseettss 22001199 $$ 5544 77 6611 –– 2277 2277 3344 22001188 $ 48 6 54 – 21 21 33 22001177 $ 58 7 65 23 – 23 42 NNeett aasssseettss aattttrriibbuuttaabbllee ttoo 5511%% oowwnneerrsshhiipp iinntteerreesstt $$ 1177 $ 17 $ 21 In 2019, 2018 and 2017, Timir’s statement of operations included only other income and expenses amounting to $(1) million, $(2) million and $2 million, respectively. At 31 December 2019, 2018 and 2017 Timir owed to the Group $9 million, $7 million and $8 million, respectively, which were included in the receivables from related parties caption in 2018 and 2019 and in other non-current financial assets in 2017. The amounts represent a loan bearing interest of 6.45% per annum (in 2017 the interest rate was 0.5% per annum). 196 50 11. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES (CONTINUED) SSttrreeaammccoorree The Group owns a 50% interest in Streamcore (Cyprus), a joint venture established for the purpose of exercising joint control over facilities for scrap procurement and processing in Siberia, Russia. The table below sets out Streamcore’s assets and liabilities as of 31 December: Strategic report Business review CSR report Corporate governance Financial statements Additional information US$ million Property, plant and equipment Inventories Accounts receivable TToottaall aasssseettss Deferred income tax liabilities Current liabilities TToottaall lliiaabbiilliittiieess NNeett aasssseettss NNeett aasssseettss aattttrriibbuuttaabbllee ttoo 5500%% oowwnneerrsshhiipp iinntteerreesstt The table below sets out Streamcore’s income and expenses: US$ million Revenue Cost of revenue Other expenses, including income taxes NNeett pprrooffiitt GGrroouupp’’ss sshhaarree ooff pprrooffiitt ooff tthhee jjooiinntt vveennttuurree 12. DISPOSAL GROUPS HELD FOR SALE 22001199 $$ 2255 1100 9944 112299 11 33 44 112255 $$ 6633 22001199 $$ 550022 ((447788)) ((1100)) 1144 77 22001188 22001177 $ 21 9 151 181 1 86 87 $ 94 $ 47 22001188 $ 579 (553) (8) $ 18 $ 9 $ 24 60 104 188 2 92 94 $ 94 $ 47 22001177 $ 458 (432) (9) $ 17 $ 8 The table below demonstrates the carrying values of assets and liabilities, at the dates of disposal, of the subsidiaries and other business units disposed of during 2017–2019. US$ million Property, plant and equipment Goodwill Other non-current assets Inventories Accounts receivable Cash and cash equivalents TToottaall aasssseettss Employee benefits Other non-current liabilities Current liabilities TToottaall lliiaabbiilliittiieess NNoonn--ccoonnttrroolllliinngg iinntteerreessttss NNeett aasssseettss 22001199 $$ 3399 –– 2266 3344 2222 4477 116688 77 1133 111100 113300 –– $$3388 22001188 $ 65 – 2 38 46 2 153 21 – 147 168 – 22001177 $ 119 6 34 27 38 12 236 23 35 38 96 6 $ (15) $ 134 51 197 Annual report & Accounts 2019 12. DISPOSAL GROUPS HELD FOR SALE (CONTINUED) The net assets of disposal groups sold in 2017–2019 related to the following reportable segments: US$ million AAsssseettss ccllaassssiiffiieedd aass hheelldd ffoorr ssaallee Steel Coal Other operations LLiiaabbiilliittiieess ddiirreeccttllyy aassssoocciiaatteedd wwiitthh aasssseettss ccllaassssiiffiieedd aass hheelldd ffoorr ssaallee Steel Coal Other operations NNoonn--ccoonnttrroolllliinngg iinntteerreessttss Steel Cash flows on disposal of subsidiaries and other business units were as follows: US$ million Net cash disposed of with subsidiaries Cash received Tax and transaction costs paid NNeett ccaasshh iinnffllooww The disposal groups sold during 2017–2019 are described below. Stratcor Inc. 22001199 $$ 116688 115555 –– 1133 113300 112244 66 –– –– 22001199 $$ ((4477)) 9999 ((88)) 4444 22001188 $ 153 153 – – 168 168 – – – – 22001188 $ (2) 54 – $ 52 22001177 $ 236 196 40 – 96 79 17 – 6 6 22001177 $ (12) 489 (65) $ 412 On 11 October 2019, the Group sold its wholly-owned subsidiary EVRAZ Stratcor Inc. to a third party for cash consideration of 1 US dollar. EVRAZ Stratcor Inc. is a vanadium producer located in the USA, it was included in the steel segment of the Group’s operations. The Group recognised a $19 million gain on sale of the subsidiary within the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. Evraztrans Ukraine On 15 November 2019, the Group sold its wholly-owned subsidiary Evraztrans Ukraine to a third party for cash consideration of $8 million. Evraztrans Ukraine is a railway forwarder located in Ukraine, it was included in 2 segments of the Group’s operations – other operations and steel. The Group recognised a $(36) million loss on sale of the subsidiary, including $(37) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. At 31 December 2019, the sale consideration was unsettled. Yartsevo Rolling Mill Historically, the Group was one of major creditors of a steel-rolling mill in Yartsevo located in the Smolensk region of Russia. The mill went into the bankruptcy proceedings and in the 1st half of 2019 the Group impaired the non-current financial asset relating to the mill, recognising a $56 million loss, which was recorded in the Impairment of non-current financial assets caption of the consolidated statement of operations. At 30 June 2019, the resulting carrying value of the non-current financial asset was $21 million. In November 2019, the Group acquired property, plant and equipment and inventory of this rolling mill from the auction undertaken in the course of the bankruptcy proceedings for $22 million with the purpose of subsequent sale to a third party. The proceeds from the sale were used by the bankruptcy administrator to partially repay the debts of the mill, the majority of which were the debts to the Group. Upon acquisition the acquired non-current asset was classified as a disposal group held for sale. Shortly after the acquisition the Group sold the mill for cash consideration of $66 million to a third-party acquirer. The gain on sale before tax amounting to $44 million was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Income tax paid on a resale margin amounted to $8 million. At the moment of the acquisition the Group did not have any arrangement for the sale of the mill to a new purchaser, therefore, the purchase and sale transactions were not treated as linked. 198 52 Strategic report Business review CSR report Corporate governance Financial statements Additional information 12. DISPOSAL GROUPS HELD FOR SALE (CONTINUED) Palini e Bertoli On 2 December 2019, the Group sold its wholly-owned subsidiary EVRAZ Palini e Bertoli to a third party for cash consideration of $36 million. EVRAZ Palini e Bertoli, an Italian rolling mill, was included in the steel segment of the Group’s operations. The Group recognised a $2 million gain on sale of the subsidiary, including $(5) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations and $(1) of transaction costs. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $47 million. At 31 December 2019, $3 million of the sale consideration was unsettled. Dneprovsk Metallurgical Plant On 6 March 2018, the Group sold Dneprovsk Metallurgical plant (Ukraine), in which it had a 97.73% ownership interest, to a third party for cash consideration of $35 million. The consideration was payable in 2 instalments: $25 million was received upon signing of the transaction documents and the rest was settled in December 2018. The Group received interest income on deferred consideration in the amount of $1 million. Prior to disposal the subsidiary was included in the steel segment. The Group recognised a $(10) million loss on sale of the subsidiary, including $(60) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $2 million. Yuzhkoks On 19 December 2017, the Group sold a Ukrainian coking plant Yuzhkoks, in which it had a 94.96% ownership interest, to a third party for cash consideration of $63 million, including $16 million of prepayment for the sale of this subsidiary received in 2016. Prior to disposal the subsidiary was included in the steel segment. The Group recognised a $(91) million loss on sale of the subsidiary, including $(132) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. Nakhodka Trade Sea Port On 15 June 2017, the Group sold its wholly-owned subsidiary EVRAZ Nakhodka Trade Sea Port (“NMTP”) to a wholly-owned subsidiary of Lanebrook Limited (the ultimate controlling shareholder of the Group) for cash consideration of $332 million. In connection with the sale transaction the Group entered into an agreement with NMTP pursuant to which the latter will transship cargo of the Group’s coal and metals in specified volumes for 5 years on terms specified in the agreement. The Group received a consideration of $8 million in respect of the transshipment agreement, which was recognised as deferred income with a 5-year period of amortisation. Prior to disposal the subsidiary was included in the coal segment. The Group recognised a $284 million gain on sale of the subsidiary, including $(5) million of transaction costs and $(20) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. In addition, the Group paid income tax on the sale transaction in the amount of $60 million. Sukha Balka On 1 June 2017, the Group sold a Ukrainian iron ore mine Sukha Balka, in which it had a 99.42% ownership interest, to a third party for cash consideration of $109 million. In 2017, the Group received $94 million. At 31 December 2017, the unpaid amount was $15 million plus $3 million of interest accrued relating to the sale of Sukha Balka. This amount was fully received in the first half of 2018. Prior to disposal the subsidiary was included in the steel segment. The Group recognised a $(555) million loss on sale of the subsidiary, including $(586) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. Strategic Minerals Corporation Following the sale agreement signed in 2016, on 6 April 2017, the Group sold Strategic Minerals Corporation (USA), in which it had a 78.76% ownership interest, to a third party for cash consideration of $16 million. Strategic Minerals Corporation owns a 75% share in the Vametco vanadium mine and plant located in the Republic of South Africa. Prior to disposal both subsidiaries were included in the steel segment. The Group recognised a $2 million gain on sale of the subsidiary, including $(3) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain/(loss) on disposal groups classified as held for sale caption of the consolidated statement of operations.. Cash disposed with the subsidiary amounted to $12 million. 53 199 Annual report & Accounts 2019 13. OTHER NON-CURRENT ASSETS Other non-current assets consisted of the following as of 31 December: Non-current Financial Assets US$ million Derivatives not designated as hedging instruments (Note 25) Hedging instruments (Note 25) Financial assets measured at fair value through other comprehensive income Trade and other receivables Loans receivable Receivables from related parties Restricted deposits Other Other Non-current Assets US$ million Safety stock inventories Defined benefit asset (Note 23) Income tax receivable Other 22001199 $$ 1177 –– –– 1166 11 –– 66 –– $$ 4400 22001199 $$ 2299 1122 66 88 $$ 5555 22001188 22001177 $ – – – 17 1 1 6 66 $ 91 22001188 $ 24 3 8 9 $ 44 $ – 4 33 23 20 8 6 57 $ 151 22001177 $ 28 – 2 9 $ 39 Other Non-current Financial Assets In 2018 and 2017, the Group’s other non-current financial assets mainly related to a steel-rolling mill located in the Smolensk region of Russia. In 2019, these assets were partially impaired and the remaining balance was settled by cash (Note 12). Financial Assets Measured at Fair Value Through Other Comprehensive Income At 31 December 2017, the Group held approximately 15% in Delong Holdings Limited (“Delong”), a flat steel producer headquartered in Beijing (China). At that date the investments in Delong were classified as available-for-sale and measured at fair value based on market quotations of the Singapore Exchange. At 31 December 2017, the carrying value of these investments amounted to $33 million, including a $30 million increase in the fair value recognised in other comprehensive income in 2017. At 1 January 2018, the Group irrevocably designated these investments as measured at fair value through other comprehensive income. For such financial instruments all subsequent changes in fair value are reported in other comprehensive income, no impairment losses are recognised in profit or loss and no gains or losses are recycled to profit or loss upon derecognition. In June 2018, the Group sold its ownership interest in Delong to the major shareholder of the entity for cash consideration of $92 million. Market value of the equity instruments at the date of sale was $71 million. Total gain, comprising the change in market value until the sale and the excess of the sale price over the market value of the investments at the sale date, amounting to $59 million was recognised in other comprehensive income. Upon sale the Group transferred the realised gains accumulated in other comprehensive income ($89 million) to accumulated profits. 14. INVENTORIES Inventories consisted of the following as of 31 December: US$ million Raw materials and spare parts Work-in-progress Finished goods 22001199 $$ 881111 118855 448844 22001188 $ 737 292 445 22001177 $ 548 245 405 $$ 11,,448800 $ 1,474 $ 1,198 As of 31 December 2019, 2018 and 2017, the net realisable value allowance was $39 million, $34 million and $40 million, respectively. As of 31 December 2019, 2018 and 2017, certain items of inventory with an approximate carrying amount of $512 million, $629 million and $438 million, respectively, were pledged to banks as collateral against loans provided to the Group (Note 22). 200 54 15. TRADE AND OTHER RECEIVABLES Trade and other receivables consisted of the following as of 31 December: US$ million Trade accounts receivable Other receivables Allowance for expected credit losses Strategic report Business review CSR report Corporate governance Financial statements Additional information 22001199 $$ 448811 9999 558800 ((4466)) $$ 553344 22001188 $ 806 71 877 (42) $ 835 22001177 $ 722 63 785 (54) $ 731 Ageing analysis and movement in allowance for expected credit losses are provided in Note 28. 16. RELATED PARTY DISCLOSURES Related parties of the Group include associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Group’s ultimate parent or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Amounts owed by/to related parties at 31 December were as follows: US$ million Loans Timir (Note 11) Dividends receivable Yuzhny GOK Sale of investments Streamcore (Note 11) Trade balances Nakhodka Trade Sea Port Vtorresource-Pererabotka Yuzhny GOK Other entities Less: allowance for expected credit losses AAmmoouunnttss dduuee ffrroomm rreellaatteedd ppaarrttiieess AAmmoouunnttss dduuee ttoo rreellaatteedd ppaarrttiieess 22001199 22001188 22001177 22001199 22001188 22001177 $$ 99 $ 7 $ – $$ –– $ – $ – –– –– –– 11 –– –– 1100 –– 4 – – – – – 11 – 6 – – 2 4 – 12 – –– 55 77 55 11 11 1199 –– – – 10 95 15 2 122 – – – 6 52 195 3 256 – $$ 1100 $ 11 $ 12 $$ 1199 $ 122 $ 256 At 31 December 2017, the loan receivable from Timir (Note 11) amounting to $8 million, was classified as a non-current financial asset (Note 13). In 2017–2019, the Group did not recognise any expense or income in relation to the doubtful debts allowance/expected credit losses of related parties. 55 201 Annual report & Accounts 2019 16. RELATED PARTY DISCLOSURES (CONTINUED) Transactions with related parties were as follows for the years ended 31 December: US$ million 22001199 22001188 22001177 22001199 22001188 22001177 SSaalleess ttoo rreellaatteedd ppaarrttiieess PPuurrcchhaasseess ffrroomm rreellaatteedd ppaarrttiieess Genalta Recycling Inc. Nakhodka Trade Sea Port Vtorresource-Pererabotka Yuzhny GOK Other entities $$ –– –– 66 2288 55 $ – – 6 32 1 $ – – 8 37 – $$ 1100 7722 449988 7777 11 $ 15 73 569 104 4 $ 14 36 452 107 12 $$ 3399 $ 39 $ 45 $$ 665588 $ 765 $ 621 In addition to the disclosures presented in this note, some of the balances and transactions with related parties are disclosed in Notes 11, 12, 13 and 25. Genalta Recycling Inc. is a joint venture of a Canadian subsidiary of the Group. It sells scrap metal to the Group. Lanebrook Limited (“Lanebrook”) was a controlling shareholder of the Company. After the transfer of ownership interests in EVRAZ plc to the shareholders of Lanebrook (Note 1), it represents an entity under common control by the shareholder. At 31 December 2018 and 2017, the Group had other receivables from Lanebrook, amounting to $32 million, in connection with the acquisition of a 1% ownership interest in Yuzhny GOK in 2008 (Note 18). In 2019, these receivables were settled by cash. Nakhodka Trade Sea Port (“NTSP”) was the Group’s subsidiary sold in 2017 (Note 12) and is an entity under common control with the Group. NTSP renders handling services to the Group. Streamcore is an associate of the Group. In 2019, the Group received from Streamcore an advance payment for the sale of another associate of the Group, RVK Limited, to Streamcore for $5 million. At the end of the reporting year this transaction has not been completed. Vtorresource-Pererabotka is a subsidiary of Streamcore, the Group’s joint venture, acquired in 2012. It sells scrap metal to the Group and provides scrap processing and other services. In 2019, 2018 and 2017, the purchases of scrap metal from Vtorresource-Pererabotka amounted to $424 million (1,640,750 tonnes), $494 million (1,821,380 tonnes) and $422 million (1,601,320 tonnes), respectively. At 31 December 2019, $156 million payable by the Group for purchases of scrap from Vtorresource-Pererabotka were classified as trade payables to third parties as Vtorresource- Pererabotka sold its receivables under factoring contracts to several banks with no recourse (Note 26). Yuzhny GOK, an ore mining and processing plant, is an associate of an entity, which is under common control with EVRAZ plc. The Group sold steel products to Yuzhny GOK and purchased sinter from the entity. In 2019, 2018 and 2017, the volume of purchases was 755,085 tonnes, 1,344,277 tonnes and 1,639,306 tonnes, respectively. In 2019, 2018 and 2017, the Group recognised dividend income from Yuzhny GOK in the amount of $3 million, $4 million and $6 million, respectively, within the other non-operating gains/(losses) caption in the consolidated statement of operations. The dividends declared in 2018 and 2017 were received by the Group in the years following the years of declaration. The transactions with related parties were based on prevailing market terms. Compensation to Key Management Personnel Key management personnel include the following positions within the Group:    directors of the Company, vice presidents, senior management of major subsidiaries. In 2019, 2018 and 2017, key management personnel totalled 30, 32 and 30 people, respectively. Total compensation to key management personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following: US$ million Salary Performance bonuses Social security taxes Share-based payments (Note 21) Termination benefits 22001199 $$ 1144 1122 44 77 11 $$ 3388 22001188 $ 14 13 4 8 – $ 39 22001177 $ 15 14 3 9 1 $ 42 Other disclosures on directors' remuneration required by Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts & Reports) regulations 2008 are included in the Directors' Remuneration Report. 202 56 17. OTHER TAXES RECOVERABLE Taxes recoverable consisted of the following as of 31 December: US$ million Input VAT Other taxes Strategic report Business review CSR report Corporate governance Financial statements Additional information 22001199 $$ 7733 110022 $$ 117755 22001188 $ 78 123 $ 201 22001177 $ 140 85 $ 225 Input VAT, representing amounts payable or paid to suppliers, is recoverable from the tax authorities via offset against VAT payable to the tax authorities on the Group’s revenue or direct cash receipts from the tax authorities. Management periodically reviews the recoverability of the balance of input value added tax and believes it is fully recoverable within one year. 18. OTHER CURRENT FINANCIAL ASSETS Other current assets included the following as of 31 December: US$ million Other receivables from Lanebrook (Note 16) Restricted deposits at banks 22001199 $$ –– 44 $$ 44 22001188 $ 32 3 $ 35 19. CASH AND CASH EQUIVALENTS Cash and cash equivalents, mainly consisting of cash at banks, were denominated in the following currencies as of 31 December: US$ million US dollar Euro Russian rouble Other 22001199 $$ 777744 448844 113344 3311 22001188 $ 273 540 215 39 22001177 $ 32 15 $ 47 22001177 $ 1,253 31 163 19 $$ 11,,442233 $ 1,067 $ 1,466 57 203 Annual report & Accounts 2019 20. EQUITY SShhaarree CCaappiittaall Number of shares 3311 DDeecceemmbbeerr 22001199 22001188 22001177 Ordinary shares, issued and fully paid 11,,550066,,552277,,229944 1,506,527,294 1,506,527,294 On 10 July 2018, EVRAZ plc reduced the nominal value of its shares from $1 to $0.05 each. The amount of the cancelled share capital ($1,432 million) became distributable reserves. TTrreeaassuurryy SShhaarreess Number of shares Treasury shares 3311 DDeecceemmbbeerr 22001199 22001188 22001177 5544,,662200,,223333 63,177,187 74,474,663 In 2015, EVRAZ plc repurchased 108,458,508 of its own shares ($336 million). In 2019, 2018 and 2017, 8,556,954 shares, 11,297,476 shares and 12,541,215 shares, respectively, were transferred to the participants of Incentive Plans (Note 21). The cost of treasury shares transferred to the participants of Incentive Plans, amounted to $27 million, $35 million and $39 million in 2019, 2018 and 2017, respectively. EEaarrnniinnggss ppeerr SShhaarree 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: 22001199 22001188 22001177 Weighted average number of ordinary shares outstanding during the period Effect of dilution: share options WWeeiigghhtteedd aavveerraaggee nnuummbbeerr ooff oorrddiinnaarryy sshhaarreess aaddjjuusstteedd ffoorr tthhee eeffffeecctt ooff ddiilluuttiioonn 11,,444488,,778899,,004488 1111,,999966,,331100 11,,446600,,778855,,335588 1,439,326,349 19,462,750 1,458,789,099 1,427,585,897 26,974,433 1,454,560,330 $$ 332266 $$ 00..2233 $$ 00..2222 $ 2,406 $ 1.67 $ 1.65 $ 699 $ 0.49 $ 0.48 Profit for the year attributable to equity holders of the parent, US$ million Basic earnings per share Diluted earnings per share DDiivviiddeennddss Dividends declared by EVRAZ plc during 2017–2019 were as follows: DDaattee ooff ddeeccllaarraattiioonn TToo hhoollddeerrss rreeggiisstteerreedd aatt DDiivviiddeennddss ddeeccllaarreedd,, UUSS$$ mmiilllliioonn UUSS$$ ppeerr sshhaarree 09/08/2017 28/02/2018 24/05/2018 08/08/2018 15/11/2018 27/02/2019 07/08/2019 18/08/2017 09/03/2018 08/06/2018 17/08/2018 23/11/2018 08/03/2019 16/08/2019 430 429.6 187.6 577.3 361 577.3 508.2 0.30 0.30 0.13 0.40 0.25 0.40 0.35 204 58 Strategic report Business review CSR report Corporate governance Financial statements Additional information 21. SHARE-BASED PAYMENTS In 2017-2019, the Group had several Incentive Plans under which certain senior executives and employees (“participants”) could be awarded shares of the parent company upon vesting. These plans were adopted on 24 September 2013, 8 August 2014, 26 October 2015, 15 September 2016, 25 September 2017, 26 September 2018 and 25 September 2019. The vesting under Incentive Plans adopted before 2017 does not depend on the achievement of any performance conditions. The new Plans adopted in 2017, 2018 and 2019 provide that the number of shares transferred to participants upon vesting is dependent on the Group’s performance versus the selected group of peers. EBITDA and total shareholder return (“TSR”) are used as the key performance indicators. If the Group’s EBITDA achieves a specific ranking in the peer group (not lower than the 7th place in terms of EBITDA dynamics), then 50% of the shares of a particular tranche become vested, otherwise they are forfeited. If the Group’s TSR achieves a specific ranking in the peer group, then the other 50% of the shares of a particular tranche become vested, otherwise they are forfeited. Subject to the resolution of the Remuneration Committee, EBITDA can become the only metric in the performance evaluation (in case if the net debt to EBITDA ratio is equal to 3 or higher). The TSR-related vesting condition of the Incentive Plans 2017, 2018 and 2019 was considered by the Group as a market condition. As such, it was included in the estimation of the fair value of the granted shares and will not be subsequently revised. Vesting condition related to EBITDA was not taken into account when estimating the fair value of the share options at the grant date. Instead, this will be taken into account by adjusting the share-based expense based on the number of share options that eventually vest. 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 2019 are presented below: Number of Shares of EVRAZ plc TToottaall IInncceennttiivvee PPllaann 22001199 IInncceennttiivvee PPllaann 22001188 IInncceennttiivvee PPllaann 22001177 IInncceennttiivvee PPllaann 22001166 March 2020 March 2021 March 2022 March 2023 5,223,903 3,159,678 1,614,553 773,640 515,761 515,761 773,641 773,640 560,534 840,809 840,912 – 1,803,121 1,803,108 – – 2,344,487 – – – 10,771,774 2,578,803 2,242,255 3,606,229 2,344,487 The plans are administered by the Board of Directors of EVRAZ plc. 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 awarded up to the date of termination. There have been no modifications or cancellations to the plans during 2017–2019. 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 2019, 2018 and 2017 was $4.25, $5.27 and $2.54 per share of EVRAZ plc, respectively. The fair value of these awards was estimated at the date of grant and measured at the market price of the shares of the 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 of Incentive plans, which were effective during 2017-2019: Dividend yield (%) Expected life (years) Market prices of the shares of EVRAZ plc at the grant dates IInncceennttiivvee PPllaann 22001199 IInncceennttiivvee PPllaann 22001188 IInncceennttiivvee PPllaann 22001177 IInncceennttiivvee PPllaann 22001166 IInncceennttiivvee PPllaann 22001155 IInncceennttiivvee PPllaann 22001144 IInncceennttiivvee PPllaann 22001133 2.3 – 3.0 0.5 – 3.5 1.8 – 2.3 0.5 – 3.5 2.1 – 2.9 0.5 – 3.5 n/a 0.5 – 3.5 7.3 – 9.1 0.6 – 3.6 3.6 – 4.8 0.6 – 3.6 4.0 – 8.8 0.6 – 3.6 $5.75 $7.36 $3.86 $1.73 $1.36 $1.68 $2.13 The following table illustrates the number of, and movements in, share-based awards during the years. Number of shares OOuuttssttaannddiinngg aatt 11 JJaannuuaarryy Granted during the year Forfeited during the year Vested and exercised during the year OOuuttssttaannddiinngg aatt 3311 DDeecceemmbbeerr 22001199 22001188 22001177 1177,,775555,,997777 22,,557788,,880033 ((11,,000066,,005522)) ((88,,555566,,995544)) 1100,,777711,,777744 27,912,610 3,143,865 (2,003,022) (11,297,476) 34,581,349 7,361,166 (1,488,690) (12,541,215) 17,755,977 27,912,610 The weighted average share price at the dates of exercise was $7.21, $6.82 and $2.62 in 2019, 2018 and 2017, respectively. The weighted average remaining contractual life of the share-based awards outstanding as of 31 December 2019, 2018 and 2017 was 1.1, 1 and 1.2 years, respectively. In the years ended 31 December 2019, 2018 and 2017, the expense arising from the equity-settled share-based compensations was as follows: US$ million Expense arising from equity-settled share-based payment transactions 22001199 $$ 1133 22001188 $ 15 22001177 $ 17 205 59 Annual report & Accounts 2019 22. LOANS AND BORROWINGS Short-term and long-term loans and borrowings were as follows as of 31 December: US$ million Bank loans US dollar-denominated 6.50% notes due 2020 8.25% notes due 2021 6.75% notes due 2022 5.375% notes due 2023 5.25% notes due 2024 Rouble-denominated 12.95% rouble bonds due 2019 12.60% rouble bonds due 2021 7.95% rouble bonds due 2024 Unamortised debt issue costs Interest payable 22001199 NNoonn-- ccuurrrreenntt CCuurrrreenntt 22001188 NNoonn-- ccuurrrreenntt CCuurrrreenntt 22001177 NNoonn-- ccuurrrreenntt CCuurrrreenntt $$ 11,,440044 $$ 11,,335522 $$ 5522 $ 1,370 $ 1,290 $ 80 $ 2,113 $ 2,051 $ 62 –– 775500 550000 775500 770000 –– 224422 332233 ((1188)) 8888 –– 775500 550000 775500 770000 –– 224422 332233 ((1188)) –– –– –– –– –– –– –– –– –– –– 8888 700 750 500 750 – 216 216 – (20) 81 700 750 500 750 – – 216 – (20) – – – – – – 216 – – – 81 700 750 500 750 – 260 260 – (28) 86 700 750 500 750 – 260 260 – (28) – – – – – – – – – – 86 $$ 44,,773399 $$ 44,,559999 $$ 114400 $ 4,563 $ 4,186 $ 377 $ 5,391 $ 5,243 $ 148 The average effective annual interest rates were as follows at 31 December: Long-term borrowings Short-term borrowings US dollar Russian rouble Euro Canadian dollar 22001199 55..7744%% 99..9944%% 22..3399%% 44..0088%% 22001188 6.13% 12.84% 3.47% 3.87% 22001177 6.00% 12.78% 3.77% 3.29% 22001199 33..3311%% 77..8833%% 00..7700%% –– 22001188 – – 0.74% – The liabilities are denominated in the following currencies at 31 December: US$ million US dollar Russian rouble Canadian dollar Euro Other Unamortised debt issue costs 22001199 $$ 44,,002277 558866 112200 2244 –– ((1188)) 22001188 $ 3,758 440 144 238 3 (20) 22001177 1.85% – – – 22001177 $ 4,604 530 43 242 – (28) The movement in loans and borrowings were as follows: US$ million 1 January CCaasshh cchhaannggeess:: Cash proceeds from bank loans and notes, net of debt issues costs Repayment of bank loans and notes, including interest Net proceeds from/(repayment of) bank overdrafts and credit lines, including interest NNoonn--ccaasshh cchhaannggeess:: Change in the balance of debt issues costs paid in subsequent reporting period Non-cash proceeds (Note 29) Interest and other charges expensed (Note 7) Interest capitalised (Note 9) Accrual of premiums and other charges on early repayment of borrowings (Note 7) Transfer to disposal groups held for sale Effect of exchange rate changes 31 December 206 60 $$ 44,,773399 $ 4,563 $ 5,391 22001199 $$ 44,,556633 22,,880055 ((33,,003355)) 2222 –– –– 229911 –– 2277 –– 6666 $$ 44,,773399 22001188 $ 5,391 1,412 (2,459) – – 6 322 1 1 – (111) $ 4,563 22001177 $ 5,894 2,441 (3,344) (139) (1) 8 394 6 78 (6) 60 $ 5,391 22. LOANS AND BORROWINGS (CONTINUED) Pledged Assets The Group’s pledged assets at carrying value included the following at 31 December: US$ million Property, plant and equipment Inventory Issuer Substitution Strategic report Business review CSR report Corporate governance Financial statements Additional information 22001199 $$ 7722 551122 22001188 $ 67 629 22001177 $ 66 438 On 13 March 2019, all outstanding US dollar-denominated notes with the total nominal value of $2,700 million were transferred from Evraz Group S.A. to EVRAZ plc. Issue of Notes and Bonds In April 2019, EVRAZ plc issued 5.25% US dollar-denominated notes due 2024 in the amount of $700 million. The proceeds from the issue of the notes were used to finance the purchase of 6.50% notes due 2020 at the tender offer in April 2019 and make whole call in May 2019. In August 2019, EvrazHolding Finance, the Group’s subsidiary, issued 7.95% rouble-denominated bonds due 2024 in the amount of 20,000 million roubles ($317 million at the exchange rate at the date of the transaction). In March 2017, the Group issued 5.375% notes due 2023 in the amount of $750 million. The proceeds from the issue of the notes were used to finance the purchase of 9.50% notes due 2018, 6.75% notes due 2018 and 6.50% bonds due 2020 at the tender offers settled in March 2017 and to refinance other current indebtedness of the Group. Repurchase of Notes and Bonds In April and May 2019, the Group fully settled its 6.50% notes due 2020 ($700 million). The premium over the carrying value on the repurchase and other costs relating to the transaction in the total amount of $26 million were charged to the Gain/(loss) on financial assets and liabilities caption of the consolidated statement of operations. In June 2019, the Group fully settled its 12.95% rouble bonds due 2019, there was no gain or loss on this transaction. Upon repayment of these bonds, the related swap contracts matured and the Group recycled $33 million of the accumulated unrecognised gains on cash flow hedges from other comprehensive income to the statement of operations. In 2017, the Group partially repurchased 9.50% notes due 2018 ($125 million), 6.75% notes due 2018 ($528 million) and 6.50% bonds due 2020 ($300 million). The premium over the carrying value on the repurchase and other costs relating to the transaction in the total amount of $8 million, $23 million and $23 million, respectively, were charged to the Gain/(loss) on financial assets and liabilities caption of the consolidated statement of operations. In 2017, the Group also fully settled $350 million under 7.5% senior secured notes due 2019. Loss on this transaction amounted to $17 million, including $13 million of premium. In addition, the Group fully settled its 7.75% bonds due 2017 issued by Raspadskaya ($26 million), there was no gain or loss on this transaction. Compliance with Financial Covenants Some of the loan agreements and terms and conditions of notes provide for certain covenants in respect of EVRAZ plc and its subsidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios, including restrictions in respect of indebtedness and profitability. EBITDA used for covenants compliance calculations is determined based on the definitions of the respective loan agreements and may differ from that used by management for evaluation of performance. Several bank credit facilities totalling $1,191 million contain certain financial maintenance covenants. These covenants require EVRAZ plc to maintain two key ratios, consolidated net indebtedness to 12-month consolidated EBITDA and 12-month consolidated EBITDA to adjusted 12-month consolidated interest expense, within certain limits. A breach of one or both of these ratios or excess of the indebtedness limit would constitute an event of default under the facility which in turn may trigger cross default events under other debt instruments of the Group. The terms of certain facilities also set certain limitations on acquisitions and disposals by EVRAZ plc. Notes due 2021, 2022, 2023 and 2024, totalling $2,700 million issued by the Group have covenants restricting the incurrence of indebtedness by the issuer and its consolidated subsidiaries conditional on a gross leverage ratio. While the ratio level itself does not constitute a breach of covenants, exceeding the threshold of 3.5 times triggers a restriction on incurrence of consolidated indebtedness, which is removed once the ratio goes back below the threshold. The effect of the restriction is such that EVRAZ plc and its subsidiaries are not allowed to increase the consolidated indebtedness, but are allowed to refinance existing indebtedness subject to certain conditions. As of 31 December 2019, the Group’s gross leverage ratio was below 3.5. 61 207 Annual report & Accounts 2019 22. LOANS AND BORROWINGS (CONTINUED) Compliance with Financial Covenants (continued) Several bank credit facilities totalling $171 million provide for certain covenants restricting the incurrence of indebtedness by EVRAZ North America plc and its subsidiaries conditional on a fixed charge ratio. Once the threshold for the ratio is exceeded, it triggers restrictions on incurrence of additional indebtedness by EVRAZ North America plc and its subsidiaries. The incurrence covenants are in line with the Group’s financial strategy and, therefore, do not constitute any excessive restriction on its operations. During 2019 the Group was in compliance with all financial and non-financial covenants. Unamortised Debt Issue Costs Unamortised debt issue costs represent agent commission and transaction costs paid by the Group in relation to the arrangement and reset of loans and notes. Unutilised Borrowing Facilities The Group had the following unutilised borrowing facilities as of 31 December: US$ million Committed Uncommitted Total unutilised borrowing facilities 23. EMPLOYEE BENEFITS Russian Plans 22001199 444477 11,,116655 $$ 11,,661122 22001188 $ 377 1,434 $ 1,811 22001177 $ 131 1,251 $ 1,382 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. At the end of the reporting year the benefit obligation was valued based on the terms of the pension plan assuming that all defined benefit plan participants will continue to participate in the plan. Defined contribution plans represent payments made by the Group to the Russian state pension, social insurance and medical insurance 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. In October 2018, the Russian pension law was amended introducing a higher retirement age from 1 January 2019. During 2019 – 2023 the retirement age will be gradually increased for women from 55 to 60 and for men from 60 to 65. The Group accounted for these amendments, when measuring the post-employment benefit obligations as of 31 December 2018 and recorded the resulting decrease in the obligations in the amount of $2 million as a part of past service costs. Ukrainian Plans The Ukrainian companies make regular contributions to the State Pension Fund thereby compensating 100% of 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 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. The Ukrainian pension legislation provides for annual indexation of pensions, at least up to the level of CPI. Starting from 2018 the minimum annual indexation of pensions, which takes into account 50% of CPI and 50% of salary growth, becomes obligatory.The indexation of pensions at a level higher than minimally required depends on the availability of financial resources in the State pension fund. The Group’s Ukrainian subsidiaries were obliged to pay indexed preferential pensions. The Group determined the amount of defined benefit obligations based on the assumption that pensions will be indexed at a minimum required level. 208 62 Strategic report Business review CSR report Corporate governance Financial statements Additional information 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. The subsidiaries also have U.S. and Canadian supplemental retirement plans (“SERP’s”), which are non-qualified plans designed to maintain benefits for eligible employees at the plan formula level. The subsidiaries provide other unfunded post-retirement medical and life insurance plans (“OPEB’s”) for certain of their eligible employees upon retirement after completion of a specified number of years of service. For the pension plans, SERP’s and OPEB’s, the subsidiaries use a measurement date for plan assets and obligations of 31 December. Certain employees that were hired after specified dates are no longer eligible to participate in the defined benefit pension plans. Those employees are instead enrolled in defined contribution plans and receive a contribution funded by the Group’s subsidiaries equal to 3–7% of annual wages, including applicable bonuses. The defined contribution plans are funded throughout the year and, depending on their work location, participants’ benefits vesting dates range from immediate to after three years of service. In addition, the subsidiaries have defined contribution plans available for eligible U.S. and Canadian-based employees in which the subsidiaries generally match a percentage of the participants’ contributions. Some Canadian employees participate in a retirement savings plan. For these employees, the participation may be voluntary, employee contributions are matched by the employer at 1-3% of annual wages, including applicable bonuses, and depending on the group of employees, are funded either annually or throughout the year. Other Plans Defined benefit pension plans and defined contribution plans are maintained by the subsidiaries located in Europe. DDeeffiinneedd CCoonnttrriibbuuttiioonn PPllaannss The Group’s expenses under defined contribution plans were as follows: US$ million Expense under defined contribution plans DDeeffiinneedd BBeenneeffiitt PPllaannss 22001199 $$ 227722 22001188 $ 245 22001177 $ 246 The Russian, Ukrainian and other defined benefit plans were mostly unfunded and the US and Canadian plans were partially funded. Except as disclosed above, in 2019 there were no significant plan amendments, curtailments or settlements. The Group’s defined benefit plans are exposed to the risks of unexpected growth in benefit payments as a result of increases in life expectancy, inflation, and salaries. As the plan assets include significant investments in quoted and unquoted equity shares, corporate and government bonds and notes, the Group is also exposed to equity market risk. 63 209 Annual report & Accounts 2019 23. EMPLOYEE BENEFITS (CONTINUED) The components of net benefit expense recognised in the consolidated statement of operations for the years ended 31 December 2019, 2018 and 2017 and amounts recognised in the consolidated statement of financial position as of 31 December 2019, 2018 and 2017 for the defined benefit plans were as follows: NNeett bbeenneeffiitt eexxppeennssee ((rreeccooggnniisseedd iinn tthhee ssttaatteemmeenntt ooff ooppeerraattiioonnss wwiitthhiinn ccoosstt ooff ssaalleess aanndd sseelllliinngg,, ggeenneerraall aanndd aaddmmiinniissttrraattiivvee eexxppeennsseess aanndd iinntteerreesstt eexxppeennssee)) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million Current service cost Net interest expense Net actuarial gains/(losses) on other long-term employee benefits obligation Past service cost Other Net benefit expense YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million Current service cost Net interest expense Net actuarial gains/(losses) on other long-term employee benefits obligation Past service cost Curtailment/settlement gain Other Net benefit expense YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million Current service cost Net interest expense Net actuarial gains/(losses) on other long-term employee benefits obligation Past service cost Curtailment/settlement gain Other Net benefit expense RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $$ ((22)) ((88)) ((44)) ((11)) –– $$ ((1155)) $$–– –– –– –– –– $$–– UUSS && CCaannaaddiiaann ppllaannss OOtthheerr ppllaannss $$ ((1177)) $$((11)) ((55)) –– –– ((33)) –– –– –– –– TToottaall $$ ((2200)) ((1133)) ((44)) ((11)) ((33)) $$ ((2255)) $$ ((11)) $$ ((4411)) RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss $ (2) (8) (1) – 1 – $ (10) $– – – – – – $– $ (19) (5) – (1) – (3) $ (28) RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss $ (2) (9) 2 (3) – – $ (1) (4) – 3 – – $ (18) (6) – (3) 2 (3) $ (12) $ (2) $ (28) OOtthheerr ppllaannss $– – – – – – $– OOtthheerr ppllaannss $– – – – – – $– TToottaall $ (21) (13) (1) (1) 1 (3) $ (38) TToottaall $ (21) (19) 2 (3) 2 (3) $ (42) 210 64 Strategic report Business review CSR report Corporate governance Financial statements Additional information 23. EMPLOYEE BENEFITS (CONTINUED) GGaaiinnss//((lloosssseess)) rreeccooggnniisseedd iinn ootthheerr ccoommpprreehheennssiivvee iinnccoommee YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million Return on plan assets, excluding amounts included in net interest expense Net actuarial gains/(losses) on post-employment benefit obligation YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million Return on plan assets, excluding amounts included in net interest expense Net actuarial gains/(losses) on post-employment benefit obligation YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million Return on plan assets, excluding amounts included in net interest expense Net actuarial gains/(losses) on post-employment benefit obligation RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $$ –– ((1155)) $$ ((1155)) $$ –– –– $$ –– RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $– 2 $ 2 $– – $– RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $ – 6 $ 6 $ – (4) $ (4) UUSS && CCaannaaddiiaann ppllaannss $$ 8844 ((8811)) $$ 33 UUSS && CCaannaaddiiaann ppllaannss $ (30) 56 $ 26 UUSS && CCaannaaddiiaann ppllaannss $ 48 (23) $ 25 OOtthheerr ppllaannss $$ –– ((33)) $$ ((33)) OOtthheerr ppllaannss $– – $– OOtthheerr ppllaannss $ – – $ – TToottaall $$ 8844 ((9999)) $$ ((1155)) TToottaall $ (30) 58 $ 28 TToottaall $ 48 (21) $ 27 In addition to the amounts presented in the table above, actuarial gains/(losses) recognised in other comprehensive income include $(1) million relating to a subsidiary classified as a disposal group held for sale. Actual return on plan assets was as follows: US$ million Actual return on plan assets including: US & Canadian plans Russian plans NNeett ddeeffiinneedd bbeenneeffiitt lliiaabbiilliittyy YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001199 US$ million Benefit obligation Plan assets Net defined benefit asset Net defined benefit liability 22001199 $$110077 110077 –– 22001188 $ (10) (10) – RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $$ 112233 –– –– $$ 112233 $$ –– –– –– $$ –– UUSS && CCaannaaddiiaann ppllaannss $$ 778855 ((665533)) 1122 $$ 114444 OOtthheerr ppllaannss $$ 1111 ((77)) –– $$ 44 65 22001177 $ 66 66 – TToottaall $$ 991199 ((666600)) 1122 $$ 227711 211 Annual report & Accounts 2019 23. EMPLOYEE BENEFITS (CONTINUED) NNeett ddeeffiinneedd bbeenneeffiitt lliiaabbiilliittyy ((ccoonnttiinnuueedd)) YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001188 US$ million Benefit obligation Plan assets Net defined benefit asset Net defined benefit liability YYeeaarr eennddeedd 3311 DDeecceemmbbeerr 22001177 US$ million Benefit obligation Plan assets Net defined benefit liability MMoovveemmeennttss iinn nneett ddeeffiinneedd bbeenneeffiitt lliiaabbiilliittyy//((aasssseett)) US$ million AAtt 3311 DDeecceemmbbeerr 22001166 Net benefit expense recognised in the statement of operations Contributions by employer (Gains)/losses recognised in other comprehensive income Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001177 Net benefit expense recognised in the statement of operations Contributions by employer (Gains)/losses recognised in other comprehensive income Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001188 Net benefit expense recognised in the statement of operations Contributions by employer (Gains)/losses recognised in other comprehensive income Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001199 OOtthheerr ppllaannss $ – – – $ – OOtthheerr ppllaannss $ – – $ – OOtthheerr ppllaannss $$ 22 – – – (2) – $$ –– – – – – – TToottaall $ 778 (555) 3 $ 226 TToottaall $ 895 (611) $ 284 TToottaall $$ 331177 42 (37) (27) (18) 7 $$ 228844 38 (32) (28) (20) (19) RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss $ 687 (555) 3 $ 135 UUSS && CCaannaaddiiaann ppllaannss $ 765 (611) $ 154 $ – – – $ – UUkkrraaiinniiaann ppllaannss $ 19 – $ 19 UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss $$ 3311 $$ 117766 28 (27) (25) – 2 $$ 115544 28 (24) (26) – – 2 (2) 4 (16) – $$ 1199 – – – (20) 1 $$ –– – – – – – $ 91 – – $ 91 RRuussssiiaann ppllaannss $ 111 – $ 111 RRuussssiiaann ppllaannss $$ 110088 12 (8) (6) – 5 $$ 111111 10 (8) (2) – (20) $$ 9911 15 (10) 15 – 12 $$ 113322 $$ –– $$ 222233 25 (15) (3) (7) – 1 – 3 – – 41 (25) 15 (7) 12 $$ 112233 $$ –– $$ 113322 $$ 44 $$ 225599 212 66 23. EMPLOYEE BENEFITS (CONTINUED) MMoovveemmeennttss iinn bbeenneeffiitt oobblliiggaattiioonn US$ million AAtt 3311 DDeecceemmbbeerr 22001166 Interest cost on benefit obligation Current service cost Past service cost Benefits paid Actuarial (gains)/losses on benefit obligation related to changes in demographic assumptions Actuarial (gains)/losses on benefit obligation related to changes in financial assumptions Actuarial (gains)/losses on benefit obligation related to experience adjustments Curtailment/settlement gain Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001177 Interest cost on benefit obligation Current service cost Past service cost Benefits paid Actuarial (gains)/losses on benefit obligation related to changes in demographic assumptions Actuarial (gains)/losses on benefit obligation related to changes in financial assumptions Actuarial (gains)/losses on benefit obligation related to experience adjustments Curtailment/settlement gain Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001188 Interest cost on benefit obligation Current service cost Past service cost Benefits paid Actuarial (gains)/losses on benefit obligation related to changes in demographic assumptions Actuarial (gains)/losses on benefit obligation related to changes in financial assumptions Actuarial (gains)/losses on benefit obligation related to experience adjustments Reclassification to liabilities directly associated with disposal groups classified as held for sale Other Translation difference AAtt 3311 DDeecceemmbbeerr 22001199 Strategic report Business review CSR report Corporate governance Financial statements Additional information RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss $$ 110088 $$ 3311 UUSS && CCaannaaddiiaann ppllaannss $$ 771111 OOtthheerr ppllaannss $$ 22 9 2 3 (8) – (11) 3 – – 5 $$ 111111 8 2 – (8) – (6) 5 (1) – (20) $$ 9911 8 2 1 (10) 3 15 1 – – 12 4 1 (3) (2) – 4 – – (16) – $$ 1199 – – – – – – – – (20) 1 $$ –– – – – – – – – – – – 24 18 3 (37) (19) 48 (6) (2) – 25 $$ 776655 25 19 1 (36) (7) (49) – – – (31) $$ 668877 26 17 – (36) (2) 83 – (8) – 18 TToottaall $$ 885522 37 21 3 (47) (19) 41 (3) (2) (18) 30 $$ 889955 33 21 1 (44) (7) (55) 5 (1) (20) (50) – – – – – – – – (2) – $$ –– – – – – – – – – – – $$ –– $$ 777788 – 1 – (1) – 3 – – 8 – 34 20 1 (47) 1 101 1 (8) 8 30 $$ 112233 $$ –– $$ 778855 $$ 1111 $$ 991199 The weighted average duration of the defined benefit obligation was as follows: Years Russian plans Ukrainian plans US & Canadian plans Other plans 22001199 1100..8855 –– 1144..3344 2200..33 22001188 9.82 8.00 13.48 7.46 22001177 10.11 8.00 13.09 7.46 213 67 Annual report & Accounts 2019 23. EMPLOYEE BENEFITS (CONTINUED) CChhaannggeess iinn tthhee ffaaiirr vvaalluuee ooff ppllaann aasssseettss US$ million AAtt 3311 DDeecceemmbbeerr 22001166 Interest income on plan assets Return on plan assets (excluding amounts included in net interest expense) Contributions of employer Benefits paid Other Translation difference AAtt 3311 DDeecceemmbbeerr 22001177 Interest income on plan assets Return on plan assets (excluding amounts included in net interest expense) Contributions of employer Benefits paid Other Translation difference AAtt 3311 DDeecceemmbbeerr 22001188 Interest income on plan assets Return on plan assets (excluding amounts included in net interest expense) Contributions of employer Benefits paid Reclassification to liabilities directly associated with disposal groups classified as held for sale Other Translation difference AAtt 3311 DDeecceemmbbeerr 22001199 RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss $$ 553355 18 48 27 (37) (3) 23 OOtthheerr ppllaannss $$ –– – – – – – – TToottaall $$ 553355 18 48 37 (47) (3) 23 $$ 661111 $$ –– $$ 661111 20 (30) 24 (36) (3) (31) – – – – – – 20 (30) 32 (44) (3) (31) $$ –– – – 2 (2) – – $$ –– – – – – – – $$ –– $$ 555555 $$ –– $$ 555555 – – – – – – – 21 84 15 (36) (1) (3) 18 – – – (1) – 8 – 21 84 25 (47) (1) 5 18 $$ –– $$ 665533 $$ 77 $$ 666600 $$ –– – – 8 (8) – – $$ –– – – 8 (8) – – $$ –– – – 10 (10) – – – $$-- The amount of contributions expected to be paid to the defined benefit plans during 2020 approximates $42 million. 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 Cash Other 22001199 22001188 22001177 QQuuootteedd UUnnqquuootteedd QQuuootteedd UUnnqquuootteedd QQuuootteedd UUnnqquuootteedd 4488%% 1144%% 33%% –– 6655%% 3344%% –– –– 11%% 3355%% 51% 12% 2% – 65% 35% – – – 35% 47% 12% 2% – 61% 39% – – – 39% 214 68 Strategic report Business review CSR report Corporate governance Financial statements Additional information 23. EMPLOYEE BENEFITS (CONTINUED) The principal assumptions used in determining pension obligations for the Group’s plans are shown below: 22001199 UUSS && CCaannaaddiiaann ppllaannss 33..33--33..44%% –– 33%% 8866 8888--8899 55--66..88%% RRuussssiiaann ppllaannss 77%% 55%% 55%% 7700 8800 –– OOtthheerr ppllaannss 00..22%% –– 11%% 8888 9900 –– 22001188 UUSS && RRuussssiiaann CCaannaaddiiaann ppllaannss 8.6% 5%-9% 5%-9% 69 79 – ppllaannss 3.3-4.3% – 3% 86 88-89 5-7% OOtthheerr ppllaannss 3% 3% – 81 87 – RRuussssiiaann PPllaannss 7.6% 5% 5% 69 79 – 22001177 UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss OOtthheerr ppllaannss 11.6% 3.6-4.0% 6% 6% 65 75 – – 3% 85-87 88-89 6.7% 3% 3% – 81 87 – Discount rate Future benefits increases Future salary increase Average life expectation, male, years Average life expectation, female, years Healthcare costs increase rate The following table demonstrates the sensitivity analysis of reasonable changes in the significant assumptions used for the measurement of the defined benefit obligations, with all other variables held constant. IImmppaacctt oonn tthhee ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn aatt 3311 DDeecceemmbbeerr 22001199,, IImmppaacctt oonn tthhee ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn aatt 3311 DDeecceemmbbeerr 22001188,, RReeaassoonnaabbllee cchhaannggee iinn aassssuummppttiioonn RRuussssiiaann ppllaannss UUSS$$ mmiilllliioonn UUSS && CCaannaaddiiaann ppllaannss UUSS$$ mmiilllliioonn UUSS && CCaannaaddiiaann ppllaannss OOtthheerr ppllaannss RRuussssiiaann ppllaannss IImmppaacctt oonn tthhee ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn aatt 3311 DDeecceemmbbeerr 22001177,, UUSS$$ mmiilllliioonn OOtthheerr ppllaannss RRuussssiiaann ppllaannss UUkkrraaiinniiaann ppllaannss UUSS && CCaannaaddiiaann ppllaannss OOtthheerr ppllaannss Discount rate Future benefits increases Future salary increase Average life expectation, male, years Average life expectation, female, years Healthcare costs increase rate 10% (10%) 10% (10%) 10% (10%) 1 (1) 1 (1) 10% (10%) $$ ((88)) $$ ((3344)) $$ ((11)) $ (7) $ (38) $ – $ (7) $ (2) $ (37) $ – 99 66 ((99)) 11 ((11)) 11 ((11)) 11 ((11)) –– –– 3366 –– –– 11 ((11)) 1122 ((1122)) 77 ((77)) –– –– 11 –– –– –– –– –– –– –– –– –– –– 8 5 (4) 1 (1) – (2) – (2) – – 40 – – 1 (1) 11 (11) 6 (6) 1 (1) – – – – – – – – – – – 8 5 (4) – – 1 (1) 1 (1) – – 2 – – 1 (1) – – – – – – 40 – – 1 (1) 12 (12) 6 (6) 1 (1) 69 – – – – – – – – – – – 215 Annual report & Accounts 2019 24. PROVISIONS At 31 December the provisions were as follows: US$ million 22001199 22001188 22001177 NNoonn--ccuurrrreenntt CCuurrrreenntt NNoonn--ccuurrrreenntt CCuurrrreenntt NNoonn--ccuurrrreenntt CCuurrrreenntt Site restoration and decommissioning costs Other provisions $$ 332211 –– $$ 332211 $$ 2211 1122 $$ 3333 $ 221 1 $ 222 $ 23 12 $ 35 $ 260 9 $ 269 In the years ended 31 December 2019, 2018 and 2017, the movement in provisions was as follows: US$ million AAtt 3311 DDeecceemmbbeerr 22001166 Additional provisions Increase from passage of time Effect of change in the discount rate Effect of changes in estimated costs and timing Utilised in the year Unused amounts reversed Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001177 Additional provisions Increase from passage of time Effect of change in the discount rate Effect of changes in estimated costs and timing Utilised in the year Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001188 Additional provisions Increase from passage of time Effect of change in the discount rate Effect of changes in estimated costs and timing Utilised in the year Unused amounts reversed Reclassification to liabilities directly associated with disposal groups classified as held for sale Translation difference AAtt 3311 DDeecceemmbbeerr 22001199 Site Restoration Costs SSiittee rreessttoorraattiioonn aanndd ddeeccoommmmiissssiioonniinngg ccoossttss OOtthheerr pprroovviissiioonnss $$ 222244 11 16 33 15 (11) (1) (9) 11 $$ 228899 4 16 (38) 29 (13) (1) (42) $$ 224444 31 18 73 (20) (21) – (9) 26 $$ 334422 $$ 77 14 – – – (5) (4) – – $$ 1122 14 – – – (12) – (1) $$ 1133 21 – – – (10) (4) (8) – $$ 1122 $ 29 3 $ 32 TToottaall $$ 223311 25 16 33 15 (16) (5) (9) 11 $$ 330011 18 16 (38) 29 (25) (1) (43) $$ 225577 52 18 73 (20) (31) (4) (17) 26 $$ 335544 Under the legislation, mining companies and steel mills have obligations to restore mining sites and contaminated land. The majority of costs are expected to be paid after 2061. At 31 December the respective liabilities were measured based on estimates of restoration costs, which are expected to be incurred in the future discounted at the following annual rates: Russia Ukraine USA Others 216 22001199 77%% nn//aa 22%% nn//aa 22001188 9% 13.2% 3.0% 4.7% 22001177 8% 13.2% 2.2% 5% 70 Strategic report Business review CSR report Corporate governance Financial statements Additional information 25. LEASE AND OTHER LONG-TERM LIABILITIES LLeeaassee LLiiaabbiilliittiieess The Group has a number of lease contracts, under which it leases railroad cars, coating equipment, warehouses, offices and other machinery and equipment (Note 9). Before the adoption of IFRS 16 (Note 2) the Group classified its leases (as lessee) at the inception date as either a finance lease within the Other long-term liabilities caption or an operating lease. US$ million 1 January 2019 Recognition of liabilities under new contracts Sale of subsidiaries Interest accrued Payment of principal Payment of interest Reclassification into short-term portion Exchange difference 31 December 2019 TToottaall $$ 112244 1155 ((22)) 88 ((3355)) ((22)) –– 99 $$ 111177 NNoonn--ccuurrrreenntt lleeaassee lliiaabbiilliittiieess CCuurrrreenntt ppoorrttiioonn ooff lleeaassee lliiaabbiilliittiieess $ 90 14 – 6 – – (33) 6 $ 83 $ 34 1 (2) 2 (35) (2) 33 3 $ 34 Expense relating to variable lease payments not included in the measurement of opening lease liabilities amounted to $7 million. Expense relating to leases, which were not recognised as lease liabilities (leases of low-value assets and short-term leases), amounted to $12 million. The maturity of contractual undiscounted and discounted cash flows under lease payments was as follows at 31 December 2019: US$ million Not later than 1 year from the reporting date Later than 1 year and not later than 2 years Later than 2 years and not later than 5 years Later than 5 years and not later than 10 years Later than 10 years TToottaall lleeaassee ppaayymmeennttss Less: amounts representing finance charges 3311 DDeecceemmbbeerr 22001199 OOtthheerr LLoonngg--TTeerrmm LLiiaabbiilliittiieess Other liabilities consisted of the following as of 31 December: US$ million FFiinnaanncciiaall lliiaabbiilliittiieess Finance lease liabilities Derivatives not designated as hedging instruments Hedging instruments Long-term trade and other payables Long-term accounts payable to related parties Less: current portion (Note 26) NNoonn--ffiinnaanncciiaall lliiaabbiilliittiieess Employee income participation plans and compensations Tax liabilities Other non-financial liabilities Less: current portion (Note 26) LLeeaassee ppaayymmeennttss PPrreesseenntt vvaalluuee ooff lleeaassee ppaayymmeennttss $ 35 38 40 14 8 113355 (18) $$ 111177 $ 34 34 34 10 5 111177 – $$ 111177 22001199 22001188 22001177 $$ –– 66 –– 4444 –– 5500 ((2244)) 2266 –– 44 1133 1177 ((33)) 1144 6 5 46 30 2 89 (68) 21 6 8 6 20 (3) 17 $$ 4400 $ 38 71 8 – 3 45 1 57 (18) 39 5 1 11 17 (2) 15 $ 54 217 Annual report & Accounts 2019 25. LEASE AND OTHER LONG-TERM LIABILITIES (CONTINUED) Hedging Instruments In July 2015, the Group issued bonds in the total amount of 15,000 million Russian roubles ($216 million at 31 December 2018), which bore interest of 12.95% per annum and had a put date in June 2019. The Group used an intercompany loan to transfer the proceeds from the bonds within the Group. To manage the currency exposure, the Group entered into a series of cross currency swap contracts with several banks under which it agreed to deliver US-dollar denominated interest payments at rates ranging from 5.90% to 6.55% per annum plus the notional amount, totaling approximately $265 million, in exchange for rouble-denominated interest payments at the rate of 12.95% per annum plus notional, totaling 14,948 million roubles ($215 million at 31 December 2018). 12.95 per cent bonds due 2019 Year of issue 2015 Bonds principal, millions of roubles 15,000 Hedged amount, millions Swap amount, Interest rates of roubles US$ million on the swap amount 13,310 239 5.90% - 6.55% The Group accounted for these swap contracts as cash flow hedges. In 2017, one of these swap contracts with the notional amount of $26 million did not meet the criteria for efficiency and ceased to be classified as hedging instruments. In 2019, 2018 and 2017, the change in fair value of these derivatives amounted to $46 million, $(44) million and $20 million, respectively. The realised gain/(loss) on the swap transactions amounting to $(23) million, $11 million and $14 million, respectively, was related to the interest portion of the change in fair value of the swap. Under IFRS the lesser of the cumulative gain or loss on the hedging instrument from inception of the hedge and the cumulative change in present value of the expected future cash flows on the hedged item from inception of the hedge is recognised in other comprehensive income and the remaining loss on the hedging instrument is recorded through the statement of operations. In 2019, 2018 and 2017, the Group recognised a gain/(loss) in other comprehensive income amounting to $27 million, $(3) million and $9 million, respectively. Most of the swaps were assessed as effective. Those swaps, which ceased to be effective, were reclassified into Derivatives Not Designated as Hedging Instruments. In 2019, 2018 and 2017, $19 million, $(41) million and $11 million, respectively, were recorded in the Foreign exchange gains/(losses) caption in the consolidated statement of operations. In June 2019, upon repayment of the 12.95% rouble bonds, the related swap contracts matured and the Group recycled $33 million of the accumulated unrecognised gains on cash flow hedges from other comprehensive income to the statement of operations. Derivatives Not Designated as Hedging Instruments In 2017-2019 derivatives not designated as hedging instruments comprised of the swap contracts, which either were not designated as cash flow or fair value hedges or ceased to be effective, and forward contracts. The aggregate amounts under swap contracts translated at the year end exchange rates are summarised in the table below. US$ million Bonds principal Hedged amount Swap amount 22001199 $$ 332233 332233 331177 22001188 $ 24 24 26 22001177 $ 28 28 26 To manage the currency exposure on the rouble-denominated bonds, the Group partially economically hedged these transactions: in 2019, the Group concluded a currency and interest rate swap contract under which it agreed to deliver US dollar-denominated interest payments at a 3.75% rate per annum plus the US dollar notional amount, in exchange for rouble-denominated interest payments plus the rouble notional amount. The exchange is exercised on approximately the same dates as the payments under the bonds. The swap contracts, which were effective at 31 December 2019, are summarised in the table below. 7.95 per cent bonds due 2024 YYeeaarr ooff iissssuuee 2019 BBoonnddss pprriinncciippaall,, mmiilllliioonnss ooff rroouubblleess HHeeddggeedd aammoouunntt,, mmiilllliioonnss ooff rroouubblleess SSwwaapp aammoouunntt,, UUSS$$ mmiilllliioonn IInntteerreesstt rraatteess oonn tthhee sswwaapp aammoouunntt 20,000 20,000 317 3.75% In addition, in 2017, one of the swaps with a notional amount of $26 million did not meet the criteria for hedging and ceased to be classified as a hedging instrument. This swap was reclassified into Derivatives Not Designated as Hedging Instruments. These swap contracts were not designated as cash flow or fair value hedges or excluded from such hedging instruments due to hedge inefficiency. The Group accounted for these derivatives at fair value which was determined using valuation techniques. The fair value was calculated as the present value of the expected cashflows under the contracts at the reporting dates. Future rouble-denominated cashflows were translated into US dollars using the USD/RUB implied yield forward curve. The discount rates used in the valuation were the non-deliverable forward rate curve and the interest rate swap curve for US dollar at the reporting dates. In 2019, 2018 and 2017, a change in fair value of the derivatives of $20 million, $(6) million and $2 million, respectively, together with a realised gain/(loss) on the swap transactions, amounting to $8 million, $2 million and $2 million, respectively, was recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations (Note 7). 218 72 Strategic report Business review CSR report Corporate governance Financial statements Additional information 25. LEASE AND OTHER LONG-TERM LIABILITIES (CONTINUED) Derivatives Not Designated as Hedging Instruments (continued) In 2018, the Group concluded EUR/USD forward contracts, which were accounted for at fair value. In 2019 and 2018, the change in fair value of the derivatives $(4) million and $(2) million, respectively, together with a realised gain/(loss) on the currency forward transactions, amounting to $14 million and $9 million, respectively, was recognised within gain/(loss) on financial assets and liabilities in the consolidated statement of operations (Note 7). 26. TRADE AND OTHER PAYABLES Trade and other payables consisted of the following as of 31 December: US$ million Trade accounts payable Liabilities for purchases of property, plant and equipment, including VAT Accrued payroll Other payables Other long-term obligations with current maturities (Note 25) 22001199 $$ 998822 113322 116622 7755 2277 22001188 $ 877 98 140 30 71 22001177 $ 822 89 158 39 20 $$ 11,,337788 $ 1,216 $ 1,128 The maturity profile of the accounts payable is shown in Note 28. At 31 December 2019, trade accounts payable included $156 million owed by the Group for purchases of scrap from Vtorresource-Pererabotka, a related party (Note 16). These amounts were classified as trade payables to third parties as Vtorresource-Pererabotka sold its receivables from the Group under factoring contracts to several banks with no recourse. 27. OTHER TAXES PAYABLE Other taxes payable were mainly denominated in roubles and consisted of the following as of 31 December: US$ million VAT Social insurance taxes Property tax Land tax Personal income tax Import/export tariffs Other taxes, fines and penalties 22001199 $$ 6677 4488 77 66 88 77 1100 22001188 $ 124 40 10 5 6 74 7 22001177 $ 129 42 12 6 7 – 16 $$ 115533 $ 266 $ 212 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES CCrreeddiitt RRiisskk 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 and euros, 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 2019, the major customers were Russian Railways (4.2% of total sales) and Shang Chen Steel Co. (2.2%). 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. 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 allowance for expected credit losses 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. 219 73 Annual report & Accounts 2019 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) CCrreeddiitt RRiisskk ((ccoonnttiinnuueedd)) 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) 22001199 $$ 1100 1177 – 555500 3333 1100 11,,442233 $$ 22,,004433 22001188 $ 9 66 32 852 30 12 1,067 $ 2,068 22001177 $ 21 61 65 754 31 19 1,466 $ 2,417 Receivables from related parties in the table above do not include prepayments in the amount of$Nil, $Nil and $1 million as of 31 December 2019, 2018 and 2017, respectively. The ageing analysis of trade and other receivables, loans receivable and receivables from related parties at 31 December is presented in the table below. US$ million 22001199 22001188 22001177 GGrroossss aammoouunntt IImmppaaiirrmmeenntt GGrroossss aammoouunntt IImmppaaiirrmmeenntt GGrroossss aammoouunntt IImmppaaiirrmmeenntt Not past due Past due less than 6 months between 6 months and 1 year over 1 year $$ 444466 119933 110077 3311 5555 $$ 663399 $$ ((11)) ((4455)) ((11)) –– ((4444)) $$ ((4466)) $ 770 166 109 9 48 $ 936 $ (1) (41) – – (41) $ (42) $ 671 187 114 20 53 $ 858 In the years ended 31 December 2019, 2018 and 2017, the movement in allowance for expected credit losses was as follows: US$ million At 1 January Charge for the year Utilised Disposal of subsidiaries Translation difference At 31 December LLiiqquuiiddiittyy RRiisskk 22001199 $$ ((4422)) ((33)) 22 – ((33)) 22001188 $ (54) 1 3 – 8 $$ ((4466)) $ (42) $ (1) (53) (2) (10) (41) $ (54) 22001177 $ (47) (10) 4 1 (2) $ (54) 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 (Note 22). 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. 220 74 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) LLiiqquuiiddiittyy RRiisskk ((ccoonnttiinnuueedd)) The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments. Strategic report Business review CSR report Corporate governance Financial statements Additional information 3311 DDeecceemmbbeerr 22001199 US$ million FFiixxeedd--rraattee ddeebbtt Loans and borrowings Principal Interest Lease liabilities Other long-term financial liabilities Amounts payable under put options for shares in subsidiaries TToottaall ffiixxeedd--rraattee ddeebbtt VVaarriiaabbllee--rraattee ddeebbtt Loans and borrowings Principal Interest TToottaall vvaarriiaabbllee--rraattee ddeebbtt NNoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt Trade and other payables Payables to related parties TToottaall nnoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt 3311 DDeecceemmbbeerr 22001188 US$ million FFiixxeedd--rraattee ddeebbtt Loans and borrowings Principal Interest Finance lease liabilities Other long-term financial liabilities Amounts payable under put options for shares in subsidiaries Principal Interest TToottaall ffiixxeedd--rraattee ddeebbtt VVaarriiaabbllee--rraattee ddeebbtt Loans and borrowings Principal Interest TToottaall vvaarriiaabbllee--rraattee ddeebbtt NNoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt Trade and other payables Payables to related parties TToottaall nnoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt OOnn ddeemmaanndd LLeessss tthhaann 33 mmoonntthhss 33 ttoo 1122 mmoonntthhss 11 ttoo 22 yyeeaarrss 22 ttoo 55 yyeeaarrss AAfftteerr 55 yyeeaarrss TToottaall $$ –– –– –– –– –– –– –– –– –– 222288 11 222299 $$ 55 9977 99 1166 –– $$ 55 113344 2266 88 6699 $$ 11,,000022 118844 3388 1111 $$ 22,,330044 224499 4400 1166 –– –– 112277 224422 11,,223355 22,,660099 2266 1144 4400 888833 1133 889966 1166 4455 6611 7788 –– 7788 3300 5599 8899 –– –– –– 338866 112255 551111 –– –– –– $$ 1100 –– 2222 –– –– 3322 888855 1166 990011 –– –– –– $$ 33,,332266 666644 113355 5511 6699 44,,224455 11,,334433 225599 11,,660022 11,,118899 1144 11,,220033 $$ 222299 $$ 11,,006633 $$ 338811 $$ 11,,332244 $$ 33,,112200 $$ 993333 $$ 77,,005500 OOnn ddeemmaanndd LLeessss tthhaann 33 mmoonntthhss 33 ttoo 1122 mmoonntthhss 11 ttoo 22 yyeeaarrss 22 ttoo 55 yyeeaarrss AAfftteerr 55 yyeeaarrss TToottaall $ – – – – – – – 3 – 3 129 94 223 $ – 84 – 13 – – 97 2 15 17 864 26 890 $ 226 148 3 53 60 9 499 65 45 110 12 – 12 $ 710 194 – 9 – – $ 2,452 211 1 8 – – 913 2,672 13 59 72 – – – 1,014 107 1,121 – – – $ 17 – 5 3 – – 25 – – – – – – $ 3,405 637 9 86 60 9 4,206 1,097 226 1,323 1,005 120 1,125 $ 226 $ 1,004 $ 621 $ 985 $ 3,793 $ 25 $ 6,654 75 221 Annual report & Accounts 2019 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) LLiiqquuiiddiittyy RRiisskk ((ccoonnttiinnuueedd)) 3311 DDeecceemmbbeerr 22001177 US$ million FFiixxeedd--rraattee ddeebbtt Loans and borrowings Principal Interest Finance lease liabilities Other long-term financial liabilities Amounts payable under put options for shares in subsidiaries Principal Interest TToottaall ffiixxeedd--rraattee ddeebbtt VVaarriiaabbllee--rraattee ddeebbtt Loans and borrowings Principal Interest TToottaall vvaarriiaabbllee--rraattee ddeebbtt NNoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt Financial instruments included in long-term liabilities Trade and other payables Payables to related parties TToottaall nnoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt OOnn ddeemmaanndd LLeessss tthhaann 33 mmoonntthhss 33 ttoo 1122 mmoonntthhss 11 ttoo 22 yyeeaarrss 22 ttoo 55 yyeeaarrss AAfftteerr 55 yyeeaarrss TToottaall $ – – – – – – – – – – – 143 237 380 $ – 90 – 14 – – $ 4 179 1 3 – – 104 187 1 19 20 – 770 18 788 57 57 114 1 37 – 38 $ 269 252 4 20 $ 2,580 416 1 15 $ 799 22 6 4 $ 3,652 959 12 56 60 4 609 408 64 472 – – – – – – – – 60 4 3,012 831 4,743 1,013 113 1,126 1 – – 1 202 4 206 – – – – 1,681 257 1,938 2 950 255 1,207 $ 380 $ 912 $ 339 $ 1,081 $ 4,139 $ 1,037 $ 7,888 Payables to related parties in the tables above do not include contract liabilities in the amount of $5 million, $2 million and $1 million as of 31 December 2019, 2018 and 2017, respectively. MMaarrkkeett RRiisskk 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. IInntteerreesstt RRaattee RRiisskk 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. 222 76 Strategic report Business review CSR report Corporate governance Financial statements Additional information 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) MMaarrkkeett RRiisskk ((ccoonnttiinnuueedd)) IInntteerreesstt RRaattee RRiisskk ((ccoonnttiinnuueedd)) 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. In estimating reasonably possible changes the Group assessed the volatility of interest rates during the reporting periods. US$ million 22001199 22001188 22001177 BBaassiiss ppooiinnttss EEffffeecctt oonn PPBBTT BBaassiiss ppooiinnttss EEffffeecctt oonn PPBBTT BBaassiiss ppooiinnttss EEffffeecctt oonn PPBBTT US$ millions US$ millions US$ millions LLiiaabbiilliittiieess ddeennoommiinnaatteedd iinn UUSS ddoollllaarrss Decrease in LIBOR Increase in LIBOR LLiiaabbiilliittiieess ddeennoommiinnaatteedd iinn eeuurroo Decrease in EURIBOR Increase in EURIBOR LLiiaabbiilliittiieess ddeennoommiinnaatteedd iinn rroouubblleess Decrease in Bank of Russia key rate Increase in Bank of Russia key rate CCuurrrreennccyy RRiisskk ((1177)) 1177 ((66)) 66 ((7755)) 5500 22 ((22)) –– –– –– –– (17) 17 (1) 1 (100) 50 $ 2 (2) – $ – – $ – (11) 11 (1) 1 (225) 300 $ 2 (2) – $ – – $ – 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/UAH RUB/UAH USD/KZT 22001199 $$ 22,,775500 446677 ((7777)) ((990077)) ((1111)) 1177 –– –– ((116644)) 22001188 $ 2,886 265 7 (723) (12) (20) (119) – (170) 22001177 $ 2,589 (276) (11) (892) (6) 5 (199) (4) (163) 77 223 Annual report & Accounts 2019 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) MMaarrkkeett RRiisskk ((ccoonnttiinnuueedd)) CCuurrrreennccyy RRiisskk ((ccoonnttiinnuueedd)) 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. 22001199 22001188 22001177 CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT % US$ millions % US$ millions % US$ millions ((77..7788)) 77..7788 ((77..5500)) 77..5500 ((88..8844)) 88..8844 ((55..0022)) 55..0022 ((44..5588)) 44..5588 ((22..2233)) 22..2233 ((55..9988)) 55..9988 ((77..6688)) 77..6688 ((1100..8822)) 1100..8822 ((44..2200)) 44..2200 ((223300)) 220000 ((3355)) 3355 –– –– 44 ((44)) 4422 ((4422)) –– –– ((11)) 11 –– –– –– –– 77 ((77)) (13.87) 13.87 (13.54) 13.54 (16.08) 16.08 (7.35) 7.35 (6.76) 6.76 (2.96) 2.96 (8.54) 8.54 (5.86) 5.86 (15.04) 15.04 (8.43) 8.43 (468) 350 (36) 36 – – (1) 1 49 (49) – – 2 (2) 7 (7) – – 14 (14) (10.01) 10.01 (11.35) 11.35 (12.03) 12.03 (7.36) 7.36 (6.76) 6.76 (3.08) 3.08 (7.95) 7.95 (5.78) 5.78 (11.99) 11.99 (6.30) 6.30 (282) 241 31 (31) – – 1 (1) 61 (60) – – – – 12 (11) – – 10 (10) USD/RUB EUR/RUB CAD/RUB EUR/USD USD/CAD EUR/CZK USD/CZK USD/UAH RUB/UAH USD/KZT In addition to the effects of changes in the exchange rates disclosed above, the Group is exposed to currency risk on derivatives (Note 25). The impact of currency risk on the fair value of these derivatives is disclosed below. 22001199 22001188 22001177 CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT % US$ millions % US$ millions % US$ millions USD/RUB ((77..7788)) 77..7788 3300 ((2255)) (13.87) 13.87 36 (27) (10.01) 10.01 66 (49) FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:    Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs). The carrying amounts of financial instruments, such as cash, short-term and long-term investments, short-term accounts receivable and payable, short- term loans receivable and payable and promissory notes, approximate their fair value. 224 78 Strategic report Business review CSR report Corporate governance Financial statements Additional information 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss ((ccoonnttiinnuueedd)) At 31 December the Group held the following financial instruments measured at fair value: US$ million LLeevveell 11 LLeevveell 22 LLeevveell 33 LLeevveell 11 LLeevveell 22 LLeevveell 33 LLeevveell 11 LLeevveell 22 LLeevveell 33 22001199 22001188 22001177 AAsssseettss mmeeaassuurreedd aatt ffaaiirr vvaalluuee Derivatives not designated as hedging instruments (Notes 13, 25) Hedging instruments (Note 25) Financial assets measured at fair value through other comprehensive income (Note 13) LLiiaabbiilliittiieess mmeeaassuurreedd aatt ffaaiirr vvaalluuee Derivatives not designated as hedging instruments (Note 25) Hedging instruments (Note 25) –– –– –– –– –– 1177 –– –– 66 –– –– –– –– –– –– – – – – – – – – 5 46 – – – – – – – 33 – – 3 1 – – 3 – – – – – 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 for which carrying amounts differ from fair values at 31 December. US$ million 22001199 22001188 22001177 CCaarrrryyiinngg aammoouunntt FFaaiirr vvaalluuee CCaarrrryyiinngg aammoouunntt FFaaiirr vvaalluuee CCaarrrryyiinngg aammoouunntt FFaaiirr vvaalluuee Long-term fixed-rate bank loans Long-term variable-rate bank loans $$ 5566 11,,330099 $$ 5577 11,,333300 $ 269 1,084 $ 266 1,092 $ 427 1,668 $ 442 1,665 USD-denominated 6.50% notes due 2020 8.25% notes due 2021 6.75% notes due 2022 5.375% notes due 2023 5.25% notes due 2024 Rouble-denominated 12.95% rouble bonds due 2019 12.60% rouble bonds due 2021 7.95% rouble bonds due 2024 –– 777766 551133 775599 770055 –– 225500 333333 –– 882255 555555 881199 777700 –– 226688 334466 708 777 513 759 – 216 223 – 723 826 535 754 – 222 241 – 707 774 512 757 – 260 269 – 752 873 560 792 – 280 302 – $$ 44,,770011 $$ 44,,997700 $ 4,549 $ 4,659 $ 5,374 $ 5,666 The fair value of the non-convertible bonds and notes was determined based on market quotations (Level 1). The fair value of 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 (Level 3). The discount rates used for valuation of financial instruments were as follows: Currency in which financial instruments are denominated 22001199 22001188 22001177 USD EUR RUB 2.5 – 3.8% 4.9 – 5.7% 3.6 – 4.5% – – 1.7 – 3.4% 1.7 – 3.9% 8.13% 7.97% 79 225 Annual report & Accounts 2019 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) CCaappiittaall MMaannaaggeemmeenntt 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. There were no changes in the objectives, policies and processes during 2019. 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 taking into account cashflow and other constraints. 29. NON-CASH TRANSACTIONS Transactions that did not require the use of cash or cash equivalents, not disclosed in the notes above, were as follows in the years ended 31 December: US$ million Liabilities for purchases of property, plant and equipment, excluding VAT Loans provided in the form of payments by banks for property, plant and equipment 22001199 $$ 114422 – 22001188 $ 92 6 22001177 $ 80 8 30. 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, the USA and Canada. Russia is considered to be a developing market with higher economic and political risks. The unrest in the Southeastern region of Ukraine and the economic sanctions imposed by the USA and the European Union on Russia in 2014 and later on caused economic slowdown in Russia and reduced access to international capital markets. Further sanctions imposed on Russia could have an adverse impact on the Group’s business. Steel consumption is affected by the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions. In March 2018 the United States placed 25% tariffs on imports of most steel products from several countries, including Russia, while granting temporary exemptions for others, including Canada, Mexico, and the European Union. In May 2018, the U.S. announced the end of temporary exemptions for Canada, Mexico, and the European Union, putting 25% tariffs on imports from those jurisdictions effective 1 June 2018. In response, the government of Canada introduced 25% tariffs effective 1 July 2018 on selected steel products from the U.S. In addition, effective 25 October 2018, the Canadian government imposed provisional safeguard measures on imports from most countries (excluding the United States) of certain categories of steel products by adding a 25% surtax in cases, where the volume of imports from trading partners exceeded historical norms. Most of those provisional safeguards expired on 29 April 2019 following an inquiry by the Canadian International Trade Tribunal. In May 2019, the United States lifted the 25% tariffs on imports of steel products from Canada and Mexico. The Canadian government lifted its retaliatory tariffs on steel the same day. Therefore, the Group’s cross-border transactions between U.S. and Canadian subsidiaries no longer face the 25% Section 232 tariffs and Canadian retaliatory tariffs. The entities of the Steel North America segment import steel for further processing and final products for selling to domestic customers. U.S. Section 232 tariffs remain in place against other countries, including Russia, and U.S. subsidiaries still face those 25% tariffs on any imported steel from those countries. In August 2018, the U.S. imposed a preliminary 24.38% antidumping duty on welded line pipe greater than 16-inch outside diameter exported from Canada into the United States. In April 2019, after completing its final investigation, the U.S. imposed a final antidumping duty of 12.32% that remains in place. A review of the duty rate at the U.S. Department of Commerce may be initiated in May 2020, which may lead to a revised rate in October 2021. Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances. 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. 226 80 Strategic report Business review CSR report Corporate governance Financial statements Additional information 30. COMMITMENTS AND CONTINGENCIES (CONTINUED) Taxation Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can 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. In Russia 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. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on its 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 $70 million. Contractual Commitments At 31 December 2019, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $379 million. In 2010, the Group concluded a contract with PraxAir (Note 2, Accounting Judgements) for the construction of an air separation plant and for the supply of oxygen and other gases produced by PraxAir at this plant for a period of 20 years (extended to 25 years in 2015, when the construction was completed). This supply contract does not fall within the scope of IFRS 16 “Leases”. At 31 December 2019, the Group has committed expenditure of $551 million over the life of the contract. In 2018, the Group concluded a contract with Air Liquide for the construction of an air separation plant and for the supply of oxygen and other gases produced by Air Liquide at this plant 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 $400 million, which is payable within 20 years starting upon commencement of production in 2021 in proportion to the amounts of the variable component. The variable component is determined based on the actual purchase of gases and is estimated at $406 million during the life of the contract. Based on management’s assessment this supply contract does not fall within the scope of IFRS 16 “Leases” as the Group has no access to the equipment and has no rights either to operate the assets, or to design them in order to predetermine the way of their usage. Also it is expected that more than an insignificant amount of the assets’ output will be sold to the parties unrelated to the Group. In addition, Air Liquide will construct the system of trunk and auxiliary pipelines, distribution stations and other equipment for products delivery, which will be leased by the Group for a period of 20 years and accounted for under IFRS 16. The cost of construction of the products delivery system is estimated at $106 million. In 2019, the Group concluded a contract with Xcel Energy Inc. for the supply of electricity for a period of 22 years. The Group is committed to purchase from 1 January 2022 at least 500,000 MWh annually on a take-or-pay basis at rates ranging from 3.90 to 4.90 cents/kWh. The rates can be adjusted for gas prices. The total amount of this commitment at the unadjusted rates approximates $440 million. 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. The Group budgeted to spend approximately $20 million under these programmes in 2020. Environmental Protection In the course of its 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. The Group has a number of environmental claims and proceedings which are at a stage of investigation. Environmental provisions in relation to these proceedings that were recognised at 31 December 2019 amounted to $18 million. Preliminary estimates available of the incremental costs indicate that such costs could be up to $186 million. The Group has insurance agreements, which will provide reimbursement of the costs to be actually incurred up to $228 million, of which $18 million relate to the accrued environmental provisions and have been recognised in receivables at 31 December 2019. Management believes that an economic outflow of the additional costs is not probable and 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 2020 to 2025, under which the Group will perform works aimed at reductions in environmental pollution and contamination. As of 31 December 2019, the costs of implementing these programmes are estimated at $199 million. 81 227 Annual report & Accounts 2019 30. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 its operations or financial position. 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. As of 31 December 2019, possible legal risks approximate $22 million. Issued Guarantees In June 2018, EVRAZ plc and EVRAZ West-Siberian Metallurgical Plant issued a joint guarantee in the amount of up to 30 billion roubles ($486 million at the exchange rate as of 31 December 2019) to nine companies owned by Sibuglemet to compensate any direct losses caused by the failure to perform the agreed management services provided by one the Group’s subsidiaries to these entities. Sibuglemet is a producer of coking coal and operator of coal refineries in the Kemerovo region of Russia. The management company committed to perform all management functions including, inter alia, all the decisions required to carry out the day-to-day operations of these coal companies, their investment and procurement activities. The guarantee expires on 31 December 2025. 31. 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 TToottaall aauuddiitt ffeeeess OOtthheerr sseerrvviicceess 22001199 $$ 11 22 33 11 $$ 44 22001188 $ 1 2 3 1 $ 4 32. MATERIAL PARTLY-OWNED SUBSIDIARIES Financial information of subsidiaries that have material non-controlling interests is provided below. Subsidiary Raspadskaya New CF&I (subsidiary of EVRAZ Inc NA) CCoouunnttrryy ooff iinnccoorrppoorraattiioonn Russia USA NNoonn--ccoonnttrroolllliinngg iinntteerreessttss 22001199 11.83% 10.00% 22001188 16.16% 10.00% 22001177 $ 1 2 3 1 $ 4 22001177 18.05% 10.00% US$ million 22001199 22001188 22001177 AAccccuummuullaatteedd bbaallaanncceess ooff mmaatteerriiaall nnoonn--ccoonnttrroolllliinngg iinntteerreessttss Raspadskaya New CF&I (subsidiary of EVRAZ Inc NA) Others PPrrooffiitt aallllooccaatteedd ttoo mmaatteerriiaall nnoonn--ccoonnttrroolllliinngg iinntteerreessttss Raspadskaya New CF&I (subsidiary of EVRAZ Inc NA) Others 228 $$ 116622 110055 ((1155)) 225522 3355 22 22 $$ 3399 $ 170 103 (16) 257 74 4 (14) $ 64 $ 149 99 (6) 242 51 1 8 $ 60 82 32. MATERIAL PARTLY-OWNED SUBSIDIARIES (CONTINUED) The summarised financial information regarding these subsidiaries is provided below. This information is based on amounts before inter-company eliminations. Strategic report Business review CSR report Corporate governance Financial statements Additional information SSuummmmaarriisseedd ssttaatteemmeennttss ooff ooppeerraattiioonnss Raspadskaya US$ million Revenue Cost of revenue Gross profit/(loss) Operating costs Impairment of assets Foreign exchange gains/(losses), net PPrrooffiitt//((lloossss)) ffrroomm ooppeerraattiioonnss Non-operating gains/(losses) PPrrooffiitt//((lloossss)) bbeeffoorree ttaaxx Income tax benefit/(expense) NNeett pprrooffiitt//((lloossss)) OOtthheerr ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) TToottaall ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) attributable to non-controlling interests dividends paid to non-controlling interests New CF&I US$ million Revenue Cost of revenue Gross profit/(loss) Operating costs Impairment of assets PPrrooffiitt//((lloossss)) ffrroomm ooppeerraattiioonnss Non-operating gains/(losses) PPrrooffiitt//((lloossss)) bbeeffoorree ttaaxx Income tax benefit/(expense) NNeett pprrooffiitt//((lloossss)) OOtthheerr ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) TToottaall ccoommpprreehheennssiivvee iinnccoommee//((lloossss)) attributable to non-controlling interests dividends paid to non-controlling interests 22001199 $$ 999966 ((550099)) 448877 ((9966)) ((9922)) ((2244)) 227755 2233 229988 ((6644)) $$ 223344 115500 338844 5566 ((33)) 22001199 $$ 775577 ((665544)) 110033 ((9933)) – 1100 2200 3300 ((77)) $$ 2233 ((66)) 1177 22 – 22001188 $ 1,086 (493) 593 (76) (4) 23 536 5 541 (113) $ 428 (204) 224 42 – 22001188 $ 808 (690) 118 (88) (1) 29 19 48 (11) $ 37 7 44 4 – 83 22001177 $ 868 (430) 438 (74) 9 13 386 (21) 365 (75) $ 290 36 326 57 – 22001177 $ 558 (533) 25 (54) (2) (31) 18 (13) 21 $ 8 (3) 5 1 – 229 Annual report & Accounts 2019 32. MATERIAL PARTLY-OWNED SUBSIDIARIES (CONTINUED) SSuummmmaarriisseedd ssttaatteemmeennttss ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt 3311 DDeecceemmbbeerr Raspadskaya US$ million Property, plant and equipment Other non-current assets Current assets TToottaall aasssseettss Deferred income tax liabilities Non-current liabilities Current liabilities TToottaall lliiaabbiilliittiieess TToottaall eeqquuiittyy attributable to: equity holders of parent non-controlling interests New CF&I US$ million Property, plant and equipment Other non-current assets Current assets TToottaall aasssseettss Deferred income tax liabilities Non-current liabilities Current liabilities TToottaall lliiaabbiilliittiieess TToottaall eeqquuiittyy attributable to: equity holders of parent non-controlling interests SSuummmmaarriisseedd ccaasshh ffllooww iinnffoorrmmaattiioonn Raspadskaya US$ million Operating activities Investing activities Financing activities New CF&I US$ million Operating activities Investing activities Financing activities 33. SUBSEQUENT EVENTS Dividends 22001199 $$ 887700 99 11,,008822 11,,996611 8822 7766 332277 448855 11,,447766 11,,331144 116622 22001199 $$ 220055 11,,003388 115522 11,,339955 1166 112288 220044 334488 11,,004477 994422 110055 22001199 $$ 338866 119944 ((7722)) 22001199 $$ 7766 ((7700)) ((66)) 22001188 $ 831 113 858 1,802 71 23 545 639 1,163 993 170 22001188 $ 173 982 199 1,354 12 81 231 324 1,030 927 103 22001188 $ 345 (285) (37) 22001188 $ 80 (80) – 22001177 $ 1,047 11 590 1,648 72 31 599 702 946 797 149 22001177 $ 167 921 155 1,243 12 89 156 257 986 887 99 22001177 $ 406 19 (413) 22001177 $ (16) 16 – On 26 February 2020, the Board of directors of EVRAZ plc declared dividends in the amount of $581 million, which represents $0.40 per share. 230 84 Strategic report Business review CSR report Corporate governance Financial statements Additional information 34. LIST OF SUBSIDIARIES AND OTHER SIGNIFICANT HOLDINGS CCoouunnttrryy ooff iinnccoorrppoorraattiioonn NNaammee RReellaattiioonnsshhiipp OOwwnneerrsshhiipp iinntteerreesstt iinn 22001199 RReeggiisstteerreedd aaddddrreessss NNootteess Canada Camrose Pipe Corporation indirect subsidiary 100.00% 9040 N.Burgard Way, Portland, OR 97203 Canada Canadian National Steel Corporation indirect subsidiary 100.00% Canada EVRAZ Inc. NA Canada indirect subsidiary 100.00% Canada EVRAZ Materials Recycling Inc. indirect subsidiary 100.00% Canada EVRAZ Wasco Pipe Protection Corporation indirect subsidiary 51.00% Canada Genalta Recycling Inc. joint venture 50.00% Canada General Scrap Partnership indirect subsidiary 100.00% Canada Genlandco Inc. indirect subsidiary 100.00% Canada Kar-basher Manitoba Ltd joint venture 50.00% Canada Kar-basher of Alberta Ltd indirect subsidiary 100.00% Canada King Crusher Inc. joint venture 50.00% Canada New Gensubco Inc. indirect subsidiary 100.00% Canada Sametco Auto Inc. indirect subsidiary 100.00% Cyprus Actionfield Limited indirect subsidiary 100.00% Cyprus East Metals Limited indirect subsidiary 100.00% 3300 TD Canada Trust Tower, 421-7 Avenue SW, Calgary Alberta T2P 4K9 160 Elgin Street, Suite 2600, Ottawa Ontario K1P 1C3 160 Elgin Street, Suite 2600, Ottawa, Ontario K1P 1C3 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 2400, 525 8th Avenue SW Calgary AB T2P 1G1 387 Broadway, Winnipeg, Manitoba R3C 0V5 387 Broadway, Winnipeg, Manitoba R3C 0V5 387 Broadway, Winnipeg, Manitoba R3C 0V5 3300 TD Canada Trust Tower, 421-7 Avenue SW, Calgary, Alberta T2P 4K9 3300 TD Canada Trust Tower, 421-7 Avenue SW, Calgary, Alberta T2P 4K9 387 Broadway, Winnipeg, Manitoba R3C 0V5 160 Elgin Street, Suite 2600, Ottawa, Ontario K1P 1C3 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia Cyprus Fegilton Limited indirect subsidiary 100.00% 3 Themistokli Dervi, Julia House, 1066, Nicosia sold Cyprus Laybridge Limited indirect subsidiary 100.00% Cyprus Malvero Holdings Limited indirect subsidiary - Cyprus Mastercroft Finance Limited indirect subsidiary 100.00% Cyprus Nafkratos Limited indirect subsidiary 100.00% Cyprus RVK Invest Limited associate 42.63% Cyprus Sinano Shipmanagement Limited indirect subsidiary 100.00% Cyprus Steeltrade Limited indirect subsidiary 100.00% Cyprus Streamcore Limited joint venture 50.00% Cyprus Unicroft Limited indirect subsidiary 100.00% 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia Themistokli Dervi, 3, Julia House, P.C. 1066, Nicosia, Cyprus 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia 3 Themistokli Dervi, Julia House, 1066, Nicosia Leoforos Archiepiskopou Makariou lll, 135, EMELLE Building, flat/office 22, 3021, Limassol liquidated 100% controlled through put option for the purchase of shares Cyprus Velcast Limited indirect subsidiary 100.00% 3 Themistokli Dervi, Julia House, 1066, Nicosia under strike-off procedures Czech Republic EVRAZ Nikom, a.s. indirect subsidiary 100.00% Mnisek pod Brdy, c. 900, 25210 Italy EVRAZ Palini e Bertoli S.r.l indirect subsidiary 100.00% via E. Fermi 28, 33058 San Giorgio di Nogaro (UD) sold Kazakhstan Evraz Caspian Steel indirect subsidiary 65.00% 41, ul. Promyshlennaya, Kostanai, 110000 Kazakhstan EvrazMetall Kazakhstan indirect subsidiary 100.00% office 411; 29, prospekt Jenis, Saryarka district, Nur-Sultan Luxembourg Evraz Group S.A. direct subsidiary 100.00% 13, avenue Monterey, L-2163, Luxembourg Mexico EVRAZ NA Mexico indirect subsidiary 100.00% Frida Kahlo 195-709, Valle Оrientе, San Pedro Garza Carcia, Nuevo Leon, 66269 Netherlands ECS Holdings Europe B.V. indirect subsidiary 65.00% Hoogoorddreef 15, 1101 BA Amsterdam 85 231 Annual report & Accounts 2019 34. LIST OF SUBSIDIARIES AND OTHER SIGNIFICANT HOLDINGS (CONTINUED) CCoouunnttrryy ooff iinnccoorrppoorraattiioonn NNaammee RReellaattiioonnsshhiipp OOwwnneerrsshhiipp iinntteerreesstt iinn 22001199 RReeggiisstteerreedd aaddddrreessss NNootteess Republic of S.Africa Republic of S.Africa Republic of S.Africa EVRAZ Highveld Steel and Vanadium Limited indirect subsidiary 85.11% Old Pretoria Road, Portion 93 of the Farm Schoongezicht 308 JS eMalahleni (Witbank) deconsolidated in 2015 Mapochs Mine (Proprietary) Limited indirect subsidiary 62.98% Mapochs Mine Community Trust indirect subsidiary - Old Pretoria Road, Portion 93 of the Farm Schoongezicht 308 JS eMalahleni (Witbank) deconsolidated in 2015 Portion 93 of the farm Schoongezicht No.308 JS, eMalahleni deconsolidated in 2015 Russia Aktiv-Media indirect subsidiary 100.00% Russia Allegro JV associate 50.00% Russia ATP Yuzhkuzbassugol indirect subsidiary 100.00% Russia AVT-Ural indirect subsidiary 51.00% Russia Blagotvoritelniy fond Evraza - Sibir Blagotvoritelniy fond Evraza - Ural indirect subsidiary - non-commercial indirect subsidiary - non-commercial - - Centr kultury i iskusstva NTMK indirect subsidiary - non-commercial Centr podgotovki personala Evraz- Ural indirect subsidiary - non-commercial - - Russia Centr Servisnykh Resheniy indirect subsidiary 100.00% Russia Russia Centralnaya Obogatitelnaya Fabrika Abashevskaya Centralnaya Obogatitelnaya Fabrika Kuznetskaya indirect subsidiary 92.10% indirect subsidiary 100.00% Russia Elekrosvyaz YKU indirect subsidiary 87.20% office 6; 35, ul. Ordzhonikidze, Novokuznetsk, Kemerovskaya obl., 654007 office 2/2, bld.2, ul. Vladislava Tetyukhina, Verhnyaya Salda, Sverdlovskaya obl., 624760 20, Silikatnaya, Novokuznetsk, Kemerovskaya obl., 654086 2, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 1, ul. Ploshad Pobedy, Novokuznetsk, Kemerovskaya obl., 654010 office 4, 39, ul. Karl Marks, Nizhny Tagil, Sverdlovskaya obl., 622001 1, ul. Metallurgov, Nizhny Tagil, Sverdlovskaya obl., 622025 1, ul. Metallurgov, Nizhny Tagil, Sverdlovskaya obl., 622025 1, ul. Rudokoprovaya, Novokuznetsk, Kemerovskaya obl., 654063 12, Tupik Strelochny, Novokuznetsk, Kemerovskaya obl., 654086 16, Shosse Severnoe, Novokuznetsk, Kemerovskaya obl., 654043 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 Brianskmetallresursy indirect subsidiary 99.96% 14, ul. Staleliteinaya, Bryansk, 241035 Russia Russia EVRAZ Consolidated West-Siberian metallurgical Plant EVRAZ Kachkanarsky Ore Mining and Processing Plant indirect subsidiary 100.00% indirect subsidiary 100.00% 16, ul. Shosse Kosmicheskoe, Novokuznetsk, Kemerovskaya obl., 654043 2, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 Russia EVRAZ Metall Inprom indirect subsidiary 100.00% EVRAZ Nizhny Tagil Metallurgical Plant direct subsidiary 100.00% EVRAZ Uzlovaya indirect subsidiary 100.00% 2-a, ul. Marshala Zhukova, Taganrog, Rostovskaya obl., 347942 1, ul. Metallurgov, Nizhny Tagil, Sverdlovskaya obl., 622025 4, ul.Entuziastov, kvartal 5 Pyatiletka, Uzlovaya, Tulskaya obl., 301600 EVRAZ Vanady Tula indirect subsidiary 100.00% 1, ul. Przhevalskogo, Tula, 300016 Russia EVRAZ Yuzhny Stan indirect subsidiary 100.00% Russia EvrazEK indirect subsidiary 100.00% 1, ul. Zarechnaya, rabochy poselok Ust- Donetsky, Ust-Donetsky raion, Rostovskaya obl., 346550 2B, ul. Khlebozavodskaya, Novokuznetsk, Kemerovskaya obl., 654006 liquidated Russia Evrazenergotrans indirect subsidiary 50.00% indirect subsidiary 100.00% 4, ul. Belovezhskaya, Moscow, 121353 4, ul. Rudokoprovaya, Novokuznetsk, Kemerovskaya obl., 654006 office 14; 62, ul. Internationalnaya, Kyzyl, Tyva Republic, 667000 30, Shosse Severnoe, Novokuznetsk, Kemerovskaya obl., 654043 4, ul. Belovezhskaya, Moscow, 121353 4, ul. Belovezhskaya, Moscow, 121353 1, ul. Zhdanova, Gurievsk, Kemerovskaya obl., 652780 9, ul. Khimicheskaya, Taganrog, Rostovskaya obl., 347913 office 115; 2, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 controlled through put option for the purchase of shares of Malvero Holdings Limited merged controlled through put option for the purchase of shares of Malvero Holdings Limited EvrazHolding Finance indirect subsidiary 100.00% EvrazHolding LLC EvrazMetall Sibir EvrazService Evraztekhnika indirect subsidiary 100.00% indirect subsidiary indirect subsidiary 100.00% 100.00% Gurievsky rudnik indirect subsidiary 100.00% Industrialnaya Vostochno- Evropeiskaya company indirect subsidiary 100.00% Russia KachkanarEnergoTrans indirect subsidiary 50.00% 232 86 Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Strategic report Business review CSR report Corporate governance Financial statements Additional information 34. LIST OF SUBSIDIARIES AND OTHER SIGNIFICANT HOLDINGS (CONTINUED) CCoouunnttrryy ooff iinnccoorrppoorraattiioonn NNaammee RReellaattiioonnsshhiipp OOwwnneerrsshhiipp iinntteerreesstt iinn 22001199 RReeggiisstteerreedd aaddddrreessss NNootteess Russia Kachkanarskaya teplosnabzhauschaya company indirect subsidiary 100.00% Russia Kulturno-sportivniy centr metallurgov indirect subsidiary - non-commercial - Russia Kuznetskpogruztrans indirect subsidiary 94.50% Russia Kuznetskteplosbyt indirect subsidiary 100.00% Russia Magnit indirect subsidiary - Russia Managing Company EVRAZ Mezhdurechensk indirect subsidiary 100.00% Russia Medsanchast Vanady indirect subsidiary 100.00% Russia Metallenergofinance indirect subsidiary 100.00% Russia Metservice indirect subsidiary 100.00% Russia Mezhegeyugol Coal Company indirect subsidiary 100.00% Russia Mine Abashevskaya indirect subsidiary 100.00% Russia Mine Alardinskaya indirect subsidiary 100.00% Russia Mine Esaulskaya indirect subsidiary 100.00% Russia Mine Osinnikovskaya indirect subsidiary 100.00% Russia Mine Uskovskaya indirect subsidiary 100.00% Russia Mining Metallurgical Company “Timir” joint venture 51.00% Russia Montazhnik Raspadskoy indirect subsidiary 88.17% Russia Mordovmetallotorg indirect subsidiary 99.90% Russia Nizhny Tagil Telecompany Telecon indirect subsidiary - Russia Novokuznetskmetallopttorg associate 48.51% Russia Ohothichie hozyaistvo indirect subsidiary - non-commercial - 17, 8 microraion, Kachkanar, Sverdlovskaya obl., 624350 20, Prospect Metallurgov, Novokuznetsk, Kemerovskaya obl., 654007 18, ul. Promyshlennaya, Novokuznetsk, Kemerovskaya obl., 654029 4, ul. Rudokoprovaya, Novokuznetsk, Kemerovskaya obl., 654006 4, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 69, ul. Kirova, Novokuznetsk, Kemerovskaya obl., 654080 1, Zeleny Mys district, Kachkanar, Sverdlovskaya obl., 624350 4, ul. Rudokoprovaya, Novokuznetsk, Kemerovskaya obl., 654006 office 16; 51, ul. Malysheva, Ekaterinburg, Sverdlovskaya obl., 620075 62, ul. Internationalnaya, Kyzyl, Tyva Republic, 667000 5, ul. Kavkazskaya, Novokuznetsk, Kemerovskaya obl., 654013 56, ul. Ugolnaya, Malinovka, Kaltan, Kemerovskaya obl., 652831 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 3, ul. Shakhtovaya, Osinniki, Kemerovskaya obl., 652804 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 4, Prospect Geologov, Neryungri, Republic of Saha (Yakutia), 678960 office 408; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 39, Aleksandrovskoe Shosse, Saransk, Respublica Mordovia, 430006 74, ul. Industrialnaya, Nizhny Tagil, Sverdlovskaya obl., 622025 16, ul. Chaikinoi, Novokuznetsk, Kemerovskaya obl., 654005 1, ul. Metallurgov, Nizhny Tagil, Sverdlovskaya obl., 622025 Russia Russia Olzherasskoye shakhtoprokhodcheskoye upravlenie indirect subsidiary 88.17% office 331; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 Osinnikovsky remontno- mekhanichesky zavod indirect subsidiary 84.43% 1/2, ul. Pervogornaya, Osinniki, Kemerovskaya obl., 652804 Russia Parus indirect subsidiary 100.00% office 107; 3, ul. 1 Liteinaya, Yartsevo, Smolenskaya obl., 215805 sold Russia Promuglepoject indirect subsidiary 100.00% Russia Publishing House IKaR indirect subsidiary - Russia Raspadskaya direct subsidiary 88.17% Russia Raspadskaya Coal Company indirect subsidiary 88.17% Russia Raspadskaya Preparation Plant indirect subsidiary 88.17% Russia Raspadskaya-Koksovaya indirect subsidiary 88.17% Russia Russia Russia Razrez Raspadskiy indirect subsidiary 88.17% Regional Media Company Regionalniy Centr podgotovki personala Evraz-Sibir indirect subsidiary indirect subsidiary - non-commercial - - 4, ul. Nevskogo, Novokuznetsk, Kemerovskaya obl., 654006 4, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 office 201; 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 office 203; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 office 424; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 office 213; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 4, ul. Belovezhskaya, Moscow, 121353 4, ul. Nevskogo, Novokuznetsk, Kemerovskaya obl., 654006 87 233 Annual report & Accounts 2019 Russia Russia Russia Russia Russia Russia Russia Russia Russia 34. LIST OF SUBSIDIARIES AND OTHER SIGNIFICANT HOLDINGS (CONTINUED) CCoouunnttrryy ooff iinnccoorrppoorraattiioonn NNaammee RReellaattiioonnsshhiipp OOwwnneerrsshhiipp iinntteerreesstt iinn 22001199 RReeggiisstteerreedd aaddddrreessss NNootteess Russia Rembytcomplex indirect subsidiary 100.00% Russia Sanatoriy-porfilactory Lenevka indirect subsidiary - non-commercial - Russia Sfera indirect subsidiary 100.00% Russia Sibir-VK joint venture 50.00% Russia Sibmetinvest indirect subsidiary 100.00% 8, 8 microraion, Kachkanar, Sverdlovskaya obl., 624351 Nikolopoltavskoye post-office, Lenevka, Prigorodny district, Sverdlovskaya obl., 622911 office 315; 205, ul. 8 Marta, Ekaterinburg, Sverdlovskaya obl., 620085 37A, ul. Kutuzova, Novokuznetsk, Kemerovskaya obl., 654041 office 10; 1, 1st km of Rublevo-Uspenskoye shosse, der. Razdory, Odintsovo area, Moscow region, 143082 57, Prospect Stroiteley, Novokuznetsk, Kemerovskaya obl., 654005 Specializirovanniy registrator KOMPAS investment 10.83% Specializirovannoye Shakhtomontazhno-naladochnoye upravlenie indirect subsidiary 49.64% 28, proezd Zaschitny, Novokuznetsk, Kemerovskaya obl., 654034 controlled through put option for the purchase of shares of Malvero Holdings Limited Russia Sportivniy complex Uralets Russia Sportivno-Ozdorovitelny complex Metallurg-Forum indirect subsidiary - non-commercial indirect subsidiary - non-commercial - - Russia Tagilteplosbyt indirect subsidiary 100.00% Tomusinskoye pogruzochno- transportnoye upravlenie indirect subsidiary 51.66% 36, Gvardeisky bulvar, Nizhny Tagil, Sverdlovskaya obl., 622005 office 26; 61, ul. Krasnogvardeiskaya, Nizhny Tagil, Sverdlovskaya obl., 622013 67, Prospect Lenina, Nizhny Tagil, Sverdlovskaya obl., 622034 office 209; 106, ul. Mira, Mezhdurechensk, Kemerovskaya obl.,652870 Trade Company EvrazHolding indirect subsidiary 100.00% 4, ul. Belovezhskaya, Moscow, 121353 Vladimirmetallopttorg indirect subsidiary 95.64% 57, ul. P. Osipenko, Vladimir, 600009 TV-Most indirect subsidiary Russia TVN indirect subsidiary - - Russia Uliyanovskmetall indirect subsidiary 99.37% Russia United accounting systems indirect subsidiary 100.00% Russia Russia United Coal Company Yuzhkuzbassugol Upravlenie po montazhu, demontazhu i remontu gornoshakhtnogo oborudovaniya indirect subsidiary 100.00% indirect subsidiary 100.00% Russia Vanadyservice indirect subsidiary 100.00% Vanady-transport indirect subsidiary 100.00% Vtorresurs-Pererabotka joint venture 50.00% Yuzhno-Kuzbasskoye geologorazvedochnoye upravlenie indirect subsidiary 100.00% Russia ZAO Irkutskvtorchermet associate 42.63% Russia ZAO Vtorchermet associate 42.63% Russia Zapadnye Vorota indirect subsidiary 100.00% Russia Zavod metallurgicheskih reagentov associate Switzerland Switzerland East Metals A.G. East Metals Shipping A.G. indirect subsidiary indirect subsidiary 50.00% 100.00% 100.00% Ukraine EVRAZ Ukraine indirect subsidiary 100.00% Ukraine Evraztrans Ukraine indirect subsidiary 100.00% Ukraine 234 United accounting systems Ukraine indirect subsidiary 100.00% 88 office 164, 31, Moscovsky prospect, Kemerovo, 650065 office 16; 35, ul. Ordzhonikidze, Novokuznetsk, Kemerovskaya obl., 654007 20, 11 proezd Inzhenerny, Ulyanovsk, 432072 office 205; 1, ul. Rudokoprovaya, Novokuznetsk, Kemerovskaya obl., 654063 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 3, ul. Shakhtovaya, Osinniki, Kemerovskaya obl., 652804 11a, 10 microraion, Kachkanar, Sverdlovskaya obl., 624351 merged 2, ul. Sverdlova, Kachkanar, Sverdlovskaya obl., 624351 37A, ul. Kutuzova, Novokuznetsk, Kemerovskaya obl., 654041 33, Prospect Kurako, Novokuznetsk, Kemerovskaya obl., 654006 office 212, bld. ZAO Vtorchermet, ul. Severny Promuzel, Irkutsk, 664053 office 211, bld. ZAO Vtorchermet, ul. Severny promuzel, Irkutsk, 664053 14a, ul. Bolshaya Dorogomilovskaya, Moscow, 121059 1, ul. Metallurgov, Nizhny Tagil, Sverdlovskaya obl., 622025 Baarerstrasse 131, 6300 Zug Baarerstrasse 131, 6300 Zug 31, ul. Udarnikov, Dnepr, Dnepropetrovskaya obl., 49064 office 512, 93, ul. Yavornitskogo, Dnepr, Dnepropetrovskaya obl., 49000 3, ul. Mayakovskogo, Dnepr, Dnepropetrovskaya obl., 49064 liquidated sold liquidated Strategic report Business review CSR report Corporate governance Financial statements Additional information 34. LIST OF SUBSIDIARIES AND OTHER SIGNIFICANT HOLDINGS (CONTINUED) CCoouunnttrryy ooff iinnccoorrppoorraattiioonn NNaammee RReellaattiioonnsshhiipp OOwwnneerrsshhiipp iinntteerreesstt iinn 22001199 RReeggiisstteerreedd aaddddrreessss NNootteess United Kingdom EVRAZ North America plc indirect subsidiary 100.00% Suite 1, 3rd Floor, 11-12 St James’s Square, London SW1 4LB USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA CF&I Steel LP Colorado and Wyoming Railway Company indirect subsidiary indirect subsidiary 90.00% 90.00% 1612 E Abriendo Pueblo, CO 81004 2100 S. Freeway Pueblo, CO 81004 East Metals North America, LLC indirect subsidiary 100.00% East Metals Services Inc. indirect subsidiary 100.00% EVRAZ Claymont Steel, Inc. indirect subsidiary 100.00% EVRAZ Inc. NA indirect subsidiary 100.00% 71 S.Wacker, Suite 1700, Chicago, IL 60606 71 S.Wacker, Suite 1700, Chicago, IL 60606 71 S.Wacker, Suite 1700, Chicago, IL 60606 71 S.Wacker, Suite 1700, Chicago, IL 60606 EVRAZ Stratcor, Inc. indirect subsidiary 100.00% 4285 Malvern Road, Hot Springs, AR 71901 sold EVRAZ Trade NA LLC indirect subsidiary 100.00% Fremont County Irrigating Ditch Co. General Scrap Inc. New CF&I Inc. Oregon Ferroalloy Partners investment indirect subsidiary indirect subsidiary indirect subsidiary 13.50% 100.00% 90.00% 60.00% Oregon Steel Mills Processing Inc. indirect subsidiary 100.00% OSM Distribution Inc. indirect subsidiary 100.00% Palmer North America LLC indirect subsidiary 90.00% 71 S.Wacker, Suite 1700, Chicago, IL 60606 113 W. 5th Street Florence, CO 81226 3101 Valley Street Minot, ND 58702 1612 E Abriendo Pueblo, CO 81004 14400 Rivergate Blvd. Portland, OR 97203 71 S.Wacker, Suite 1700, Chicago, IL 60606 71 S.Wacker, Suite 1700, Chicago, IL 60606 251 Little Falls Drive, Wilmington, Delaware 19808 Union Ditch and Water Co. indirect subsidiary 57.59% 113 W. 5th Street Florence, CO 81226 89 235 Annual report & Accounts 2019 EVRAZ plc Separate Financial Statements for the year ended 31 December 2019 Separate statement of comprehensive income (In millions of US dollars) General and administrative expenses Operating income Impairment of investments Foreign exchange gains/(losses) Interest expense Gain/(loss) on financial assets or liabilities Dividend income Other non-operating gains/(losses) PPrrooffiitt bbeeffoorree ttaaxx Current income tax expense NNeett pprrooffiitt TToottaall ccoommpprreehheennssiivvee iinnccoommee The accompanying notes form an integral part of these separate financial statements. NNootteess 22001199 22001188 3311 DDeecceemmbbeerr 66 33 66 33,,66,,77,,88 77 66 66 99 $$ ((1111)) 99 ((331188)) ((119999)) ((221111)) ((66)) 99,,773322 3333 99,,002299 ((113399)) 88,,889900 $$ 88,,889900 $ (10) 6 – 164 (66) – – – 94 (14) 80 $ 80 236 Separate statement of financial position Strategic report Business review CSR report Corporate governance Financial statements Additional information (In millions of US dollars) AASSSSEETTSS NNoonn––ccuurrrreenntt aasssseettss Investments in subsidiaries Investments in joint ventures Receivables from related parties CCuurrrreenntt aasssseettss Receivables from related parties Dividends receivable from related parties Income tax receivable TTOOTTAALL AASSSSEETTSS EEQQUUIITTYY AANNDD LLIIAABBIILLIITTIIEESS Capital and reserves Issued capital Treasury shares Reorganisation reserve Merger reserve Share-based payments Accumulated profits LLIIAABBIILLIITTIIEESS NNoonn--ccuurrrreenntt lliiaabbiilliittiieess Trade and other payables Long-term loans Loans payable to related parties Financial guarantee liabilities CCuurrrreenntt lliiaabbiilliittiieess Trade and other payables Payables to related parties Short-term loans and current portion of long-term loans Loans payable to related parties Financial guarantee liabilities Income tax payable TTOOTTAALL LLIIAABBIILLIITTIIEESS NNootteess 3311 DDeecceemmbbeerr 22001199 22001188 33 33 66 66 66 99 44 44 44 44 55 88 77 66 66 33,,88 66 77 66 66 99 $$ 1155,,009955 2222 1199 1155,,113366 99 662299 1166 665544 $ 3,197 24 21 3,242 12 – – 12 1155,,779900 3,254 7755 ((116699)) ((558844)) 112277 116622 99,,117700 88,,778811 77 22,,774477 552222 1199 33,,229955 77 33,,115511 6633 442244 77 6622 33,,771144 77,,000099 75 (196) (584) 127 149 1,393 964 14 – 724 21 759 14 – – 1,493 10 14 1,531 2,290 TTOOTTAALL EEQQUUIITTYY AANNDD LLIIAABBIILLIITTIIEESS $$ 1155,,779900 $ 3,254 The Financial Statements on pages 236-247 were approved by the Board of Directors on 26 February 2020 and signed on its behalf by Alexander Frolov, Chief Executive Officer. The accompanying notes form an integral part of these separate financial statements. 237 Annual report & Accounts 2019Separate statement of cash flows (In millions of US dollars) CCaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess Net profit Adjustments to reconcile net loss to net cash flows from operating activities: NNootteess 22001199 22001188 $$ 88,,889900 $ 80 Operating income Impairment of investments Foreign exchange (gains)/losses Interest expense (Gain)/loss on financial assets or liabilities Dividend income Other non-operating (gains)/losses Changes in working capital: Receivables from related parties Income tax receivable Trade and other payables Taxes payable NNeett ccaasshh ffllooww uusseedd iinn ooppeerraattiinngg aaccttiivviittiieess CCaasshh fflloowwss ffrroomm iinnvveessttiinngg aaccttiivviittiieess Dividends received NNeett ccaasshh ffllooww ffrroomm iinnvveessttiinngg aaccttiivviittiieess CCaasshh fflloowwss ffrroomm ffiinnaanncciinngg aaccttiivviittiieess Proceeds from bank loans and notes Repayment of bank loans and notes, including interest Proceeds from loans provided by related parties Repayment of loans provided by related parties, including interest Payments for investments on deferred terms, including interest Dividends paid to shareholders NNeett ccaasshh ffllooww uusseedd iinn//((ffrroomm)) ffiinnaanncciinngg aaccttiivviittiieess Effect of foreign exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt tthhee eenndd ooff tthhee yyeeaarr SSuupppplleemmeennttaarryy ccaasshh ffllooww iinnffoorrmmaattiioonn:: Interest paid Income taxes paid The accompanying notes form an integral part of these separate financial statements. 238 66 33 66 33,,66,,77 77 66 66 66 99 88 66 77 77 66 66 33 44 ((99)) 331188 119999 221111 66 ((99,,773322)) ((3333)) ((115500)) 88 ((1166)) ((77)) 114400 ((2255)) 778844 778844 669955 ((885544)) 11,,773366 ((11,,224411)) ((88)) ((11,,008866)) ((775588)) ((11)) –– –– $$ –– ((220000)) ((1166)) (6) – (164) 66 – – – (24) 5 – (6) 14 (11) – – – – 2,976 (1,396) (11) (1,556) 13 (2) – – $ – (34) – Strategic report Business review CSR report Corporate governance Financial statements Additional information Separate statement of changes in equity (In millions of US dollars) NNootteess IIssssuueedd ccaappiittaall TTrreeaassuurryy sshhaarreess RReeoorrggaanniissaattiioonn rreesseerrvvee MMeerrggeerr rreesseerrvvee SShhaarree--bbaasseedd ppaayymmeennttss AAccccuummuullaatteedd pprrooffiittss TToottaall AAtt 3311 DDeecceemmbbeerr 22001177 $ 1,507 $ (231) $ (584) $ 127 $ 134 $ 1,472 $ 2,425 Total comprehensive loss for the year Share-based payments Dividends declared Reduction of share capital Transfer of treasury shares to participants of the Incentive Plans AAtt 3311 DDeecceemmbbeerr 22001188 Total comprehensive income for the year Share-based payments Dividends declared Reduction of share capital Transfer of treasury shares to participants of the Incentive Plans AAtt 3311 DDeecceemmbbeerr 22001199 55 44 44 44 55 44 44 44 – – – (1,432) – – – – – 35 – – – – – – – – – – – 15 – – – 80 – 80 15 (1,556) (1,556) 1,432 (35) – – $$ 7755 $$ ((119966)) $$ ((558844)) $$ 112277 $$ 114499 $$ 11,,339933 $$ 996644 –– –– –– –– –– –– –– –– –– 2277 –– –– –– –– –– –– –– –– –– –– –– 1133 –– –– –– 88,,889900 88,,889900 –– 1133 ((11,,008866)) ((11,,008866)) –– ((2277)) –– –– $$ 7755 $$ ((116699)) $$ ((558844)) $$ 112277 $$ 116622 $$ 99,,117700 $$ 88,,778811 The accompanying notes form an integral part of these separate financial statements. 239 Annual report & Accounts 2019 EVRAZ plc Notes to the separate financial statements Year ended 31 December 2019 1. CORPORATE INFORMATION These separate financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 26 February 2020. EVRAZ plc (“EVRAZ plc” or “the Company”) was incorporated on 23 September 2011 as a public company limited by shares under the laws of the United Kingdom. The Company was incorporated under the Companies Act 2006 with the registered number in England 7784342. Until 1 August 2019 the registered address of EVRAZ plc was 5th Floor, 6 St. Andrew Street, London, EC4A 3AE, United Kingdom. The new Company’s address is 2 Portman street, London, W1H 6DU, United Kingdom. The Company, together with its subsidiaries (the “Group”), is involved in the production and distribution of steel and related products, vanadium products and coal and iron ore mining. The Group is one of the largest steel producers globally. Until 3 September 2018 Lanebrook Limited (“Lanebrook”) registered in Cyprus was the ultimate controlling party of the Group. On that date Lanebrook distributed all its ownership interest in EVRAZ plc to its direct shareholders in proportion to their holdings in Lanebrook. At 31 December 2018 and 2019, EVRAZ plc was jointly controlled by a group of 3 shareholders: Greenleas International Holdings Limited (BVI), Abiglaze Limited (Cyprus) and Crosland Global Limited (Cyprus). 2. SIGNIFICANT ACCOUNTING POLICIES BBaassiiss ooff PPrreeppaarraattiioonn These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the European Union and in accordance with the Companies Act 2006. International Financial Reporting Standards are issued by the International Accounting Standard Board (“IASB”). IFRSs that are mandatory for application as of 31 December 2019, but not adopted by the European Union, are not expected to have a significant impact on the Company’s financial statements. These financial statements have been prepared on a going concern basis as the directors believe that there are no material uncertainties which could create a significant doubt as to the Company’s ability to continue as a going concern in the foreseeable future. FFoorreeiiggnn CCuurrrreennccyy TTrraannssaaccttiioonnss The presentation and functional currency of the Company is the US dollar. Transactions in foreign currencies are initially recorded in US dollars at the rate on 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. IInnvveessttmmeennttss Investments in subsidiaries, associates or joint ventures are initially recorded at acquisition cost. Impairment in value is recorded if the carrying value of an investment exceeds its recoverable amount. The initial cost of the 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 Company’s 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. CCaasshh aanndd CCaasshh EEqquuiivvaalleennttss Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. BBoorrrroowwiinnggss 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. PPrroovviissiioonnss 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. 240 Strategic report Business review CSR report Corporate governance Financial statements Additional information 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FFiinnaanncciiaall GGuuaarraanntteeee LLiiaabbiilliittiieess Financial guarantee liabilities issued by the Company are those contracts that require a payment to be made to reimburse the incurred losses because the specified debtor or counterparty to a contract fails to make payments or to perform the agreed terms of a contract. Financial guarantees issued by the Company are recognised initially as a liability at fair value, being equal to the estimated future cash inflows receivable from the subsidiaries under the guarantee agreements, with a corresponding recognition of the same amount as receivables from related parties. Subsequently, the liability is amortised over the lives of the guarantees through the statement of comprehensive income, unless it is considered probable that a guarantee will be called, in which case it is measured at the value of the guaranteed amount payable, if higher. 3. INVESTMENTS IN SUBSIDIARIES AND JOINT VENTURES Investments in subsidiaries and joint ventures consisted of the following as of 31 December: Subsidiaries Evraz Group S.A. NTMK Raspadskaya Joint Ventures Timir OOwwnneerrsshhiipp iinntteerreesstt CCoosstt,, nneett ooff iimmppaaiirrmmeenntt UUSS$$ mmiilllliioonn 22001199 22001188 22001199 22001188 110000%% 110000%% 8888..1166%% 100% – – 22,,888844 1100,,777711 11,,444400 1155,,009955 3,197 – – 3,197 5511..0000000011%% 51.00001% 2222 24 The movement in investments was as follows: $US million 3311 DDeecceemmbbeerr 22001177 Share-based compensations 3311 DDeecceemmbbeerr 22001188 Additional investments Impairment loss (recognition)/reversal Share-based compensations EEvvrraazz GGrroouupp SS..AA.. NNTTMMKK RRaassppaaddsskkaayyaa $ 3,182 15 $$ 33,,119977 –– ((331166)) 33 $ – – $$ –– 1100,,776611 –– 1100 $ – – $$ –– 11,,444400 –– –– TTiimmiirr $ 24 – $$ 2244 –– ((22)) –– TToottaall $ 3,206 15 $$ 33,,222211 1122,,220011 ((331188)) 1133 3311 DDeecceemmbbeerr 22001199 $$ 22,,888844 $$ 1100,,777711 $$ 11,,444400 $$ 2222 $$ 1155,,111177 The Company recognises share-based payments made to employees of subsidiaries under control of Evraz Group S.A., EVRAZ NTMK and Raspadskaya as an addition to the cost of its investments in these subsidiaries (Note 5). Evraz Group S.A. 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. At that date 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 the share exchange. In 2019, the Company impaired its investment in Evraz Group S.A. largely as a consequence of the decline in value of the Large diameter pipes cash-generating unit. More details are provided in Note 6 of the consolidated financial statements . NTMK On 18 April 2019, the Company acquired 100% ownership interest in NTMK from Evraz Group S.A. for consideration of $10,761 million, which was partially settled by non-cash consideration (Note 6). At 31 December 2019, the Company owed $2,899 million to Evraz Group S.A. in respect of this acquisition. Raspadskaya On 18 April 2019, the Company acquired 84.33% ownership interest in Raspadskaya from Evraz Group S.A. for consideration of $1,423 million, which was settled wholly by non-cash consideration (Note 6). On 30 September 2019, the Company acquired 1.33% in Raspadskaya from Evraz Group S.A. for cash consideration of $17 million. 241 Annual report & Accounts 2019 3. INVESTMENTS IN SUBSIDIARIES AND JOINT VENTURES (CONTINUED) OJSC Mining and Metallurgical Company Timir Since 2013 the Company has owned a 51% ownership interest in the joint venture with Alrosa for the development of iron ore deposits in the Yakutia region in Russia. The Company’s consideration for this stake of 4,950 million roubles was recognised as $149 million being the present value of the expected cash outflows at the exchange rate as of the date of the transaction. During 2013-2019 the Company paid deferred installments for this acquisition. In 2019 and 2018, the Company paid 480 million roubles and 500 million roubles ($7 million and $9 million, respectively) of purchase consideration and $1 million and $2 million, respectively, of interest charges. In 2019 and 2018, the Company recognised interest charges on deferred installments of $Nil and $1 million, respectively, within interest expense. At 31 December 2018, trade and other accounts payable included liabilities relating to this acquisition in the amount of $8 million, which were fully settled in 2019. In 2016 and before, due to the postponement of the major project activities, the Company impaired its investment in Timir. In 2019, the Company additionally impaired $2 million. Additional information regarding Timir is provided in Note 11 of the consolidated financial statements. Indirect Subsidiaries and Other Significant Holdings The full list of indirect subsidiaries and other significant holdings of EVRAZ plc is presented in Note 34 of the consolidated financial statements. 4. EQUITY Share Capital NNuummbbeerr ooff sshhaarreess 3311 DDeecceemmbbeerr 22001199 22001188 Ordinary shares of $0.05 each, issued and fully paid 11,,550066,,552277,,229944 1,506,527,294 EVRAZ plc does not have an authorised limit on its share capital. On 10 July 2018 the High Court of England and Wales approved the reduction of the nominal value of each share from $1.00 to $0.05. The amount of the cancelled share capital amounting to $1,432 million increased the Company's distributable reserves. Treasury Shares NNuummbbeerr ooff sshhaarreess Treasury shares 3311 DDeecceemmbbeerr 22001199 22001188 5544,,662200,,223333 63,177,187 In 2015, EVRAZ plc purchased 108,458,508 of its own shares. These shares are used for the Company’s Incentive Plans (Note 21 of the consolidated financial statements). Under these plans, in 2019 and 2018, the Company transferred to the participants of Incentive Plans 8,556,954 and 11,297,476 shares, respectively. Reorganisation Reserve Reorganisation reserve represents the difference between the net assets of Evraz Group S.A. at the date of the Group’s reorganisation (7 November 2011) and the par value of the issued shares of EVRAZ plc. This charge to equity reduced the amount of distributable reserves. Merger Reserve The merger reserve arose in 2013 in connection with the purchase of 50% in Corber Enterprises S.à r.l. (“Corber”) in accordance with section 612 of the Companies Act 2006. Impairments of the carrying value of this investment were transferred to the merger reserve. In 2015, the disposal of the investment in Corber to Evraz Group S.A. (Note 3) was made for non-cash consideration, which does not meet the criteria for qualifying consideration. The balance of the merger reserve will be presented as a separate component of equity in the Company’s statement of financial position until such time as Evraz Group S.A. is sold for qualifying consideration, and the merger reserve will be re-allocated to accumulated profits and become distributable. 242 4. EQUITY (CONTINUED) Dividends Strategic report Business review CSR report Corporate governance Financial statements Additional information In 2019 and 2018, the Company declared dividends in the amount of $1,086 million and $1,556 million, respectively (Note 20 of the consolidated financial statements). Distributable Reserves $US million Accumulated profits Reorganisation reserve Unrealised profits 31 December 22001199 99,,117700 ((558844)) ((88,,220000)) 338866 22001188 1,393 (584) – 809 Dividend income from Evraz Group S.A. (Note 6) did not constitute a qualifying consideration and was distributed out of the profit resulting from sale of assets (EVRAZ NTMK and Raspadskaya) to parent and, therefore, this income is excluded from the Company’s distributable reserves at 31 December 2019. Although distributable reserves are currently calculated at $386 million (2018: $809 million), the Company has also considered the impact of further restrictions on distributions for public companies within Section 831 of the Companies Act. Under these restrictions the amount of reserves available for distribution at 31 December 2019 would be $379 million (2018: $762 million). During February 2020 the directors became aware that certain dividends paid in 2018 and 2019 totaling $1,447 million had been made otherwise than in accordance with the Companies Act 2006. The directors duly checked the sufficiency of distributable reserves before each distribution, but due to an administrative error the interim accounts were not filed at Companies House prior to payment. To rectify these breaches, in February 2020 the Company filed the interim accounts in respect of each dividend payment. A special resolution will be proposed at the Annual General Meeting of the Company’s shareholders in June 2020 to authorise the appropriation of distributable profits to the payment of the relevant dividends and remove any right for the Company to pursue shareholders or directors (the ‘Director Release’) for repayment. The Director Release will constitute a related party transaction under the Listing Rules of the UK Listing Authority and under IFRS. The overall effect of the special resolution being passed will be to return all parties to the position they would have been in had the relevant dividends been made in full compliance with the Companies Act 2006. 5. SHARE-BASED PAYMENTS As disclosed in Note 21 of the consolidated financial statements, the Group has incentive plans under which certain employees (“participants”) can be gifted shares of the Company. In 2019 and 2018, the Company recognised share-based compensation expense amounting to $13 million and $15 million, respectively, as a cost of investments in subsidiaries with a corresponding increase in equity. 6. RELATED PARTY TRANSACTIONS Related parties of the Company include its direct and indirect subsidiaries, associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Company’s parent or its shareholders. Loans Received from Related Parties The following movements in loans payable to related parties were in 2018-2019. BBaallaannccee aatt 3311 DDeecceemmbbeerr 22001188 LLooaannss rreecceeiivveedd ffrroomm rreellaatteedd ppaarrttiieess IInntteerreesstt rraattee MMaattuurriittyy IInntteerreesstt eexxppeennssee RReeppaayymmeenntt ooff llooaannss NNoonn--ccaasshh ttrraannssaaccttiioonnss FFoorreexx ((ggaaiinn))//lloossss BBaallaannccee aatt 3311 DDeecceemmbbeerr 22001199 US$ million CCuurrrreennccyy Direct subsidiary Evraz Group S.A. USD 3.50% 2022 $$ −− $$ 554433 $$ 66 $$ ((2211)) Indirect subsidiaries East Metals A.G EVRAZ KGOK Sibmetinvest EVRAZ Vanady Tula EVRAZ ZSMK USD RUB RUB RUB RUB 2.73-5.06% 2018-2020 5.89% 2019-2020 5.51% 5.51-5.89% 2020 2019 6622 664488 −− 224444 5.51-5.89% 2019-2021 11,,226633 446666 336688 6655 110000 119944 1111 2277 22 77 4444 ((112211)) ((112266)) −− ((110011)) ((887722)) $$ −− −− −− ((997733)) ((6699)) ((227711)) ((771199)) $$ −− $$ 552288 −− 5566 22 2211 9900 441188 −− −− −− −− $$ 22,,221177 $$ 11,,773366 $$ 9977 $$ ((11,,224411)) $$ ((22,,003322)) $$ 116699 $$ 994466 243 Annual report & Accounts 2019 6. RELATED PARTY TRANSACTIONS (CONTINUED) Loans Received from Related Parties (continued) BBaallaannccee aatt 3311 DDeecceemmbbeerr 22001177 LLooaannss rreecceeiivveedd ffrroomm rreellaatteedd ppaarrttiieess IInntteerreesstt rraattee MMaattuurriittyy IInntteerreesstt eexxppeennssee RReeppaayymmeenntt ooff llooaannss NNoonn--ccaasshh ttrraannssaaccttiioonnss FFoorreexx ((ggaaiinn))//lloossss BBaallaannccee aatt 3311 DDeecceemmbbeerr 22001188 US$ million CCuurrrreennccyy Direct subsidiary Evraz Group S.A. USD 3.50% 2020 $ − $ 92 $ 1 $ (93) $ − $ − $ − Indirect subsidiaries East Metals A.G EVRAZ KGOK EVRAZ Vanady Tula EVRAZ ZSMK USD RUB RUB RUB 2.73-5.06% 2018-2020 5.89% 2019-2020 5.51-5.89% 2019 5.51-5.89% 2019-2021 738 − − − 552 664 257 1,411 16 10 4 33 (1,244) − (1) (58) − − − − − − (26) (16) 62 648 244 (123) 1,263 $ 738 $ 2,976 $ 64 $ (1,396) $ − $ (165) $ 2,217 Non-cash transactions include the transfer of the Company’s obligations under loans payable with a carrying value of $2,031 million to Evraz Group S.A. for consideration of $1,999 million. The excess of the carrying value of the liabilities transferred over the newly recognised liability to Evraz Group S.A. amounting to $33 million was recognised as a gain in the income statement within the Other non-operating gains/(losses) caption. Dividend Income In the reporting year the Company’s dividend income consisted of dividends from Evraz Group S.A. ($8,200 million declared in August 2019 and settled by a non-cash offset), EVRAZ NTMK ($886 million declared in July 2019 and fully paid by cash and $623 million declared in December 2019 and not paid as of 31 December 2019) and from Raspadkaya ($23 million declared in September 2019 and fully paid by cash). Dividend income accrued in 2019 Dividends received by cash Tax withheld Non-cash offset Exchange loss Dividends receivable at 31 December 2019 Offset of Liabilities with Evraz Group S.A. EEvvrraazz GGrroouupp SS..AA.. EEVVRRAAZZ NNTTMMKK RRaassppaaddsskkaayyaa $ 8,200 $ 1,509 – – (8,200) – $$ –– (763) (85) – (32) $$ 662299 $ 23 (21) (2) – – $$ –– TToottaall $ 9,732 (784) (87) (8,200) (32) $$ 662299 During 2019 there were a number of transactions between EVRAZ plc and its direct subsidiary Evraz Group S.A.:     EVRAZ plc purchased EVRAZ NTMK and Raspadskaya from Evraz Group S.A. for total consideration of $12,201 million (Note 3); EVRAZ plc transferred its obligations under loans payable to EVRAZ KGOK, EVRAZ Vanady Tula, EVRAZ ZSMK, Sibmetinvest for consideration of $1,999 million (Note 6, Loans Received from Related Parties); Evraz Group S.A. transferred to EVRAZ plc notes payble for consideration of $2,850 million (Note 7); Evraz Group S.A. declared dividends to EVRAZ plc in the amount of $8,200 million (Note 6, Dividend Income). During 2019 EVRAZ plc and Evraz Group S.A. concluded agreements, under which the above mentioned mutual payment obligations were offset resulting in a net liability payable to Evraz Group S.A. in the amount of $3,151 million. Guarantees In 2014-2017, the Company issued guarantees to several banks in respect of the liabilities of EVRAZ NTMK and EVRAZ ZSMK, indirect subsidiaries of the Company, under certain loans totaling $1,191 million at 31 December 2019 (2018: $1,061 million). The loans are due for repayment during the period from 2021 to 2023. The Company earns guarantee fees in respect of these guarantees and in 2019 it accrued $2 million of such income (2018: $3 million). In addition, in 2019 the Company accrued $1 million of guarantee fees (2018:$1 million) for the issued guarantees to several banks for liabilities of East Metals A.G amounting to $141 million as of 31 December 2019 (2018: $86 million). In 2019, the Company issued a guarantee in respect of the liabilities of Evrazholding Finance, an indirect subsidiary, under the bonds due 2024 with the outstanding principal amount of RUB 20 billion ($323 million at the exchange rate as of 31 December 2019). The Company recognised a financial guarantee liability of $5 million in respect of this guarantee. The guarantee fees earned by the Company amounted to $1 million. In 2018, the Company issued a guarantee to nine companies owned by Sibuglemet to compensate any direct losses caused by the failure to perform the agreed management services provided by Management Company Mezhdurechensk, an indirect subsidiary of the Company, to these entities (Note 30 of the consolidated financial statements). In 2018, the Company recognised financial guarantee liability of $18 million. In 2019 and 2018, the Company accrued $4 million and $2 million income, respectively, under this guarantee. 244 Strategic report Business review CSR report Corporate governance Financial statements Additional information 6. RELATED PARTY TRANSACTIONS (CONTINUED) Guarantees (continued) In 2019, the Company issued a guarantee for the loan payable by Evraz Group S.A. to East Metals A.G. amounting to $169 million and accrued $1 million of guarantee fee income. The above guarantees are recognised at fair value in the statement of financial position of the Company. The guarantee fees are recorded within the Operating income caption of the Company’s income statement. Other Transactions In 2019, OOO Evrazholding, an indirect subsidiary of the Company, rendered consulting services to the Company in the amount of $1 million (2018: $1 million). Other disclosures on directors' remuneration required by Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts & Reports) regulations 2008 and those specified for audit by the Directors' Remuneration Report Regulations 2002 are included in the Directors' Remuneration Report. 7. LOANS AND BORROWINGS The Company had the following loans and borrowings during 2018-2019. 66..5500%% nnootteess dduuee 22002200 88..2255%% nnootteess dduuee 22002211 66..7755%% nnootteess dduuee 22002222 55..337755%% nnootteess dduuee 22002233 55..2255%% nnootteess dduuee 22002244 $US million 3311 DDeecceemmbbeerr 22001188 NNoonn--ccaasshh cchhaannggeess:: Recognition of notes at fair value Interest and other charges expensed Accrual of premiums and other charges on early repayment of borrowings CCaasshh cchhaannggeess:: Cash proceeds from bank loans and notes, net of debt issues costs Repayment of interest and premiums on early repayment Repayment of principal 3311 DDeecceemmbbeerr 22001199 $$ –– 773388 44 66 –– ((4488)) ((770000)) $$ –– $$ –– 880088 2299 –– –– ((3311)) –– $$ –– 552288 2200 –– –– ((1177)) –– $$ –– 777766 3322 –– –– ((4400)) –– $$ –– –– 2288 –– 669955 ((1188)) –– $$880066 $$553311 $$ 776688 $$ 770055 $$ 22,,881100 TToottaall $$ –– 22,,885500 111133 66 669955 ((115544)) ((770000)) On 13 March 2019, Evraz Group S.A. transferred all its rights and obligations under the notes with a nominal amount of $2,700 million to EVRAZ plc for consideration of $2,850 million being the market value of the notes at that date. The Company recognised the liabilities at fair value and classified them as subsequently measured at amortised cost. In April 2019, EVRAZ plc issued 5.25% US dollar-denominated notes due 2024 in the amount of $700 million. The proceeds from the issue of the notes were used to finance the purchase of 6.50% notes due 2020 at the tender offer in April 2019 and make whole call in May 2019. In April and May 2019, the Group fully settled its 6.50% notes due 2020 ($700 million). The premium over the carrying value on the repurchase amounting to $(6) million was included in the Gain/(loss) on financial assets and liabilities caption of the separate statement of comprehensive income. At 31 December 2019 the current portion of borrowings included only interest payable under the notes. 8. TRADE AND OTHER PAYABLES Trade and other accounts payable included the following at 31 December: US$ million Liability relating to a settlement of guarantee Payables for the acquisition of Timir (Note 3) 22001199 22001188 NNoonn--ccuurrrreenntt CCuurrrreenntt NNoonn--ccuurrrreenntt CCuurrrreenntt $$77 –– $$77 $$ 77 –– $$77 $ 14 – $ 14 $ 6 8 $ 14 At 31 December 2019 and 2018, trade and other accounts payable included liabilities relating to the settlement of the Company’s guarantee under a long-term take-or-pay supply contract of a former indirect subsidiary of the Company. In 2019, the Company paid $7 million (2018: $6 million) in respect of this liability and recognised interest expense of $1 million (2018: $1 million). 245 Annual report & Accounts 2019 9. INCOME TAXES A reconciliation of income tax expense applicable to profit before income tax using the statutory tax rate to income tax expense as reported in the Company’s financial statements for the years ended 31 December is as follows: US$ million Profit/(loss) before income tax At the statutory income tax rate of 19% Adjustment in respect of income tax of previous years Non-deductible expenses Effect of lower tax rate for dividend income Allowance for deferred tax asset Benefit arising from a previously unrecognised tax loss of a prior period that is used to reduce current tax expense Current income tax expense 2019 $$ 99,,002299 ((11,,771166)) ((22)) ((9944)) 11,,669966 ((2233)) –– $$ ((113399)) 2018 $ 94 (18) – – – – 4 $ (14) The tax rate on dividends is equal to 10% for income from the Russian subsidiaries and zero rate for dividend income from Luxembourg. In 2019, the Company accrued tax on dividend income amounting to $153 million. At 31 December 2019 the Company had an amount payable of $62 million in relation to income tax on dividends receivable from NTMK. In 2019, the Company recognised current income tax benefit of $16 million relating to the current year tax losses of $87 million that can be carried back to recover current tax paid in 2018. As of 31 December 2019, the unused tax losses carried forward amounted to $121 million (2018: $Nil). Deferred tax assets in respect of these losses have not been recorded as it is not probable that sufficient taxable profits will be available in the foreseeable future to offset the losses. They are available for offset against future taxable profits indefinitely. As at 31 December 2019, the Company had $130 million of unutilised foreign tax credits. No deferred tax asset has been recognised on these tax credits as they are unlikely to have value in the future. These tax credits have no fixed expiry date. 10. FINANCIAL INSTRUMENTS LLiiqquuiiddiittyy RRiisskk The following tables summarise the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments, including interest payments. 3311 DDeecceemmbbeerr 22001199 US$ million FFiixxeedd--rraattee ddeebbtt Loans and borrowings Principal Interest Loans payable to related parties Principal Interest Trade and other payables Principal Interest Financial guarantees TToottaall ffiixxeedd--rraattee ddeebbtt NNoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt Payables to related parties TToottaall nnoonn--iinntteerreesstt bbeeaarriinngg ddeebbtt 246 OOnn ddeemmaanndd LLeessss tthhaann 33 mmoonntthhss 33 ttoo 1122 mmoonntthhss 11 ttoo 22 yyeeaarrss 22 ttoo 55 yyeeaarrss AAfftteerr 55 yyeeaarrss TToottaall $$ –– –– –– –– –– –– –– –– $$ –– 6688 119988 44 33 –– –– $$ –– 110055 221188 2288 33 11 77 $$ 775500 114422 $$ 11,,995500 116699 -- 1188 44 –– 77 552222 55 44 –– 1122 227733 336622 992211 22,,666622 33,,115511 –– –– –– –– –– –– –– –– $$ –– $$ 22,,770000 448844 993388 5555 1144 11 2266 44,,221188 33,,115511 –– –– –– –– –– –– –– –– –– –– $$33,,115511 $$ 227733 $$ 336622 $$ 992211 $$ 22,,666622 $$ –– $$ 77,,336699 10. FINANCIAL INSTRUMENTS (CONTINUED) Strategic report Business review CSR report Corporate governance Financial statements Additional information LLiiqquuiiddiittyy RRiisskk ((ccoonnttiinnuueedd)) 3311 DDeecceemmbbeerr 22001188 US$ million FFiixxeedd--rraattee ddeebbtt Loans payable to related parties Principal Interest Trade and other payables Principal Interest Financial guarantees TToottaall ffiixxeedd--rraattee ddeebbtt MMaarrkkeett RRiisskk CCuurrrreennccyy RRiisskk OOnn ddeemmaanndd LLeessss tthhaann 33 mmoonntthhss 33 ttoo 1122 mmoonntthhss 11 ttoo 22 yyeeaarrss 22 ttoo 55 yyeeaarrss AAfftteerr 55 yyeeaarrss TToottaall $ – $ 251 $ 1,209 – – – – 7 10 1 – 103 3 – 10 $ 557 23 7 – 7 $ 167 $ – $ 2,184 7 8 – 10 – – – 4 140 28 1 31 $ – $ 269 $ 1,325 $ 594 $ 192 $ 4 $ 2,384 The Company’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 Sensitivity Analysis 2019 $ 613 2018 $ 2,162 The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held constant, of the Company’s profit before tax. In estimating reasonably possible changes the Company assessed the volatility of foreign exchange rates during the reporting periods. USD/RUB FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss 22001199 CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT 22001188 CChhaannggee iinn eexxcchhaannggee rraattee EEffffeecctt oonn PPBBTT % US$ millions % US$ millions (7.78) 7.78 52 (44) (13.87) 13.87 (348) 263 The carrying amounts of financial instruments, such as cash, accounts receivable and payable, loans payable to related parties, approximate their fair value. The fair value of the notes is disclosed in Note 28 of the consolidated financial statements. 11. SUBSEQUENT EVENTS On 12 February 2020, EVRAZ NTMK, the Company’s wholly-owned subsidiary, declared dividends in the amount of 31.9 billion roubles, which is approximately $499 million. These dividends increase the Company’s distributables reserves. Other material events after the reporting year are disclosed in Note 33 of the consolidated financial statements. 247 Annual report & Accounts 2019 Additional information Lakhta Center St. Petersburg, Russia Stock performance indicators and shareholder information The shares of EVRAZ plc trades on the Main market of London Stock Exchange Unsolicited telephone calls and correspondence Information about shares of EVRAZ plc The Company’s issued share capital as of 31 December 2019 and 26 February 2020 was 1,506,527,294 ordinary shares, of which 54,619,5211 shares are held in Treasury. Therefore, the total number of voting rightsin the Company is 1,451,907,773. Share price Relative share price dynamics, 52w Ticker (Bloomberg) Trading service Market Listing category FTSE index FTSE sector FTSE sub-sector Country of share register Segment MiFID Status SEDOL ISIN number EVR LN SETS MAIN MARKET Premium Equity Commercial Companies FTSE100 Industrial Metals & Mining Iron & Steel GB STMM Regulated Market B71N6K8 GB00B71N6K86 150 140 130 120 110 100 90 80 70 60 01.2019 02.2019 03.2019 04.2019 05.2019 06.2019 07.2019 08.2019 09.2019 10.2019 11.2019 12.2019 EVRAZ FTSE 100 INDEX Shareholder structure 28.77 ROMAN ABRAMOVICH1 19.41 ALEXANDER ABRAMOV1 9.69 ALEXANDER FROLOV1 5.77 GENNADY KOZOVOY2 33.56 FREE-FLOAT 1. The number of shares differs from the figure in the Financial statements by the amount of shares held in Trust. 250 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: • Make sure you get the correct name of the person and organisation • 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 • Report the matter to the FSA either by calling 0845 606 1234 or visiting www. fsa. gov. uk/ scams • If the calls persist, hang up Details of any share dealing facilities that the company endorses will be included in Company mailings. 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. 1. 2. The number of shares as per dealing notification dated 20 June 2019. The number of shares is as per TR-1 Form: Notification of major interest in shares dated 6 February 2013. For Mr Kozovoy, includes shares held directly. Strategic report Business review CSR report Corporate governance Financial statements Additional information Definitions of selected alternative performance measures The Group uses alternative performance measures (APMs) to improve comparability of information between reporting periods and business units, either by adjusting for uncontrollable or one-off factors which impact upon IFRS measures or, by aggregating measures, to aid the user of this report in understanding the activity taking place across the Group’s portfolio. EBITDA EBITDA is determined as a segment’s profit/(loss) from operations adjusted for social and social infrastructure maintenance expenses, 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. See Note 3 of the consolidated financial statement for additional information and reconciliation with IFRS financial statements. Free Cash Flow Free Cash Flow represents EBITDA, net of noncash items, less changes in working capital, income tax paid, interest paid and covenant reset charges, conversion premiums, premiums on early repurchase of bonds and realised gain/(losses) on interest payments under swap contracts, interest income and debt issue costs, less capital expenditure, including recorded in financing activities, purchases of subsidiaries, net of cash acquired, proceeds from sale of disposals classified as held for sale, net of transaction costs, less purchases of treasury shares for participants of the incentive plans, plus other cash flows from investing activities. Free Cash Flow is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ calculation of Free Cash Flow may be different from the calculation used by other companies and therefore comparability may be limited. Cash and short-term bank deposits Cash and short-term bank deposits is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ calculation of cash and short-term bank deposits may be different from the calculation used by other companies and therefore comparability may be limited. Total debt Total debt represents the nominal value of loans and borrowings plus unpaid interest, finance lease liabilities, loans of assets classified as held for sale, and the nominal effect of cross-currency swaps on principal of rouble-denominated notes. Total debt is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ calculation of total debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation is different from that used for covenant compliance calculations. Net debt Net debt represents total debt less cash and liquid short-term financial assets, including those related to disposals classified as held for sale. Net debt is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ calculation of net debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation is different from that used for covenant compliance calculations. Cash and short-term bank deposits calculation, US$ million Cash and cash equivalents Cash and short-term bank deposits 1,423 1,423 1,067 1,067 356 356 33.4 33.4 31 December 2019 31 December 2018 Change Change,% Total debt has been calculated as follows, US$ million Long-term loans, net of current portion Short-term loans and current portion of long-term loans Add back: Unamortised debt issue costs and fair value adjustment to liabilities assumed in business combination Nominal effect of cross-currency swaps on principal of rouble- denominated notes Finance lease liabilities, non-current portion Finance lease liabilities, current portion Total debt 140 18 (6) 83 34 31 December 2019 31 December 2018 Change Change,% 4,599 4,186 413 9.9 377 20 (237) (62.9) (2) (10) 50 (55) - 6 83 28 n/a n/a n/a 5 4,868 4,638 230 Net debt has been calculated as follows, US$ million 31 December 2019 31 December 2018 Change Change,% Total debt Cash and cash equivalents Net debt 4,868 (1,423) 3,445 4,638 (1,067) 3,571 230 (356) (126) 5 33.4 (3.5) 251 Annual report & accounts 2019CAPEX CAPEX has been calculated as follows, US$ million Capital expenditure (CAPEX) is cash expenditure on property, plant and equipment. For internal reporting and analysis, CAPEX includes non- cash transactions related to CAPEX. GHG intensity ratio Tonnes of CO2 equivalent (Scope 1 and 2 GHG emissions) divided by tonnes of crude steel. Оnly steelmaking enterprises are included into the calculation, which are located in Russia and North America. Labour productivity, US$/t P=S/V S – Labour Costs (asset and A-category subsidiaries), exclusive of tax, local currency (on Division consolidation sites with different currencies, $) V – production volume, tn. (for steel assets: V – metal products shipped) LTIFR 31 December 2019 31 December 2018 Change Change,% Purchases of property, plant and equipment and intangible assets Non-cash purchases (Note 12) CAPEX 762 - 762 521 6 527 241 (6) 235 46.3 n/a 44.6 Coking coal concentrate cash cost, US$/t Cash cost of coking coal concentrate is defined as cost of revenues less depreciation and SG&A, the result is divided by sales volumes. Iron ore products cash cost, US$/t Cash cost of iron ore products is defined as cost of revenues less depreciation and SG&A, the result is divided by sales volumes. Number of EBS transformations Number of EBS transformations implemented at the key assets during the reporting year. The LTIFR is calculated on a year-to-date basis for the company employees only. LTIFR = X•1000000/Y Effect from efficiency improvement programme (сustomer focus and cost cutting effects) X is the total number of occupational injuries resulted in lost time among the company employees in the reporting period. Fatalities are not included. Each project effect is calculated as an absolute deviation of targeted metriс year to year multiplied by relevant price or volume depending on project’s focus. Y is the actual total number of man-hours worked by all company employees in the reporting period. Slab cash costs, US$/t Cash cost of slab is defined as the production cost less depreciation, the result is divided by production volumes of slab. Raw materials from EVRAZ coal and iron ore producers are accounted for on at-cost-basis. Costs of slab of EVRAZ NTMK, EVRAZ ZSMK are then weighted averaged by the total saleable slab production volume. 252 Strategic report Business review CSR report Corporate governance Financial statements Additional information Data on mineral reserves COAL Yuzhkuzbassugol JORC equivalent coal proved and probable reserves, kt Mine Alardinskaya Yesaulskaya Erunakovskaya-8 Osinnikovskaya Uskovskaya Total Raspadskaya JORC equivalent coal proved and probable reserves, kt Mine Raspadskaya Raspadskaya Koksovaya (incl. Razrez Koksovy) MUK-96 Razrez Raspadskiy Total Mezhegeyugol JORC equivalent coal proved and probable reserves, kt Mine Mezhegeyugol IRON ORE Evrazruda JORC equivalent coal proved and probable reserves, kt Mine Kaz Tashtagol Sheregesh Total As of 31 December 2019 Fe, % 4,082 62,053 84,847 150,982 Kachkanarsky GOK (EVRAZ KGOK) JORC equivalent coal proved and probable reserves, kt Mine As of 31 December 2019 Gusevogorskoe Kachkanar Proper (Sobstvenno-Kachkanarskoye) Total 3,050,520 6,743,222 9,793,742 31.90 Fe, % 15.9 As of 31 December 2019 83,132 23,137 113,913 73,030 184,489 477,702 As of 31 December 2019 911,914 224,639 113,058 101,323 1,350,934 As of 31 December 2019 85,768 S, % 1.39 V2O5, % 0.13 253 Annual report & accounts 2019Terms and Abbreviations B C Basic oxygen furnace Basic oxygen furnace is a frunace used in a method of primary steelmaking in which carbon-rich molten pig iron is made into steel. Blowing oxygen through molten pig iron lowers the carbon content of the alloy and changes it into low-carbon steel. The process is known as basic because fluxes of burnt lime or dolomite, which are chemical bases, are added to promote the removal of impurities and protect the lining of the converter. Beam A structural element. Beams are characterised by their profile (the shape of their cross-section). One of the most common types of steel beam is the I-beam, also known as H-beam, or W-beam (wide-flange beam), or a ‘universal beam/column’. Beams are widely used in the construction industry and are available in various standard sizes, eg 40-k beam, 60Sh beam, 70Sh beam as mentioned in this report. Billet A usually square, semi-finished steel product obtained by continuous casting or rolling of blooms. Sections, rails, wire rod and other rolled products are made from billets. Blast furnace The blast furnace is the classic production unit to reduce iron ore to molten iron, known as hot metal. It operates as a counter-current shaft system, where iron ore and coke is charged at the top. While this charge descends towards the bottom, ascending carbon containing gases and coke reduces the iron ore to liquid iron. To increase efficiency and productivity, hot air (often enriched with oxygen) is blown into the bottom of the blast furnace. In order to save coke, coal or other carbon containing materials are sometimes injected with this hot air. Cash cost of coking coal concentrate Cash cost of coking coal concentrate is defined as the production cost less depreciation, incl. SG&A and Maintenance CAPEX, the result is divided by production volumes. This measure is used to monitor segment competitiveness improvement. CAPEX Capital expenditure. CFR 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. Channel U-shaped section for construction. Coal washing The process of removing mineral matter from coal usually through density separation, for coarser coal and using surface chemistry for finer particles. Coke A product made by baking coal without oxygen at high temperatures. Unwanted gases are driven out of the coal. The unwanted gases can be used as fuels or processed further to recover valuable chemicals. The resulting material (coke) has a strong porous structure which makes it ideal for use in a blast furnace. 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 A type of furnace that uses pure oxygen in the process of producing steel from cast iron or dry mix. Conversion costs Conversion costs is defined as production costs without raw materials and depreciation, incl. SG&A and Maintenance CAPEX. This measure is used to monitor segment competitiveness improvement. Continuous casting machine Process whereby molten metal is solidified into a “semi-finished” billet, bloom, or slab for subsequent rolling in the finishing mills. Crude steel Steel in its solidified state directly after casting. This is then further processed by rolling or other treatments, which can change its properties. D Debottlenecking Increasing capacity of a supply or production chain through the modification of existing equipment or infrastructure to improve efficiency. Coke battery A group of coke ovens operating as a unit and connected by common walls. Deposit An area of coal resources or reserves identified by surface mapping, drilling or development. Coking coal Highly volatile coal used to manufacture coke. E By-product A secondary product which results from a manufacturing process or chemical reaction. Concentrate Electric arc furnace A furnace used in the steelmaking process which heats charged material via an electric arc. 254 Strategic report Business review CSR report Corporate governance Financial statements Additional information F I Feasibility study A comprehensive engineering estimate of all costs, revenues, equipment requirements and production levels likely to be achieved if a mine is developed. The study is used to define the technical and economic viability of a project and to support the search for project financing. Finished products Products that have completed the manufacturing process but have not yet been sold or distributed to the end user. 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. G Greenfield The development or exploration of a new project not previously examined. Grinding balls Balls used to grind material by impact and pressure. H Head-hardened rails High strength rails with head hardened by heat treatment. Heat-treatment A group of industrial and metalworking processes used to alter the physical, and sometimes chemical, properties of a material. HiPo High potential employee. Iron ore Chemical compounds of iron with other elements, mainly oxygen, silicon, sulphur or carbon. Only extremely pure (rich) iron-oxygen compounds are used for steelmaking. ISO 14001 The International Standardisation Organisation’s standard for environmental management systems. ISO 9001:2008 The International Standardisation Organisation’s standard for a quality management system. J JORC Code The Australasian Joint Ore Reserves Committee, which is widely accepted as a standard for professional reporting of Mineral Resources and Ore Reserves. Kt Thousand tonnes. K L Labour productivity Labour productivity is defined as labour costs exclusive of tax divided by production volumes of steel products. The measurement of performance enables the Company to monitor labour efficiency. Ladle furnace 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 Lean is philosophy of managing the business that is based on a set of principles that define the way of work. Long products Include bars, rods and structural products that are ‘long’ rather than ‘flat’ and are produced from blooms or billets. Longwall An underground mining process in which the coal face is dug out by a shearer and transported above ground by conveyors. LTIFR 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. Lumpy ore 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. M Model line Model line is as a value stream within a single facility or operation, provides a focused and controlled playground for implementing lean. Serve as internal benchmark for the Company. The measurement of performance enables the Company to monitor lean implementation. Mt Million tonnes. Mtpa Million tonnes per annum. 255 Annual report & accounts 2019O Open pit mine A mine working or excavation open to the surface where material is not replaced into the mined out areas. OCTG pipe Oilfield Casing and Tubing Goods or Oil Country Tubular Goods – pipes used in the oil industry. P Pellet An enriched form of iron ore shaped into small balls or pellets. Pellets are used as raw material in the steel making process. Pig iron The solidified iron produced from a blast furnace used for steel production. In liquid form, pig iron is known as hot metal. Pipe blank A flat sheet of metal, a semi-finished product, sold to pipemakers to manufacture pipes. Plate A long thin square shaped construction element made from slabs. Pulverised coal injection (PCI) 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. R Railway products Include rails, rail fasteners, wheels, tyres and other goods for the railway sector. Rebar Reinforcing bar, a commodity grade steel used to strengthen concrete in highway and building construction. Rebar A500SP is a type of reinforcing bar that allows for a reduction in the metallic component of reinforced concrete, thereby significantly lowering construction costs. Rolled steel products Products finished in a rolling mill; these include bars, rods, plate, beams etc. in metallurgical production. Slag is used in cement and fertiliser production as well as for base course material in road construction. Rolling mill 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. Steam coal All other types of hard coal not classified as coking coal. Coal of this type is also commonly referred to as thermal coal. T S SG&A Selling, General and Administrative Expenses. Saleable products Products produced by EVRAZ mines or steel mills which are suitable for sale to third parties. Self-coverage The raw material requirement of EVRAZ steelmaking facilities compared with coal product sales or production of iron ore products from own raw materials. Scrap Iron containing recyclable materials (mainly industrial or household waste) that is generally remelted and processed into new steel. Semi-finished products The initial product forms in the steel making process including slabs, blooms, billets and pipe blanks that are further processed into more finished products such as beams, bars, sheets, tubing etc. Sinter An iron rich clinker formed by heating iron ore fines and coke in a sinter line. The materials, in pellet form, combine efficiently in the blast furnace and allow for more consistent and controllable iron manufacture. Slab A common type of semi-finished steel product which can be further rolled into sheet and plate products. Slag Slag is a byproduct generated when non- ferrous substances in iron ore, limestone and coke are separated from the hot metal Tailings 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. Tubular products Include large diameter line pipes, ERW pipes and casings, seamless pipes and other tubular products. U Unrealised profit (URP) Inter-segment unrealised profit or loss (URP) is a change in the sales margin included in balances of inventories purchased from segments other than the reportable segment between the end and the beginning of the reporting period. V Vanadium A grey metal that is normally used as an alloying agent for iron and steel. It is also used to strengthen titanium based alloys. Vanadium pentoxide The chemical compound with the formula V2O5: this orange solid is the most important compound of vanadium. Upon heating, it reversibly loses oxygen. Vanadium slag Vanadium slag produced from pig iron in the converter shop and used as a raw material by producers of ferroalloys and vanadium products. 256 Strategic report Business review CSR report Corporate governance Financial statements Additional information Short summary of relevant anti-corruption policies Code of Conduct The Code of Conduct is the key document that all employees are requested to adhere to and act in full accordance with. Every new employee is trained on the Code of Conduct on their first day of work. The document is available on the corporate intranet and stresses the ultimate importance of ethical behaviour in all circumstances. Anti-corruption training and the tone set from the top of the organisation emphasise the role of the Code of Conduct in the Group’s daily life. care, culture, and environmental protection. All petitions are carefully considered in terms of legitimacy and transparency of purpose, the amount sought, and the reputation of the petitioner. The decisions are then taken by the Group CEO. When support is granted, sponsorship being its preferred form, such instances are followed up by experts under the vice president for corporate communications and by compliance managers. This ensures full accountability and strict adherence of those supported to EVRAZ policy requirements. Candidate background and criminal record checks EVRAZ consistently performs thorough background and criminal record checks on all potential employees. Among other requirements and norms, the policy specifies that all necessary effort is invested only after the candidate gives written permission to work with his/her personal data. The company is committed to protecting each individual’s privacy and works in full compliance with relevant laws on personal data. Anti-corruption policy EVRAZ Anti-corruption Policy establishes and explains key principles that all assets have adopted to prevent corruption. The policy is easily accessible on the corporate intranet for employees, interested parties and partners, who are all expected to be compliant with relevant anti-corruption legislation and the principles upheld by EVRAZ. Anti-corruption training policy Consistent anti-corruption education efforts are an integral element of a well-thought- out compliance system. The policy adopted in December 2015 defines what positions and levels of authority are to undergo training in anti-corruption awareness. Specifically, all managers and specialists from compliance, legal, controlling, asset protection, investor and government relations, and HR are to receive training and pass a corresponding test. The same refers to all decision makers and/or client managers from procurement and sales. Compliance managers are assigned discreet authority to analyse risk areas and decide who else needs to be trained. Sponsorship and charity policy This policy regulates all aspects of EVRAZ sponsorship and charity efforts as necessary. Under it, the Group may consider supporting low-income or physically challenged individuals, and those suffering from conflicts or natural disasters. EVRAZ may choose to support certain projects in education, sport, health Gift and business entertainment policy EVRAZ believes that business gifts and hospitality are accepted ways to demonstrate and further develop good relationships. At the same time, adequate and consistent control over such expenses is highly important and is one of the key areas for anti-corruption compliance to watch. The policy defines rules and strict approval procedures to be followed when extending or receiving gifts and hospitality. In particular, all amounts above US$100 for a personal gift (received or given) and US$500 for hospitality (received or extended to a person) must be approved by the responsible compliance manager. Corresponding amounts in U.S. and Canada are US$50 and US$250 respectively. To this end, an electronic notification system has been developed. The internal audit function conducts regular checks of the completeness and accuracy of records, either planned or requested by a compliance manager, and compliance specialists act on any recommendations promptly. Hotline policy and whistle- blowing procedures EVRAZ encourages employees to raise concerns to their line managers if they believe the company’s policies or cardinal principles are somehow violated. If employees, clients, or contractors feel unable to do so via other means and procedures, a confidential hotline is available 24/7. Conflict of interest policy A conflict of interest is a set of circumstances in which employees have financial or other personal considerations that may compromise or influence their professional judgment or integrity in carrying out their work responsibilities. The policy specifies how to identify, consider, and duly take care of situations with signs of such conflicts. HR together with compliance managers routinely check whether there are conflicts of interests in the Group, whereas employees and particularly their managers are expected to provide information about any potentially risky situations. Special commissions consider cases that are reported and found to come up with the best possible solution to each individual situation. Contractor/supplier due diligence checks To guard against unscrupulous, unreliable, or suspicious would-be agents and partners, the company runs comprehensive due diligence checks on a business or person prior to signing a contract. EVRAZ fervently upholds a know- your-partner/client policy and in doing so is fully compliant with the applicable anti- corruption laws. The investigation includes but is not limited to checking the company’s business reputation and solvency, as well as its top management’s profile and reputation. 257 Annual report & accounts 2019Contact details Registered Name and Number EVRAZ plc (Company No. 07784342) Secretary Prism Cosec Registered Office Investor Relations 2 Portman street, London, W1H 6DU, England, UK. Tel. (London): +44 (0) 207 832 8990 Tel. (Moscow): +7 (495) 232 1370 E-mail: ir@evraz.com Directors Alexander Abramov Alexander Frolov Laurie Argo Karl Gruber Deborah Gudgeon Alexander Izosimov Sir Michael Peat Eugene Shvidler Eugene Tenenbaum 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 E-mail: webqueries@computershare.co.uk 258 Strategic report Business review CSR report Corporate governance Financial statements Additional information 259 Annual report & accounts 2019

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