Ferrexpo
Annual Report 2007

Plain-text annual report

F e r r e x p o p c l A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 7 Positioned for growth Ferrexpo plc Registered Office: 2-4 King Street London SW1Y 6QL www.ferrexpo.com Ferrexpo plc Annual Report and Accounts 2007 Company overview Business review Sustainable development review Corporate governance Financial statements IFC Activity and mission statements 01 Operational and financial highlights 02 Ferrexpo at a glance 04 Chairman’s statement 08 Chief Executive Officer’s review 12 Chief Executive Officer’s questions and answers 14 Board of Directors and Executive Committee 18 Overview 19 Market environment 20 Supply 21 Performance review 22 Business Improvement 36 Commitment 37 Health and safety 40 Environment 43 Employees 44 Communities Programme 23 Growth projects 25 Marketing 28 Risks 30 Financial review 33 Key performance indicators 46 Corporate Governance 64 Accounts and notes report 51 Remuneration report 57 Directors’ report 62 Statement of Directors’ responsibilities 63 Independent auditors’ report 108 Glossary Ferrexpo is a resources company listed on the London Stock Exchange and a member of the FTSE 250 index. Ferrexpo is headquartered in Switzerland, with its principal operating assets in Ukraine. The Company is primarily involved in the production and export of iron ore pellets, used in producing steel. We are committed to realising the potential of one of the largest iron ore resources in the world, and aim to be recognised as a leading global supplier of iron ore pellets, providing outstanding service to our customers and strong returns to our shareholders. This Annual Report includes statements that are forward looking in nature, particularly relating to the business, strategy, investments, production, major projects and their contribution to expected production and other plans of the Ferrexpo Group and its current goals, assumptions and expectations relating to its future financial condition, performance and results. Forward looking statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause the actual results, performance or achievements of the Ferrexpo Group to be materially different from any future results, performance or achievements expressed in or implied by such forward looking statements. Past performance is no guide to future performance, and persons in need of advice should consult an independent financial adviser. The forward looking statements reflect knowledge and information available at the date of preparation of this Annual Report. Except as required by the Listing Rules, the Disclosure and Transparency Rules and applicable law, Ferrexpo undertakes no obligation to update or change any forward looking statements to reflect events occurring after the date of this document. Nothing in this Annual Report should be construed as a profit forecast. Ferrexpo plc  Annual Report and Accounts 2007 Company overview 01 Operational and financial highlights 2 . 8 9 6 4 . 3 6 5 3 . 7 4 5 2 . 5 8 1 10000 1 . 6 4 2 ----------- – – – – – – – – – – – – – 2007 8000 6000 1 . 9 4 1 4000 2000 2 7 0 , 9 0 5 5 , 8 7 5 7 , 7 1 4 . 0 2 2 4 . 7 1 7 4 . 0 1 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 Revenues (US$million) EBITDA (US$million) EPS (US cents per share) Production volumes (Kt) A year of growth US$698m 65% revenue up by 28% to US$698m  EBITDA up 65% to   US$246m 3.2 US cents dividend of 3.2 US cents   per Ordinary Share 128% 9% underlying earnings1 up by  128% to US$152m increase of 9% in iron ore  output to 28.9 million tonnes 19% increase in production of   high quality (65% Fe) pellets  from Company’s own ore 63% EBIT for the year up by 63% to  US$187m 1  See Glossary 02 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Ferrexpo at a glance Our business at a glance Where we operate Our operations are located  in central Ukraine, giving  us an unmatched  competitive advantage in  terms of logistics, making  us an iron ore producer  with one of the lowest  costs of supply to our  principal customers. Ferrexpo transports its product via rail   and barge to its customers in Eastern and  Central Europe, Turkey and to the Port of  Yuzhny on the Black Sea for onward  transport by ship to China, Japan and India.  Superior logistics management is   the key to maximising the benefit of our  location on the doorstep of Europe. The  Group owns half of the TIS-Ruda private bulk  commodity terminal at Yuzhny, the only one  of its kind in the former CIS, and   is in the process of building up its own fleet  of railway cars. 749 miles 12 1 11 3 7 9 7 5 Ukraine 13 2 4 6 8 1,105 miles 10 1,786 miles 3,151 miles 14 15 1 2 3 Netherlands Serbia Germany 4 5 6 Romania Italy 7 7 8 9 Bulgaria Austria Turkey 10 11 12 Czech Republic Middle East 13 Poland 14 Russia 15 Slovakia Markets served by rail Markets served by ocean vessel Markets part served by ocean vessel Ferrexpo plc  Annual Report and Accounts 2007 Company overview 03 Our operations Ferrexpo’s operations   are situated on the  Kremenchug Magnetic  Anomaly, a 50km long iron  ore deposit in Ukraine’s  Poltava region, making it  the largest iron ore  resource in Europe. The  Group holds the licences to  explore or mine the entire  deposit, with its current  operations situated at the  southern end of the  deposit, adjacent to the  Dnieper River. Our operating asset The GPL Mine A single open-cut mine, 6km long  and 300m deep • Encompassing two deposits – Gorishne- Plavninskoye and Lavrikovskoye Produced 29mt of iron ore in 2007,  equating to 9.1mt of pellets Announced expansion to  approximately 32mtpa of iron ore by late  2010, and an extension of the mine   life to at least 2035 in November 2007 1.6bt of JORC-classified  resource remaining (magnetite,  c.30% Fe content) Processing and pelletising capacity  of over 12mtpa • • • • Brovarskoye Manuilovskoye Kharchenkovskoye Vasilevskoye Galeschinskoye Belanovskoye Yeristovskoye Lavrikovskoye Gorishne- Plavninskoye Dnieper River Further potential • • Four large northern deposits  Approximately 14bt of magnetitic ore  reserves, classified under the Soviet GKZ  code Our projects Three large, well-explored  deposits Galeschinskoye Mine concept studies currently under way •  325mt high-grade haematite deposit  (c.60% Fe content) within a larger  magnetite deposit Belanovskoye Pre-feasibility study currently under way •  1.6bt of JORC-classified resource  (magnetite, c.30% Fe content)  Large open-cut mine planned –  c.45mtpa of iron ore  Plan includes dedicated new processing  and pelletising facilities • • Yeristovskoye Our most advanced growth project. Detailed feasibility study under way • Over 800mt of JORC-classified resource  (magnetite, c.30% Fe content)  Open-cut mine planned – approximately  27mtpa of iron ore  Plan includes dedicated new processing  and pelletising capacity  US$47m of capex committed to  draglines in 2007  Pre-stripping commences in 2008  First ore in 2011 • • • • • 04 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Chairman’s statement 2007 year in review An eventful and successful year I am pleased to report that Ferrexpo has achieved strong  operational and financial performance in its first financial  reporting period as a publicly listed company. The Group  has made considerable progress towards its  stated  objective of becoming a world-class resources company.  We are committed to best practice in our operations,  marketing and corporate governance, and we are  developing a significant and realistic growth programme. Performance in 2007 Notwithstanding the highest priority we attach to the health and safety of our people, we incurred a fatal injury at our Poltava mine in November. Regrettably, in 2008, we have suffered a further two fatal accidents at this site. These tragedies are totally unacceptable and have provided a rallying point for us to redouble our efforts in continuing to introduce best practice in health and safety management. We have now appointed Du Pont Safety Resources  which has an outstanding record of success  in assisting companies to achieve a ‘zero  harm’ objective. We increased production from our existing mine for the sixth consecutive year. The Group produced 9.1mt of iron ore pellets, an increase of 6% compared to 2006. Pellet production from our own produced ore rose from 8.1mt in 2006 to 8.8mt in 2007, and we produced 19% more high quality 65% Fe pellets from our own ore. The increases in volume and product quality resulted directly from continued improvements in operating efficiency and capital investment. The improvement in production output and quality, along with higher achieved sales prices resulting from the increasingly favourable global iron ore market and a relentless focus on operating costs, enabled us to achieve significant growth in both revenues and profits during 2007. Revenues for 2007 were up 27.6% at  US$698.2m (2006: US$547.3m). Pre-tax profit  increased by 99% to US$160.8m (2006:  US$80.7m). Group EBITDA for the period  increased by 65% to US$246.1m (2006:  US$149.1m). Market environment The Group achieved an average price of US$72.3 per tonne of pellets sold in 2007, a 17% increase over the average achieved price in the previous year (2006: US$61.8 per  tonne). International iron ore benchmark  price increases in 2007 had a positive effect  on a number of our pellet contracts. We were  successful in our continued efforts to  increase prices to appropriate levels on a  delivered, ‘value in use’ basis which resulted  in Group average price outcomes in line with  the international benchmark. At year end, the Group was selling approximately 85% of its output to established clients on the basis of long term supply agreements. Globally, iron ore is currently in short supply, driven by demand from developing nations, in particular China and India, and in our core Eastern European markets, where per capita steel consumption continues to grow in line with their strong economic growth. This demand and supply dynamic has led to the increases in international benchmark prices outlined above, and we anticipate further uplifts to our product prices in the current year on the back of continued demand growth. Our customers forsee continuing solid demand for steel in 2008. The global steel industry has also been subject to increased environmental limits on sinter plant construction, a declining global supply of high quality lump iron ore and heightened productivity targets in steel making. These factors are likely to result in sustained higher consumption ratios of pellets versus other forms of iron ore feed. Ferrexpo plc  Annual Report and Accounts 2007 Company overview 05 May 2007 Ferrexpo issues a Notice of Intention to Float on the Regulatory News Service of the London Stock Exchange in anticipation of its impending listing. June 2007 The Initial Public Offering of Ferrexpo plc on the Main Market of the London Stock Exchange was successfully priced at 140p per share, raising a total of US$424 million, approximately half of which were primary proceeds. July 2007 Ferrexpo announces the extension of its long term supply contract with VoestAlpine AG, its largest customer, to 2015. September 2007 Ferrexpo included in the FTSE 250 index. September 2007 Ferrexpo announces the first capital expenditure commitment on the Yeristovskoye mine development, the first of its major growth projects, investing US$47 million on six draglines. September 2007 Ferrexpo announces its Interim Results for the first half of 2007, which reflected growth in production and achieved prices, and tight cost control. November 2007 Ferrexpo announces the commitment of US$158 million to expand its existing mine and extend its productive life to 2032, a highly capital efficient project that will result in an approximately 15% uplift in production from existing operations by 2011. December 2007 Ferrexpo announces the appointment of Chris Mawe as its Chief Financial Officer and Oliver Baring as its Senior Non-executive Director, together with other management role changes associated with its accelerated growth plans. The Group has made considerable progress towards its stated objective of becoming a world - class resources company. Operations In 2007 Ferrexpo retained its leading position as the largest exporter of iron ore pellets from the Ukraine. Overall pellet production increased by 6% compared with the previous year. Market conditions made it uneconomical to  purchase iron ore concentrate from third  parties to take advantage of our excess  pelletising capacity. The increase in our  production was therefore accomplished  using almost entirely our own produced  concentrate, and was accompanied by a  further increase in the proportion of high  grade pellet production with an iron content  above 65%. Our cash costs of production for 2007 were US$31.8 per tonne of pellets, as against US$29.3 per tonne in 2006. This 8.6% increase in production costs compares favourably against Ukrainian inflation, which saw a Producer Price Index increase of 23.3% for 2007. Ferrexpo maintained flat nominal costs of production in 2005, 2006 and the first half of 2007, through aggressive cost management and the implementation of a Business Improvement Programme at our Poltava mine. We are continuing to successfully control costs. High Ukrainian cost inflation in the second half of the year meant we were not able to achieve the material real reductions in costs that we delivered in prior periods. This is likely to remain a factor in Ukraine in the short term and will remain a feature of the industry worldwide in the medium term. Marketing We have had a very successful year in the crucial areas of marketing and distribution, having extended one of our largest long term contracts to 2015, and initiated a major new long term supply agreement in Ukraine. Logistics To ensure access to world markets, the TIS-Ruda ocean-vessel port facility was commissioned in May 2007 and formally recognised by the Port of Yuzhny in October 2007. Ferrexpo owns 49% of TIS- Ruda, the first privately owned dry bulk commodity terminal in the former CIS, and has access to its 5mtpa export capacity. To enhance the reliability of supply, we are also in the process of procuring up to 550 railcars for use on the state railway infrastructure. We continue to develop the Group’s  logistical capabilities throughout the  delivery chain to allow further expansion of  our global customer base in anticipation of  our growing production. Investing activities Operating cash flow for 2007 was US$188.8m, an increase of 176% over the previous year (2006: US$68.3m). Together  with the proceeds from our Listing in June,  this strong cash flow has allowed us to  initiate investment in our accelerated growth  strategy. The Group invested US$104.4m in  continuing to develop and upgrade our  existing operations in 2007, and in November  the Board committed a further US$158m in  development capital expenditure for this purpose. In addition to the expansion and optimisation of the existing mine, we are focusing our investment activities primarily on our major growth projects. The Board has approved a new accelerated business plan which envisages the parallel development of several of the Group’s major expansion projects. The first of these is Yeristovskoye, for which the Board committed US$47m in September 2007 for new draglines. This equipment will be used to commence stripping operations at this  deposit in 2008. 06 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Chairman’s statement continued Our key aim is to realise the potential   of our unique resource  Management and people We continued to strengthen our management and operational capability. We are pleased to welcome to the Board Chris Mawe (previously Finance Director of UK Coal plc) as Chief Financial Officer and Oliver Baring (Chairman of Mwana Africa plc) as Senior Independent Non-executive Director. On behalf of the Board I would like to thank all of our management and staff, both at our operations and elsewhere in the Group, for their hard work and commitment throughout the year. The significant progress which the Group has made in 2007 would not have been possible without their enthusiasm and dedication. Corporate governance and social responsibility I am pleased to report that the Group has achieved substantial compliance with the UK Combined Code on Corporate Governance within six months of its listing on the London Stock Exchange, and we continue to make further progress in line with best practice. The Board remains firmly committed to delivering high standards of corporate governance in the future. The Board has constituted a Corporate Social Responsibility (‘CSR’) Committee, chaired by our Chief Executive, to monitor the management of the Group’s health, safety, environmental and community programmes. CSR remains a priority and we are continuing to develop further initiatives to institutionalise safety conscious behaviour, actively engage with local communities and to minimise our impact on the environment. Outlook The current year has started well with substantial increases in global iron ore prices being announced. This has created a very positive environment for the annual price negotiations with our major customers and we expect the global pricing trend to flow through to our new contract prices from 1 April 2008. Production continues to increase incrementally as our improvement programmes come into effect. Ukrainian cost inflation was high in 2007 and is set to continue in 2008, with the result that we do face cost increases in the coming year, particularly with regard to State regulated cost inputs. The Directors believe that the Group will continue to grow its revenues and profits in 2008. Ferrexpo plc  Annual Report and Accounts 2007 Company overview 07 Production continues to increase incrementally as our improvement programmes come into effect. Dividend The Directors intend to pursue a dividend policy consistent with the Group’s growth profile. This will reflect the investment the Group is making to drive future growth and the amount of cash generated by the existing operations, while maintaining a prudent level of dividend cover. The Directors recommend a dividend in respect of profits generated for the Ferrexpo Group in 2007 of 3.2 US cents per Ordinary Share for  payment on 19 May 2008 to shareholders on  the register at the close of business on 18  April 2008. The dividend will be paid in UK  pounds sterling. Michael Abrahams CBE DL Chairman 08 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Chief Executive Officer’s review Our strategy explained The Group’s principal aim is to enhance overall value for its shareholders, through a strategy of: Positioned for accelerated growth Our excellent operational and financial performance   in 2007 has established a strong foundation for   the accelerated growth plans of the Group.  EBITDA 1 . 6 4 2 2 . 5 8 1 1 . 9 4 1 2005 2006 2007 65% EBITDA (US$million) EBITDA up 65% to US$246.1m At the start of the year, we set out to achieve  improvements in operating efficiency,  product quality and production growth. In  marketing, we aimed to become the iron ore  supplier of choice in our key markets. We  have succeeded in all these endeavours, with  substantial progress being made at both our  existing operations and with our growth  projects.  We hold the exclusive licences to a world  class iron ore resource, uniquely positioned  close to our core markets and operating   in a global market environment that is  increasingly positive for our business.  Among the world’s iron ore producers,   we are very favourably positioned to take  advantage of the opportunities these  circumstances present and have made  significant progress in developing the   range of capabilities required to do so. Our strategy is to maximise the value   of the Group through the accelerated  commercialisation of our extensive  undeveloped ore deposits, whilst ensuring  continuous production growth and cost  competitiveness in our existing operations.  The Board continues to refine and develop  this strategy, with an overarching focus on  management’s priorities to establish the  operational, financial and risk management  capabilities required for aggressive delivery  on our project pipeline.  Existing operations In 2007, the goals for our existing operations  at Ferrexpo Poltava Mining (‘FPM’) centred  on continuing the demonstrated trend of  improvements across all areas of CSR and  especially safety, and in operating efficiency,  product quality and production growth. Considerable progress has been made   in establishing health, safety and  environmental management (‘HSE’) systems  at FPM and a culture of continuous  improvement in HSE performance is evident.  Sadly, we suffered a fatality during 2007 and  a further two   in 2008 that highlighted the urgent need   for us to introduce best practice in  behavioural safety. We have now secured the  services of Du Pont Safety Resources which  has an outstanding record of success in  assisting companies to move towards a ‘zero  harm’ objective.  We succeeded in increasing the iron ore  output from our existing Gorishne –  Plavninskoye Lavrikovskoye (‘GPL’) mine   by 9% and achieved a 6% increase in total  pellet output. This was accomplished with  only negligible production of pellets from  purchased concentrate, the margins being  prohibitively low. Production of our higher  quality 65% Fe pellets from our own ore rose  by 19%. Notwithstanding the increased yield  of higher quality pellets   and the local inflationary environment, we  succeeded in containing increases in unit  production costs to some 15 percentage  points below Ukrainian Producer Price Index  for 2007.  Ferrexpo plc  Annual Report and Accounts 2007 Company overview 09 1 Increasing production of iron ore pellets by optimising and expanding the extraction of iron ore from its current open-cut mine on the Gorishne-Plavninskoye and Lavrikovskoye deposits. 3 Deriving substantial value from its significant unexploited iron ore reserves through the accelerated development of the nearby Yeristovskoye, Belanovskoye and Galeschinskoye deposits. 5 Increasing sales into growing markets for iron ore and extracting value through the Group’s advantageous logistical position and its enhanced operational capability. 7 Managing the Group’s cost base by reducing its exposure to energy market volatility and other cost fluctuations. 8 Upgrading existing assets and procuring additional capital equipment to achieve target production levels in excess of 32mtpa of pellets by 2018. 2 Implementing best practice mine and facilities operations at Ferrexpo Poltava Mining (‘FPM’), enhancing efficiency and reducing operating costs. 4 Leveraging its relationships with its existing global customer base to grow market share and support the Group’s increased production profile. 6 Continuing to develop the Group’s logistical capabilities to match its growing production. Our key strategy accelerate development   of reserves grow production expand customer base We carried out extensive engineering   test work on the GPL mine in 2007, in   the course of fulfilling our commitment   to optimising our existing facilities. This   work revealed the potential to expand   and improve the mine beyond what was  thought feasible at the time of our Listing.   It culminated in our announcement in  November 2007 of the commencement   of a US$158m project to expand iron   ore production at the GPL mine to  approximately 32mtpa by late 2010 and   to extend the life of the mine at these  production levels to at least 2035. This  additional ore production will enable the  Group to take advantage of currently under- utilised processing capacity to increase high  quality pellet production   by approximately 15%, or 1.3mtpa. This  project will deliver meaningful and capital- efficient growth as we continue to pursue  opportunities for extracting greater value  from our current operations.  We are well advanced with the engineering  of upgrades to the beneficiation and  pelletising plants at FPM that will enable   us to continue to improve product quality,  further reduce real unit operating costs and  ensure that we have a robust capability to  process the expanded production of ore  from the GPL pit for its now extended  economic life. We have also committed to an intensification  of our Business Improvement Programme at  FPM to accelerate the shift towards best-in- class operational performance. Growth projects At the time of our Listing, we informed   the market that we planned to double our  production by 2014. We proposed to do this  by commissioning a second open-cut mine  immediately to the north of our existing GPL  mine, on the Yeristovskoye deposit. We now  believe that further accelerated  development of the deposits   to the north of the GPL mine is feasible.  Studies under way on the Yeristovskoye and  Belanovskoye deposits indicate that they can  be developed essentially in parallel. Work is  also proceeding on plans to develop  Galeschinskoye, the deposit to the north of  Belanovskoye. Given the positive conditions  prevailing in the global iron ore market and  our enhanced operational and project  execution capability, this acceleration will be  of great benefit to Ferrexpo.  We are now contemplating a fourfold  increase in ore production within the next 10  years. We are planning to accelerate the  development of the Yeristovskoye mine by  one year, and then to develop a mine at   the Belanovskoye deposit soon thereafter.  First ore from the Yeristovskoye mine is now  expected in 2011, with infrastructural and  site preparation operations already under  way. Six new draglines were ordered in  September to assist in the stripping   of Yeristovskoye at a cost of US$47m.   The Yeristovskoye mine is currently in  detailed feasibility study, and the Board  expects to consider final investment  commitment to the entire project in the  second half of 2008. Belanovskoye is  currently at the pre-feasibility study stage,  and development option studies for the  Galeschinskoye deposit are now in progress. 10 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Chief Executive Officer’s review continued We have made significant progress in  developing the capability to execute these  expansion projects. A new operating  organisation, separate from FPM, is being  established to develop and ultimately operate  the new assets and key senior managers have  been appointed. This will facilitate the  immediate introduction of best practice into  these assets. We are developing our mining  alliance with DTP Terrasement S.A. (France)  (‘DTP’) and project management alliance with  Worley Parsons Europe Limited, and these are  gathering momentum and have been  instrumental in enabling us to aggressively  pursue these growth projects with confidence.  Our growth projects are brownfield  expansions of our existing business and   as such represent substantially lower risk  additions of new iron ore capacity than many  of the iron ore projects that have been  announced worldwide.  We are confident in our capacity to fund and  execute our growth plans from our own  resources. However, we are actively  discussing the mutual benefits of  investments in our growth assets with a  range of strategic investors to provide the  additional funding and execution capability  that will be required if we are to progress our  plans as aggressively as possible in order to  take advantage of the extremely favourable  outlook for our products. Marketing Our marketing strategy aims to develop a  portfolio of customers in a range of markets  that will enable us to achieve full value for  our products and provide sales volume  growth commensurate with the pace of  development of our new producing assets. We seek to maximise the proportion of our  production sold on long term contracts and  to strengthen our relationships with our key  customers, while also participating in a low  level of short term sales. We have had a  successful 2007, with a major new long term  contract in Ukraine, as well as the extension  of our contract with VoestAlpine AG to 2015  and the extension of our contracts in  Slovakia and Serbia. At the end of 2007,  approximately 85% of our sales were made  under long term supply agreements, most of  which are directly or indirectly linked to  benchmark prices. Sales in 2007 reached 9,261kt and included  growth in our highest return core markets of  Eastern Europe and Ukraine.   We were successful in establishing long term  business into Turkey, resuming sales to Russia  and we delivered our first trial cargo to  Japan. Logistics Significant progress was made in 2007.   We are committed to managing the fullest  extent of our delivery chain to assure our  customer service, to maximise overall   sales margins and to ensure that our growth  plans are not frustrated by logistics  constraints. This will be achieved by  developing world class logistics  management as an integral function of our  sales and marketing activities. Selected  investments in barge, rail and port facilities  will also be required to overcome logistics  bottlenecks in Ukraine and Eastern   Europe and these are being contemplated  with key partners.  Our investment in the TIS-Ruda ocean vessel  terminal provides us with access   Ferrexpo plc  Annual Report and Accounts 2007 Company overview 11 to a private port on the Black Sea with   a capacity of 5mtpa. This facility has  significant expansion potential and provides  the base from which we can grow our  seaborne trade as we expand our producing  assets. We also acquired 110 rail cars in 2007,  with a further 440 planned for delivery in  2008. This will allow us to benefit from lower  rail tariffs afforded to users of own rolling  stock and to enhance reliability. We also have  major rail and water way studies under way  in Ukraine to determine future needs. Market outlook We believe that the existing positive market  environment for our business is likely to  continue for the next two years and beyond.  This is fundamentally due to sustained strong  demand for steel products and steel-making  raw materials not only in the developing  economies of China and India, but also in  Eastern Europe, the former CIS and several  other parts of the world. Strong iron ore  pricing is being underpinned by a slow supply  response from the mining industry,  attributable to the acute execution difficulties  being experienced by many of the projects  that have been launched to meet the demand  surge, the need to develop lower quality ore  bodies and massive infrastructure  investments required for many of the new  greenfield developments.  From a cost perspective, the industry has  witnessed fundamental structural changes in  the past year. The production cost of   the marginal tonne of iron ore has risen  substantially and, in the view of many market  commentators, permanently. We believe that  this rebasing of production costs provides a  new floor for iron ore prices, below which  they are unlikely to fall. People Our strong performance in 2007 is a direct  result of the quality and dedication of our  people and their enthusiastic support for the  major change programmes that are now  under way across all facets of our business.  We are committed to building the additional  capability required to implement our  aggressive growth plans in line with best  practice while containing costs and this is a  critical priority for our executive team. I  would like to thank all our employees and  our key partners for their ongoing support  and contribution.  Mike Oppenheimer Chief Executive Officer 12 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Chief Executive Officer’s questions and answers Mike Oppenheimer answers some of your questions Q&A Our principal competitive advantages are our location and the size of our iron ore resource. Q. Having previously worked with large  international diversified resources  companies with operations in many  countries, what is your impression of doing  business in Ukraine? A. Ukraine compares favourably to many   of the places I have worked in the past. Being  a developing economy does of course bring  with it many challenges,   but few that are unusual or unexpected.   It is worth remembering that many of the  world’s mines are in developing countries  and Ukraine is considerably more developed  than many of these, especially as far as  infrastructure, engineering and  manufacturing are concerned, sectors critical  to successful resource development. Our  Ukrainian employees are well educated and  trained and they have embraced our  programmes for establishing best practice  with enthusiasm. The media has made much of the political  instability in Ukraine over the past few years,  but this seems to reflect the commitment of  the Ukrainian people to   a strong democratic process. During my   time with our Company, this so-called  instability has had little effect on our existing  business, but it has meant that Ukraine has  not had the opportunity to develop a unified  and transparent economic policy for export  oriented resources industries. We have  concerns with the recent above-inflation  increases in state-regulated costs such   as electricity and rail tariffs and we   look forward to engaging the current  government on the integrated set of issues  that relate to Ukraine’s attractiveness for  major resources industry investment.  Q. As a single commodity ‘pure play’  company, Ferrexpo is relatively unusual   in the London market. What are the  advantages of this? A. Investors frequently prefer to construct  their own portfolios, rather than hold  companies that are already diversified. For  investors seeking to balance their mining  company portfolios, Ferrexpo represents   a very clear exposure to iron ore.  Operationally, our stated iron ore growth  strategy allows us to focus our scarce human  and capital resources on the business we  know best. Q. What are your competitive advantages  over other iron ore producers? How do you  compete with the big producers, such as the  Brazilians? A. Our principal competitive advantages are  our location and the size of our iron ore  resource. Most of our principal customers are  in Central and Eastern Europe and Ukraine.  These customers operate steel mills that  were constructed in many cases by the  former Soviet Union to use Ferrexpo pellets  and extensive infrastructure was established  to deliver these to the customers’ operating  sites. For the majority of these customers, we  have one of the lowest costs of supply of any  iron ore producer. We are also close to Turkey   and the Middle East, both of which have the  potential to become attractive markets for us  in the future. The Brazilian producers do have  lower cash costs of production than we do,  principally due to the higher grades of their  resources. However, their shipping distances  to our major customers are substantially  greater than ours and ocean and rail freight  charges are a significant portion of the total  cost of pellet supply, thus ensuring that our  supply costs are highly competitive within  the markets we serve. We have also been  able to enhance our product quality and  supply reliability and are now regarded as a  preferred supplier by many of our major  customers. Our vast undeveloped resources  provide the base from which we can  aggressively grow our competitively priced  supply and we have demonstrated our  commitment to the investments required,  further enhancing our offering to our major  customers. We have developed our own  export logistics via the Black Sea and supply  competitively into the strongly growing  markets of Asia.  Q. What is the outlook for iron ore pricing?  Ferrexpo plc  Annual Report and Accounts 2007 Company overview 13 A. The current environment for iron ore   is unprecedented. Our view is that prices will  continue to strengthen for at least the next  two years, as the world’s iron ore producers  struggle to bring more capacity on stream to  meet the growing demand from China and  other developing nations. The industry has  suffered under-investment in the past, and  what we are now seeing is market tightness  while this state of affairs   is addressed.  Q. How is the market for iron ore developing  and what is the attraction of pellets? A. The development of the market for   iron ore and pellets is a function of global  demand. At present, demand is increasing  rapidly, and iron ore producers are unable to  supply sufficient product to meet this  demand. In addition, the supply of higher  quality ores, which can be fed directly   into iron making furnaces, is dwindling  worldwide. This has forced producers   to mine lower quality ores, and these  generally need to be beneficiated to improve  their Fe content, and often this involves the  production of pellets. Pellets are an  intermediate product, since they have  undergone some processing, so at times  when steel mills are running at full capacity,  they offer productivity gains to blast furnace  operators. This results in pellets being sold at  a premium to the benchmark price for iron  ore fines. With   the continued strength of the world steel  market, we are of the view that pellets will  continue to attract a premium for ‘value   in use’ and improved productivity in blast  furnaces. This should see continued support  for solid pellet price premiums   to sinter fines and lump ores. Q. Costs are rising across the mining industry.  How has Ferrexpo managed   to keep them down? A. Understandably, our operations have not  historically had the strong focus on costs and  profitability that has now become the norm  worldwide. Two years ago   we instituted a ‘Business Improvement  Programme’, designed to introduce   best practice in our operations, thereby  increasing efficiency and productivity.  Results achieved to date have been notable.  We were able to keep costs flat   in nominal terms (implying significant real  reductions) for 2005, 2006 and the first half  of 2007. This success is partly attributable to  the fact that there were many areas where  substantial improvement could be achieved  very quickly by implementing practices used  at leading mining operations around the  world. Ferrexpo is facing the same kind of  inflationary cost pressures that the rest of the  industry is seeing. Our costs rose by 13.1% in  the second half of 2007, and are likely to rise  again in 2008   as we face increasing cost inflation in  Ukraine. We have plans to mitigate these cost  increases, however, and aggressive cost  management will remain a key focus of  management. Q. How has Ferrexpo changed and  developed in the period since the Listing? A. Compared with a year or two ago,  Ferrexpo is a completely transformed  Company. Preparation for Listing  necessitated many changes to the way the  business was run, in terms of governance,  transparency, operational efficiency, health  and safety, and financial management, to  name but a few. FPM is a world class  resource, and focus was put on introducing  world class management processes to  complement it. By the time of the Listing   in June, the turnaround process was well  under way, and it has continued in leaps and  bounds since then. The fact that we have  produced more, extended our plans for  expansion and delivered real term  reductions in costs is testament to that  change. Our Board has also developed   and in December we welcomed Christopher  Mawe to the role of Chief Financial Officer  and Oliver Baring as our Senior Independent  Director. Ferrexpo   is rapidly becoming an organisation with   best practice operations and corporate  governance.  Q. What are the key benefits of a   London listing? A. Our London Listing provides us with  access to one of the world’s largest capital  markets and the world financial centre for  the mining industry. Beyond that, it has  provided enormous benefits in terms of  transparency and credibility. The fact that  the Group has undergone the due diligence  process and been subjected to the  regulatory and investor scrutiny necessary  for a listing on the Main Market of the LSE  has opened many doors for us. Our inclusion  in the FTSE 250 index in September further  enhanced our credibility in the eyes of  investors. Ferrexpo’s negotiations with  potential partners and even customers with  whom we are now dealing have benefited  enormously from the fact that we are listed.  The London Listing not only provided new  funds for the growth of our business but  continues to play a much wider role in  making all of our strategic plans possible. Q. What is your ambition for the Group, and  where do you see Ferrexpo in five years’  time? A. My ambition for the Group is to see   it become the primary iron ore supplier   in Europe and Ukraine, and a significant  player in the industry worldwide. We have  made great strides towards best practice,  and we are now ready to launch the  accelerated development of our vast iron ore  resource. In five years’ time, I expect  Ferrexpo will be halfway to becoming a   32mt per annum iron ore pellet producer.   14 Ferrexpo plc  Annual Report and Accounts 2007 Company overview Board of Directors and Executive Committee 1. 2. 5. 3. 6. 4. 7. Strength through teamwork The Board 1. Michael Abrahams, CBE DL (70) Non-executive Chairman Michael Abrahams is Chairman of the  London Clinic, KCOM Group PLC, the  Prudential Staff Pension Scheme and Amteus  plc. He was Deputy Chairman   of Prudential plc until May 2000, and has  served as chairman and as a director of   a number of quoted and unquoted  companies. 2. Mike Oppenheimer (53) Chief Executive Officer Mike Oppenheimer has been Chief Executive  Officer of the Ferrexpo Group since 1 August  2005. He has had global executive leadership  experience across a number of resource  industries, in both the mining and petroleum  sectors. He was previously President of BHP  Billiton Energy and a member of the BHP  Billiton Executive Committee until July 2004.  He was appointed President of Energy Coal  after the BHP merger with Billiton. Before  that, he was President of North West Shelf &  Gas Commercialisation and member of the  BHP Petroleum Executive Committee until  early 2000. Mike Oppenheimer was formerly  a director of Richards Bay Coal Terminal,  International Colombia Resources  Corporation, QCT Resources Ltd, World Coal  Institute and a member of Coal Industry  Advisory Board of the IEA. 3. Dennis McShane (52) Director of Business Development In December 2007 Dennis McShane moved  from his role overseeing the Group’s finance  and strategy functions to a full time focus on  business development and in particular the  Group’s strategic investor programme. Prior  to joining the Group in 2003, he was an  investment banker for over 25 years with  JPMorgan Chase with extensive experience  in the mining and metals sector and  emerging markets,   most recently as Head of Mining & Metals  AsiaPacific, based in Sydney. He is a  graduate of the State University of New York  and PMD from the Harvard Business School.  Dennis McShane is also a non-executive  director of Ophir Energy plc.  4. Christopher Mawe, FCA (46) Chief Financial Officer Chris Mawe is the most recent addition   to both the Executive Committee and the  Group’s Board of Directors, having joined the  Group in January 2008. He qualified   as a Chartered Accountant with Coopers and  Lybrand in 1991, having gained a First Class  Honours degree in Engineering. He has held  senior financial positions for the past 16  years, firstly with IMI plc both in the UK and  Europe, and then with Carclo plc as finance  director. Most recently, Chris was finance  director of UK Coal plc. 5. Kostyantyn Zhevago (34) Non-executive Director Kostyantyn Zhevago is ultimately the  controlling shareholder of Ferrexpo. He has  been a member of the Ukrainian Parliament  since 1998. He is currently a member of the  Parliamentary Committee on Law Policy and  Chairman of the Parliamentary Group for  Inter-Parliamentary Relations with Japan.  Since 2002, Kostyantyn Zhevago has been a  member of the permanent delegation of the  Ukrainian Parliament in the Parliamentary  Assembly of the European Council and a  member of the Ukrainian faction of the  Committee for Parliamentary Cooperation  between Ukraine and the European Union.  He has previously served as chairman of the  management board and deputy chairman of  the supervisory board of CJSC Commercial  Bank Finance and Credit (‘Finance and Credit  Bank’) and as a member of the supervisory  board of JSC Ukrnafta. Between 1993 and  1996, he was financial director of Finance and  Credit Bank. Kostyantyn Zhevago graduated  from the Kyiv State Economic University in  1996, specialising in international economics.  6. Raffaele (Lucio) Genovese (46) Independent Non-executive Director Lucio Genovese is also the Chief Executive  Officer of Nage Capital management, a  Swiss-based advisory and proprietary  company specialising in the metals and  mining sector. He has previously served   as Investment Officer and a member of   the board of Taj Investment Limited with  responsibility for its Indian public and private  investment portfolio. Prior to   that, he held a number of positions with  Glencore International, including senior  member of the Copper Division, CEO of CIS  Operations, manager of the Moscow office  and Trader in the Ferrous Division.   He was an assistant manager in the Audit  Division of PriceWaterhouseCoopers in South  Africa. He is a Chartered Accountant (South  Africa). 7. Wolfram Kuoni (41) Independent Non-executive Director Wolfram Kuoni is the founder and senior  partner of Kuoni Law Firm, Zurich,  Switzerland, and serves on a number of  boards of directors. He has over 12 years of  experience in investment banking. Prior to  1995, he held a number of positions within  UBS Investment Banking (Zurich and New  York), including head of the European Export  and Project Finance Team. He also originated  and structured cross-border acquisitions and  equity capital markets transactions. Wolfram  Kuoni graduated with a law degree from the  University   of Berne, and holds a doctorate in law   from the University of Zurich and an MBA  from INSEAD in France. He is a member   of the Zurich Bar. Ferrexpo plc  Annual Report and Accounts 2007 Company overview 15 8. 9. 10. 11. 12. 13. 14. The Executive Committee 10. Nikolay Goroshko (48) Chief Commercial Officer, Projects Nikolay Goroshko has worked for Ferrexpo  Poltava Mining since 1984. He is a graduate of  the Kyiv Institute of National Economics,  specialising in Industrial Planning. He  became Acting Group Chief Financial Officer  in April 2007 and Chief Commercial Officer in  charge of the Group’s Growth Projects in  December 2007. 11. Nikolay Kladiev (35) FPM Chief Financial Officer Nikolay Kladiev joined FPM in June 2005.  Over the course of his career Nikolay Kladiev  has spent several years as an   Audit manager with Ernst & Young and CFO  of a large Russian factory. Nikolay Kladiev  holds a Masters in International Economic  Relations from the Kyiv National University of  Economics. 12. Viktor Lotous (43) FPM Chief Operating Officer Viktor Lotous joined Ferrexpo Poltava Mining  in 1986. He is a graduate of Kryvy Rih Mining  and Ore Institute, and of the   Kyiv State Economic University, specialising  in Finance. He became chief engineer in 1997  and General Director and Group   Chief Operating Officer in April 2007. 13. Simon Wandke (48) Chief Marketing Officer Simon Wandke joined the Group in 2006. He  was Vice President Strategy for the Minerals  Group and Vice President Coal, Iron Ore and  HBI Marketing at BHP Billiton until 2001.  Between 2002 and 2006, he was a partner of  Destra Consulting Group in Melbourne,  specialising in Change Management. Simon  Wandke is a graduate of the University of  Melbourne in Psychology and Marketing, and  completed post graduate studies in  Corporate Finance   at Swinburne University, Australia. 14. Dave Webster (56) Interim Chief Operating Officer Dave Webster joined the Group in June 2006.  He previously spent five years as Project  Director with ProMet in Australia and before  that spent 25 years at BHP Billiton  specialising in business performance and  strategic planning. He has a Bachelor of  Metallurgy from the University of Newcastle.  Dave Webster was group projects officer  until December 2007, when he moved to his  current role with responsibility for the  Group’s growth projects both at its existing  GPL mine and its planned new mines, and  oversight for Group operations. 8. Ihor Mitiukov (55) Independent Non-executive Director Ihor Mitiukov was the General Director of the  Financial Policy Institute until March 2008.  He has recently become the Managing  Director and Head of Country   for Ukraine, Morgan Stanley with effect from  17 March 2008. From 2002 to 2005, Ihor  Mitiukov served as Extraordinary and  Plenipotentiary Ambassador of Ukraine in  the United Kingdom. He also represented  Ukraine in the International Maritime  Organisation. From 1997 to 2001 he served as  Minister of Finance of Ukraine and,   from 1995 to 1997, as Ukraine’s Special  Representative (with Vice-Prime Ministerial  status) to the European Union in Brussels. In  1994, he was deputy governor of the  National Bank of Ukraine and then Vice- Prime Minister of Ukraine for Banking and  Finance. Prior to that, he held various  positions at Agrarian-Industrial Bank Ukraine,  and was appointed as its deputy governor in  1992. Ihor Mitiukov graduated from the  Cybernetics Department, Kyiv State  University and has a PhD in Economics (1985)  from the Institute of Economy, Academy of  Sciences (Ukraine). 9. Oliver Baring (63) Senior Independent Non-executive Director Oliver Baring has been Chairman of Mwana  Africa plc since its reverse takeover of African  Gold plc in September 2005. Prior to that, he  was Chairman of First Africa Holdings Limited  and Director of First   Africa UK Limited. Oliver Baring retired   from UBS Warburg in 2001, having led   the International Mining Group with  responsibility for Africa and Europe.  Previously he had been head of the UBS  Warburg mining equity sales team and was  responsible for its respected coverage and  sales capability. Oliver Baring was a partner  in Rowe and Pitman before its merger with  SG Warburg. Oliver Baring is chairman   of First Africa Holdings Limited, and is a non- executive director of the Merrill Lynch World  Mining Trust, a member of the Advisory  Council of Sentient Private Equity Fund and  director and non-executive Chairman of  Ridge Mining plc. 16 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review Ferrexpo plc  Annual Report and Accounts 2007 Business review 17 18 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review The opportunity Overview Our business The Group’s principal business is the mining,  processing and sale of iron ore in the form of  pellets, used in the production of steel. The  Group owns and operates an integrated  mining and processing facility, comprising an  open cut iron ore mine, concentrating facility  and pelletising plant   in the city of Komsomolsk, in the Poltava  region of Ukraine. The Group’s operations  are fully integrated from the mining of ore  through to the production of pellets. All  production is converted into pellets through  its own facilities. In addition, third party iron  ore concentrate is converted into pellets  where this provides adequate margins.  • • • • • Brownfield expansion capability from  existing proven reserves. The Group is  currently the 12th largest producer of  iron ore in the world. Ready access to additional resources. Favourable geographic location in  Central Europe benefiting from well- established logistics links to both   the CIS countries and the expanding  world market. Surplus pelletising capacity allowing   it to expand production or process  concentrate from third parties as  appropriate. Long-established stable relationships  with key customers.  The Group’s mining operation, known as  Ferrexpo Poltava Mining (‘FPM’), is well  located on the Dnieper River in Ukraine,   in close proximity to its major customers in  Central and Eastern Europe. It has both water  and rail links to the European market and (via  the Black Sea) to the main sea routes to  emerging Asian markets. In 2007, 83% by  volume of the Group’s iron ore products  were exported. These exports   are handled by the Group’s specialist sales  and marketing arm, which is based in  Switzerland with additional offices in Kyiv,  Shanghai and Hong Kong. At the year end,  approximately 85% of the Group’s 2007 sales  were being made under long term supply  agreements with iron and steel producers. It  is a key part of the Group’s strategy to  increase the number and duration of such  contracts. The Group’s principal export  markets are Central and Eastern Europe and  China.  The Group’s business has several important  competitive advantages:  • • An experienced management team.  Substantial commercially viable but  under-exploited iron ore reserves. The Board’s priority is to maximise  shareholder value through increased  production of iron ore pellets utilising  existing economic reserves and careful cost  control.  The Board intends to pursue this aim  through a strategy of commercialising the  Group’s significant unexploited iron ore  reserves, enhancing and expanding its  operational and logistical capacity and  targeting growth markets for iron ore, while  developing new international customer  relationships through its advantageous  logistical position and expanded production  capability. To this end, the Group announced  the expansion and extension of its existing  operations in November 2007, and has  embarked   upon a growth programme involving the  accelerated development of its  Yeristovskoye, Belanovskoye and  Galeshchinskoye deposits.  The Group listed on the London Stock  Exchange in June 2007, and was included in  the FTSE 250 index in September 2007.  Ferrexpo plc  Annual Report and Accounts 2007 Business review 19 Operating environment – Ukraine Ukraine is a parliamentary presidential  republic and formerly part of the Soviet  Union. Political instability following the  collapse of the Soviet Union culminated in  the Orange revolution in late 2004/early  2005, which resulted in greater political  openness, faster economic reforms   and commitment to integration with the  West. An element of political instability  nonetheless persisted, coming to a head   in 2007 with President Viktor Yuschenko’s  decision to dissolve parliament in April 2007.  Following the parliamentary elections on 30  September 2007, Yulia Tymoshenko was  endorsed as the new Prime Minister of  Ukraine in December 2007, heading a pro- Western coalition formed by her political  block and allies of the President. Observers  are optimistic that Ms Tymoshenko’s cabinet  will adopt reforms to fight corruption and  seek to maintain Ukraine’s strong economic  growth. The political instability   in Ukraine in 2007 and in previous years has  had little effect on the Group’s business.  Doing business in Ukraine is attended by  minor problems typical of developing  economies, but the Board perceives few  major risks specifically associated with the  location of its assets. From the perspective of  the Group, the major issue affecting its  business is the lack of a coherent and  transparent national economic policy in  Ukraine. To date, the business community  has had no formal governmental body or  other forum for the discussion of regulated  input costs such   as power and rail transport. The Board  expects that this will change under the   new political dispensation, and it will engage  the government on these issues   as soon as possible. Ukraine experienced relatively severe  inflation in 2007, with the officially reported  domestic Producer Price Index (‘PPI’)  increasing by 23.3%, and the Consumer Price  Index (‘CPI’) by 16.6%. The local currency is  the hyrivna, which is informally pegged to  the US dollar. The average exchange rate  during 2007 was 5.05 UAH/US$, unchanged  from that in 2006.  The Government’s official forecast for  Ukraine’s economic and social development  in 2008 (as amended in November 2007)  estimates that Ukraine’s gross domestic  product growth rate and rated inflation will  be 6.8% and 9.6% respectively in 2008. It is  expected that the National Bank of Ukraine  (‘NBU’) will maintain the UAH/US$ exchange  rate at between UAH 4.95 and 5.25 to   US$ 1.00 in 2008 in line with its anti- inflationary policy1. Both the EU and the US have granted ‘market  status’ to Ukraine, supporting   its early access to the WTO in 2008. In  February 2008 the WTO General Council  approved Ukraine’s ‘accession package’ and  Ukraine is expected to become a WTO  member after ratifying the protocol of  accession later this year. Market environment The demand for steel continues to drive the iron ore market Global iron ore demand is expected to grow  strongly to approximately 2.1bt by 20092.  Mainly powered by demand led steel  industry expansion in Asia – particularly  China and India. Rising iron ore demand will  be further supported by emerging industrial  economies in the former CIS countries, South  America and the Middle East. The global iron  ore consumption growth rate was 11%  between 2006 and 20072, and is expected to  continue at an average annual rate above 4%  in the period to 2009. Demand growth is  expected to be greatest in China, with iron  ore consumption (not adjusted for low grade  domestic production) expected to grow to  over 1.2bt by 20092, driven by demand-led  growth fuelling the expansion of China’s  blast furnace based steel industry. Chinese  imports of iron ore exceeded 375mt in 20073  out of a total world import market of  approximately 790mt4. By 2009, China is  expected to account for 57%2 of global iron  ore consumption. The demand for steel from  China, India and other developing  economies is driven primarily by the  requirements in these countries for the  construction of infrastructure.  1  National Bank of Ukraine 2  Commodities Research Unit (CRU) 3  CISA, China estimate 4  Credit Suisse 20 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued Supply dynamics and global pricing Supply In 2007, global iron ore production totalled  1.65bt 5. Global iron ore supply is expected to  grow strongly over the remainder of the  decade with annual output projected to  increase to 2,022mt by 20095. The iron ore  industry is highly consolidated, with the  largest iron ore producers in the world  controlling a significant proportion of world  iron ore production and the majority of the  world seaborne trade in iron ore. These  companies have announced extensive  investment in new projects and their existing  mining operations in order to keep up with  the anticipated 10% growth of the world iron  ore market over the next two years.  Global pellet production is expected to  increase to approximately 445mtpa by 20096,  with the bulk of the capacity coming from  North and South America, Oceania and  Eastern Europe. For the seaborne pellet  market, Brazil is the centre of most new  capacity that is expected to come   on stream over the next five years. While global supply of iron ore is expected to  grow strongly, it is the view of the Group’s  Board that this supply is unlikely to match  the growth in demand over the next two  years, and potentially beyond. A number   of new iron ore projects have been  announced globally, but in the opinion of  both the Board and market commentators,  many of these are subject to significant   risk of execution delay, postponement or  cancellation, due to high capital costs and a  shortage of project execution expertise  across the industry.  Pricing drivers There continues to be a significant supply lag  in the global iron ore industry. Demand from  countries such as China has continued to  grow in 2007, and the iron ore industry has to  date been unable to commission sufficient  new capacity to meet this demand. Historical  under-investment in the industry has  negatively impacted the supply response of  the major iron ore producers. This imbalance  continues to   put upward pressure on iron ore prices, and  is likely to persist in the medium term. In  addition, the supply of high-quality lump ore  is declining globally, with the result that  many of the new iron ore projects that   have been announced are based on lower  quality, logistically disadvantaged ore bodies  that require the installation and operation of  costly beneficiation plant and logistics  infrastructure. This has resulted   in a fundamental shift in the cost structure of  the industry, pushing the cost of the  marginal tonne of iron ore significantly  above its historical highs. It is the Board’s  view that the long term ‘floor price’ for iron  ore will be set by this increased marginal cost  per tonne. The Group believes   that contract prices for iron ore fines will  increase strongly in 2008, with the potential  for a further increase in 2009. Pellet premium Iron ore pellets tend to trade at a premium to  iron ore fines, depending on the market  environment in the iron ore cycle at the  relevant time. The industry generally is  currently in a state of undersupply of all   iron ore products, with physical scarcity of  product affecting steel producers. Typically,  steel mills are currently operating at full  capacity, making efficiency of production  increasingly important. Having undergone  some processing, iron ore pellets are an  intermediate product between raw ore and  iron and steel, and so provide productivity  gains in blast furnaces, requiring less coke in  the steelmaking production process. Pellets,  because of their spherical form   and low moisture content, also have  advantages for transporting. Increased  demand for pellets is also anticipated due to  the decline in quality and quantity of  naturally occurring lump ores suitable to   be added directly to blast furnaces, and  increased environmental concerns with  sinter production. Pellets have therefore  traded at a premium to other forms of ore. In  the prevailing market conditions, it is   the Board’s view that the so-called ‘pellet  premium’ will continue at the higher end   of the levels experienced over the last   few years.  5  Raw Materials Group, Sweden 6  Commodities Research Unit (CRU) –   ‘apparent production’   Ferrexpo plc  Annual Report and Accounts 2007 Business review 21 Logistics management: TIS- The Group is justifiably proud of its  world-class logistics management,  which are nowhere more evident   than in its TIS-Ruda dry-bulk cargo  terminal at the Port of Yuzhniy on   the Black Sea. A first for Ukraine The TIS-Ruda facility is the first privately-owned  dry-bulk cargo terminal in Ukraine and  commenced operation in mid 2007. The Group  owns 49.9% of the equity in the facility, but has  access to the entire 5mtpa capacity. In 2007, the  Group shipped 0.5mt through TIS-Ruda, which  was commissioned and recognised in the Port  Rules of Yuzhniy in the fourth quarter of 2007.  Pre-empting bottlenecks The TIS-Ruda terminal is a good example of the  Group’s logistics management. The Group’s early  investment in this facility has reduced its reliance  on congested State ports and provided it with  excess ship loading capacity to serve its key  growth markets in China, as well as those in other  parts of Asia and the Middle East.   TIS-Ruda will help reduce the Group’s exposure  to the port bottlenecks afflicting so much of the  mining industry, and the facility   has expansion potential, including land assigned  to build a 1mtpa capacity stockyard to meet  future growth beyond the 5mtpa current  nominal capacity. The terminal also   has international port features which ensure   the integrity of the product quality can be  maintained. Performance review Highlights • • 9% increase in iron ore output to 28.9mt.  19% increase in production of high quality (65% Fe) pellets from the Company’s   own ore. Substantial savings in raw materials and energy per unit of output. Intensification of works in the northern extension of the current mine to increase the  short term iron ore output.  Commencement of operations in Yeristovskoye deposit: infrastructure and site  preparation works under way.  Operations commenced at the TIS-Ruda port facility and established own fleet of railway  cars. • • • • Production Operating statistics Iron ore mined    Fe content   Change UOM FY2007 FY2006 +/- 000’t  28,934  26,425  29.72  29.91  %  2,509  0.19  Iron ore processed   000’t  29,024  26,507  2,517  Concentrate produced (WMS)    Fe content  000’t  10,651  63.50  % Floated concentrate    High grade    Fe content  Purchased concentrate     Fe content  Purchased iron ore  Pellets produced from own ore     Higher grade    Fe content    Lower grade    Fe content  Pellets produced from purchased     concentrate and ore    Lower grade    Fe content  Total pellet production  Pellet sales volume  Gravel output  Stripping volume  9,695  63.36  4,418  3,392  67.25  441  63.68  51  8,149  3,112  65.06  5,037  62.22  000’t  000’t  %  000’t  %  000’t  000’t  000’t  %  000’t  %  5,620  4,032  67.28  266  64.06  172  8,793  3,701  65.09  5,092  62.22  000’t  000’t  %  279  207  62.22  401  392  62.22  000’t  9,072  8,550  000’t  9,261  8,740  000’t  3,023  3,162  000’m3  18,664  18,517  956  0.14  1,202  640  0.03  (175)  0.38  121  644  589  0.03  55  0.00  (122)  (185)  (0.0)  522  521  139  147  % 9 1 9 10 – 27 19 – (40) 1 237 8 19 – 1 – (30) (47) – 6 6 5 1 22 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued and increases in flotation volumes enabled  FPM to substantially increase its production  of higher quality 65% Fe pellets. Production  of 65% Fe pellets from own ore increased by  19% to 3,701kt, and now constitutes 42% of  FPM’s total production (38% in 2006),  consistent with the Group’s commitment to  quality enhancement and its ‘value in use’  marketing strategy. Business Improvement Programme We have continued to see positive results  from our Business Improvement Programme  (‘BIP’), which remains a priority for FPM  management. We have committed to an  intensification of the BIP programme at FPM  to accelerate the shift towards best in class  operational performance, assisted by GPR  Dehler, a consultant widely used in the  mining industry to facilitate improvement  initiatives. FPM is now two years into a four- year programme which aims to introduce  global best operating practice across its  different areas of operation. Following BIP  recommendations, FPM concentrated on  implementing various improvements to its  mining facility in 2007, principally around the  planning and organisation of maintenance  and repairs. This resulted in substantial  improvements in the availability and  utilisation of mining equipment. It also  enabled FPM to increase the operating  efficiency of its existing mining equipment,  allowing it to scale down plans to increase its  equipment fleet and thereby avoid  unnecessary capital expenditure.  As part of the BIP, the Group also  implemented a range of training sessions for  managers and employees, and set up an  initial team of FPM employees with  responsibility for implementing and  monitoring the ongoing BIP initiatives.   The Group has implemented various  management changes, aimed at creating   a culture of continuous improvement. In 2007, the goals for our existing   operations at FPM centred on continuing the  demonstrated trend of improvements across  all areas of CSR, and in operating efficiency,  product quality and production growth. FPM mined 28,934kt of iron ore in 2007, 9.5%  more than in the previous year. FPM currently  mines two different types of iron ore; K22  which is a richer ore containing a slightly  higher percentage of iron, and K23 which is a  leaner ore containing slightly less iron.  Improvements in mining conditions   in the pit meant that this growth was  accompanied by a 17% increase in the  proportion of rich (K22) ore mined. This  increase in the overall quality of the ore mined  resulted in a decrease in the proportion   of lean (K23) ore used for processing to  53.8% (compared to 56.7% in 2006),   which assisted in increasing the operational  efficiency of FPM, concentrating plant and  improving concentrate quality. FPM produced 10,651kt of concentrate in  2007, a 10% increase compared to 2006.  Emphasis was placed on achieving higher  quality concentrate. Upgrades to FPM’s  beneficiation technology resulted in  improvements in magnetic iron yield to  92.4% (91.8% in 2006). The quality of  concentrate in the year under review  increased to 63.50% Fe, continuing the  improving trend seen in previous years  (63.36% and 62.63% in 2006 and 2005  respectively). Total pellet production in 2007 increased by  6% to 9,072kt (8,550kt in 2006). Production of  pellets from own ore increased by 8%, while  production of pellets from purchased ore  and concentrate declined as a result   of concentrate market tightness and the  consequent inability of the Group to realise  sufficient margins from this business.   As a result of FPM’s efficiency and mining  volume improvements in 2007, the decline in  production of pellets from purchased   raw materials was more than offset by the  increase in production of pellets from FPM’s  own produced concentrate. The improvements in concentrate quality      Ferrexpo plc  Annual Report and Accounts 2007 Business review 23 Our major The Group is committed to becoming  the iron ore supplier of choice in  Europe. We value our long term  relationships with our customers and  seek to be the most reliable supplier  possible. Our marketing strategy is  aimed at increasing the number and  length of our customer contracts, and  selling the bulk of our production  according to international iron   ore benchmark-price-linked  arrangements. Our major customers  are the cornerstones of our business. VoestAlpine AG VoestAlpine is one of the Group’s oldest and  largest customers, and one of the premier  producers of high-quality automotive steel in the  world. Located in Austria, the VoestAlpine steel  mills receive pellets from the Group’s Ukrainian  operations both by barge on the Danube River  and also by direct rail, which provides the  customer with highly competitive, flexible and  small-parcel delivery options. VoestAlpine  endorsed its trust of the Group   in September 2007 with the extension of its  supply contract with the Group to 2015.   The Group supplied over 2.2mt of pellets to  VoestAlpine in 2007. United States Steel Corp. The Group also supplies iron ore pellets to   US Steel, one of the oldest and largest steel  companies in the world. Due to its proximity   to Ukraine, the US Steel mill in Slovakia also  derives significant logistical advantages from  sourcing pellets from the Group by direct rail.  FPM also supply pellets to US Steel’s Serbia plant  (Smederevo) which is serviced by a combination  of rail and barge delivery. Under   a long term contract, the Group supplied more  than 1.9mt to US Steel mills in Europe in 2007. Costs The Group’s cash cost of pellet production  (‘C1’) in 2007 was US$31.79 per tonne, an  increase of 8.6% over 2006 (US$29.26   per tonne). The Ukrainian PPI however,  increased by 23.3% over the year. Relative to  PPI, the Group therefore achieved a  significant (approximately 15 percentage  points) real term reduction in costs  compared to 2006. The challenge facing the  Group in 2007 was to sustain operating  efficiency under these inflationary  conditions. Management efforts were  focused on implementing measures aimed at  reducing the rates of consumption of energy  and raw materials through efficiency  initiatives and improvements in technology. Electricity consumption per tonne of pellets  produced from own ore, the largest single  cost item, declined by 3.3% to 190.9KWHr per  tonne of pellets produced from own   ore during 2007. Gas consumption reduced  by 8.5% requiring 18.44 thousand cubic  metres per tonne of pellets compared   to 2006. There was also a decline of  approximately 4% in the consumption   of steel grinding bodies in 2007. More  efficient use of machinery was also a factor  mitigating against inflationary increases. Efficiency programmes resulted in a  reduction of the average number of  employees by 11% in 2007. Overall, 9,188  people were employed as at 31 December  2007. This was due to more efficient  operations and improved organisation.  Total payroll costs were US$5.78 per   tonne of pellets in 2007, an increase of 4%  compared to 2006, significantly below the  prevailing inflation rate of 16.6%. FPM has  achieved a reduction in its labour cost in real  terms, given the 11% reduction in personnel  and the fact that Ukrainian CPI increased by  16.6% in 2007. Total payroll cost in 2007 was  US$42.6m (2006: US$38.3m), or US$4.70 per  tonne of pellets produced (2006: US$4.48 per  tonne).  The Group’s costs are principally  denominated in Ukrainian hyrivna, which is a  managed currency currently maintained at  UAH5.05 to the US dollar.  Distribution costs per tonne of pellets  increased by 9.9%, from US$9.88 per tonne in  2006 to US$10.86 per tonne in 2007. This  resulted from increases in railway tariffs and  port charges imposed   by the Ukrainian authorities. The Group   has begun to implement a series of measures  to minimise the effect of rising distribution  costs. These include railcar purchases,  renegotiating freight terms with customers,  using transhipment ports with lower  charges, using its own barge port   on the Dnieper River more intensively and  the Group’s investment in the TIS-Ruda port  facility. Capital expenditure The Group’s total cash outflow due to capital  expenditure in 2007 was US$104.4m, 114%  more than in 2006 (US$48.8m). The major  part of this, US$56.9m, was invested in the  mining complex. The Group announced the  commitment of US$47m of capital  expenditure for six draglines to be used for  stripping operations at the new Yeristovskoye  mine in September 2007, and a further  US$158m for the expansion and extension of  the current GPL mine. In March 2008 the  Group announced US$55m for initial mining  equipment for Yeristovskoye. Growth projects Mine expansion and life extension at existing operations We carried out extensive engineering   work on the Gorishne-Plavninskoye   Lavrikovskoye (‘GPL’) mine in 2007, in the  course of fulfilling our commitment to  optimising our existing facilities. The work  was undertaken in conjunction with Turgis  Consulting (Proprietary) Limited (‘Turgis’),  the Company’s South Africa-based mining  24 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued engineering partner. This work revealed the  potential to expand and improve the mine  beyond what was thought feasible at the  time of our Listing on the London Stock  Exchange. The culmination of this came   in November 2007 when the Group  announced the commencement of a project  to expand production at its current GPL  mining operation to approximately 32mtpa  by 2011 and to extend the life of the mine at  these higher production levels for at least  the period to 2032. The design of the pit  expansion is such that the incremental ore  mined will consist entirely of richer (K22) ore,  all of which will be used to produce FPM’s  higher quality pellets. This project is currently under way, with   the additional ore production allowing the  Group to take advantage of currently under  utilised processing capacity. This will  increase high quality pellet production by  approximately 15%, or 1.3mtpa. We expect  this project to deliver meaningful and capital  efficient growth as we continue to pursue  opportunities for extracting greater value  from our current operations.  The capital expenditure committed to this  project in 2007 will be spent on stripping  works over the next three years, with the  remainder to be spent on additional mining  equipment.  Major growth projects At the time of our Listing on the London  Stock Exchange, in June 2007, we informed  the market that we planned to double our  production by 2014. We proposed to do this  by commissioning a second open-cut mine  immediately to the north of our existing GPL  mine, on the Yeristovskoye deposit. We now  believe   that further accelerated development of   the deposits to the north of the GPL mine   is feasible. Studies under way on the  Yeristovskoye and Belanovskoye deposits  indicate that they can be developed  essentially in parallel. Work is also  proceeding on development options for  Galeshchinskoye, the deposit to the north of  Belanovskoye. Given the positive conditions  prevailing in the global iron ore market and  our enhanced operational and project  execution capability, this acceleration will be  of great benefit to Ferrexpo.  We are now contemplating a fourfold  increase in ore production within the next 10  years. We are planning to accelerate the  development of the Yeristovskoye mine by  one year, and then to develop a mine at   the Belanovskoye deposit soon thereafter.   First ore from the Yeristovskoye mine is now  expected in 2011, with infrastructure and site  preparation works already under way. Six  new draglines were ordered in September to  assist in the stripping of Yeristovskoye at a  cost of US$47m. The Yeristovskoye mine is  currently in detailed feasibility study, and the  Board expects   to consider final investment commitment   to the entire project by mid 2008.  Belanovskoye is currently at the pre- feasibility study stage, and development  option studies for the Galeshchinskoye  deposit are now in progress. Our growth projects are brownfield  expansions of our existing business,  supported by our existing transport and  logistics infrastructure and, as such,  represent substantially lower risk additions  of new iron ore capacity than many of the  iron ore projects that have been announced  worldwide.  The Group has formed a separate operating  entity to administer the three major growth  projects separately from the GPL operation.  The Group has appointed George Mover as  Director General (designate) for this entity,  and Nikolay Goroshko, the former Acting  Chief Financial Officer for the Group, has  moved to become Chief Commercial Officer  with responsibility for all financial and  commercial aspects of the projects. Dave  Webster has moved from Chief Projects  Officer for the Group to Interim Chief  Operating Officer with oversight of the major  Ferrexpo plc  Annual Report and Accounts 2007 Business review 25 growth projects and the GPL expansion  project. It is intended that this separate  operational entity will have best practice  operations from the outset. The Group is  actively recruiting quality employees for  these projects.  We are developing our mining alliance with  DTP Terassement S.A. (France) (‘DTP’) and  project management alliance with Worley  Parsons Europe Limited, and these are  gathering momentum and have been  instrumental in enabling us to aggressively  pursue these growth projects with  confidence.  We are confident in our capacity to fund and  execute our growth plans from our own  resources. However, we are actively  discussing the mutual benefits of  investments in our growth assets with a  range of strategic investors to provide the  additional funding and execution capability  that will be required if we are to progress our  plans as aggressively as possible in order to  take advantage of the extremely positive  outlook for our products. Marketing The Group’s products are mainly sold in the  international markets. Export sales are  handled by its specialist sales and marketing  arm, Ferrexpo AG, which is based in  Switzerland with additional offices in Kyiv,  Shanghai and Hong Kong. The Group  exported more than 80% of its production in  2007. Historically, the Group has principally  supplied pellets to iron and steel plants in  Central and Eastern Europe, although it is  now increasingly supplying customers in  Asia. 18.4% of the Group’s total sales in 2007  was sold into China. The share of pellet sales to Ukrainian  customers increased from 14% in 2006 to  19% in 2007, as a result of more reliable  domestic demand from the expanding  Ukrainian steel industry. Domestic sales   are made directly through FPM on an ex- works basis.  The following table shows the Group’s  principal export markets for iron ore pellets  for the years ended 31 December 2007 and  2006 (by volume): Traditional markets  Natural markets  Growth markets  Total 2007 (’000t) 2006 (’000t) 5,900.7  5,641.9 390.7 1,576.0  1,419.5 187.9  7,664.6  7,452.1 At year end, over 85% of the Group’s sales  were made pursuant to long term supply  contracts, consistent with the Group’s stated  strategy of increasing the stability of its  customer portfolio. This represents a  substantial increase compared to the 77% of  sales made pursuant to long term supply  agreements in 2006. The Group completed  its first long term contract with a Chinese  steel mill in 2006, and has subsequently  entered into four more such agreements in  China. The Group’s expansion into China  demonstrates its track record in creating and  building solid customer relations. It has  increased its sales into China from 1.8% of  total sales in 2004 to 15.0% in 2007. The  Group sold its remaining iron ore pellets on  shorter-term contracts consistent with the  terms of trade in certain markets, or on the  spot market as trials to new customers. The  Board expects that the proportion of sales  that will be made under long term contracts  in 2008 will be broadly similar to that seen in  2007.  The Group is also focusing on achieving  higher prices through enhanced pellet  quality and a better understanding of its  customers’ requirements of its products. This  is necessary in order to capture the  maximum price relative to its competitors’  delivered cost to the customer on a ‘value to  the customer’ basis. The Group is a well established producer and  has been supplying iron ore pellets to some  of its key customers for more than   20 years. Several of the Group’s traditional  26 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued customers within Central and Eastern Europe  operate steel plants that were designed  specifically to use its iron ore pellets, giving  the Group an unrivalled position within  these markets.  The Group continued to significantly   reduce third party agents in various historic  marketing arrangements, and now has direct  commercial and technical relationships with  all of its end-users.   This strategy will continue in 2008. Traditional markets The Group’s ‘traditional markets’ are those  markets that the Group has supplied  historically, and in which it enjoys a competitive  advantage based on its location. These include  Austria, Ukraine, Poland, Slovakia, Romania,  Bulgaria and Russia. Serbia is a more recent  addition to this segment. Continued growth in  per capita steel consumption in many of these  markets is likely to continue, particularly those  FSU regions which are effectively   re-industrialising. During 2007, the Group  executed new long term contracts in Austria  and Ukraine, and extended existing long term  contracts in Slovakia and Serbia. Sales were re- established in Russia in 2007 where niche  quality opportunities exist for FPM. Total sales  to traditional markets in 2007 were 5,901kt, an  increase of 4.6% over 2006. Natural markets ‘Natural markets’ are relatively new markets  for the Group in regions where the Board  believes it has a competitive advantage  which is yet to be exploited. This segment  includes Western Europe, Turkey and the  Middle East. Turkey has plans to significantly  increase iron making in the near term and  FPM’s proximity across the Black Sea affords  a significant mutual advantage to both the  Group and iron ore buyers in Turkey. This  segment represents a major target for future  sales growth. The Group is building  commercial and technical relationships in  the Middle East as a base for its sales as it  continues to improve product quality.  Growth markets ‘Growth markets’ are those which offer to  add new and significant tonnage expansion  potential to the Group’s customer portfolio.  Currently China is the major target, where  five long term contracts are in place  providing a solid base for future sales  growth. During 2007 relationships continued  to be built in the rest of Asia, specifically in  India and Japan. The Group’s first cargo to  Japan was sold in 2007. With planned  tonnage expansion and further quality  improvements, north Asian markets are  expected to form a major part of the Group’s  long term sales. The Group has a shorter  shipping distance to these markets than  competitor iron ores from Brazil. Pricing The Group achieved an average DAF/FOB  price for the pellets it sold in 2007 of US$72.3  per tonne, an increase of 17% over the  average achieved price for 2006 (US$61.8 per  tonne). Most of the Group’s export sales are  based on annually negotiated prices  contained in supplements to long term  supply contracts. A proportion of sales  tonnage is directly tied to the international  seaborne traded iron ore benchmark price  (‘Benchmark Price’) movement agreed  between the major   iron ore producers and specific Western  European or Asian steel producers for   a given year. Historically, the Group has often  realised a discount to the prevailing  Benchmark Price, but after adjustments   for freight, quality, proximity and logistics  impacts, this is increasingly no longer the  case. Variations in the Group’s achieved price  stem from price variations of pellets sold into  different jurisdictions, as well   as the mix between our 62% Fe pellets   and our 65% Fe pellets (which attract a  premium). Domestic sales have historically  taken place using quarterly prices, but   the Group has successfully moved a  substantial proportion of Ukrainian sales to  annual or long term contracts from 2007.  Marketing strategy The Group’s current sales strategy for the  Ferrexpo plc  Annual Report and Accounts 2007 Business review 27 additional volumes of pellets that it expects  to produce is to maintain and consolidate  the Group’s position in its traditional markets  to capture organic growth. Additionally it  will maximise opportunities for sales growth  in its natural markets and increasingly target  growth markets. The Board believes that, for  customers throughout Central Europe, its  products represent an attractive alternative  to those of major seaborn suppliers due to  the lower costs of transporting pellets over a  shorter distance from Ukraine, together with  an ability to provide many customers with a  continuous small-parcel delivery chain. The  Group remains an independent producer  with transparent business practices which it  expects will increasingly position FPM   as the European supplier of choice. In  addition, the Group began exporting iron  ore pellets to China in 2003, and the Board  considers China to be an increasingly  important strategic market due to its   rapidly growing demand for and domestic  consumption of iron and steel. Logistics In order to meet current and future growing  customer demands, the delivery chain  logistics capability of the Group needs to be  expanded. This is a critical contributor to the  Group’s long term market shares and  margins. Significant progress has already  been made with the following: • 49.9% equity investment in the first  private dry bulk minerals panamax  terminal on the Black Sea in 2007 the  ‘TIS-Ruda Terminal-Yuzhny’ Acquisition of 110 rail cars in 2007, with a  further 440 planned for delivery in 2008 Major rail and waterway assessments in  Ukraine are under way to determine  future needs • • The Group’s objective is to further maximise  value for its shareholders and customers by  developing world class customer delivery  chain logistics management as an integral  function of its sales and marketing activities.  The Group intends to achieve this by  building on its extensive Ukrainian and  Central European expertise and by forming  strategic alliances with selected partners to  add specific capabilities.  Whilst this is a focus for all of the Group’s  global customers, it is particularly important  in the traditional markets where FPM has a  complex delivery chain from its operations  covering rail, barging and trans-shipment.  The Group’s strategy is to manage as much of  the delivery chain to its customers as  possible in order to ensure on time supply of  the correct quality product at the lowest  cost. Initial focus will be on moving FPM’s  own products, and in future could include  third party materials and FPM supply needs.  The Group will engage customers in this  process to maximise long term value for all  parties. The total delivery chain logistics  scope includes rail, trans-shipment, barge  and ocean vessels. Often several of these are  required in order to deliver pellets to the  Group’s customers. Achieving the Group’s  objectives will entail significant investment  and appropriate funding methods, as  investment in infrastructure in the former CIS  has been insufficient since the collapse of the  Soviet Union in 1991.  Group management Executive management The Group has assembled a strong and  experienced management team. The Group’s  management combines the best of local  Ukrainian expertise with experienced  managers from the global mining industry.  The Group is managed by an Executive  Committee of senior managers, which is  responsible for overseeing the operational  activities and development of the Group and  implementing the strategy set by the Board  of Directors. The Executive Committee meets  monthly and formally reports to the Board  each quarter. It is chaired by Mike  Oppenheimer, the Group CEO, and is  comprised of seven other members  representing the various parts of the Group’s  business. The details of the members of the  Executive Committee are set out on page 15  of this Annual Report and in the Chairman’s  letter regarding the Annual General Meeting. Risks to our business Risk is inherent in all businesses, including  28 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued mining. The Group faces several risks to its  business and strategy, and management of  these risks is an integral part of the  management of the Group. The Group’s  Executive Committee has put in place a  formal process to assist it in identifying and  reviewing risks. Plans to mitigate known risks  are formulated, and the effectiveness of and  progress in implementing these plans is  reviewed regularly, in accordance with the  Turnbull Guidance. Despite the Group’s best  efforts to factor these known risks into its  business strategy, inevitably risks will exist of  which the Group is currently unaware.  The list of the principal risks and  uncertainties facing the Group’s business  that follows below is based on the Board’s  current understanding, but because of the  very nature of risk it cannot be expected to  be exhaustive. New risks may emerge and  the severity or probability associated with  known risks may change over time. Risks relating to the Group’s operations Iron ore prices The Group’s business is highly dependent on  the market price of iron ore. Sale prices and  volumes in the worldwide iron ore market  depend predominantly on the prevailing and  expected level of demand for iron ore,  mainly from steel manufacturers, and the  world steel industry is cyclical.   As a result, there is uncertainty regarding the  long term iron ore price, despite the current  strong outlook. There is also significant  uncertainty regarding the state of the global  economy. A falling long term iron ore price  could impact the Group’s  financial performance. The Group is also  planning high levels of expansionary capital  which could yield low returns if the long  term iron ore price falls.  Mining risks and hazards The Group’s business operations, like those of  other mining companies, are subject to   a number of risks and hazards, including  industrial accidents, equipment failure,  unusual or unexpected geological conditions,  environmental hazards,   labour disputes, changes in the regulatory  environment, extreme weather conditions  (especially in winter) and other natural  phenomena. Hazards associated with   open-pit mining include accidents involving  the operation of open-pit mining and   rock transportation equipment and the  preparation and ignition of large scale   open-pit blasting operations, collapses of   the open pit wall and flooding of the open   pit. In 2007 the Group had one fatality,  compared with two in 2005 and one in 2006.  While the Group is dedicated to the zero harm  objective, there is no guarantee, given the  nature of mining operations, that other  fatalities will not occur in the future. The Group  may experience material mine or plant  shutdowns or periods of reduced production  as a result of any of the above factors, and any  such events could negatively affect the  Group’s results of operations.  Costs and reliance on State monopolies Changes in costs of the Group’s mining   and processing operations could occur   as a result of unforeseen events and  consequently result in changes in  profitability or the feasibility and cost  expectations in mining existing reserves.  Many of these changes may be beyond the  Group’s control, such as those input costs  controlled by Ukrainian state regulation,  including railway tariffs, energy costs and  royalties. In particular, the Group currently  relies substantially on the rail freight network  operated by Ukrzaliznytsya, the Ukrainian  State-owned southern railway authority, for  transportation of its raw materials and finished  products. Railway tariffs for freight    Ferrexpo plc  Annual Report and Accounts 2007 Business review 29 increase periodically, and there can be no  assurance that additional increases will not  occur in the future.  In general, the Ukrainian government has  recently shown itself to be willing to raise the  prices charged by its State monopolies above  the level of inflation and this, together with  high levels of inflation in the Ukrainian  economy, could have an impact on the  Group’s costs in the future. Logistics The Group has identified potential logistics  bottlenecks that, if left unmanaged, could  adversely impact the ability of the expanded  Group to distribute its products. The Group  has embarked upon a programme of  investing in its own railcars, having  purchased 110 in 2007 and planning to  purchase a further 440 railcars in 2008, and it  is also investing in its barging capability and  making further investments at its TIS-Ruda  port facility for dredging. There can however  be no assurance that these investments will  be sufficient to manage the bottlenecks that  it has identified or that other bottlenecks will  not emerge in the future. Skills shortage The Group has identified a shortage of key  skills in the town of Komsomolsk, where FPM  is located. This can affect both existing  operations, and to the delivery of major  expansion projects. Key appointments have  been made and the Group has established a  project managers’ group for training  purposes. The Group is using Ukraine-based  external experts and its relationships with its  key alliance partners (Worley Parsons and  DTP Terrassement) to assist it in recruiting  the necessary skilled workers. However,  there can be no assurance that these  appointments and relationships will be  sufficient to address the shortage of local  skills. Licences The Group continues to monitor and review  its commitments under its various licences,  and continues to work to ensure that the  conditions contained within the licences are  fulfilled or the appropriate waivers obtained.  Licences are critical to the Group’s  operations, and there can be no guarantee of  their renewal or reconfirmation in the future,  nor that the Group will be able to attain any  additional licences that it may require. See  also ‘Risk relating to the Group’s strategy –  Government approvals of expansion’. Risks relating to the Group’s strategy Expansion capital expenditure The Group is planning major expansion  projects, which will require the investment of  significant capital. The Group has established  procedures to control, monitor and manage  this expenditure, and has appointed a Chief  Projects Officer. Monthly asset reviews occur  on site, and an Investment Risk Review  Committee has been established.  Notwithstanding these procedures, as with  all major capital projects of this kind, there is  a risk of insufficient controls and cost overrun  which could impact the time to completion  of these projects and the return on the  capital invested. Government approvals of expansion The Group does not yet have all  governmental approvals required to  implement its expansion projects. Despite  the fact that none of the approvals that have  been applied for to date have been refused,  there is no guarantee that others will be  granted in the future. In particular, there are  some small communities located on the  proposed sites of the Group’s expansion  projects at Yeristovskoye and Belanovskoye.  Although the Group considers that there is a  low risk of difficulties being encountered in  relocating these communities, there can be  no assurance of this. 30 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued Risks relating to operating in Ukraine Ukrainian inflation Ukraine has experienced high inflation in  2007 as a result of high government  spending and rapid economic growth. There  are indications that Ukrainian inflation will be  high again in 2008. If not mitigated by  efficiency improvements this inflationary  environment poses a risk to the costs and  profitability level of the Group’s business. Exchange rate The Ukrainian national currency is the  hyrivna, which is informally tied to the US  dollar, and has not devalued despite high  Ukrainian inflation. The policy of the  Ukrainian government has been to maintain  the strength of the hyrivna. A large  proportion of the Group’s costs are  denominated in hyrivna, with the result that  a real increase in the value of the hyrivna  could have an adverse effect on the Group’s  financial performance. Financial review Highlights • • • Revenue up by 28% to US$698m EBITDA up by 65% to US$246m EBIT for the period up by 63% to  US$187m  Underlying earnings1 up by 128% to  US$152m  Operating CI costs increased 8.6% vs  Ukraninian PPI of 23.3% Free cash flow of $139m Strong balance sheet: gearing reduced  to 26% from 48% Dividend of 3.2 US cents per share • • • • • Revenues The Group achieved overall revenue growth  of 27.6% compared with the prior year.   The Group’s revenue for the year increased  by US$150.9m to US$698.2m. This strong  performance was due to improved average  pellet prices which rose by 17% to US$72.3  per tonne compared with US$61.8 per tonne  in 2006 and increased production volumes  and quality. Sales volumes for the year  increased to 9,261kt (8,740kt in 2006) as did  1 See Glossary growth in the proportion of sales of higher  priced high-grade ‘65% Fe pellets’ which  increased to 40.7% for 2007 from 35.1% in  2006. Costs and margins A principal measure of operating  performance of the business is C1 cost per  tonne of pellets produced. This is defined as  the cash production cost from own ore  divided by the total volume of production. In  2007 the Group achieved C1 cash cost of  production from own ore of US$31.79 per  tonne compared with US$29.26 per tonne in  2006. This excellent performance was achieved in  the face of Ukrainian PPI inflation of 23.3%. It  is pleasing to report that the Group was able  to contain its C1 costs significantly below  general inflation due to reduced energy  consumption per tonne of pellets, improved  operating efficiency and tight cost control of  other general production expenses. Higher sales prices principally improved the  gross margin in the year which was 51.9%  (2006: 45.8%). Gross profit increased by  44.6% to US$362.3m (2006: US$250.6m). The Group pays distribution costs principally  to deliver pellets to the border of Ukraine or  within Ukraine to supply domestic customers.  Total distribution costs per tonne of pellets  sold increased to US$10.86 per tonne for the  year compared with US$9.88 per tonne in  2006. This increase was primarily driven by  higher rail tariffs. General and administration costs relate   to the operations within Ukraine and at   the Swiss sales and holding Company,  including Group costs. These amounted to  US$44.3m in 2007 compared with US$41.1m  for the prior year. In 2006 general and  administration costs included US$3.9m in  relation to Vostok Ruda.   The majority of the Group’s holding in Vostok  Ruda was disposed of in 2006. Underlying  general and administration costs now reflect  an appropriate level which is required for the  Group’s operation as a large public company.  Initial public offering costs amounted to  US$65.9m in the year, of which US$34.0m  Ferrexpo plc  Annual Report and Accounts 2007 Business review 31 was expensed and US$31.9m offset against  the share premium account reserve. Finance costs Net finance costs reflected lower overall debt  levels post IPO and reduced to US$22.7m  from US$30.3m in 2006. This was due to  strong operational cash generation and the  receipt of IPO proceeds during the year.  In December 2006 the Group restructured its  bank debt, extending the maturity dates of  its outstanding indebtedness and decreasing  its cost of borrowings. As part of this  restructuring, the Group raised a bank  syndicated loan in an initial amount of  US$275.0m. This successful transaction was  later increased to US$335.0m as a result of  oversubscription. This allowed the Group to  reduce its weighted average interest rate to  7.6% from 8.3% and to 8.2% from 9.2% on  floating and fixed interest rate financial  liabilities, respectively. Taxation The Group derives taxable income mainly in  Switzerland and Ukraine. The effective tax  rate was 16.6% compared with 18.3% in  2006. Earnings As a result of the strong operational  performance described above, the Group was  able to achieve an increase in underlying  earnings of 128.4% to US$151.5m (2006:  US$66.4m) and improve earnings per share  (‘EPS’) significantly. Fully diluted EPS rose  strongly to 20.33 US cents per share in   2007 (2006: 10.47 US cents per share).  Underlying EPS was similarly higher at   24.93 US cents per share in 2007   (2006: 10.92 US cents per share). 32 Ferrexpo plc  Annual Report and Accounts 2007 Business review Business review continued applied in replacement or modernisation of  plant in the existing operations. Our increased financial strength is apparent  in our debt to equity ratio. This was 26% at 31  December 2007 compared to 48% at   31 December 2006. The Group’s Ukrainian operations have  continued to experience delays in recovering  VAT from the government on   a timely basis throughout the year, which  represents an additional debt burden to   the Group. The situation has improved after  the year end and management are of the  opinion that the VAT refunds will be fully  recovered. Management continue to actively  pursue this issue with the relevant  government authorities. During the year the Group continued its  phased disposal of Vostok Ruda, disposing of  6.2% to an entity under common control for  $5,613,000, resulting in a gain of $4,714,000.  The remainder of the Vostok Ruda  investment representing 3.2% of the share  capital is available for sale.  Also during the year the Group acquired a  stake of 9.91% in OJSC Stahanov, a rail car  construction plant, from an entity under  common control. This is to help secure  supplies of rail cars for our expanding logistic  operations.  Related party transactions are discussed   in note 37 to the accounts on pages   96 and 97. Balance sheet and cash flow The cash flow of the business is summarised  in the table below: US$ millions EBITDA  Working capital movements  Net financial payments  Income tax paid  Movement in provisions and     other non-cash items  Net cash flow from operating     activities  Sustaining capital expenditure  Free cash flow  (Paid for)/received from:  Expansionary projects  Purchase of available for sale     investments  Loans to associates  Distributions  Net IPO proceeds  Other receipts  Reduction in debt  Year ended 31.12.07 246.1 (1.8) (24.0) (32.0) 0.5 188.8 (49.8) 139.0 (54.6) (12.1) (5.0) (69.8) 153.4 9.7 160.6 The strong operating results increased  EBITDA by 65.0% to US$246.1m increasing  EBITDA margin to 35.2% in 2007 from 27.2%  in 2006. Net cash flow from operating activities  amounted to US$188.8m in 2007 (2006:  US$68.3m). This strong performance and the  proceeds of our recent IPO have enabled the  Group to strengthen the balance sheet  significantly. As a result,   Net Financial Indebtedness has decreased to  US$117.9m at 31 December 2007   (31 December 2006: US$278.5m). Overall this cash flow was invested partly in  the modernisation of plant and equipment  for existing operations and partly in  investments which lay the foundations for  the development of the unexploited ore  body. Cash outflow due to capital  expenditure was US$104.4m in 2007  compared with US$48.8m in 2006. Of   this expenditure US$54.6m related to  expansionary projects and US$49.8m was                                Ferrexpo plc  Annual Report and Accounts 2007 Business review 33 Key Performance Indicators CSR Performance 2 Metric LTIFR Definition Long term injury   frequency rate1 11 Target Below 0.75  Metric Fatalities Definition Work-related fatal  accidents Target No fatalities OPERATIONS Metric Pellet production Definition Pellet production   from own produced   concentrate 7 5 . 0 Target Increasing production 9000– 8800– 8600– 8400– 8200– 8000– 7800– 7600– 7400– 7200– 7000– 6800– 6600– 6400– 6200– 6000– 5800– 5600– 5400– 5200– 5000– 4800– 4600– 4400– 4200– 4000– 3800– 3600– 3400– 3200– 3000– 2800– 2600– 2400– 2200– 2000– 1800– 1600– 1400– 1200– 1000– 800– 600– 400– 200– 0–– 4.1– 4.0– 3.9– 3.8– 3.7– 3.6– 3.5– 3.4– 3.3– 3.2– 3.1– 3.0– 2.9– 2.8– 2.7– 2.6– 2.5– 2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 0.9– 0.8– 0.7– 0.6– 0.5– 0.4– 0.3– 0.2– 0.1– 0–– FINANCIALS Metric EBITDA Definition Earnings before interest,  tax, depreciation and  amortisation2 7 5 . 0 Target Increase EBITDA  2005 2006 2007 Performance 3 9 7 , 8 9 4 1 , 8 7 3 1 , 7 2005 2006 2007 Performance 1 . 6 4 2 2 . 5 8 1 1 . 9 4 1 2005 2006 2007 2.5– 2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 0.9– 0.8– 0.7– 0.6– 0.5– 0.4– 0.3– 0.2– 0.1– 0–– 3.2– 3.1– 3.0– 2.9– 2.8– 2.7– 2.6– 2.5– 2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 4.1– 0.9– 4.0– 0.8– 0.7– 3.9– 0.6– 3.8– 0.5– 0.4– 3.7– 0.3– 3.6– 0.2– 0.1– 3.5– 0–– 3.4– 3.3– 3.2– 3.1– 3.0– 2.9– 2.8– 2.7– 2.6– 2.5– 2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 0.9– 0.8– 0.7– 0.6– 0.5– 0.4– 0.3– 0.2– 0.1– 0–– Performance 3 2 . 2 4 3 . 1 7 5 . 0 2005 2006 2007 Performance 9 . 9 2 3 . 9 2 8 . 1 3 2005 9.5% 2006 14.1% 2007 23.3% PPI :4 Performance 1 4 . 0 2 2 4 . 7 1 7 4 . 0 1 2005 2006 2007 Metric Production quality 4.1– 4.0– 3.9– 3.8– 3.7– 3.6– 3.5– 3.4– 3.3– 3.2– 3.1– 3.0– 2.9– 2.8– 2.7– 2.6– 2.5– 2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 0.9– 0.8– 0.7– 0.6– 0.5– 0.4– 0.3– 0.2– 0.1– 0–– Definition Percentage of 65% Fe  pellets produced as a  proportion of total production 4.1– 4.0– 3.9– 3.8– 3.7– 3.6– 3.5– 3.4– 3.3– 3.2– 3.1– 3.0– Target 2.9– 2.8– Continual improvement –   2.7– 100% of pellets to be   2.6– 2.5– 65% Fe by 2013  2.4– 2.3– 2.2– 2.1– 2.0– 1.9– 1.8– 1.7– 1.6– 1.5– 1.4– 1.3– 1.2– 1.1– 1.0– 0.9– 0.8– 0.7– 0.6– 0.5– 0.4– 0.3– 0.2– 0.1– 0–– Definition Underlying earnings is   net profit presented after  minority interests and   excludes adjusted items.5 Metric Underlying earnings Target Increase underlying   earnings 7 5 . 0 Performance % 1 4 % 5 3 % 8 1 2005 2006 2007 Performance 5 . 5 5 1 3 . 6 0 1 4 . 6 6 2005 2006 2007 Metric C1 costs Definition Total cash costs of  production ex-works 7 5 . 0 Target Maintain increases   in C1 costs below  Ukrainian PPI inflation Metric EPS Definition Earnings per share3 7 5 . 0 Target Increase EPS 1  Lost Time Injury Frequency Rate: The rate per million hours worked of lost time injuries. 2   EBITDA: EBITDA is defined as profit from continuing operations before tax and finance, excluding depreciation and amortisation, foreign exchange gains/losses and  adjusted items. 3   EPS: EPS is calculated by dividing the net profit for the year attributable to ordinary equity shareholders of Ferrexpo plc by the number of Ordinary Shares. Comparatives for  2006 and 2005 have assumed that Ferrexpo plc was always the Group holding company, which affects the definition of Ordinary Shares, to allow a more meaningful  comparison (see note 16 of the notes to the financial statements). 4  Ukrainian producer price index inflation. 5   Adjusted items: Adjusted items that relate to the operating performance of the Group include impairment charges and reversals and other exceptional items. Non- operating adjusting items include profits and losses on disposal of investments and businesses.   34 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable develo pment review Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 35 Sustainable develo pment review 36 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable development review Our commitment Ferrexpo’s commitment to corporate social responsibility The Ferrexpo Board’s commitment to  corporate social responsibility (‘CSR’) derives  from a shared belief that the Group’s licence  to operate will be underpinned by the  Group’s CSR performance. For many  operations within former CIS countries, the  traditional response had been to use legal  standards as the sole benchmark for CSR  compliance. By contrast, we are committed  to striving to achieve the highest standards  of performance in CSR matters. The Board’s approach to CSR The Board intends to give effect to its  commitment to CSR through: • • • • group policies; Board and management focus;  asset level management systems; and  performance management at all levels. The Board recognises its responsibility to set  the standards that management and  employees are expected to meet in all areas  of its corporate social responsibility. To this  end, it has reserved for itself responsibility  for establishing Group policies for health,  safety, community relations and  environmental matters. It will also be  responsible for establishing Group standards  on business ethics. The Group has established a Corporate Social  Responsibility Committee (‘the CSR  Committee’) to monitor and hold  management to account for the  implementation of those policies, including  performance measurement and risk  assessment.  Management are responsible for the  implementation of policies and procedures  and the membership of the CSR Committee  therefore consists of the Chief Executive  Officer, Ferrexpo Poltava Mining (‘FPM’) Chief  Operating Officer and the Chief Projects  Officer, along with the Chairman of the  Board. To assist them in the exercise of their  duties, the CSR Committee will, from time to  time, engage specialist technical advisers.  The CSR Committee will meet at least twice a  year, however, the executive members of the  CSR Committee are also currently reviewing  progress in policy development and  implementation on a monthly basis. As the only operating asset within the Group,  FPM provides the focus for development and  implementation of the Group’s CSR  procedures, based on established Group  policies. Within FPM a single department has  been created with responsibility for all  aspects of health and safety, security and  environmental protection. This department  is responsible for air and water testing  laboratories, the medical centre, fire  prevention service, gas service, civil defence  and emergency response headquarters and  workshops. This department reports directly  to the FPM Chief Operating Officer. All Group employees are expected to take  personal responsibility for their conduct and  management recognise the need to create  the right cultural and behavioural  environment among the Group’s workforce  to allow the policies agreed by the Board to  be successfully implemented.  Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 37 Health and safety Health and safety policy The Group’s policy on health and safety is as follows: • The prevention of injuries to employees is the highest priority of the Board and  management. Our policies and practices at all levels need to reflect this. Within our operating assets, accountability for health and safety performance lies with  senior line management. All operating assets are required to develop and implement health and safety  management systems in line with Group policy, including performance management. Performance metrics will be developed that are reflective of the Group’s commitment to  strive to achieve the highest standards of health and safety performance. Senior line management is responsible for ensuring that adequate resources are  committed to health and safety. They have an obligation to secure their resources  through the Group’s planning and budgeting processes. Adequate health and safety training will be given to all employees and contractors. Specific focus needs to be applied to behavioural safety at all levels, to fatal risk  prevention and to the major industrial health hazards associated with our operations.  Employees are personally responsible for their own safety and that of their colleagues. • • • • • • • Health and safety performance Long Term Injury Frequency Rate (LTIFR – see note)  Fatal accidents  Total accidents  Lost days  2007 0.57  1  9  590  2006 1.34  1  14  557  2005 2.23 2 24 549 Note The coefficient of accident frequency is calculated in accordance with best practice and represents the number of  recorded accidents per million manhours. CASE STUDY 1 Investment in training During 2007, Ferrexpo invested over US$60,000 in  its facilities for health and safety training. This  money was spent on refurbishing the safety  training office and training rooms with the  installation of display boards and equipment for  multimedia presentations and demonstrations.  Fully equipped safety training and briefing rooms  are located in Ferrexpo Poltava’s Mining and  Transport departments. These facilities are used to  increase employees’ awareness of safe operating  procedures and the use of personal protection  equipment.                38 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable development review continued actions has been developed and will be  implemented during the course of 2008. Regrettably, we suffered a further two  fatalities in 2008. These tragedies are totally  unacceptable and have provided a rallying  point for us to redouble our efforts in  continuing to introduce best practice in  health and safety management. We have  now appointed Du Pont Safety Resources  which has an outstanding record of success  in assisting companies to achieve a ‘zero  harm’ objective.  In accordance with the Labour Protection  Law, compensation equivalent to at least five  times annual salary is payable to the victims  of accidents (or their families). Individual  workers contribute to a statutory insurance  fund which is responsible for paying the  compensation. FPM is aware that it has a  moral as well as a legal responsibility  towards the families of employees affected  by accidents at work and will also make  additional voluntary payments to the family  of employees on a case-by-case basis to  ensure that they do not suffer hardship. Safety initiatives In line with Group policy, FPM is  implementing a number of measures to  improve the health and safety of its workers,  including the introduction of enhanced  occupational health and safety (‘OH&S’)  standards in the collective bargaining  agreement with its workforce, upgrading  technology, introducing systemic changes  and sanitary measures, better protective  equipment and health care measures. FPM is  also focusing on training (see Case Study 1).  Management and employees are trained in  workplace safety when they first join FPM  and then continuously during their  employment. Health and safety management systems In accordance with Ukrainian law, FPM   has developed a health and safety policy  applicable to their operations and types   of activity that is in line with the Group  health and safety policy. Compliance with  this policy is monitored via a three-tiered  system. Daily control is conducted by  operating personnel, engineers and  technicians. Production managers carry out  weekly inspections, and senior management  conducts periodic inspections in conjunction  with governmental personnel.  In 2006, Ferrexpo Poltava initiated the  development of a health and safety  management system consistent with the  requirements of OHSAS 18000 the  internationally recognised standard for  health and safety management. This system  was externally audited under the UkrSEPRO  system in March 2007 and accreditation was  obtained in the second half of 2007.  Fatalities and reportable accidents The prevention of injuries to employees is  the highest priority of Board and  management who adhere to the philosophy  that all accidents are avoidable.  In line with policy at FPM, all accidents are  investigated to determine the cause and  identify appropriate remedial action. Serious  and fatal accidents are also investigated by  the State authority. The CSR Committee and  Group Executive Committee require senior  management to provide full reports on the  causes of fatal and serious accidents, details  of corrective actions to prevent these types  of accident from recurring and plans for  enhancing overall safety management based  on the lessons learnt. Senior managers are  expected to present these reports, in person,  at the first Executive Committee meeting  after the accident concerned.  Sadly, in 2007 there was one fatality at the  Poltava operation when a railway fitter was  struck by a moving train during maintenance  works. Following an intensive investigation  into this accident, a programme of corrective  Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 39 Regular workplace risk assessments are  undertaken and on the basis of these  assessments the correct personal safety  equipment is procured and provided for  employees.  In line with Group policy focus on behavioural  safety, increased efforts are being made in  FPM to encourage and promote a culture of  safety. Du Pont Safety Resources, a world class  exponent of behavioural safety in the  workplace, has been approached to  undertake a diagnostic evaluation of the  current working practices at FPM. This will  assist the development and implementation  of appropriate practices which, in turn, will  enhance safety self-awareness and promote  safety performance improvement through  behavioural change rather than the traditional  focus on process.  FPM is required by Ukrainian labour  protection laws to dedicate 0.5% of sales to  labour protection and safety. The statutory  payment amounted to approximately US$2.9  million in 2007 (2006: US$2.41 million – 0.51%  of sales).  Occupational health initiatives In accordance with the requirements of the  Ministry of Health in Ukraine and to prevent  or detect occupation-related diseases at the  early stage, FPM employees, particularly  those engaged in potentially dangerous and  harmful work, are given medical  examinations both on recruitment and at  regular intervals during their employment.  Employees who have worked for 10 years or  more under potentially harmful working  conditions are assessed more frequently. FPM owns medical facilities at the Poltava  site and these facilities are made available at  no cost or at subsidised rates to employees  and their dependants. The cost of such  provision was US$480,200 in 2007 (2006:  US$462,000). In the past three years, there have been 12  CASE STUDY 2 Cultural investment in the local community The cultural centre of Komsomolsk has traditionally  been the Palace of Culture and Technology. Until  recently, the Palace of Culture was run by the local  City Council and the facilities had become out of  date. In 2005, Ferrexpo management and the City  Council agreed to co-operate on the  reconstruction and re-equipping of the Palace of  Culture and Ferrexpo contributed over US$800,000  to the cost of its repair and upgrading. The  significance to the local community of this  investment cannot be over-estimated as it is the  only cultural centre in Komsomolsk. Today, there  are 16 distinct groups of performers based in the  Palace of Culture. Not only do they perform in  Komsomolsk itself, but also further afield within  Ukraine. Almost 600 people, including 200  children, participate in the cultural activities made  possible by the revitalised Palace of Culture.  40 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable development review continued Environment performance 7 . 6 1 9 , 2 4 . 4 9 2 , 2 9 . 5 7 8 , 2 1 . 6 9 2 , 2 5 . 5 7 8 , 2 2 . 9 9 2 , 2 5 . 4 8 8 7 . 5 8 8 0 . 8 8 8 2005 2006 2007 Nitric oxide emissions (tonnes) Carbon dioxide emissions (tonnes) Sulphur dioxide emissions (tonnes) recorded cases of industrial disease (three in  2005, six in 2006 and three in 2007); most  cases are associated with prolonged  exposure to elevated dust concentrations.  Other diseases included auditory impairment  due to excess noise and two cases of cancer  (which whilst classified   as industrial disease in accordance with  Ukrainian legislation and therefore recorded,  are not believed to have been attributable to  the Group’s operations).  The industrial diseases that have been  recorded include some – silicosis and  bronchial complaints – which can be caused  by exposure to particular forms of dust  (although there are also other possible  causes for some of these diseases).  Improvements to dust control systems are  part of a long term package of measures  designed to improve the working  environment. To reduce the dust level of the  production area in the pit and at the plants  and Company workshops, the pit-face and  technological roads are watered each shift  (depending on the weather pattern). Environment Environmental policy The Group’s policy on the environment is as  follows: • Our operating practices and growth  plans will be implemented in a manner  consistent with the principles underlying  long term sustainable resource  development; we will balance the long  term environmental consequences of  our actions against short term economic  returns. All operating assets are required to  develop and implement environmental  management systems in line with Group  policy. All new capital projects will include  environmental risk assessments and  mitigation plans. • • In 2007, the Group spent approximately  US$12.7m (2006: US$10.1m) on  environmental permits and protection  measures including approximately US$2.0m  (2006: US$1.5m) in statutory emissions  payments, approximately US$6.0m (2006:  US$5.2m) on environmental protection  equipment and infrastructure and  approximately US$4.7m (2006: US$3.4m) on  new projects.  Environmental management systems The primary responsibility of FPM’s  dedicated Environmental Department is   to ensure that all necessary permits are   in place, to undertake monitoring in  accordance with the prevailing regulatory  requirements and to supervise the  implementation of an agreed programme   of environmental improvements based on  the Department’s own assessments. Environmental laws in Ukraine set  requirements for the protection of the  natural environment, the use of natural  resources, emissions into the atmosphere  and water and waste disposal. FPM holds   a number of environmental licences and  permits, including permits for atmospheric  emission control, solid waste disposal,  tailings disposal, mine waste disposal and  special use of fresh water. Until 2007, the  environmental monitoring and management  programme was designed solely to meet the  current statutory requirements. However, in  2006, the Environmental Department started  to develop a full Environmental Management  System (‘EMS’) in accordance with ISO 14001.  The EMS was externally audited by UkrSEPRO  and given a certificate of conformity with ISO  14001 in the third quarter of 2007. Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 41 FPM emissions dynamics 5 . 6 5 1 , 9 2 . 0 9 3 , 9 5 . 6 9 3 , 9 7 . 3 9 1 , 6 8 . 2 6 9 , 2 6 . 5 5 1 , 6 6 . 4 3 2 , 3 9 . 0 6 1 , 6 5 . 5 3 2 , 3 2005 2006 2007 Emissions total (tonnes) Solids emissions (tonnes) Air emissions (tonnes) Project evaluation During the year, the Group endorsed the  Equator Principles as a benchmark when  evaluating new projects. As part of any new  project proposal, the Group will undertake  an environmental impact assessment and  this will be reviewed alongside other project  evalution documents presented to the Board  for approval.  Environmental initiatives Air quality Dust and gas emissions are two major issues  that FPM carefully monitors and controls to  ensure that air quality is not adversely  impacted by its operations. In recent years,  there have been a substantial number of  initiatives taken to meet this need.  In 2007, investments were made in new  equipment to improve the filtering at the  crushing plant. A programme of pit-face  watering has already been conducted during  the dry season for several years. However, in  2007 this was taken further with the  procurement of two hydro monitors for this  purpose.  In order to decrease the air emissions caused  by diesel locomotives and reduce diesel fuel  consumption, special mounting devices for  the Group’s diesel equipment have been  obtained.  All gas emission points are equipped with  filters. Dust control measures have been  implemented to prevent wind-borne dust  pollution from the tailings dams.  CASE STUDY 3 Investment in sport Ferrexpo Poltava seeks to contribute to all aspects  of the life of the local community. For some time,  investment in sport has been one of the channels  for such contributions. Prior to 2004, the local  football team, Gornyak-Sport, which plays in the  Ukrainian 2nd Division, was forced to play its home  matches outside of Komsomolsk because of the  poor condition of its ‘Yunost’ stadium and pitch.  In 2004 and 2005, Ferrexpo agreed to pay almost  US$1.6m for the reconstruction of the stadium  including the stands, training facilities and pitch.  This has enabled the local team to resume its place  at the centre of the local life of Komsomolsk.  Ferrexpo has continued to contribute almost  US$200,000 per annum to   the financing of the football club which is now  attracting a lot more interest from the local  community, particularly young people, who are  using its facilities on a regular basis.  Ferrexpo also pays US$50,000 per month to a local  football club – Gornyak-Sport – for advertising its  logo. In addition to its investment in Gornyak-Sport,  Ferrexpo also makes contributions to local tennis  clubs, children’s sports academies (offering water  sports, judo and marksmanship, among others)  and motor sport.  42 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable development review continued Water management FPM uses some 448 million m3 of water each  year, much of which is recycled through the  tailings facility, although approximately 3.3  million m3 is extracted from a combination  of the local river and the municipal potable  water supply. The Tailings Storage Facility (‘TSF’) also  receives the treated effluent from  Komsomolsk’s sewage treatment plant. This  situation originates from the 1970s when the  mine and the town were managed as a single  organisation. Excess water from the TSF is  passed through an extensive reedbed  treatment system (commissioned in 2002  and designed primarily to reduce the  concentration of nitrates and ammonia from  the sewage effluent) prior to discharge to  surface water.  Storm water from the site is treated in a new  treatment plant (commissioned in late 2005  and designed to remove suspended solids  and oil products) prior to discharge to  surface water. The new treatment plant is  expected to remedy problems identified  with the discharge of previously untreated  storm water. During 2006, the washing facilities of the  transport department were reconstructed to  prevent the pollution of ground water by oil  products that had been carried by the  surface water as it drained away. Most of the dam water is recycled for use in  the production process; the excess is  biologically treated before being released  into the environment. During 2007, the use  of duckweed at the bio-engineering sections  of the dam canals commenced.  Waste rock management The currently operating Gorischne- Plavninskoe Lavrikovskoe (‘GPL’) open pit has  generated some 500mm3 of waste rock that  is deposited in two dumps. There is no  indication that run-off from the waste rock  dumps is problematic and abandoned areas  of the rock dumps have been successfully re- vegetated. Waste rock from future  operations, including the proposed  Yeristovskoe pit will also be deposited on  these two dumps or will be used to back-fill  part of the GPL pit. The annual tree and bush  planting project assists in the absorption of  gases that would otherwise pollute the air,  whilst also reducing noise.  Mine closure and rehabilitation FPM recognises that its activities impact on  the environment and communities in which  it operates. It is aware that a commitment to  sustainability requires it to prepare now for  the cessation of mining operations even  though that eventuality is a long way off. In  2005, it developed a closure and  rehabilitation plan for the existing GPL pit  and associated waste rock dumps.  Rehabilitation of the rock dumps is  scheduled to begin in 2025 and of the  partially back-filled existing open pit in 2055.  The site will be restored primarily to forestry  with an area of open water remaining in part  of the open pit.  The Yuzhgiproruda Institute, on behalf of  FPM, periodically reviews the scope and cost  estimates of its site restoration plans and a  review was undertaken in the middle of the  year, 2007. The Company will provide fully for  the costs of mine closure and rehabilitation  as they develop and it is committed to  comply fully with the terms of its operating  licences and the requirements of Ukrainian  law.  Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 43 Employees Average number of employees during the year 2007 2006 2005 Production  Sales, marketing, distribution  Administration and other  Total  7,796  185  2,131  8,518  197  2,635  8,097 197 2,549 10,112  11,350 10,843 The target of FPM’s Human Resources policy is to effectively ensure that personnel are  recruited capable of enabling the Group to manufacture high quality and competitive  products.  For the technical and economical positions FPM recruits young specialist graduates from  Dnepropetrovsky Mining Academy, Kyiv Universities, Krivoy-Rog Institutes, Komsomolsk  Polytechnical School among other places.  Training and development The Group is committed to developing its employees. The Group provides technical training  for all employees consistent with their duties and responsibilities. In particular, investment  has been made in facilities for health and safety training (see Case Study 1). Over the past  three years, on average, over 300 employees have been supported in either full-time or  distance learning courses. In 2007, 75 employees were sponsored in full-time courses and 207  were placed on distance learning courses. Trade unions The Group does not have individual contracts with its employees in Ukraine other than with  its senior managers. Most of FPM’s workers are members of a trade union (the ‘Poltava Trade  Union’). There has been no significant industrial action or labour dispute at Poltava since its  privatisation in 1995. FPM entered into a new collective bargaining agreement with the  Poltava Trade Union on 30 March 2007. Management has also signed a protocol of intent with  the Poltava Trade Union for the period from 2008 to 2010 in which it has agreed to ensure that  individual salaries will be increased at least in line with inflation and that an annual reduction  in headcount will occur, subject (except for any jobs that are outsourced) to an agreed  maximum.  Management believes that wages paid by the Group are higher than average wages in  Ukraine, although they tend to be less than the average wages paid by other Ukrainian mining  companies.                    44 Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review Sustainable development review continued Communities Community policy • • • • Our presence should benefit those  communities around our operations; our  operations will benefit if local  communities are thriving. We strive to be recognised as an  attractive local employer and a  concerned corporate citizen. We will assist in the development of the  micro-economic environment within the  communities in which we operate to  ensure that their dependence on us for  their livelihood is reduced. We aim to have a positive relationship  with and enhance the communities  around us. We wish to have an open  dialogue with these communities and to  ensure that our involvement with them  is cost effective and relevant to their  needs. Community context Poltava is located in an area of  predominantly flat agricultural land close to  the Dnieper River, one of the largest  European river systems and an important  transport artery for Ukraine, Belarus and  Russia. Iron ore mining in the area dates from  the 19th century, although the major  expansion of mining activity occurred   in the early 20th century. The town of  Komsomolsk was established adjacent to the  mine to support the mining operation and  ancillary industries (transport, power etc.).  Ferrexpo Poltava is still by far the largest  employer in the town, which has a  population of approximately 40,000 people,  with approximately 25% of the working  population of Komsomolsk being employed  by the mine in one capacity or another.  Community initiatives FPM has been a significant investor in local  community initiatives from the outset.   Since 2004, the Company has spent   UAH55.6m on the social infrastructure of  Komsomolsk and the surrounding area.  These funds have been spent on charities,  medical facilities, social services, education,  religion, culture (see Case   Study 2) and sporting activities (see Case  Study 3), as well as on the maintenance of  certain of the city’s social and cultural  structures. These include contributions to  local municipalities, welfare support, the  provision of medicine, education and sport,  maintaining these at a level in keeping with  the rest of the Poltava Region and Ukraine.  FPM spent US$4.4m in support of local  cultural, educational, sporting and social  projects in 2007. Total expenditure on social projects in 2007  was UAH15m. The primary focus has been on  providing assistance for the medical centres  in Komsomolsk with the emphasis being  placed on the procurement and repair of  medical equipment and furniture.  Educational institutions in the city such as  kindergartens and schools have also received  financial support for repairs and  maintenance. In recent years, FPM has  provided a summer camp called ‘Horizon’ for  almost 1,500 children of employees and  other families in Komsomolsk.    Ferrexpo plc  Annual Report and Accounts 2007 Sustainable development review 45 Historically, FPM has employed a significant  number of people to provide support  services to the Group’s mining activities. In  many cases, these services could be made  available on a commercial basis to other  enterprises within the local community  which in turn could improve the viability and  sustainability of the local economy. To  encourage this process, FPM have offered  finance and other support to employees who  provide these in-house services to  encourage them to transform these internal  departments into stand alone businesses. During the year, the road transport and  maintenance, building maintenance and  security departments were transferred into  stand alone businesses. These transfers  involved 569 employees. In each case,  Ferrexpo Poltava Mining has entered into  service agreements with these new  businesses, providing them with an initial  guaranteed income as independent  businesses. Fixed assets and materials have  also been transferred.     46 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Corporate governance report Introduction The Board is committed to good corporate governance practices, in  its management of the affairs of the Group and in its accountability to  shareholders. As detailed in this report, the Company has taken  action to institute an effective corporate governance framework by  establishing its Board committees, internal procedures and Group  policies which are critical for the proper management of the Group  and good governance of an international business. From the date of  its incorporation until 15 June 2007 (the date of its listing on the  London Stock Exchange), Ferrexpo plc was not subject to the rules of  the UK Listing Authority. Since the Company has been listed, the  Board has sought to comply with corporate governance best practice  and this report details the steps that have been taken to achieve  compliance with the Principles of Good Governance and the Code of  Best Practice contained in the Combined Code on Corporate  Governance issued on 27 June 2006 (the ‘Combined Code’).  Accordingly, the Board and its management believe in conducting  their affairs in a fair and transparent manner and in maintaining high  ethical standards in their dealings with all relevant parties.  Statement of compliance Since Listing in June 2007 the Company has become compliant with  the provisions of section 1 of the Combined Code save that neither  Board evaluation nor evaluation of the Chairman has yet been  conducted. It is intended that these evaluation exercises will be  undertaken during 2008. The Directors intend to ensure that they continue to comply with the  recommendations of the Combined Code. The Combined Code establishes 17 main principles of good  governance in four areas: Directors, Directors’ Remuneration,  Accountability and Audit, and Relations with Shareholders. The  following three sections explain how these principles were applied,  with the exception of those relating to Directors’ Remuneration  (a detailed report on Directors’ remuneration can be found on pages  51 to 56). Directors The Board The Board comprises a Non-executive Chairman: Michael Abrahams,  three Executive Directors: Mike Oppenheimer, Dennis McShane and  Chris Mawe and five Non-executive Directors. Oliver Baring has been  nominated as the Senior Independent Director. The other Non- executive Directors are Kostyantyn Zhevago, Lucio Genovese,  Wolfram Kuoni and Ihor Mitiukov. Biographical details of the Directors at the date of this report are set  out on pages 14 and 15 together with details of their membership of  Board committees. Brief details of the Chairman, the Chief Executive  and the Senior Independent Director are set out on page 47. The Board is responsible for setting the Company’s objectives and  policies, and providing effective leadership and control required   for a public company. The Board is responsible for approving   the Group strategy, budgets, business plans and major capital  expenditure. It also monitors financial performance and critical  business issues.  The Board has a formal schedule of matters specifically reserved to it  for decision which was approved by the Board. The schedule of  matters reserved to the Board sets out those matters which require  Board approval and include the Group’s strategy, business plan and  annual budget. Major project approvals and contract awards require  the approval of the Board as well as key policies and procedures.  The Board is supported by the Executive Committee (‘Exco’) which  meets monthly. All of the information that is submitted to the Board  by management is reviewed and approved by Exco.  Directors receive a suite of briefing notes and reports for their  consideration in advance of each Board meeting, including reports  on the Company’s operations to ensure that they remain briefed   on the latest developments and are able to make fully informed  decisions. The briefing notes and reports that are prepared by Exco  take into account the factors set out in section 172 of the Companies  Act 2006, which are considered by Exco when making any proposals  and recommendations to the Board.  All Directors have access to the advice and services of the Company  Secretary, who is responsible for ensuring that   Board procedures are followed and that applicable rules and  regulations are complied with. All Directors may take independent  professional advice at the expense of the Company in the furtherance  of their duties. On appointment, all Directors are advised of their  duties, responsibilities and liabilities as a Director of a public listed  company.  Directors have the right to request that any concerns they have are  recorded in the appropriate committee or Board minutes.  The Board met four times between June and December 2007.  Attendance by Directors at Board meetings and Board Committee  meetings is shown below. All Board meetings are held in Switzerland.  Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 47 Attendance at Board and Board committee meetings The following table sets out the number of meetings of the Board and its committees following its Listing and individual attendance by the  relevant members at these meetings.  Committee meetings Number of meetings held     since Listing  Chairman Michael Abrahams  Executive Directors  Mike Oppenheimer  Dennis McShane  Board meetings 4  4  4  4  Christopher Mawe (note 1)  n/a  Non-executive Directors  Kostyantyn Zhevago  Oliver Baring (note 2)  Raffaele (Lucio) Genovese  Wolfram Kuoni  Ihor Mitiukov  4  1  4  4  4  Audit Remuneration Nominations CSR 3  3  n/a  n/a  n/a  n/a  n/a  3  3  3  3  3  n/a  n/a  n/a  n/a  1  3  n/a  3  1  1  n/a  1  n/a  1  n/a  n/a  n/a  n/a  1 1 1 n/a n/a n/a n/a n/a n/a n/a Notes 1 Christopher Mawe was appointed to the Board on 7 January 2008.  2 Oliver Baring was appointed to the Board on 1 December 2007. 3 In addition to Michael Abrahams and Mike Oppenheimer, David Webster and Viktor Lotous are members of the CSR Committee, and have both attended one meeting each.  Chairman, Chief Executive and Senior Independent Director The roles of the Chairman and Chief Executive are held by different individuals. The division of responsibilities between the Chairman   and Chief Executive has been clearly established in writing and agreed by the Board. The Chairman’s other current responsibilities are set out in the biographical notes on page 14. There have been no changes to those  commitments since the Company’s IPO.  Oliver Baring was appointed to the Board with effect from 1 December 2007 as a Non-executive Director and nominated Senior Independent  Director. Mr Baring will assist in communications with shareholders concerning corporate governance matters if that   is required.  Board balance and independence The Board believes that its current membership of three Executive Directors, one Non-executive Chairman and five Non-executive Directors,  four of whom are deemed by the Board to be independent, is of an appropriate size and structure to manage the Company in an effective and  successful manner. It also considers that no one Non-executive Director can influence or dominate the decision making. The Relationship  Agreement with Kostyantyn Zhevago specifically deals with decision making. More details are given below. The Board has carefully considered the guidance criteria on independence of Non-executive Directors under the Combined Code. In the  opinion of the Board, all the continuing Non-executive Directors bring independence of judgement and character to the Board and to the  Board Committees on which they sit. The Board considers that all the Non-executive Directors, with the exception of Mr Zhevago, are  independent of the Company as defined by provision A.3.1 of the Combined Code. The Board considers that the industry expertise and  experience of Mr Zhevago is beneficial to the Group.    48 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Corporate governance report continued Mr Zhevago is a beneficiary of the Minco Trust which owns 100% of  Fevamontinico S.a.r.l, the major shareholder in the Company.  Consequently he and Fevamontinico S.a.r.l. have entered into   a relationship agreement with the Company to ensure that the Group  is capable of carrying on its business independently, that transactions  and relationships between the Group, Fevamontinico S.a.r.l and Mr  Zhevago are at arm’s length and on normal commercial terms, and  that there shall be at all times a majority   of Directors independent of Fevamontinico and Mr Zhevago   on the Board (‘the Relationship Agreement’). The Relationship  Agreement does not apply to Mr Zhevago in his capacity as a  Non-executive Director. Information and professional development Induction was provided for all the new Non-executive Directors   at the time of the Listing and an induction programme for all new  Non-executive Directors has been established. All Directors are made  aware that they may take independent professional advice at the  expense of the Company in the furtherance of their duties. All  Directors have access to the advice and services of the Company  Secretary, who is responsible to the Board for ensuring that all  governance matters are complied with and who assists with  professional development as required. Professional development and training is provided in a number   of ways including updates on changes and proposed changes in laws  and regulations affecting the Group and site visits to ensure Directors  are familiar with the Group’s operations. In July 2007 the members of  the Audit Committee received a briefing on their roles and  responsibilities and a further update briefing has been provided since  the year-end. Since June 2007, all Board members have received a briefing on the  new duties of Directors as prescribed by the Companies Act 2006. In  addition, the Board has evaluated all its processes to ensure  compliance with the Companies Act 2006. Performance evaluation Most of the members of the Board have been appointed for less than  a year and therefore the Board believes that it is too early to begin a  process of Board evaluation at this stage. It is therefore proposed that  a Board evaluation process will be conducted by the Chairman in the  second half of 2008. The Chairman is currently considering the  process for doing this. The Senior Independent Director will monitor  the evaluation of the Chairman by the other members of the Board.  Election of Directors at the 2008 Annual General Meeting In accordance with Article 73 of the Company’s Articles of  Association, the Directors may be appointed by the Company by  ordinary resolution or by the Board. If appointed by the Board, a  Director holds office only until the next Annual General Meeting.  Since all the Directors were appointed by the Board during the year,  their terms of office will expire at the forthcoming Annual General  Meeting but, being eligible, will offer themselves for election. There  will not, therefore, be any Directors retiring by rotation. In future  years, Directors will be required to retire by rotation in accordance  with the Company’s Articles of Association. A separate Chairman’s letter, which includes the Notice of the Annual  General Meeting, will be circulated to shareholders with this Annual  Report and Accounts. Resolutions to elect all the Directors are set out  in the full AGM notice along with biographical details   for each Director. The Board fully supports all the elections being  proposed and recommends that all Directors be appointed by  shareholders at the forthcoming AGM.  Board committees The Board has a number of committees consisting of certain  Directors, and in the case of the Executive and CSR Committees,  certain senior managers, to which specific responsibilities have been  delegated and for which written terms of reference have been  agreed. These terms of reference are available for inspection on the  Company’s website at www.ferrexpo.com. Membership of the various  Committees, including the Chairman of each Committee,   is shown below. The Company provides the Committees with sufficient resources to  undertake their duties, including access to the Company Secretary.  Nominations Committee The Nominations Committee meets as required and is now chaired by  Oliver Baring who was appointed to the Board with effect from 1  December 2007. Its other members are Michael Abrahams,  Kostyantyn Zhevago, Ihor Mitiukov and Wolfram Kuoni. The role of  the Nominations Committee is to identify and nominate candidates  for the approval of the Board, to fill Board vacancies and make  recommendations to the Board on Board composition and balance.  The Nominations Committee will consult regularly with the Board  when filling Board vacancies. The Executive Directors and Chairman  will also assist in identifying the scope and required skills for the  vacant role.  Since its constitution, the Nominations Committee has reviewed the  Group’s succession plan, considered the timing of the Board  evaluation process and considered the appointment of the new  Directors appointed in the second half of the year.  Remuneration Committee The Remuneration Committee is chaired by Lucio Genovese   and its other members are Michael Abrahams, Ihor Mitiukov and  Oliver Baring, all of whom are Non-executive Directors. The  Remuneration Committee meets as required and is responsible  for reviewing and approving all aspects of remuneration for the  Executive Directors and members of the Executive Committee. Further details concerning the activities of the Remuneration  Committee are set out in the Directors’ Remuneration Report   on pages 51 to 56. Audit Committee The Audit Committee is chaired by Wolfram Kuoni and its other  members are Lucio Genovese and Ihor Mitiukov.  The Chairman, Chief Executive, Chief Financial Officer, the Director of  Business Development, the Group Financial Controller and a  representative of the Company’s external auditors normally attend  the meetings.   Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 49 Corporate Social Responsibility (‘CSR’) Committee The CSR Committee, originally the HSEC Committee, was established  on 1 June 2007. Its terms of reference were revised and approved on  8 November 2007.  The role of the CSR Committee is to formulate and recommend to  the Board the Company’s policy on corporate social responsibility  issues as they affect the Company’s operations. In particular,   it will focus on ensuring that effective systems and standards,  procedures and practices are in place in the Company. The CSR  Committee will also be responsible for reviewing management’s  investigation of incidents or accidents that occur in order to assess  whether policy improvements are required.  The CSR Committee comprises Mike Oppenheimer, who chairs the  CSR Committee, Michael Abrahams, Viktor Lotous (Chief Operating  Officer) Ferrexpo Poltava Mining and David Webster (Chief Projects  Officer). The Committee shall meet not less than twice a year and at  such other times as the Chairman of the CSR Committee shall  require. It is the intention to appoint external expertise to assist the  CSR Committee in developing policy in   this area. Further details concerning the activities of the CSR Committee are  set out in the CSR Report on pages 36 to 45. The Executive Committee The Executive Committee acts as the main decision making body of  the Group. Its members are detailed on page 15. It is responsible for  taking all the main decisions relating to the Group apart from those  that are reserved for the entire Board or which require a decision of  the full Board, such as approving the Group’s strategy, capital  expenditure and budget. It meets regularly during the year and no  meetings are held in the United Kingdom.  Accountability and audit The Board is mindful of its responsibility to present a balanced   and clear assessment of the Company’s financial position and  prospects. This assessment is primarily provided in the Chairman’s  Statement, Chief Executive’s Report and Financial Reviews contained  in this Report. Audit Committee The Combined Code recommends that all members of the Audit  Committee are independent Non-executive Directors, and that   at least one member should have recent and relevant financial  experience. All members of the Audit Committee are considered to  possess appropriate knowledge and skills. Wolfram Kuoni is   an independent Non-executive Director and Chairman of the   Audit Committee. He has worked for UBS for 12 years and   has extensive experience of international corporate finance.  Ihor Mitiukov is an independent Non-executive Director and was  Director General of the Ukrainian Financial Policy Institute until  March 2008. He has since become Managing Director and   Head of Country for Ukraine for Morgan Stanley with effect from  17 March 2008. Lucio Genovese is an independent Non-executive  Director and a Chartered Accountant in South Africa.  Under its terms of reference, the Audit Committee is required to  meet at least three times a year at the most appropriate times in the  reporting and audit process. Between its formation and 31 December 2007, the Audit Committee  met three times and carried out the following activities: • Approved the appointment of Ernst & Young LLP as the external  auditor, and reviewed the scope of the work being proposed for  2007 and audit fees. Approved the scope and findings of the Interim Review  performed by the external auditors. Reviewed the risk matrix, internal audit plan and the  appointment of BDO Vistura International as internal auditor. • • • • • • • Agreed the scope of the internal audit review and annual   audit plan. Approved and monitored the implementation of the financial  procedures plan proposed by management post IPO. Approved the policies relating to non-audit services, the  employment of former employees of the external auditor   and the independence and objectivity of the external auditor. Reviewed the whistleblowing policy. Reviewed effectiveness of External Auditors. Internal control The Board has overall responsibility for the Group’s system of internal  control which includes risk management and reviewing   its effectiveness. The system of internal control is designed to  identify, evaluate and manage significant risks associated with the  achievement of the Group’s objectives. Because of the limitations  inherent in any system of internal control, this system is designed to  meet the Company’s particular needs and the risks to which   it is exposed rather than eliminate risk altogether. Consequently it  can only provide reasonable and not absolute assurance against  material misstatement or loss. The Board has delegated its responsibility for reviewing the  effectiveness of these controls to the Audit Committee. The Audit  Committee will review these systems on an annual basis. The day-to- day responsibility for managing risk and the maintenance of the  Group’s system of internal control is collectively assumed by the  Executive Committee. Key risk and control issues are reviewed by the  Executive Committee each month at its regular meeting. Two other  working groups have a role in this process, the Finance and Risk  Management Committee (‘FRMC’) which reviews financial reporting  each month and the Investment Risk Review Committee which  reviews the risks associated with any major capital expenditure  proposal prior to recommendation to the Board.  On behalf of the Board, the Executive Committee have established a  process for identifying, evaluating and managing the significant risks  faced by the Group in accordance with the Turnbull Guidance. The  Group has also adopted a risk-based approach in establishing the  Group’s system of internal control and in reviewing its effectiveness.  To assist in managing key internal risks, it has established a number of  Group wide procedures, policies and standards and has set up a  framework for reporting matters of significance. The Audit  Committee is responsible for reviewing   the effectiveness of the Group’s risk management, internal control  systems and the half year and annual financial statements before  their submission to the Board. It also reviews the scope and results of  the audit with the external auditors and the internal audit schedule of  work for the forthcoming financial year.  The Audit Committee is also responsible for reviewing the  arrangements whereby staff may, in confidence, raise concerns about  possible improprieties in matters of financial reporting or other  matters. There are a number of components to the system of internal controls  within the Company and these are detailed as follows: • A risk matrix has been developed and is monitored and reviewed  by the Exco. A framework of transaction and entity level controls to prevent  and detect material error and loss. A budgetary and periodic reporting review process performed  by the Exco. A documented structure of delegated authorities and approvals  for transaction and investment decisions, including any with  related parties. A review of the proposed Financial Reporting Procedures   was undertaken by Ernst & Young pre-IPO and a schedule   of follow-up actions has been produced and progress with   its implementation is being monitored. • • • •   50 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Corporate governance report continued • • • A new reporting system has been implemented to significantly  improve the depth, accuracy and speed of consolidation of  financial information for Group entities. A programme of internal audit reviews has been performed   by BDO Vistura International. FRMC reviews monthly financial information and management  accounts and meets fortnightly.  The Board have, through the Executive Committee and the Audit  Committee, reviewed the effectiveness of the Group’s system of  internal controls taking account of the matters summarised under the  headings of risk evaluation, identification of control regime and  implementation above. On the basis of this review, the Board  considers that the measures that have already been implemented  both before and after the IPO to initiate a risk management  framework are appropriate to the Group’s circumstances.   The Board is committed to making further progress in the  implementation of its internal control regime, particularly in relation  to execution of the planned internal audit programme, with a view to  achieving best practice levels of risk management and internal  control for international mining companies listed on the London  Stock Exchange. Treasury The Board approved a treasury policy during the year and a treasury  function is in place and will monitor compliance with the policy and  compliance with banking covenants. Investment proposals A budgetary process and authorisation levels regulate capital  expenditure. For expenditure beyond specified levels, detailed  written proposals are submitted for approval to the Exco and  reviewed by the Investment Risk Review Committee and then  submitted to the Group Board for approval.  Internal audit A Group wide internal audit function has been introduced utilising  BDO Vistura International as an outsourced service provider  reporting to the Chairman of the Audit Committee.  The Audit Committee has approved separate policies in respect of  the provision of non-audit services and employment of former  employees of the auditor. The auditors will also be expected to  provide to the Audit Committee, information about policies and  processes for maintaining independence and monitoring compliance  with relevant current requirements, including those regarding the  rotation of audit partners and staff, the level of fees that the Company  pays in proportion to the overall fee income of the firm and other  regulatory requirements. Going concern A statement on the Directors’ position regarding the Company   as a going concern is contained in the Directors’ Report on   pages 57 to 61. Relations with shareholders The Board places considerable importance on effective  communication with shareholders. Executive Directors and   senior executives have frequent discussions with institutional  shareholders on a range of issues affecting the Group’s performance,  which include meetings following the announcement of the annual  and interim results. The Chief Executive, Chief Financial Officer,  Director of Business Development and   Head of Investor Relations meet with major shareholders   to discuss performance, strategy and governance, and the  Non-executive Directors are available for discussions with  shareholders if required. JPMorganCazenove, the Company’s brokers, also provide regular  reports to the Board on changes to the shareholdings of the  Company’s major investors. Information about the views of major  investors is provided to the Board at each meeting by the Chief  Executive Officer and Head of Investor Relations. The Board will use the Annual General Meeting to communicate with  shareholders and welcomes their participation. It is the intention that  the Chairman will aim to ensure that the Chairmen of the Audit,  Remuneration and Nominations Committees are present at the  Annual General Meetings to answer questions. An internal audit programme for 2007/08 has been approved by the  Audit Committee. Information on matters of interest to investors can be found on the  Company’s website at www.ferrexpo.com. This report was approved by the Board on 8 April 2008. Audit independence The Audit Committee and Board place great emphasis on the  independence and objectivity of the Company’s auditors, Ernst &  Young LLP, when performing their role in the Group’s reporting to  shareholders. The overall performance, independence and objectivity of the  auditors is reviewed annually by the Audit Committee, taking into  account the views of management, and this will be reported to senior  members of Ernst & Young. The Audit Committee has regular  discussions with the external auditors, without management being  present.     Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 51 Remuneration report Introduction This Report has been prepared in accordance with Schedule 7A   of the Companies Act 1985 – The Directors Remuneration Report  Regulations (the ‘Regulations’) and sets out information about   the remuneration of the Directors and senior management of the  Company for the year ended 31 December 2007. This report   has been audited by Ernst & Young LLP to the extent required   by the Regulations. As required by the Regulations, this report will be subject to an  advisory shareholder vote at the Company’s forthcoming Annual  General Meeting. In addition shareholders will be asked to approve at  the Annual General Meeting the Long Term Incentive Plan, details of  which are set out in this report.  Remuneration Committee The Board established the Remuneration Committee on 14 June 2007  and it met three times during the year. Lucio Genovese is   the chairman of the Remuneration Committee and its other members  are Michael Abrahams, Ihor Mitiukov and Oliver Baring. All the  members of the Remuneration Committee are independent  Non-executive Directors. Attendance at meetings of the  Remuneration Committee by individual members is detailed in   the Corporate Governance Report on page 47. Terms of reference for the Remuneration Committee have been  approved by the Board and its duties include the determination of  the policy for the remuneration of the Executive Directors and the  members of the Executive Committee, as well as their specific  remuneration packages, including pension rights and, where  applicable, any compensation payments. In determining such policy,  the Remuneration Committee is expected to take into account all  factors which it deems necessary to ensure that members of the  senior executive management of the Group are provided with  appropriate incentives to encourage strong performance and are, in a  fair and responsible manner, rewarded for their individual  contributions to the success of the Company. The composition of the Remuneration Committee and its terms   of reference comply with the provisions of the Combined Code   and are available for inspection on the Company’s website at www. ferrexpo.com.  The Chief Executive Officer and Head of Human Resources usually  attend meetings of the Remuneration Committee at the invitation of  the chairman of the Remuneration Committee and the Company  Secretary acts as secretary to this committee. No Director is present  when his own remuneration is being discussed. Advisers The Remuneration Committee appointed Kepler Associates as its  advisers in November 2007 to provide advice on remuneration policy  with particular emphasis on the structure of possible long term  incentives for senior management.  Remuneration policy Ferrexpo’s remuneration policy is designed to help attract, motivate  and retain talented executives to help drive the future growth and  performance of the business. The policy aims to: • align executive and shareholder interests; • link a high proportion of remuneration to performance; • reward a balanced portfolio of performance measures (e.g.  relative TSR outperformance of sector peers, annual business  priorities and individual performance); and provide competitive rewards assessed against the relevant  market to attract, motivate and retain talented executives. • In determining the Company’s remuneration policy, the  Remuneration Committee has taken into account the particular  business context of the Ferrexpo Group, the geography of its  operations, the relevant talent market for each executive and best  practice guidelines set by institutional shareholder bodies. During  the year, the structure and competitiveness of performance-related  and fixed elements of the remuneration packages of the Executive  Directors were reviewed against mining comparators and   FTSE-listed companies of similar size. Following this review,   the Remuneration Committee is proposing some changes to its long  term incentive arrangements for 2008, details of which are provided  later in this report and the accompanying AGM Notice. To implement this policy, in 2008 the Board intends to operate three  performance-related incentive plans for senior executives: • The Short Term Incentive Plan (‘STIP’) – to focus management on  delivery of annual business priorities based on a scorecard of key  performance indicators relating to both Company and individual  performance. The Long Term Incentive Plan (‘LTIP’) – to motivate participants to  deliver appropriate returns to shareholders. The Added Value Incentive Plan (‘AVIP’) – a one-off plan to  incentivise the Chief Executive and selected senior executives to  deliver exceptional and sustained value creation above a tailored  sector index. The Remuneration Committee is currently  consulting with shareholders on the design of the AVIP with the  intention of making a proposal to an extraordinary general  meeting of shareholders in 2008. • • Executive Directors In setting the basic levels of pay for the Executive Directors, the  Remuneration Committee seeks to ensure that salaries are market  competitive with the potential for total remuneration to be upper  quartile subject to satisfaction of suitably stretching performance  conditions. In making this determination, the Committee makes  reference to pay levels of international mining companies and other  FTSE-listed companies of similar size.  Chairman and Non-executive Directors The remuneration of the Chairman of the Company and the  Non-executive Directors consists of fees that are paid monthly   in arrears. The Chairman and Non-executive Directors do not  ordinarily participate in any of the Company’s long term incentive or  annual bonus schemes, nor do they accrue any pension entitlement.  Neither the Chairman nor any of the Non-executive Directors has a  service contract with the Company; however each has entered into a  letter of appointment with the Company. The Non-executive Directors’ fees are reviewed on 1 July each year. 52 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Remuneration report continued Long Term Incentive Plan The Remuneration Committee is proposing to continue to operate the LTIP framework described in the IPO Prospectus. This framework  provides for annual awards of performance shares and options up to 200% of salary in normal circumstances. The Committee intends to make  initial awards in 2008 of up to 100% of salary in the form of Performance Shares which vest on Ferrexpo’s three-year relative Total Shareholder  Return (‘TSR’). Relative TSR will be calibrated using percentage outperformance of the median of a tailored peer group (the comparator index).  For 2008 awards, it is proposed that the comparator index be based 50% on the median of global diversified mining companies, 30% on the  median of smaller focused iron ore miners and 20% on the median of selected other single commodity/emerging market miners, as illustrated  below.  Index component Global diversified miners (10% each)  Focused iron ore miners (5% each)  Single commodity/emerging market miners (1% each)  Aggregate weighting 50% 30% 20%  Constituents CVRD (Vale)  BHP Billiton  Anglo American  Rio Tinto  Xstrata  Aricom  Kumba Iron Ore  Cleveland-Cliffs  Mount Gibson Iron Portman Fortescue Metals Group  African Rainbow Minerals  Alcoa  Katanga Mining  Kazakhmys Alumina KGHM Polska Miedz Lundin Mining Norilsk Oxiana Peabody Energy Teck Cominco ZINIFEX Industrias Penoles  Vedanta Resources Aluminum Corp of China  Antofagasta  Boliden  Eramet  First Quantum Minerals  Freeport McMoRan  The Remuneration Committee will have discretion to review this tailored peer group if any of the constituent companies are affected by M&A  activity. The Remuneration Committee will also review the constituents and their weightings prior to the start of each LTIP cycle to ensure they  remain appropriate.  No performance shares will vest if Ferrexpo’s TSR underperforms the comparator index. 20% will vest if Ferrexpo’s TSR is equal to Index TSR;  full vesting will occur only if Ferrexpo’s TSR exceeds the Index by at least 8% p.a.; there will be straight-line pro rata vesting in between. In  addition, for any shares to vest, the Remuneration Committee must be satisfied that the recorded TSR is a fair reflection of Ferrexpo’s  underlying business performance. The vesting schedule is illustrated below: 2008 LTIP vesting schedule g n i t s e v d r a w a f o % 100% 80% 60% 40% 20% - - - - - - - - - - - - - - - - - - 0% - - - - - - - - - - - - - - - - - - - - - - Value of £100 invested at IPO on 14 June 2007, based on spot values Ferrexpo LTIP comparator index FTSE250 index O P I t a d e t s e v n i 0 0 1 £ f o e u a V l 250 200 150 100 50 0 Ferrexpo 3-year TSR Index Index +8% p.a. Source: Bloomberg Dividends will accrue on performance shares over the vesting period, and be paid on shares that vest. In the event of a change of control,  awards will be pro-rated for time and performance. The Remuneration Committee will retain discretion to vary this treatment if it deemed it to  be in shareholders’ interest to do so. 31 May 07 30 Jun 07 31 Jul 07 31 Aug 07 30 Sep 07 31 Oct 07 30 Nov 07 31 Dec 07                                 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 53 For 2008, the Remuneration Committee has agreed that financial KPIs  will also include major capital project performance; KPI weightings  for each of the Executive Directors for 2008 are   as follows: KPI Relative weighting Financial   CSR, Projects and Governance  60% 40% Service agreements The Executive Directors are employed under contracts of  employment with Ferrexpo AG, a Group company. The service  contracts may be terminated on 12 months’ notice in writing by  Ferrexpo AG and three months’ notice by each of the Executive  Directors. In setting the notice period for termination by Ferrexpo AG  at 12 months, the Remuneration Committee has reduced the  likelihood of having to pay excessive compensation in the event of  poor performance. None of the Directors have service agreements  with a notice period in excess of 12 months. The Remuneration Committee is proposing relative TSR as the  primary long term incentive measure as it considers this to be   the most objective external measure of the Company’s success.   The proposed TSR benchmark includes the world’s largest diversified  miners, focused iron ore miners, and companies operating in similar  markets.  Transitional award of performance shares The 2008 LTIP awards will not vest before Spring 2011. In recognition  of this, and to enable a smooth transition to annual rolling three-year  LTIP cycles, the Committee is proposing to supplement 2008 LTIP  awards of up to 100% of salary in performance shares with  transitional awards of performance shares of 100% of salary for the  CEO, 75% of salary for the Executive Director Business Development  and 67% of salary for the Executive Director Finance. These awards  would vest on two-year TSR performance and be based on the same  calibration. Short Term Incentive Plan At the beginning of the year a STIP was put in place for the members  of the Executive Committee, including the Executive Directors. A  number of Key Performance Indicators (‘KPIs’) were agreed for each  member of the Executive Committee and KPI targets were set at  which payments equivalent to 0% to 150% of basic salary could be  earned. For each member of the Executive Committee, the KPIs were  weighted to reflect the contribution of each executive to the  achievement of that KPI.  KPIs during the year included Financial KPIs (including Group  operating EBITDA, NOPAT) and KPIs relating to safety, projects and  governance. Their respective weightings for the Executive Directors  during the year were as follows: KPI Financial   Safety, projects and governance  Dennis Oppenheimer McShane Mike 45%  55%  50% 50% Chris Mawe did not join the Board until 7 January 2008 and therefore  was not a member of the STIP during 2007.             54 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Remuneration report continued The principal terms of the Executive Directors’ service contracts are as follows: Name Mike Oppenheimer  Dennis McShane (note 1)  Chris Mawe  Position Date of contract Notice period Current salary (p.a.) Chief Executive  Officer  1 June 2007  three months from the    employee; 12 months   US$892,500  (note 2)    Director of Business   Development  Chief Financial   Officer  from the employer 1 June 2007  three months from the    employee; 12 months  from the employer 7 January 2008  six months from the    employee; 12 months   from the employer £236,250  (note 2)   CHF596,000  Notes 1  Dennis McShane is required to make at least 70% of his work capacity, as well as all of his experience and knowledge available to the Company. He may make up to 30% of  his work capacity available to Kostyantyn Zhevago’s other investments. 2 With effect from 1 January 2008. Listing bonuses At the time of the IPO, Mike Oppenheimer was entitled to an award of cash and/or shares in the Company to the value of 0.50% of the market  capitalisation upon admission of Ordinary Shares to listing, subject to a minimum award of cash or Ordinary Shares to the value of  US$5,000,000 (calculated based on the closing price on the first day of trading). 50% of this award was due on Listing and 50% was due on the  first anniversary of the Listing. The first 50% of the Listing bonus due to Mr Oppenheimer was paid in cash; the balance will be paid in Ordinary  Shares. As a result, Mr Oppenheimer has been awarded 1,515,177 Ordinary Shares which will vest on 14 June 2008. At the time of the IPO, Dennis McShane was entitled to an award of cash and shares in the Company to the value of US$5,000,000 (comprising  US$1,000,000 in cash and US$4,000,000 in shares). Mr McShane was also entitled to a one-time award of US$3,000,000 in cash in recognition of  his past contribution to the Group. In addition if, on Listing, the market capitalisation of the Company exceeded a certain threshold, Mr  McShane was entitled to receive an award of shares in the Company to the value of 0.3% of the excess of the market capitalisation over such  threshold. As a result of these arrangements, Mr McShane received 1,449,664 Ordinary Shares during the year. Of this number, 579,865  Ordinary Shares were sold to settle taxation liabilities leaving a balance of 869,799 Ordinary Shares held by Mr McShane. Benefits-in-kind Under his service agreement, Mike Oppenheimer is entitled to 25 working days’ paid holiday per year. From 1 January 2008, Ferrexpo AG also  provides him with up to $346,575 per annum as a housing allowance, US$5,000 per annum for professional tax advice, as well as tax  equalisation, medical insurance, life insurance and permanent health insurance. Under his service agreement, Dennis McShane is entitled to 25 working days’ paid holiday per year. Ferrexpo AG also provides him with  CHF120,000 as a housing allowance per annum, £3,000 per annum for professional tax advice and a CHF30,000 relocation allowance.  Pensions The Group does not operate a separate pension scheme for Executive Directors. Mike Oppenheimer is a member of the Ferrexpo AG pension  plan which is a mandatory insurance scheme under Swiss law provided for all employees of Ferrexpo AG. Dennis McShane is a member of the  Ferrexpo UK Ltd pension plan operated by a Group company. Under his Contract of Employment with Ferrexpo AG, a minimum of 10% of his  annual base salary is required to be paid to the Ferrexpo UK Ltd Pension Plan on his behalf. Non-executive Directors’ letters of appointment Each of the Non-executive Directors has signed a letter of appointment with the Company. With the exception of Oliver Baring, who signed a  letter of appointment on 30 November 2007 immediately prior to his appointment to the Board, the Non-executive Directors signed their  letters of appointment on 14 June 2007. The Non-executive Directors have each been appointed for an initial period of three years and their  appointments are renewed on a three-yearly basis, subject to re-election, when appropriate, by the Company in general meeting. Unless  otherwise determined neither the Board nor the Director concerned may give less than three months’ notice of termination of the  appointment. The Non-executive Directors’ fees have been set at a level to reflect the time commitment and level of involvement that they are required to  make in the activities of the Board and its committees. The key terms of the Non-executive Directors’ letters of appointment are as follows: Director Michael Abrahams  Oliver Baring (note 1)  Lucio Genovese (note 2)  Wolfram Kuoni (note 3)  Ihor Mitiukov  Kostyantyn Zhevago  Position Date of appointment Duration of term Fees p.a. Chairman   Non-executive Director   Non-executive Director   Non-executive Director   Non-executive Director   Non-executive Director  14 June 2007  1 December 2007  14 June 2007  14 June 2007  14 June 2007  14 June 2007  3 years  3 years  3 years  3 years  3 years  3 years  US$350,000 US$140,000 US$140,000 US$140,000 US$120,000 Nil Notes 1  Oliver Baring receives a fee of US$120,000 p.a. as a Non-executive Director and an additional fee of US$20,000 p.a. for his role as Senior Independent Director. 2  Lucio Genovese receives a fee of US$120,000 p.a. as a Non-executive Director and an additional fee of US$20,000 p.a. for his role as Chairman of the Remuneration Committee. 3 Wolfram Kuoni receives a fee of US$120,000 p.a. as a Non-executive Director and an additional fee of US$20,000 p.a. for his role as Chairman of the Audit Committee.                                                Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 55 External appointments It is the Board’s policy to allow the Executive Directors to accept directorships of other quoted companies provided that they have obtained  the consent of both the Chairman of the Company and Mr Zhevago. Any such directorships must be formally notified to   the Board. Performance review Value of £100 invested at IPO on 14 June 2007, based on spot values 2008 LTIP vesting schedule 100% 80% 60% 40% g n i t s e v d r a w a f o % 0% 20% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - O P I t a d e t s e v n i 0 0 1 £ f o e u a V l 250 200 150 100 50 0 Ferrexpo LTIP comparator index FTSE250 index Ferrexpo 3-year TSR Index Index +8% p.a. Source: Bloomberg 31 May 07 30 Jun 07 31 Jul 07 31 Aug 07 30 Sep 07 31 Oct 07 30 Nov 07 31 Dec 07 Directors’ remuneration – Audited Information Directors’ remuneration for the period from Listing or their appointment (if earlier) to 31 December 2007. Salary, Annual Bonus and other benefits Chairman Michael Abrahams  Executive Directors Mike Oppenheimer  Dennis McShane  Non-executive Directors  Oliver Baring  Lucio Genovese  Wolfram Kuoni  Ihor Mitiukov  Kostyantyn Zhevago  Total  Salary US$000 Pension US$000 Benefit US$000 Bonus US$000 Total 2007 US$000 Total 2006 US$000 204  568  327  11  80  80  70  –  –  50  45  –  –  –  –  –  164  –  368  3,042  4,058  6,264  4,847  9,924  9,277  87  90  90  90  –  –  –  –  –  –  98  170  170  160  –  1,340  95  7,620  11,111  20,167  – – – – – – – – – Note No compensation for loss of office was paid during the year ended 31 December 2007. All Directors with the exception of Messrs McShane and Baring were appointed to the Board on 1 June 2007. Dennis McShane was appointed  to the Board on 25 April 2007 and Oliver Baring was appointed to the Board on 1 December 2007.                                                                                   56 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Remuneration report continued Listing bonus awards The Chairman and the Non-executive Directors were all awarded shares in the Company on their appointment to the Board as follows: Director Michael Abrahams  Oliver Baring  Lucio Genovese  Wolfram Kuoni  Ihor Mitiukov  Relevant Shares due Shares due Shares due on third anniversary awarded on anniversary anniversary anniversary date date appointment on second on first Shares date date 15 June 2007  1 December 2007  15 June 2007  15 June 2007  15 June 2007  Nil  12,060  16,318  16,318  16,318  90,657  12,060  16,318  16,318  16,318  90,657  Nil  Nil  Nil  Nil  90,657  Nil  Nil  Nil  Nil  Total shares awarded 271,971 24,120 32,636 32,636 32,636 Under the terms of the Trust Deed under which the shares in the Company were awarded upon appointment, the Trustee may deduct shares in  order to settle tax and related liabilities on behalf of the Director concerned. As a consequence of this provision, deductions of shares were  made in respect of Lucio Genovese, Wolfram Kuoni and Oliver Baring. Directors’ interests in Ordinary Shares The interests of Directors are set out in the Directors’ Report on pages 57 to 61. Annual General Meeting Shareholders will be asked to vote, on an advisory basis, on this Remuneration Report at the Company’s forthcoming Annual General Meeting.  This Report was approved by the Board on 8 April 2008. Signed on behalf of the Board. Lucio Genovese Chairman of the Remuneration Committee   Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 57 Directors’ report The Directors present their first report to shareholders for the financial year ending 31 December 2007.  Principal activities and business review The Company was incorporated under the name Ferrexpo plc as a public company limited by shares on 22 April 2005. The Group’s principal business is the mining, processing and sale of iron ore in the form of pellets for use in the production of steel. The Group  owns and operates an integrated mining and processing facility, comprising an open pit iron ore mine in the Ukraine. Additional information  on the Group’s operations is provided in the Company Overview and Business Review sections on pages 2 to 33. Review of the business and future developments A review of the business and future developments of the Group are presented in the Chairman’s Statement, the Chief Executive’s Report and  the Business Review on pages 4 to 33. Results and dividends Results for the year are set out in the Consolidated Income Statement on page 64.  The Directors recommend a dividend of 3.2 US cents per Ordinary Share. Subject to shareholders approving this recommendation at the  Annual General Meeting (the ‘AGM’), the dividend will be paid in UK pounds sterling on 19 May 2008 to shareholders on the register at the  close of business on 18 April 2008. Shareholders may receive UK pounds sterling dividends by direct bank transfer, provided that they have  notified the Company’s registrars in advance. Shareholders may elect to receive dividends in US dollars. Details of the proposed dividend and  the arrangements for either receiving UK pounds sterling dividends by direct bank transfer or receiving dividends in US dollars have been  circulated to shareholders separately on 1 April 2008. Events since the balance sheet date Events since the balance sheet date are summarised in note 46 to the financial statements on page 103. Corporate governance A report on corporate governance and compliance with the provisions of the Combined Code is set out on pages 46 to 50. Risk management policies The Group’s risk management policies are established by the Board of Directors to identify and analyse the risks faced by the Group, to set  appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed  regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and  procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.  Full details of the Group’s policy on risk and an overview of the Group’s exposure to credit, liquidity and market risks are set out in note 3 of the  ‘Notes to the Consolidated Financial Information’ on pages 76 to 79. Corporate social responsibility The Ferrexpo Board’s commitment to corporate social responsibility (‘CSR’) derives from a shared belief that the Group’s licence to operate will  be underpinned by the Group’s CSR performance. For many operations within former CIS countries, the traditional response had been to use  legal standards as the sole benchmark for CSR compliance. By contrast, we are committed to striving to achieve the highest standards of  performance in CSR matters.  The Board recognises that it has a responsibility to set standards which management and employees will be expected to meet in all areas of  CSR. To this end, the Board has reserved for itself the responsibility for establishing Group policies covering health, safety, community relations  and environmental matters. Accordingly, a full review of health, safety and environmental performance and community participation is  presented in the Corporate Social Responsibility Report on pages 36 to 45.  Directors and their interests The interests of the Directors as at their date of appointment, 31 December 2007 and as at 15 March 2008 in the share capital of the Company  were:  Name Michael Abrahams (note 1)  Mike Oppenheimer (note 2)  Dennis McShane   Christopher Mawe  Kostyantyn Zhevago (note 3)  Oliver Baring (note 4)  Lucio Genovese (note 5)  Wolfram Kuoni (note 6)  Ihor Mitiukov (note 7)  Date of appointment –  –  –  –  533,543,489  –  –  –  –  31 December 2007 271,971  1,515,177  869,799  –  443,905,924  19,176  313,659  27,945  32,636  15 March 2008 271,971 1,515,177 869,799 – 443,905,924 19,176 313,659 27,945 32,636 Notes 1 271,971 Ordinary Shares are held on behalf of Michael Abrahams by Appleby Trust (Jersey) Limited and will vest in his favour as to one third each on 15 June 2008, 15 June  2009 and 15 June 2010. 2 All of these shares are held on behalf of Mike Oppenheimer by Appleby Trust (Jersey) Limited and will vest in his favour on 15 June 2008.  3 Kostyantyn Zhevago is interested in these shares by reason of being a beneficiary of The Minco Trust, which is the sole shareholder of Fevamotinico S.a.r.l, which owns  443,905,924 Ordinary Shares in the Company. 4 12,060 of these shares are held on behalf of Oliver Baring by Appleby Trust (Jersey) Limited and will vest in his favour on 1 December 2008. 5 16,138 of these shares are held on behalf of Lucio Genovese by Appleby Trust (Jersey) Limited and will vest in his favour on 15 June 2008. 6 16,138 of these shares are held on behalf of Wolfram Kuoni by Appleby Trust (Jersey) Limited and will vest in his favour on 15 June 2008. 7 16,138 of these shares are held on behalf of Ihor Mitiukov by Appleby Trust (Jersey) Limited and will vest in his favour on 15 June 2008. 58 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Directors’ report continued All of the current Directors were appointed during the year. Further  details about the Directors and their roles within the Group are given  in the Directors’ biographies on pages 14 and 15. In accordance with the Articles of Association of the Company,   all of the Directors listed above, who were appointed during the year,  will retire at the forthcoming AGM and offer themselves for election.  Details of the resolutions that will be put to the AGM are given in the  Notice of Annual General Meeting which is contained in a separate  circular to shareholders. During the year, the following Director changes took place. These  were implemented as part of the reorganisation of the Company  prior to Listing. Ian Pellow resigned as a Director on 1 June 2007;  Geoff Eyre was appointed a Director on 8 May 2007 and resigned on 1  June 2007 and Nayana Bharti resigned as a Director on   25 April 2007. Dennis McShane was appointed as a Director on 25 April 2007.  Michael Abrahams, Mike Oppenheimer, Lucio Genovese, Wolfram  Kuoni, Ihor Mitiukov and Kostyantyn Zhevago were all appointed   to the Board on 1 June 2007. Oliver Baring was appointed to the  Board on 1 December 2007 and Chris Mawe was appointed a Director  on 7 January 2008. Relationship Agreement Fevamotinico S.a.r.l, Kostyantyn Zhevago, The Minco Trust and   the Company have entered into an agreement (the ‘Relationship  Agreement’) which will regulate the ongoing relationship between  them to ensure that the Group is capable of carrying on its business  independently of Fevamotinico S.a.r.l. and Kostyantyn Zhevago (as a  Non-executive Director), and to ensure that transactions and  relationships between the Group, Fevamotinico S.a.r.l. and  Kostyantyn Zhevago are at arm’s length and on a commercial basis. Remuneration of Directors Details of Directors’ Remuneration can be found in the Remuneration  Report on pages 51 to 56. Directors’ and officers’ liability insurance During the period under review the Company had in force an  indemnity provision in favour of one or more of the Directors of  Ferrexpo plc, against liability in respect of proceedings brought by  third parties, subject to the conditions set out in the Companies Act  1985. Share capital and authority to purchase own shares Details of the authorised and issued share capital of the Company are  shown in note 29 of the financial statements.  The Company was given authority to make market purchases of   up to approximately 10% of its existing Ordinary Share capital by a  resolution passed on 14 June 2007. This authority will expire at   the conclusion of the Company’s first Annual General Meeting or on  31 July 2008, whichever is the earlier, unless it is renewed.  Accordingly, a special resolution to renew the authority will be  proposed at the forthcoming AGM. Details of the resolution renewing  the authority to purchase Ordinary Shares are set out in the Notice of  Annual General Meeting enclosed with this report.  The Company did not purchase any of its issued Ordinary Shares  during the year under the authority mentioned above. Substantial shareholdings As at 31 March 2008, the following major interests in the   ordinary shares of £0.10 each of the Company had been notified to  the Company: Name of shareholder Number of Ordinary Shares % of ordinary issued share capital Fevamotinico S.a.r.l (note 1)  Nevis Corporate Services Limited/     Paneuro Products Limited (note 2)  443,905,924   72.3  20,000,000  3.3 Notes 1 Fevamotinico S.a.r.l. is a wholly owned subsidiary of Minco Trust of which  Kostyantyn Zhevago is a beneficiary. 2 Igor Kolomoisky has a controlling interest in Nevis Corporate Services Limited and  Paneuro Products Limited, each of which hold 10,000,000 Ordinary Shares of  Ferrexpo plc. Shareholder rights The Company is admitted to trading on the Main Market of the  London Stock Exchange and is therefore required by section 992 of  the Companies Act 2006 to make certain disclosures concerning the  rights attached to its shares. This information is set out in the  Appendix to this Report on pages 60 to 61.  Going concern The Directors confirm that they are satisfied that the Company has  sufficient resources to continue in operation for the foreseeable  future. Accordingly they continue to adopt the going concern basis in  preparing the financial statements. Market value of land and buildings Land is carried in the balance sheet at deemed cost resulting from a  valuation, which was undertaken on 1 January 2003 as part of the  Group’s transition to reporting under IFRS. It is not practical to  estimate the market value of land and mineral reserves and resources  at each balance sheet date. Policy on derivatives and financial instruments The Group does not hold any derivative financial instruments. Group  policy on financial instruments is set out in note 2 to the Consolidated  Financial Information on pages 68 to 76. Creditor payment policy and practice It is the Company’s policy that payments to suppliers are made in  accordance with the terms and conditions agreed between the  Company and its suppliers, provided that all relevant trading terms  and conditions have been complied with. The average creditor  payment period for the period ended 31 December 2007 for the  Company was 14 days (2006: nil days). Charitable and political donations The Company made no political donations during the year.   Group donations to charities worldwide were US$2,791,000   (2006: US$1,880,000), with UK charities receiving US$nil   (2006: $nil). Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 59 Statement on disclosure of information to auditors The Directors who held office at the date of approval of this Directors’  Report confirm that, so far as they are each aware,   there is no relevant audit information of which the Company’s  auditors are unaware, and that each Director has taken all reasonable  steps to make themselves aware of any relevant   audit information and to establish that the Company’s auditors   are aware of that information. A Statement of the Responsibilities of the Directors for preparing the  Group and Company financial statements is set out on page 62. Annual General Meeting The first Annual General Meeting of the Company will be held   at 11.00am on 15 May 2008 at The Lanesborough Hotel,   Hyde Park Corner, London SW1X 7TA. A letter from the  Chairman summarising the business of the meeting and the   Notice convening the AGM has been sent to shareholders separately  with this Report. Auditors Having reviewed the independence and effectiveness of the auditors,  the Audit Committee has recommended to the Board that the  existing auditors, Ernst & Young LLP, be reappointed. Ernst & Young  LLP have indicated their willingness to continue in office and an  ordinary resolution reappointing them as auditors and authorising  the Directors to set their remuneration will be proposed at the 2008  Annual General Meeting. This report was approved by the Board on 8 April 2008. Prism Cosec Ltd Company Secretary Ferrexpo plc Registered Office: 2-4 King Street London SW1Y 6QL Registered number: 5432915 Headquarters: Bahnhofstrasse 13 CH-6340 Baar Switzerland 60 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Directors’ report continued Appendix to the Directors’ Report Additional information for shareholders The following information is given pursuant to section 992 of the  Companies Act 2006. Share capital The Company has a single class of share capital which is divided into  ordinary shares of 10p each. The shares are in registered form. Rights and obligations attaching to shares Subject to applicable statutes and other shareholders’ rights, shares  may be issued with such rights and restrictions as the Company may  by ordinary resolution decide, or (if there is no   such resolution or so far as it does not make specific provision)   as the Board may decide. Subject to the Company’s Articles of  Association (as adopted by special resolution on 14 June 2007) (the  ‘Articles’), the Companies Act 1985 and the Companies Act 2006  (together the ‘Companies Acts’) and other shareholder rights,  unissued shares are at the disposal of the Board. At each annual  general meeting, the Company proposes to put in place annual  shareholder authority authorising the Company’s Directors to allot  unissued shares in accordance with the guidelines of the Investor  Protection Committee. Voting Subject to any rights or restrictions attaching to any class of shares,  every member present in person at a general meeting has, upon a  show of hands, one vote. In the case of joint holders of a share, the  vote of a senior who tenders a vote, whether in person or by proxy,  shall be accepted to the exclusion of votes of the   other joint holders and seniority shall be determined by the order   in which the names stand in the register in respect of the joint  holding. Under the Companies Acts, members are entitled to appoint  a proxy to exercise all or any of their rights to attend and   to vote on their behalf at a general meeting but shall not confer   any right to speak at a meeting unless invited to do so by the  Chairman. A member may appoint more than one proxy in relation to  a general meeting provided that each proxy is appointed to exercise  the rights attached to a different share or shares held   by that member. A member that is a corporation may appoint   one or more individuals to act on its behalf at a general meeting   as a corporate representative. Where more than one corporate  representative has been appointed, any one of them is entitled   to vote and exercise other powers on behalf of the member at a  general meeting but, in the event that the representatives’ votes or  other powers conflict, the power is treated by the Company as not  having been exercised and the member will be deemed to have  abstained from exercising its votes or powers. Restrictions on voting No member shall be entitled to vote at any general meeting in  respect of any shares held by him if any call or other sum then  payable by him in respect of that share remains unpaid. Currently, all  issued shares are fully paid. In addition, no member shall be entitled  to vote if he has been served with a restriction notice (as defined in  the Articles) after failure to provide the Company with information  concerning interests in those shares required to be provided under  the Companies Acts. Deadlines for voting rights Votes are exercisable at the general meeting of the Company in  respect of which the business being voted upon is being heard. Votes  may be exercised in person, by proxy or, in relation to corporate  members, by corporate representatives. Under the Companies Acts,  the deadline for delivering proxy forms cannot   be earlier than 48 hours (excluding non-working days) before the  meeting for which the proxy is being appointed. The Articles,  however, provide a deadline for submission of proxy forms of   not less than 48 hours (or such shorter time as the Board may  determine) before the meeting (not excluding non-working days). Dividends and distributions Subject to the provisions of the Companies Acts, the Company may  by ordinary resolution, from time to time, declare dividends not  exceeding the amount recommended by the Board. The Board may  pay interim dividends and also any fixed rate dividends whenever the  financial position of the Company, in the opinion   of the Board, justifies its payment. If the Board acts in good faith,   it is not liable to holders of shares with preferred or pari passu rights  for losses arising from the payment of interim or fixed dividends on  other shares. The Board may withhold payment of all or any part of any dividends  or other monies payable in respect of the Company’s shares from a  person with a 0.25% interest (as defined in the Articles) if such person  has been served with a notice under Article 70 of the Articles and has  failed to provide the Company with information concerning interests  in those shares required to be provided under the Companies Acts. Liquidation Under the Articles on a liquidation, the liquidator may, with the  sanction of an extraordinary (or special) resolution of the Company  and any other sanction required by the Companies Acts, divide  amongst the members (excluding any members holding shares as  treasury shares) in kind, all or part of the assets of the Company  (whether they shall consist of property of the same kind or not). Variation of rights Subject to the provisions of the Companies Acts, the rights attached  to a class of shares may be varied or abrogated (whether or not the  Company is being wound up) either with the consent in writing of the  holders of at least three-quarters of the nominal amount of the  issued shares of that class (excluding any share   of that class held as treasury shares) or with the sanction of   an extraordinary resolution passed at a separate meeting   of the holders of the issued shares of that class validly held in  accordance with article 69 and other relevant provisions of the  Articles. The Board may convene a meeting of the holders of   any class of shares whenever it thinks fit and whether or not the  business to be transacted involved a variation or abrogation of class  rights. Subject to the terms of issue of, or rights attached to, any  shares, the rights or privileges attached to any class of shares shall be  deemed not to be varied or abrogated by the creation or issue of any  new shares ranking pari passu in all respects (save as to the date from  which such new shares shall rank for dividend) with or subsequent to  those already issued or by the reduction   of the capital paid up on such shares or by the purchase or  redemption by the Company of its own shares in accordance   with the provisions of the Companies Acts and the Articles. Transfer of shares Any share in the Company may be held in uncertificated form   and, subject to the Articles, title to uncertificated shares may   be transferred by means of a relevant system. Provisions of the  Articles do not apply to any uncertificated shares to the extent   that such provisions are inconsistent with the holding of shares   in uncertificated form or with the transfer of shares by means of   a relevant system. Registration of a transfer of an uncertificated share  may be refused in the circumstances set out in the Uncertificated  Securities Regulations (as defined in the Articles) and where, in the  case of a transfer to joint holders, the number of joint holders to  whom the uncertificated share is to be transferred exceeds four. Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance 61 At each AGM one-third of the Directors who are subject to retirement  by rotation or, if their number is not three or a multiple of three, the  number nearest to but not less than one-third, shall retire from office  provided that if there are fewer than three Directors who are subject  to retirement by rotation, one shall retire from office. If any one or  more Directors were last appointed or reappointed three years or  more prior to the meeting, were last appointed or reappointed at the  third immediately preceding the AGM or, at the time of the meeting,  will have served more than eight years as a Non-executive Director  (excluding as Chairman of the Board), he or they shall retire from  office and shall be counted in obtaining the number required to retire  at the meeting, provided that the number of Directors required to  retire shall be increased to the extent necessary to comply with the  Articles. Power of the Directors Subject to the Company’s Memorandum of Association, the Articles,  the Companies Acts and any directions given by special resolution,  the business of the Company will be managed by the Board who may  exercise all the powers of the Company whether relating to the  management of the business of the Company or not. In particular, the  Board may exercise all the powers of the Company to borrow money  and to mortgage or charge any of its undertaking, property, assets  and uncalled capital and to issue debentures and other securities and  to give security for any debt, liability or obligation of the Company to  any third party. Shares held in the EBT The trustees of the company employee benefit trust (‘EBT’)   may vote or abstain from voting on shares held in the EBT   as they think fit and in doing so may take into account both   financial and not financial interests of the beneficiaries of the   EBT or their dependants. Significant agreements The Company is not party to any significant agreements that would  take effect, alter or terminate upon a change of control following a  takeover bid. Major shareholders The substantial interests (3% or more) in the Company’s Ordinary  Share capital (voting shares) that have been notified to the Company  are set out on page 58.  Subject to the Articles, any member may transfer all or any of his  certificated shares by an instrument of transfer in any usual form or in  any other form which the Board may approve. The instrument of  transfer must be executed by or on behalf of the transferor and (in  the case of a partly-paid share) the transferee. The transferor of a  share is deemed to remain the holder until the transferee’s name is  entered into the register. The Board may, in its absolute discretion  and without giving any reason, decline to register any transfer of any  share which is not a fully paid share. The Board may also decline to  register a transfer of a certificated share unless the instrument of  transfer: (i) is duly stamped or certified or otherwise shown to the  satisfaction of the Board to be exempt from stamp duty and is  accompanied by the relevant share certificate and such other  evidence of the right to transfer as the Board may reasonably require;  (ii) is in respect of only one class of share; and (iii) if joint transferees,  is in favour of not more than four such transferees. The Board may decline to register a transfer of any of the Company’s  certificated shares by a person with a 0.25% interest (as defined in the  Articles) if such a person has been served with   a notice after failure to provide the Company with information  concerning interests in those shares required to be provided under  the Companies Acts, unless the transfer is shown to the Board to be  pursuant to an arm’s length sale. Repurchase of shares Subject to authorisation by shareholder resolution, the Company  may purchase its own shares in accordance with the Companies Acts.  Any shares which have been bought back may be held as treasury  shares or, if not so held, must be cancelled immediately upon  completion of the purchase, thereby reducing the amount of the  Company’s issued share capital. It is proposed to seek shareholder  approval to maintain this authority for a further year at the  forthcoming Annual General Meeting (the ‘AGM’). Amendments to the Articles of Association Any amendments to the Articles of Association may be made in  accordance with the provisions of the Companies Acts by special  resolution. A resolution will be put to the AGM to amend the Articles.  The proposed changes to the Articles mainly derive from the  Companies Act 2006 which was enacted on 8 November 2006 and is  being implemented in stages. Since a number of significant changes  arising from the Companies Act 2006 will not come into force until at  least October 2008, the Company has decided at this stage to make  only a small number of changes to the Articles to reflect those  changes which will already be in force when this year’s AGM is held.  Details of the specific changes being proposed are set out in full in  the explanatory notes to the Notice of Meeting. Appointment and replacement of Directors Directors may be appointed by the Company by ordinary resolution  or by the Board and shall be no less than two. A Director appointed  by the Board holds office only until the next following AGM and is  then eligible for election by the shareholders but is not taken into  account in determining the Directors, or the number of Directors,  who are to retire by rotation at that meeting. The Board may from  time to time appoint one or more Directors to hold employment or  executive office for such period (subject to the Companies Acts) and  on such terms as they may determine and may revoke or terminate  any such appointment. Currently under the Articles, no person is  incapable of being appointed a Director by reason of his having  reached the age of 70 or above. No Director is required to vacate his  office because he has reached the age of 70 or above. 62 Ferrexpo plc  Annual Report and Accounts 2007 Corporate governance Corporate governance Statement of Directors’ responsibilities in relation to the Group financial statements The Directors are responsible for preparing the Annual Report   and the Group financial statements in accordance with applicable  United Kingdom law and those International Financial Reporting  Standards as adopted by the European Union. The Directors are required to prepare Group financial statements for  each financial year which present fairly the financial position   of the Group and the financial performance and cash flows of   the Group for that period. In preparing those Group financial  statements the Directors are required to: • select suitable accounting policies in accordance with IAS 8:  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; provide additional disclosures when compliance with the specific  requirements in IFRSs is insufficient to enable users to  understand the impact of particular transactions, other events  and conditions on the Group’s financial position and financial  performance; and state that the Group has complied with IFRSs, subject to   any material departures disclosed and explained in the financial  statements. • • • The Directors are responsible for keeping proper accounting records  which disclose with reasonable accuracy at any time the financial  position of the Group and enable them to ensure that the Group  financial statements comply with the Companies Act 1985 and Article  4 of the IAS Regulation. They are also responsible for safeguarding  the assets of the Group and hence for taking reasonable steps for the  prevention and detection of fraud and other irregularities. Directors’ statement as to disclosure of information to auditors The Directors who were members of the Board at the time of  approving the Directors’ report are listed on page 57. Having made  enquiries of fellow Directors and of the Company’s auditors, each of  these Directors confirms that: • to the best of each Director’s knowledge and belief, there is no  information (that is, information needed by the Group’s auditors  in connection with preparing their report) of which the  Company’s auditors are unaware; and each Director has taken all the steps a Director might reasonably  be expected to have taken to be aware of relevant audit  information and to establish that the Company’s auditors are  aware of that information. • Ferrexpo plc  Annual Report and Accounts 2007 63 Independent auditors’ report We have audited the Group and parent company financial statements  of Ferrexpo plc for the year ended 31 December 2007 which comprise  the Group Income Statement, the Group Balance Sheet, the Group  Cash Flow Statement, the Group Statement of Changes in Equity, the  related notes 1 to 47 and the Parent Company Balance Sheet. These  Group financial statements have been prepared under the  accounting policies set out therein. We have also audited the information in the Directors’ Remuneration  Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in  accordance with section 235 of the Companies Act 1985. Our audit  work has been undertaken so that we might state to the Company’s  members those matters we are required to state to them in an  auditor’s report and for no other purpose. To the fullest extent  permitted by law, we do not accept or assume responsibility to  anyone other than the Company and the Company’s members as a  body, for our audit work, for this report, or for the opinions we have  formed. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and  the Group financial statements in accordance with applicable United  Kingdom law and International Financial Reporting Standards (IFRSs)  as adopted by the European Union, and for preparing the parent  company financial statements and the Directors’ Remuneration  Report in accordance with applicable United Kingdom law and  Accounting Standards (United Kingdom Generally Accepted  Accounting Practice) are set out in the Statement of Directors’  Responsibilities. Our responsibility is to audit the Group financial statements and the  part of the Directors’ Remuneration Report to be audited in  accordance with relevant legal and regulatory requirements and  International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial   statements and the part of the Directors’ Remuneration Report   to be audited give a true and fair view and whether the financial  statements have been properly prepared in accordance with the  Companies Act 1985, in addition, the Group financial statements have  been properly prepared in accordance with Article 4 of the IAS  Regulation. We also report to you whether in our opinion the information   given in the Directors’ Report is consistent with the financial  statements. The information given in the Directors’ Report   includes that specific information presented in the Operating   and Financial Review that is cross referred from the Business Review  section of the Directors’ Report. In addition we report to you if, in our opinion, the Company has   not kept proper accounting records, we have not received all   the information and explanations we require for our audit, or if  information specified by law regarding Directors’ remuneration   and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the  Company’s compliance with the nine provisions of the 2006  Combined Code specified for our review by the Listing Rules of   the Financial Services Authority, and we report if it does not.   We are not required to consider whether the Board’s statements on  internal control cover all risks and controls, or form an opinion on the  effectiveness of the Group’s corporate governance procedures or its  risk and control procedures. We read other information contained in the Annual Report   and consider whether it is consistent with the audited Group financial  statements. The other information comprises only the Directors’  Report, the Chairman’s Statement, the Operating and Financial  Review and the Corporate Governance Statement.   We consider the implications for our report if we become aware   of any apparent misstatements or material inconsistencies with   the Group financial statements. Our responsibilities do not extend to  any other information. Basis of audit opinion We conducted our audit in accordance with International Standards  on Auditing (UK and Ireland) issued by the Auditing Practices Board.  An audit includes examination, on a test basis, of evidence relevant to  the amounts and disclosures in the Group financial statements. It also  includes an assessment of the significant estimates and judgements  made by the Directors in the preparation of the Group financial  statements, and of whether the accounting policies are appropriate  to the Group’s and Company’s circumstances, consistently applied  and adequately disclosed. We planned and performed our audit so as to obtain all the  information and explanations which we considered necessary in  order to provide us with sufficient evidence to give reasonable  assurance that the financial statements and the part of the Directors’  Remuneration Report to be audited are free from material  misstatement, whether caused by fraud or other irregularity or error.  In forming our opinion we also evaluated the overall adequacy of the  presentation of information in the financial statements and the part  of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • the Group financial statements give a true and fair view, in  accordance with IFRSs as adopted by the European Union, of the  state of the Group’s affairs as at 31 December 2007 and of its  profit for the year then ended; the Group financial statements have been properly prepared in  accordance with the Companies Act 1985 and Article 4 of the IAS  Regulation;  the parent company financial statements give a true and fair  view, in accordance with United Kingdom Generally Accepted  Accounting Practice, of the state of the parent company’s affairs  as at 31 December 2007;  the parent company financial statements and the part of the  Directors’ Remuneration Report to be audited have been  properly prepared in accordance with the Companies Act 1985;  and the information given in the Directors’ Report is consistent with  the Group financial statements. • • • • Ernst & Young LLP Registered auditor London 8 April 2008 Notes 1 The maintenance and integrity of the Ferrexpo plc website 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 website. 2 Legislation in the United Kingdom governing the preparation and dissemination of  financial statements may differ from legislation in other jurisdictions. 64 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Consolidated income statement US$000  Revenue  Cost of sales  Gross profit  Selling and distribution expenses  General and administrative expenses  Other income  Other expenses   Operating profit from continuing operations before adjusted items  Write-offs and impairment losses   Share of gains of associates  Net loss on disposal of subsidiary  Gain on disposal of available-for-sale investment  Initial public offering costs  Profit before tax and finance   Finance income  Finance expense  Foreign exchange loss  Profit before tax  Tax  Profit for the year  Attributable to: Equity shareholders of Ferrexpo plc  Minority interest  Earnings per share: Basic (US cents)  Diluted (US cents)  Dividends:  Proposed ordinary dividend per share (US cents)  Proposed ordinary dividend (US$000)  Year   ended   31.12.07 Year ended 31.12.06 Notes  5  698,216  547,310 6 (335,936)  (296,720)   362,280  250,590 7  8 9  10  (100,614)  (44,308) 4,844  (5,096)  (86,376) (41,140) 2,583 (5,078)   217,106 120,579 11  20 12  12 13  (1,568)  687  –  4,714  (34,004)  (2,205) – (3,524) – – 186,935  114,850 14  14  14 3,242  (25,950)  (3,467)  2,326 (32,655) (3,784)     160,760  80,737 15  (26,725)  134,035  (14,758) 65,979   124,076 9,959    134,035  63,578 2,401 65,979 16 16  16  16  20.41 20.33  10.47  10.47 3.2  19,449  –  –                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 65 Consolidated balance sheet US$000  Assets Property, plant and equipment    Goodwill and other intangible assets   Investments in associates  Available-for-sale financial assets  Other non-current assets  Deferred tax asset  Total non-current assets  Inventories  Trade and other receivables  Prepayments and other current assets  Income taxes recoverable and prepaid  Other taxes recoverable and prepaid  Available-for-sale financial assets  Short term deposits with banks   Cash and cash equivalents   Total current assets  Total assets  Equity and liabilities Share capital  Share premium  Other reserves  Retained earnings  Equity attributable to equity shareholders of the parent  Minority interest  Total equity  Interest bearing loans and borrowings  Trade and other payables  Defined benefit pension liability   Shares redemption liability   Provision for site restoration  Deferred tax liability  Total non-current liabilities  Interest bearing loans and borrowings   Trade and other payables   Accrued liabilities and deferred income  Shares redemption liability   Income taxes payable  Other taxes payable  Total current liabilities  Total liabilities  Total equity and liabilities  The financial statements were approved by the Board of Directors on 8 April 2008. Mike Oppenheimer Chief Executive Chris Mawe Chief Financial Officer Notes As at   31.12.07 As at 31.12.06 18  364,545 301,343 19  156,827  156,534 16,950 20 34,641 21 916 22  – 35 17,637  47,134  15,179  8,107  609,429 510,384 23  24 25 26  21  27  28 56,545  43,575  10,773  5,350  52,362  2,941  – 86,966 48,487 58,284 17,118 1,424 42,489 1,451 11,043 16,236    258,512 196,532   867,941 706,916 29  121,628  29  188,566  29  – – 14,258  137,482 216,616  163,164   541,068  300,646 45,854  36,146    586,922  336,792 31  146,091 204,732 10,484 32  14,501 33  9,062 30  402 34  2,535 35  2,583  16,169  –  1,746  1,025    167,614  241,716 31  32  36  30  54,537  25,127  13,812  10,036  7,717  2,176  81,243 21,492 17,986 – 4,646 3,041   113,405  128,408    281,019 370,124   867,941  706,916                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 66 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Consolidated cash flow statement US$000  Net cash flows from operating activities Cash flows from investing activities  Purchase of property, plant and equipment  Proceeds from sale of property, plant and equipment   Purchase of intangible assets     Deposits lodged at banks  Purchases of available-for-sale securities    Proceeds from sale of financial assets  Interest received  Dividends received  Acquisition of minority interest in subsidiaries  Acquisition of associates  Loans provided to related parties  Loans provided to associates  Loans repaid by related parties   Proceeds from disposal of subsidiaries  Net cash flows used in investing activities Cash flows from financing activities  Proceeds from borrowings and finance   Repayment of borrowings and finance  Dividends paid to minority interest  Distribution under 50/50 tax ruling  Proceeds from issue of share capital in Ferrexpo AG    Proceeds from issue of share capital in Ferrexpo plc:   Initial public offering proceeds     Non-initial public offering proceeds  Initial public offering costs  Share buyback in previous parent  Net cash flows from financing activities   Net increase in cash and cash equivalents   Cash and cash equivalents at the beginning of the year   Currency translation differences  Cash and cash equivalents at the end of the year   Year   ended   31.12.07  Year ended  31.12.06 Notes 38 188,846  68,300 (104,352) 1,896  (435)  9,011  (12,126) 5,704  4,805  –  –  –  –  (5,000)  (48,760) 374 (745) 8,732 (3,119) 2,408 1,473 17 (231,945) (16,950) (16,674) – –  123,457 4,338 –  37  (100,497)  (177,394) 175,244 565,593 (276,084)  (512,819) (245) (31,521) –  109,329 (786)  (5,000)  37    202,072  99  (48,648) (64,055)  37  – – (7,503) – (17,158) 122,834 71,191  16,236  (461)  13,740 2,496 – 28 86,966  16,236                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 67 Consolidated statement of changes in equity Attributable to equity shareholders of the parent   Employee  Share  Issued   capital   premium  Benefit  Uniting of  interest  reserve  Trust  reserve  Revalu-  ation  reserve  Net  unrealised  gains  reserve  Trans- lation  reserve  Retained  earnings  Total  reserves  Minority interests  Total equity US$000  27,967 2,453 – –  –  –  –  –  –  –  – –  –  –  –  –  –  – –  –  –  –  –  –  –  – 5,179  –  –  5,179  –  –  At 31 December 2005 Profit for the year  Total income and expense for the year recognised in equity Items recognised directly in equity: Distribution under    50/50 tax ruling  Acquisition of minority interest    through capital increase  Equity dividends paid by    subsidiary undertakings    to minority shareholders  Proceeds from issue of share    capital in Ferrexpo AG  Reversal of revaluation relating    to previously held interest in    Vostock Ruda LLC, upon    acquisition of a controlling   interest  At 31 December 2006 Deferred Tax on     transaction costs  Revaluation of     available-for-sale assets  Profit for the year  Total income and expense for the year recognised in equity Items recognised directly in equity: Distribution under 50/50    tax ruling  Equity dividends paid by    subsidiary undertakings to    minority shareholders  Share issue in parent    company  Transaction costs    associated with issue    of shares (note 13)  Uniting of interest elimination  Share buyback of    previous parent of    the Group  Shares issued to Employee    Benefit Trust (note 29)  Share-based payments     (note 43)  – –  –  –  –  –  –  –  –  –  –  –  109,329  – 137,296 –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  (2,453)  – –  –  –  –  –  –  –  – –  186 117,548 148,154 107,756 255,910 –  63,578  63,578  2,401  65,979 –  63,578  63,578  2,401  65,979 –  –  –  –  (21,190)  (21,190)  –  (21,190) –  –  –  (72,673)  (72,673) –  (563)  (563) –  109,329  –  109,329 –  3,228  775  (775)  – 186 163,164 300,646 36,146 336,792 –  –  5,179  –  5,179 2,384  –  –  2,384  –  –  124,076  124,076  –  2,384 9,959  134,035 2,384  –  124,076  131,639  9,959  141,598 –  –  –  –  –  –  –  –  –  –  –  –  –  (6,569)  (6,569)  –  (6,569) –  –  (251)  (251) –  336,903  –  336,903 –  –  (31,888)  (105,516)  –  (64,055)  (64,055)  –  –  –  –  (29,216)  9,124  –  –  –  –  –  (31,888) (105,516) (64,055) (29,216) 9,124 –  –  –  –  –  –  – –  –  –  –  –  –  –  –  –  –  –  –  – 121,628  215,275  –  –  –  –  –  (31,888)  –  –  –  –  (105,516)  –  –  –  –  (29,216)  9,124  –  –  –  At 31 December 2007 121,628 188,566 (20,092) 31,780 2,384 186 216,616 541,068 45,854 586,922                   68 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information Note 1: Corporate information Organisation and operation The consolidated historical information for Ferrexpo plc in respect of the year ended 31 December 2007 was approved by the Board of  Directors on 8 April 2008. Ferrexpo plc is a company incorporated in the United Kingdom. Ferrexpo plc’s registered office is 2-4 King Street, London SW1Y 6QL, UK.  Ferrexpo plc and its subsidiaries (the ‘Group’) operate a mine and processing plant near Kremenchuk in Ukraine. The Group’s operations are  vertically integrated from iron ore mining through to iron ore concentrate and pellet production. The Group’s mineral properties lie within the  Kremenchuk Magnetic Anomaly and are currently being exploited at the Gorishne-Plavninsky and Lavrikovsky deposits. These deposits are  being jointly mined as one mining complex. The Group’s operations are largely conducted through Ferrexpo plc’s principal subsidiary, Ferrexpo Poltava GOK Corporation. The Group is  comprised of Ferrexpo plc and its consolidated subsidiaries as set out below: Name  Country of incorporation  Principal activity  Ferrexpo Poltava GOK Corporation1  Ferrexpo AG2  DP Ferrotrans3  United Energy Company LLC3  Ferrexpo UK Limited1  Ferrexpo Services Limited1  Ukraine  Switzerland  Ukraine  Ukraine  England  Ukraine  Iron ore mining and processing  Sale of iron ore pellets  Trade, transportation services  Holding company  Finance  Management services and procurement  Equity  interest owned at 31 December 2007  %  85.9  100.0  100.0  100.0  100.0  100.0  2006  % 85.9 100.0 100.0 100.0 100.0 100.0 1  The Group’s interest in these entities is held through Ferrexpo AG.  2  DFerrexpo AG was the holding company of the Group until, as a result of the pre-IPO restructuring, Ferrexpo plc became the holding company on 24 May 2007. 3 The Group’s interest in these entities is held through Ferrexpo Poltava GOK Corporation. On 24 May 2007, Ferrexpo plc allotted and issued 533,043,489 ordinary shares in the Company at a par value of £0.10 each (‘Ordinary Shares’)  (£53,304,349 (US$105,515,959)) to Fevamotinico Sàrl in exchange for 129,944,923 registered shares of CHF1 each in the capital of Ferrexpo AG.  Pursuant to such transaction, Ferrexpo plc became the sole shareholder of Ferrexpo AG. As this transaction involved the combination of businesses under common control, the pooling of interests method of accounting has been  applied in the presentation of the consolidated financial statements for the years ended 31 December 2007 and 31 December 2006, which  present the results of the Group as if Ferrexpo plc had always been the parent company of the Group. The last filed accounts of Ferrexpo plc  qualified for exemption from audit under section 249AA of the Companies Act 1985 as it was dormant during the period. The last filed  accounts of Ferrexpo AG (the previous consolidated Group accounts) contained an unqualified audit opinion, and no statements equivalent to  section 237(2) or section 237(3) under the Companies Act 1985. Such statements are required to be made by the auditors where inadequate  accounting records have been kept. On 15 June 2007, the Company’s Ordinary Shares were admitted to the Official List of the Financial Services Authority and to trading   on the London Stock Exchange. The global offer comprised 152,097,932 Ordinary Shares at a price of £1.40, of which 72,527,361   new Ordinary Shares each were issued by the Company (US$14,433,743) and 79,570,571 were Ordinary Shares sold by the existing shareholder.  Gross proceeds of £101,538,305 (US$202,072,397) were received by the Company following the issue of the new   Ordinary Shares. A historic share purchase and sale transaction in Ferrexpo Poltava GOK Corporation shares, the amount of which following dilution now  represents less than 25% of the issued share capital of Ferrexpo Poltava GOK Corporation, is the subject of an ongoing legal challenge that  commenced in November 2005, and was initially dismissed by the Ukrainian Supreme Court in April 2006, but has recently been recommenced  in a lower court. The plaintiff, a party to the disputed transaction, initiated legal proceedings in the Ukrainian courts seeking to invalidate the  original share sale and purchase agreement. The plaintiff claims that the agreement was not executed in accordance with Ukrainian legislation.  No remediation or damage has been claimed. In the event of the claim succeeding and being upheld on appeal and the issued share capital  being transferred to the plaintiff, the Group will retain control of Ferrexpo Poltava GOK Corporation. Neither the Company, nor the majority  beneficial owner nor any of the Group’s subsidiary undertakings are involved in the legal proceedings. Management, having taken appropriate  legal advice, believe that the claim is without merit and consider that there is a remote likelihood that the Group’s ownership of the related  interest in Ferrexpo Poltava GOK Corporation will be successfully challenged and that the Group will not suffer material financial costs in  connection with this matter. Note 2: Summary of significant accounting policies The consolidated financial statements of Ferrexpo plc and its subsidiaries has been prepared in accordance with International Financial  Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’). IFRS as adopted by the EU differs in certain respects from IFRS as issued  by the International Accounting Standards Board (‘IASB’). However, the consolidated financial statements for the years presented would be no  different had the Group applied IFRS as issued by the IASB. The consolidated historical financial information has been prepared on a historical cost basis, except for post-employment benefits and  available-for-sale financial instruments, the latter are measured at fair value in accordance with the requirements of IAS 39 ‘Financial  instruments: recognition and measurement’, the former measured in accordance with IAS 19 ‘Employee benefits’. The consolidated historical  financial information is presented in US dollars thousands and all values are rounded to the nearest thousand except where otherwise  indicated.                         Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 69 Changes in accounting policy The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group in the  current or prior periods. In certain cases, they did however give rise to additional disclosures.  • • • • • IFRS 7 ‘Financial Instruments: Disclosures’ IAS 1 Amendment – ‘Presentation of Financial Statements: Capital Disclosures’ IFRIC 8 ‘Scope of IFRS 2’ IFRIC 9 ‘Reassessment of Embedded Derivatives’ IFRIC 10 ‘Interim Financial Reporting and Impairment’ The Group has also early adopted the following IFRIC interpretation. Adoption of this interpretation did not have any effect on the financial  performance or position of the Group.  • IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’ The principal effects of these changes are as follows: IFRS 7 ‘Financial Instruments: Disclosures’ This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial instruments  and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout   the financial statements. While there has been no effect on the financial position or results, comparative information has been revised where  necessary.  IAS 1 ‘Presentation of Financial Statements’ This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives,  policies and processes for managing capital. These new disclosures are shown in the capital management section of note 3.  IFRIC 8 ‘Scope of IFRS 2’ This interpretation requires IFRS 2 to be applied to any arrangements in which the entity cannot identify specifically some or all of the goods  received, in particular where equity instruments are issued for consideration which appears to be less than fair value. As equity instruments are  only issued to employees in accordance with the employee share scheme, the interpretation has no impact on the financial position or  performance of the Group. IFRIC 9 ‘Reassessment of Embedded Derivatives’ IFRIC 9 states that the date to assess the existence of an embedded derivative is the date that an entity first becomes a party to the contract,  with reassessment only if there is a change to the contract that significantly modifies the cash flows. As the Group has no embedded derivative  requiring separation from the host contract, the interpretation has no impact on the financial position or performance of the Group, but our  accounting policy for such items has been amended accordingly. IFRIC 10 ‘Interim Financial Reporting and Impairment’ The Group adopted IFRIC 10 as of 1 January 2007, which requires that an entity must not reverse an impairment loss recognised in   a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost.   As the Group had no impairment losses previously reversed, the interpretation had no impact on the financial position or performance   of the Group. Basis of consolidation The consolidated historical financial information comprises the financial statements for Ferrexpo plc and its subsidiaries as at   31 December each year. The financial statements of the subsidiaries are prepared as at the same reporting date as Ferrexpo plc’s,   using consistent accounting policies.  All inter-company balances and transactions including unrealised profits arising from intra-group transactions have been eliminated in full.  Unrealised losses are eliminated unless costs cannot be recovered.  Business combinations Subsidiaries acquired are fully consolidated from the date of acquisition, being the date on which the Group obtains effective control and are  accounted for using the purchase method of accounting. Similarly, disposals of subsidiaries are deconsolidated from the date on which the  Group ceases to hold effective control. Subsidiaries acquired from entities under common control, such that the ultimate controlling party has not changed as a result of the  transaction, are fully consolidated from the earliest period presented, but not before the date that they came under common control, and are  accounted for using the pooling of interests method of accounting whereby net assets are pooled at their historic carrying value. The principal  impact of this has been in the accounting for Ferrexpo plc’s interest in Ferrexpo Poltava GOK Corporation.  70 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 2: Summary of significant accounting policies continued Changes in ownership interests in subsidiaries The Group adopted the parent extension concept method of accounting for changes in ownership interest in subsidiaries. The differences  between the carrying values of net assets attributable to interests in subsidiaries acquired (or disposed of) and the consideration given (or  received) for such increases are recorded as goodwill. Functional currency Based on the economic substance of the underlying events and circumstances relevant to the parent, the functional currency of the parent has  been determined to be the US dollar, with each subsidiary determining its own functional currency. The Group has chosen   the US dollar as its presentation currency. Foreign currency translation Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in  foreign currencies are translated to the functional currency at the rate of exchange ruling at the balance sheet date   and non-monetary assets and liabilities at the historic rate. Foreign exchange differences arising on translation are recognised in the income  statement. The following exchange rates have been applied: Currency rates (US$1)  Ukrainian hyrivna   At At Average 31 December  Average  31 December 2006  2006   2007  2007 5.050 5.050 5.050  5.050 If the functional currency of a subsidiary is different to the functional currency of the parent as at the reporting date, the assets and liabilities of  this entity are translated into the parent’s functional currency at the rate ruling at the balance sheet date and the income statement is  translated using the average exchange rate for the period. The foreign exchange differences arising are taken directly to   a separate component of equity. On disposal of a foreign entity the deferred cumulative amount recognised in equity relating to the particular  foreign operation is recognised in the income statement. Use of estimates The preparation of historical financial information in conformity with IFRS requires management to make estimates and assumptions   that affect the amounts reported in the historical financial information and accompanying notes. These estimates are based on information  available as at the date of authorising the historical financial information for issue. Actual results, therefore, could differ   from those estimates. In particular, information about significant areas of estimation, uncertainty and critical judgements made by management in preparing   the consolidated financial information are described in the following notes: • • • • • • • Note 15  –   Income tax expense Note 18  –  Property, plant and equipment Note 21  –  Available-for-sale financial assets Note 33  –  Defined benefit pension liability Note 34  –  Provision for site restoration Note 35   –  Deferred income tax Note 41   –  Commitments and contingencies Investments in associates The Group’s investments in associates are accounted for under the equity method of accounting. An associate is an entity in which the Group  has significant influence and which is neither a subsidiary nor a joint venture.  Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-acquisition changes in the Group’s  share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and   is not amortised. After application of the equity method, the Group determines whether it is necessary to recognise any additional impairment  loss with respect to the Group’s net investment in the associate. The income statement reflects the share of the results of operations of the  associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes and  discloses this, when applicable, in the statement of changes in equity. The reporting dates of the associate and Ferrexpo plc are identical and the associate’s accounting policies conform to those used by   the Group. Financial instruments Derivative financial instruments The Group does not hold any derivative financial instruments. Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities (promissory notes), trade and other receivables, cash  and cash equivalents, loans and borrowings and trade and other payables. Non-derivative financial instruments are recognised at fair value  (being the fair value of the consideration given or received) plus any directly attributable transaction costs.                                                           Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 71 All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase or sell  the asset. Regular way purchases or sales are those that require delivery of assets within the period generally established by regulation or  convention in the marketplace. The Group has not designated any financial asset as financial assets at fair value through profit or loss.  Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such  assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and  receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets All investments, except for investments in associates are available for sale. Available for sale financial assets are those non-derivative financial  assets that are designated as available for sale or are not classified as either loans or receivables, or held to maturity investments or financial  assets at fair value through profit and loss. After initial recognition available-for-sale financial assets are measured at fair value with gains or  losses being recognised directly in equity.  The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at  the close of business on the balance sheet date. For investments where there is no active market, the fair value is determined using discounted  cash flow analysis. Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method less any impairment losses. Share capital Ordinary Shares Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares and share options are recognised  as a deduction from equity, net of any tax effects. Employee Benefit Trust reserve Ferrexpo plc shares held by the Group are classified in capital and reserves, as ‘Employee Benefit Trust reserves’ and recognised at cost.  Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the  original cost taken to revenue reserves. No gain or loss is recognised on the purchase, sale issue or cancellation of equity shares. Shares redemption liability The Group’s contractual obligation to purchase its own equity instruments gives rise to a financial liability for the present value of the  redemption amount. When the financial liability is recognised initially under IAS 39, its fair value is reclassified from equity. Subsequently, the  financial liability is carried as a long term liability on the amortised cost basis until extinguished on conversion or redemption. Trade and other payables Trade and other payables are recognised and initially measured at cost. Subsequently, instruments with a fixed maturity are remeasured at  amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any transaction costs and any  discount or premium on settlement. Financial liabilities which do not have a fixed maturity are subsequently carried at fair value.  Interest bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After  initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.  Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Impairment of financial assets The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the  loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future  credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate  computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The  amount of the loss shall be recognised in the income statement. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and  individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment  exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar  credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for  impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 72 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 2: Summary of significant accounting policies continued If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after  the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is  recognised in the income statement to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation)  and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income  statement. Reversals in respect of equity instruments classified as available for sale are not recognised in the income statement.  Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost at the date of transition to IFRS (hereinafter referred to as ‘the cost’) less  accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an  appropriate proportion of production overheads.   Upon recognition, items of property, plant and equipment are divided into components, which represent items with a significant value that  can be allocated to a separate depreciation period. Overhaul costs also represent a component of an asset. Assets are initially recognised in  assets under construction and then transferred to the appropriate categories on completion. Major spare parts and stand-by equipment qualify as property, plant and equipment when they are expected to be used during more than  one period.  Expenditure incurred after the properties have been put into operation, such as repairs and maintenance and overhaul costs, are normally  charged to the income statement in the period the costs are incurred. In situations where it can be clearly demonstrated that   the expenditures result in future economic benefits, the expenditures are capitalised as an additional cost. Each item’s estimated useful life has due regard to both its own physical life limitations and the present assessment of economically  recoverable reserves of the mine property at which the item is located. Estimates of remaining useful lives are made on a regular basis   for all mine buildings, machinery and equipment, with annual reassessments for major items. Changes in estimates, which affect unit of  production calculations, are accounted for prospectively. Depreciation commences when the item is available for use. Neither freehold land  nor assets under construction are depreciated.  Except for mining assets which are depreciated using the unit of production method, depreciation is calculated on a straight-line basis over  the estimated useful life of the asset, as follows: Buildings  Plant and equipment  Vehicles  Fixtures and fittings  20–50 years 5–15 years 7–15 years 2.5–10 years An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise   from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the   net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognised. Mining assets Mining assets comprise of mine exploration, evaluation and development costs incurred up to the commencement of production. Stripping  work comprises overburden removed at the pre-production, mine extension and production stages. Pre-production and mine extension  related stripping work are capitalised. Production stage stripping work is expensed. Intangible assets Goodwill Goodwill is not amortised but rather tested annually for impairment. Goodwill is allocated to the cash-generating unit expected to benefit  from the related business combination for the purpose of the impairment testing. Where the recoverable amount of the cash-generating unit  is less than its carrying amount including goodwill an impairment loss is recognised in the income statement. Management consider that there  is only one identifiable cash generating unit applicable to Ferrexpo plc, being the mining, production and sale of iron-ore pellets from the  Ukrainian mine. As such the assessment of the carrying valued and the recoverable amount is initially made with reference to   the market capitalisation of the Group and Group net assets. If this then shows indications of impairment a value in use calculation is made. An  impairment loss in respect of goodwill is not reversed. To the extent that the fair value of the acquired entity’s identifiable assets and liabilities is greater than the cost of investment, a gain is  recognised immediately in the income statement.  Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 73 Other intangible assets Other intangible assets, including mineral licences, which are acquired by the Group and which have finite useful lives, are stated at cost less  accumulated amortisation and impairment losses. Mineral licence acquisition costs are amortised on a unit of production basis.  Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when  annual impairment testing for an asset is required, 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 assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are  recognised in the income statement.  An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no  longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is  reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was  recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed  the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior  years. Such reversal is recognised in the income statement. After such a reversal the depreciation charge is adjusted in future periods to  allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • • Raw materials – cost on a first-in, first-out basis. Finished goods and work in progress – cost of direct materials and labour and a proportion 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 the estimated costs  necessary to make the sale. Site restoration costs Site restoration provisions are made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation  costs (determined by an independent expert) in the accounting period when the related environmental disturbance occurs. The provision is  discounted where material and the unwinding of the discount is included in finance costs. At the time of establishing the provision, a  corresponding asset is capitalised where it gives rise to a future benefit and depreciated over future production from the mine to which   it relates.  The provision is reviewed on an annual basis for changes in cost estimates, discount rates or the life of operations. Pension obligations and other employee benefits The Group makes defined contributions to the Ukrainian state pension scheme at the statutory rates in effect during the year, based on gross  salary payments; such expense is charged in the period the related salaries are earned. In addition, the Group has a legal obligation to compensate the Ukrainian State Pension Fund for additional pensions paid to certain categories  of the current and former employees of the Group. These obligations being unfunded are substantially similar to those typically existing under  an unfunded defined benefit plan. The Group also makes contributions to the defined benefit pension fund for employees in Ferrexpo AG. Costs relating to both plans are accrued in the historical financial information using the projected unit credit method in respect of those  employees entitled to such payments. Management uses actuarial techniques in calculating the liability related to this retirement obligation at  each balance sheet date. Actual results could vary from estimates made to date. Gains and losses resulting from the use of external actuarial valuation methodologies are recognised when the cumulative unrecognised  actuarial gains or losses for the scheme exceed 10% of the defined benefit obligation for unfunded plans and the lower of planned   assets/obligations for funded schemes. These gains or losses are recognised as income or expense over the expected average remaining  working lives of the employees participating in the plan. 74 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 2: Summary of significant accounting policies continued The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits vest. If the benefits are  already vested immediately following the introduction of, or changes to, a pension plan, the past service cost is recognised immediately. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not  recognised reduced by the past service cost not yet recognised.  Revenue recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured.  Revenue from sale of goods, including pellet and other sales, is recognised when the significant risks and rewards of ownership of the goods  have passed to the buyer and can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the  normal course of business, net of discounts and sales taxes. Risks and rewards of the ownership of goods passes when title for the goods  passes to the customer. This is determined by the terms of the sales agreement. Typically, sales are made FOB (‘Free On Board’), CIF (‘Cargo  Insurance and Freight’) or DAF (‘Delivery At Frontier’).  Other sales include the processing and sale of ore and ore concentrate, sale of parts, materials and crushed rocks and repair and rental of  railway wagons. Finance income and expense Finance income comprises interest income on funds invested. Interest income is recognised in the income statement as it accrues using the  effective interest method.  Finance expense comprises interest expense on borrowings, unwinding of the discount on provisions and impairment losses recognised on  financial assets. Foreign exchange gains and losses are reported on a net basis. Taxes Current income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the  taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the  balance sheet date. Swiss tax 50/50 ruling Under the Swiss tax 50/50 ruling a qualifying company can distribute a percentage of its profits free of tax. Ferrexpo AG (the former group  holding company), under its former ownership, qualified to make such distributions. The company ceased to qualify for this treatment upon  reorganisation of the Group, when Ferrexpo plc became the parent company of the Group, on 24 May 2007. Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets  and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: • where the deferred tax liability 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; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where  the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse  in the foreseeable future. • Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses,  to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward  of unused tax credits and unused tax losses can be utilised except: • where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition 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; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures,  deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable  future and taxable profit will be available against which the temporary differences can be utilised. • The carrying amount of deferred income tax assets is reviewed at each balance sheet 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 income tax asset to be utilised. Unrecognised  deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future  taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the  liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 75 Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax  liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Value added tax Revenues, expenses and assets are recognised net of the amount of value added tax (‘VAT’) except: • where VAT incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case VAT is recognised as  part of the cost of acquisition of the asset or as part of expense item as applicable; and receivables and payables, which are stated with the amount of VAT included. • The net amount of VAT recoverable from, or payable to, the taxation authority is disclosed in the notes to the financial statements   (note 26). Earnings per share The earnings per share (‘EPS’) calculation has assumed that the number of Ordinary Shares issued pursuant to the share exchange agreements  in relation to the acquisition of Ferrexpo AG by Ferrexpo plc have been in issue throughout 2007 and 2006 which is consistent with the pooling  of interests method used to account for combinations of businesses under common control. The Directors believe that this measure of EPS  provides a more meaningful comparison with the Group’s ongoing business than using the statutory EPS which would only reflect shares  issued based on the actual date of issue.  Basic EPS is calculated by dividing the net profit for the year attributable to ordinary equity shareholders of Ferrexpo AG by the number   of Ordinary Shares as defined above. The number of Ordinary Shares in issue excludes the shares held by the Ferrexpo AG Listing Bonus Trust.  Diluted earnings per share is calculated by adjusting the number of Ordinary Shares in issue on the assumption of conversion of all potentially  dilutive Ordinary Shares. All share awards are potentially dilutive and have been included in the calculation   of diluted earnings per share. Events after the balance sheet date Events after the balance sheet date that provide additional information on the Group’s position at the balance sheet date (adjusting events) are  reflected in the historical financial information. Events after the balance sheet date that are not adjusting events are disclosed in the notes  when material. Share-based payments Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the grant date and are recognised   as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award.   Fair value is determined by reference to the quoted closing share price on the grant date. In valuing equity-settled transactions, no account is taken of any vesting conditions. No expense is recognised for awards that do not ultimately vest. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period   has expired and management’s best estimate of the achievement or otherwise of non-market conditions and of the number of equity  instruments that will ultimately vest. The movement in cumulative expense since the previous balance sheet date is recognised in the income  statement, with a corresponding entry in equity. New Standards and interpretations not yet adopted IFRS 8 ‘Operating Segments’ introduces the ‘management approach’ to segment reporting. IFRS 8, which becomes mandatory for the Group’s  2009 financial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Group’s  Chief Operating decision maker in order to assess each segment’s performance and to allocate resources to them. Currently the Group  presents segment information in respect of its business and geographical segments (see note 4). The management approach is not expected  to change this structure of reporting significantly; however, owing to the expansionary nature of the business the Group has not yet  determined the full effect of this new standard. IFRS 8 will also reduce the maximum size of the cash generating unit to be used for the  impairment testing of goodwill. Based on current indicators management does not believe that this would impact the carrying value of  goodwill. Revised IAS 23 ‘Borrowing Costs’ removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly  attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become  mandatory for the Group’s 2009 financial statements but currently does not apply to the Group. In accordance with the transitional provisions  the Group will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective  date. IFRIC 11 IFRS 2 – ‘Group Treasury Transactions’ requires a share-based payment arrangement in which an entity receives goods or services as  consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the  equity instruments are obtained. IFRIC 11 will become mandatory for the Group’s 2008 financial statements, with retrospective application  required. It is not expected to have any impact on the consolidated financial statements. 76 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 2: Summary of significant accounting policies continued IFRIC 14 IAS 19 – ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ clarifies where refunds   or reductions in future contributions in relation to defined benefit assets, should be regarded as available and provides guidance on the  impact of minimum funding requirements (‘MFR’) on such assets. It also addresses when an MFR might give rise to a liability. IFRIC 14 will  become mandatory for the Group’s 2008 financial statements, with retrospective application required. It is not expected to have any impact on  the consolidated financial statements. IAS 1 ‘Presentation of financial statements’ (revised September 2007) – Whilst the revised IAS 1 will have no impact on the measurement of the  Group’s results or net assets it is likely to result in certain changes in the presentation of the Group’s financial statements from 2009 onwards. IFRS 2 ‘Share-based payment’ amendment to IFRS 2 – Vesting and conditions and cancellations – The amendment to IFRS 2 restricts the  definition of vesting conditions to include only service conditions (requiring a specific period of service to be completed)   and performance conditions (requiring the other party to achieve a personal goal or contribute to achieving a corporate target). All other  features are not vesting conditions, and whereas a failure to achieve such a condition was previously regarded as a forfeiture (giving   rise to a reversal of amounts previously charged to profit) it must be reflected in the grant date fair value of the award and treated as   a cancellation, which results in either an acceleration of the expected charge, or a continuation over the remaining vesting period, depending  on whether the condition is under control of the entity or counterparty. The amendment is mandatory for periods beginning   on or after 1 January 2009 and the Group is currently assessing its impact on the financial statements, although it is not expected to   be material. IFRS 3 ‘Business combinations’ (revised January 2008) – The Group does not anticipate early adopting the revised IFRS 3 and so will apply it  prospectively to all business combinations on or after 1 January 2010. Whilst it is not possible to estimate the outcome of adoption, the key  features of the revised IFRS 3 include a requirement for acquisition-related costs to be expensed and not included in the purchase price; and for  contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement  and not as a change to goodwill). the standard also changes the treatment of non-controlling interest (formerly minority interests) with an  option to recognise these at full fair value as at the acquisition date and a requirement for previously held non-controlling interests to be fair  valued as at the date control is obtained, with gains and losses recognised in the income statement. IAS 27 ‘Consolidated and Separate Financial Statements’ (revised January 2008) – IAS 27 revised is effective for annual periods beginning on or  after 1 July 2009, with earlier application only permitted when the revised IFRS 3 is applied. The revised standard applies retrospectively with  some exceptions. IAS 27 revised no longer restricts the allocation to minority interest of losses incurred by a subsidiary to the amount of the  non-controlling equity investment in the subsidiary. A partial disposal of equity interest in a subsidiary that does not result in a loss of control  will be accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to any gain or loss. Where there is loss of  control of a subsidiary, any retained interest will have to be remeasured at fair value, which will impact the gain or loss on disposal. The Group  is currently assessing the impact on its financial statements from adopting IAS 27 revised. Note 3: Financial risk management Overview The Group has exposure to the following risks from its use of financial instruments: • • • credit risk liquidity risk market risk This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes   for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout   these consolidated financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.  The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and  controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in  market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a  disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and  reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted   in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures,  the results of which are reported to the Audit Committee. The Group operates a centralised financial risk management structure under the management of the Executive Committee, accountable to the  Board and Audit Committee. The Executive Committee delegates certain responsibilities to the Chief Financial Officer (‘CFO’).   The CFO’s responsibilities include authority for approving all new physical, commercial or financial transactions that create a financial   risk for the Group. Additionally, the CFO delegates control and management of treasury risks within each of the business units to the Group  Treasurer.   Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 77 Financial instrument risk exposure and management Natural hedges that can be identified and the effectiveness quantified are used in preference to financial risk management instruments.  Derivative transactions may be executed for risk mitigation purposes only – speculation is not permitted – and are intended to have the net  effect of reducing risk on underlying market or credit exposures. Appropriate operational controls ensure operational risks are not increased  disproportionately to the reduction in market or credit risk. The Group has not used any financial risk management instruments that are derivative in nature or any other hedging instruments in this or  prior periods. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual  obligations, and arises principally from the Group’s receivables from customers and investment securities. Trade and other receivables The Group through its trading operations enters into binding contracts which contain certain obligations that create exposure to credit,  counterparty and country risks. It is the primary objective of the Group to manage such risks to reduce uncertainty of collection from buyers. A  secondary objective is to minimise the cost of mitigating risks within acceptable risk parameters. Both objectives are achieved through the  active management of the underlying portfolio of risks. Trade finance is used to balance risk and payment. The greater the risks associated with the transaction, the greater the cost. These risks  include the creditworthiness of the buyer, and the political and economic stability of the buyer’s country. Trade finance generally refers to the  financing of individual transactions or a series of revolving transactions and are often self-liquidating whereby the lending bank stipulates that  all sales proceeds to be collected are applied to settle the loan, the remainder returned to the Group. Trade finance transactions are approved  by the Group Treasurer. The primary objective is to ensure that the margins paid and conditions applicable should be the same or better than  those which other organisations with similar credit worthiness would achieve, and compared with other alternative financing available to the  Group. Credit risk is the risk associated with the possibility that a buyer will default, by failing to make required payments in a timely manner, or to  comply with other conditions of an obligation or agreement. Where appropriate, the Group uses letters of credit to assist in mitigating such  risks. Counterparty risk is rating the risk that a party to an agreement will default. In general, counterparty risk is reduced by having an organisation  with a higher credit rating act as an intermediary between the Group and the buyer. Where letters of credit are used, the Group uses a  confirming bank with a similar or higher credit rating to mitigate country and/or credit risk of the issuing bank.  Country risk is the potential volatility of foreign assets, whether receivables or investments, that is due to political and/or financial events   in a given country. Approval is obtained from the Group Treasurer before acceptance of counterparty risks.  Group Treasury monitors the concentration of all outstanding risks associated with any entity or country and reports to the CFO on a timely  basis. Investment securities The Group limits its exposure to credit, counterparty and country risk by only investing in liquid securities and with counterparties that are  incorporated in an A+ or better (S&P) rated OECD country; and is rated from S&P or Moody’s at a level to long term A (S&P) or short term A2  (S&P) or better. Recognising that the principal activities of the Group predominantly reside in Ukraine, special consideration is given for investments with  Ukrainian counterparties. Exceptions may be made under the following conditions: • • • The counterparty is resident in Ukraine. The counterparty is included in the top 15 financial institutions in Ukraine. The counterparty is either: – owned and controlled by the State with its obligations guaranteed by the State; or –  majority owned and controlled by an international financial institution capable of covering the counterparty exposure which in itself  meets the criteria of an eligible counterparty; or – a local financial institution that has achieved a minimum investment grade rating from S&P or Moody’s.       78 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 3: Financial risk management continued Guarantees The Group’s policy is to provide financial guarantees only to wholly-owned subsidiaries. At 31 December 2007 Ferrexpo AG and Ferrexpo UK  Ltd were joint and severally liable under a US$335 million loan agreement (31 December 2006: US$275 million). Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing  liquidity is to ensure, as far as possible, that it will always have sufficient funds 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 uses activity-based costing to cost its product and detailed capital expenditure forecasts, which assist it in monitoring cash flow  requirements and optimising its cash return on investments. Typically the Group ensures that it has sufficient cash on demand and/or lines of  credit to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; this excludes the  potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. The Group maintains the following  lines of credit: • US$5 million overdraft facility that is unsecured. Interest would be payable at the rate of weekly average LIBOR increased by 0.875% plus  225 basis points. US$80 million and US$135 million revolving lines of credit that can be drawn down to meet short to medium term financing needs   up to 180 days. Interest would be payable at a fixed rate of 9.0% per annum on US$80 million revolving facility and at the rate of one  month LIBOR plus 235 basis points on US$135 million revolving facility. • Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s  income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk  exposure within acceptable parameters, while optimising the return on risk. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective  functional currencies of Group entities, primarily the Ukrainian hyrivna, but also US dollars, Swiss francs, euro and sterling. The Group’s major lines of borrowings and the majority of its sales are denominated in US dollars, with costs of production in hyrivna. The  hyrivna is currently pegged to the US dollar and for this reason trade receivables and trade payables denominated in US dollars are not  hedged. Trade receivables and trade payables in other currencies are considered immaterial and are similarly not hedged. The principal amounts of the Group’s US dollar bank loans used to fund hyrivna functional currency entities are not hedged as the currency is  currently pegged to the US dollar.  Interest on borrowings is denominated in US dollars and is less than the US dollar cash flows generated by the underlying operations of the  Group. This provides an economic natural hedge and no derivatives are entered into. Appropriate hedging policies are in place to allow mitigation of currency risk were the US$/UAH peg to come to an end. Other Group monetary assets and liabilities denominated in foreign currencies are considered immaterial as the exposure to currency risk  mainly relates to corporate costs within Switzerland and the United Kingdom. Owing to these conditions the Group does not consider it necessary to engage in hedging activities. Interest rate risk The Group predominantly borrows funds that are at floating interest rates and will be exposed to interest rate movements. The primary  objective of interest rate risk management is to reduce uncertainty to interest rate movement through capping or fixing of funding costs.  However, a secondary objective is to minimise the net funding costs within acceptable risk parameters. Both objectives are achieved through  the active management of underlying interest rate exposures. The interest rate exposure to US dollars remained relatively low during the  period, and no interest rate swaps have been entered into in this or prior periods. Commodity risk The Group does not have a commodity risk exposure to its financial assets and liablities. Trade receivables are based on a fixed contract price,  and so do not fluctuate with iron ore market prices. Similarly finished goods are held at cost, with revaluation to a spot price not applicable for  iron ore pellets, there being no tradeable exchange in the product to ascertain its market value. Other market price risk Equity price risk arises from available-for-sale equity securities which are not quoted. Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain   future development of the business. The Board of Directors monitors both the demographic spread of shareholders, as well as the   return on capital, which the Group defines as total shareholders’ equity, excluding minority interests, and the level of dividends to   ordinary shareholders. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and advantages  and security afforded by a sound capital position.  Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 79 The Board maintains a dividend policy consistent with the Group’s profile, reflecting the investment activities the Group is making   on major projects for future production growth and the cash generated by existing operations, whilst maintaining a prudent level   of dividend cover. The Group does not purchase its own shares on the market nor have a defined share buyback plan. There were no changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. Note 4: Segment information Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in  providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are  different from those of other segments. Segment information is presented in respect of the Group’s business and geographical segments. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable  basis.  Primary reporting format – Business segments The Group’s activity is primarily the processing and sale of iron ore and for the purpose of the consolidated financial statements only one  business segment is therefore identified as a reportable segment. Secondary reporting format – Geographical segments The Group operated in two distinct geographical segments for the processing and sale of iron ore for the year ended 31 December 2007. The Group’s principal mining operations are based in Ukraine and the Group’s chief sales office, Ferrexpo AG, is based in Switzerland. US$000  Revenue Sales to external customers  Other segment information  Segment assets  Segment liabilities  Capital expenditure:  Property, plant and equipment    Intangible fixed assets   Depreciation and amortisation    US$000  Revenue  Sales to external customers  Other segment information  Segment assets  Segment liabilities  Capital expenditure:  Property, plant and equipment    Intangible fixed assets   Depreciation and amortisation    Year ended 31.12.07 Ukraine    Switzerland  Total   136,757    561,459    698,216   750,180  (65,251)  117,761  (215,768)    867,941 (281,019) 94,188  482  27,831  1,182  –  433  95,370 482 28,264 Year ended 31.12.06 Ukraine    Switzerland  Total 79,610    467,700    547,310   652,247  (189,182)  54,669  (180,942)    706,916 (370,124) 53,993    156,423  28,270  356  –  293  54,349   156,423 28,563                                                                                                                                                                                                                                                       80 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 5: Revenue Revenue for the year ended 31 December 2007 consisted of the following: US$000  Revenue from sales of ore pellets:  Export  Ukraine  Revenue from services provided  Revenue from other sales  Export sales by geographical destination were as follows: US$000  Austria  China  Slovakia  Serbia  Czech Republic  Bulgaria  Poland  Romania  Germany  Turkey  Japan  Italy  Other  Year   ended   31.12.07   Year ended 31.12.06   560,805  467,099 73,089 128,731  689,536  540,188 3,005  5,675  3,158 3,964 698,216  547,310 Year   ended   31.12.07   Year ended 31.12.06   160,324  140,286 83,258 103,223  54,143 81,516  64,015 83,708  52,775 55,617  15,587 27,389  15,571 23,766  23,838 7,038  –  4,183 12,302 9,777  – 5,029  – 3,418  1,141 –  560,805  467,099 During the year ended 31 December 2007 sales made to three customers accounted for approximately 53.9% of the net sales revenue (2006:  55.3%). Note 6: Cost of sales Cost of sales for the year ended 31 December 2007 consisted of the following: US$000  Materials  Purchased ore and concentrate  Electricity  Personnel costs  Spare parts and consumables    Depreciation and amortisation    Fuel  Gas  Royalties and levies  Other  Year   ended  31.12.07  92,449  17,587  74,621  47,402  14,663  25,635 28,086  25,576  8,570  1,347  Year ended 31.12.06 62,002 16,703 65,535 46,231 27,072 24,895 25,798 20,806 7,678 –   335,936   296,720                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 81 Cost of sales is reconciled to ‘C1’ costs in the following manner. US$000  Cost of sales  Depreciation and amortisation    Purchased ore and concentrate  Production cost of gravel  Stock movement in the period    Pension current service cost  Other  C1 Cost  Own ore produced tonnes  C1 cash cost per tonnes US$  Year   ended  31.12.07  Year ended 31.12.06 335,936  296,720 (24,895) (19,396) (2,728) (9,930) (1,784) 484 (25,635)  (19,911)  (2,101)  (6,284)  (1,877)  (555)  279,573  238,471 8,793,000  8,149,000 29.26 31.79  ‘C1’ costs represent the cash costs of production of own ore divided by production volume of own ore, and excludes non-cash costs such as  depreciation, pension costs and stock movement, and costs of purchased ore, concentrate and production cost of gravel. Note 7: Selling and distribution expenses Selling and distribution expenses for the year ended 31 December 2007 consisted of the following: US$000  Railway transportation  Other transportation  Agent fees  Custom duties  Advertising  Personnel cost  Depreciation  Other  Note 8: General and administrative expenses General and administrative expenses for the ended 31 December 2007 consisted of the following: US$000  Personnel costs  Buildings and maintenance  Taxes other than income tax and other charges  Social responsibility costs  Consulting and other professional fees  Depreciation and amortisation    Communication  Vehicles maintenance and fuel    Repair  Audit fees  Non-audit fees  Security  Research  Other  Year   ended   31.12.07  58,358  34,914  2,025  1,101  1,816  827  575  998  Year ended 31.12.06 53,029 27,335 1,649 1,180 1,096 784 128 1,175  100,614  86,376  Year   ended  31.12.07  Year ended 31.12.06 20,428  1,900  3,674  1,521  6,363  2,055  425  1,016  422  1,089  584  769  393  3,669  17,489 5,697 3,138 1,028 3,168 2,192 2,083 598 468 1,207 – 333 1,583 2,156 44,308   41,140  In 2006, within buildings and maintenance above of US$5,697,000 is an amount of US$3,914,000 specifically relating to Vostock Ruda LLC. The  Company was not in operation in 2006 but costs were incurred to maintain the mining shafts in working condition and these costs expensed.  The Group’s holding in Vostock Ruda was reduced to 9.4% by the end of 2006, and then to 3.2% by the end of 2007.   As a result expenses of this nature have not been consolidated for the year ended 31 December 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         82 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 8: General and administrative expenses continued Auditor remuneration US$000  Audit United Kingdom  Overseas  Other services provided by auditors United Kingdom  Overseas  Total auditor remuneration US$000  Statutory audit services Ferrexpo plc Annual Report  Subsidiary entities  Non-audit services IPO related fees  Tax advisory  Assurance related services  Total auditor remuneration The cost of the audit of the listing documents was netted off against share premium in the current year. Note 9: Other income Other income for the year ended 31 December 2007 consisted of the following: US$000  Sale of surplus maintenance spares  Other income  Note 10: Other expenses Other expenses for the year ended 31 December 2007 consisted of the following: US$000  Charitable donations  Loss on disposal of plant, property and equipment  Fines and penalties  Other   Year   ended   31.12.07  Year ended 31.12.06 78  1,011  55 1,152 12  12,080  – – 13,181 1,207 Year   ended   31.12.07   Year ended 31.12.06 1,021  68  1,089  – 1,207 1,207 11,508  134  450  12,092  – – – – 13,181 1,207 Year   ended   31.12.07  3,643  1,201  Year ended 31.12.06 1,532 1,051 4,844   2,583  Year   ended  31.12.07  Year ended 31.12.06 2,971  –  18  2,107  1,880 601 1,758 839 5,096   5,078  Note 11: Write-offs and impairment losses Impairment losses relate to adjustments made against the carrying value of assets where this is higher than the recoverable amount. Write-offs  and impairment losses for the year ended 31 December 2007 consisted of the following: US$000  Write-off/write-up of inventories   Write-off of property, plant and equipment   Impairment of property, plant and equipment  Other impairment  Year   ended   31.12.07  Year ended 31.12.06 (544)  2,112  –  –  341 814 729 321  1,568  2,205                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 83 Note 12: Net gain/(loss) from disposal of subsidiaries and investments Gain/(loss) on disposal of subsidiaries and investments for the year ended 31 December 2007 consisted of the following: US$000  Loss on disposal of subsidiaries (note 37)    Gain on disposal of available-for-sale investment (note 37)  Note 13: Initial public offering costs Initial public offering costs during the year ended 31 December 2007 consisted of the following: US$000  Consultants and other professional fees  Management listing bonus: Cash  Share award  Charged to: Income statement  Share premium reserve  Year   ended   31.12.07 Year ended 31.12.06 –  4,714  (3,524) – 4,714  (3,524) Year   ended   31.12.07   45,496  11,332  9,064  65,892  34,004  31,888  65,892  Year ended 31.12.06 – – –  –  – – – In addition to the management listing bonus charge during the year a further 2,403,000 shares remain unvested at 31 December 2007 (note 43)  (2006: nil). Note 14: Financing income/expense Finance revenue and costs for the year ended 31 December 2007 consisted of the following: US$000  Finance income Interest income on bank deposits  Other finance revenue   Finance expense Interest expense on financial liabilities measured at amortised cost  Interest on defined benefit plans  Bank charges  Other finance costs  Foreign exchange loss  Net finance expense  Year   ended   31.12.07 Year ended 31.12.06 2,457 785  2,326 – 3,242   2,326  (21,493)  (1,462)  (1,642)  (1,353)  (27,425) (1,269) (3,870) (91) (25,950) (32,655) (3,467)  (3,784) (26,175)  (34,113)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               84 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 15: Income tax expense Major components of income tax expense for the year ended 31 December 2007 consisted of the following: US$000  Current income tax   Deferred income tax  Year   ended   31.12.07   Year ended 31.12.06 31,163  (4,438)  16,371 (1,613) 26,725  14,758  The Group’s income was subject to taxation in Ukraine, Switzerland and the United Kingdom. During the year ended 31 December 2007 the  corporate income tax was levied on taxable income less allowable expenses at the following rates:  • • • Ukraine 25% (2006: 25%) Switzerland 9.8%–16.2% (2006: 9.3%) UK 30% (2006: 30%). The effective income tax rate differs from the corporate income tax rates. The weighted average of the statutory rates was 17.6% for 2007  (2006: 13.9%). This is calculated as the average of the statutory tax rates applicable in the countries in which the Group operates, weighted by  the profit/(loss) before tax of the subsidiaries in the respective countries as included in the consolidated historical financial information. The  effective tax rate is 16.6% (2006: 18.3%). The changes in the weighted average statutory income tax rate are largely due to a change in the weighting of profit/(loss) before tax in the  various jurisdictions in which the Group operates.  A reconciliation between the income tax charged in the accompanying historical financial information and income before taxes multiplied by  the weighted average statutory tax rate for the year ended 31 December 2007 is as follows: US$000  Profit before tax  Notional tax computed at the weighted average statutory tax rate of 17.6% (2006: 13.9%)  50/50 Swiss tax ruling  (Recognition)/derecognition of deferred tax assets  Tax indexation of fixed assets  Expenses not deductible for tax purposes   Prior year items   Other  Income tax expense  Year   ended   31.12.07   Year ended 31.12.06 160,760  80,737 28,234  (472)  –  (6,084)  4,675  32  340  11,186 (1,991) 791 – 4,759 13 – 26,725   14,758  Note 16: Earnings per share and dividends paid and proposed The earnings per share (‘EPS’) calculation has assumed that the number of Ordinary Shares issued pursuant to the share exchange agreements  in relation to the acquisition of Ferrexpo AG by Ferrexpo plc have been in issue throughout 2006 and 2007 which is consistent with the pooling  of interests method used to account for combinations of businesses under common control. The directors believe that this measure of EPS  provides a more meaningful comparison with the Group’s ongoing business than using the statutory EPS which would only reflect shares  issued based on the actual date of issue. Furthermore this approach provides the same results   as if the Ferrexpo AG shares, outstanding between 2006 and 2007, have been multiplied by the exchange ratio shares in Ferrexpo plc. Basic EPS is calculated by dividing the net profit for the year attributable to ordinary equity shareholders of Ferrexpo plc by the number of  Ordinary Shares as defined above.  Profit for the period attributable to equity shareholders: Basic earnings per share (US cents)  Diluted earnings per share (US cents)  Underlying earnings for the period: Basic earnings per share (US cents)  Diluted earnings per share (US cents)  Year  ended   31.12.07  Year ended 31.12.06 20.41  20.33  10.47 10.47 24.93  24.84  10.92 10.92                                                                                                                                                                                                                                                                                                                                                                                                                                                             Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 85 The calculation of the basic and diluted earnings per share is based on the following data: Thousands  Number of shares Basic number of Ordinary Shares outstanding  Effect of dilutive potential Ordinary Shares   Diluted number of Ordinary Shares outstanding  Year   ended   31.12.07  Year ended 31.12.06   607,796  607,471 – 2,403  610,199 607,471 The number of Ordinary Shares in issue excludes the shares held by the Ferrexpo AG Listing Bonus Trust. Diluted earnings per share is  calculated by adjusting the number of Ordinary Shares in issue on the assumption of conversion of all potentially dilutive Ordinary Shares. All  share awards are potentially dilutive and have been included in the calculation of diluted earnings per share. ‘Underlying earnings’ is an alternative earnings measure, which the Directors believe provides a clearer picture of the underlying financial  performance of the Group’s operations. Underlying earnings is presented after minority interests and excludes adjusted items. The calculation  of underlying earnings per share is based on the following earnings data: US$000  Profit attributable to equity holders  Write-offs/impairments  Loss on disposals  IPO costs  Gain on sale of available-for-sale investment  Tax on adjusting items  Minority interests  Tax on minority interests  Underlying earnings  Year   ended   31.12.07  Year ended 31.12.06 Notes 124,076  63,578 11  12  13  12  1,568  –  34,004  (4,714)  (3,217)  (220)  48  2,205 3,524 – – (1,432) (1,213) (303)   151,545  66,359 Adjusted items are those items of financial performance that the Group believes should be separately disclosed on the face of the income  statement to assist in the understanding of the underlying financial performance achieved by the Group. Adjusted items that relate to the  operating performance of the Group include impairment charges and reversals and other exceptional items. Non-operating adjusting items  include profits and losses on disposal of investments and businesses. Dividends paid and proposed US$000  Dividends proposed   Dividend proposed by subsidiary to minority interest of US$0.015   (2006: US$0.01)  US$000  Dividends paid during the period  Final dividend paid by parent company proposed in 2004   Final dividend proposed in previous years to minority interest  Year   ended   31.12.07  Year ended 31.12.06 251  251  563 563 Year   ended   31.12.07  Year ended 31.12.06 –  786  786  108 178 286 The Directors are proposing a dividend in respect of profits generated by the Ferrexpo Group in 2007 of 3.2 US cents per Ordinary Share. Based  on shares eligible for dividends as at 31 December 2007 this will result in a distribution of US$19,449,000 of shareholders’ funds. These financial  statements do not reflect this dividend payable, in accordance with UK Companies Act and IFRS, as it is still subject to shareholder approval. The Ferrexpo AG Listing Bonus Trust has waived the right to receive dividends on the shares it holds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       86 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 17: EBITDA The Group calculates EBITDA as profit from continuing operations before tax and finance, adjusted for depreciation and amortisation, non- recurring items included in other income and other costs, and the net gain/loss on disposal of subsidiaries and associates. The Group presents  EBITDA because it believes that EBITDA is a useful measure for evaluation of its ability to generate cash and of its operating performance. US$000  Profit before tax and finance   Write-offs and impairment losses   Net loss on disposal of subsidiary  Net gain on disposal of available-for-sale investment    Initial public offering costs  Depreciation and amortisation    EBITDA Year   ended  31.12.07  Year ended  31.12.06 Notes  186,935  114,850 11  12  12  13  4  1,568  –  (4,714)  34,004  28,264  2,205 3,524 – – 28,563 246,057 149,142 The Group has changed how it defines EBITDA from that used in prior periods which now excludes the effect of foreign exchange gains/losses  because the Group believe this is a more appropriate reflection of its ability to generate cash and of its operating performance. Note 18: Property, plant and equipment As at 31 December 2007 property, plant and equipment comprised: US$000  Cost: Land  Mining   Plant and   assets*  Buildings  equipment  Vehicles  Fixtures  and  fittings  Assets under con- struction  Total As at 31 December 2005 2,321 7,439 128,394 149,195 63,210 2,082 31,816 384,457 Additions   Transfers   Disposals   Disposal of subsidiary  –  –  –  –  –  23  –  (138)  –  11,150  (1,069)  (9,523)  –  24,728  (2,401)  (7,065)  –  12,411  (1,272)  (34)  364  271  (25)  (144)  53,985  (48,583)  (583)  (675)  54,349 – (5,350) (17,579) As at 31 December 2006 2,321 7,324 128,952 164,457 74,315 2,548 35,960 415,877 Additions   Transfers   Disposals   Disposal of subsidiary  As at 31 December 2007 Depreciation: As at 31 December 2005 Depreciation charge   Disposals   Impairment  Disposal of subsidiary  At as 31 December 2006 Depreciation charge   Disposals   Impairment  Disposal of subsidiary  At as 31 December 2007 Net book value as at: 31 December 2006 31 December 2007 –  2,563  –  –  1,333  2,714  –  –  –  9,086  (189)  –  3  18,655  (3,205)  –  –  19,581  (1,192)  –  705  402  –  –  93,329  (53,001)  (1,406)  –  95,370 – (5,992) – 4,884 11,371 137,849 179,910 92,704 3,655 74,882 505,255 – –  –  –  –  – –  –  –  –  – 349 14,653 59,082 16,847 164  –  –  (116)  397 236  –  –  –  5,444  (621)  –  (1,385)  16,329  (1,684)  –  (953)  5,937  (1,185)  –  (21)  18,091 72,774 21,578 6,584  (351)  –  –  17,575  (2,632)  –  –  5,643  (881)  –  –  515 541  (16)  –  (75)  965 712  (22)  –  –  – 91,446 –  –  729  –  28,415 (3,506) 729 (2,550) 729 114,534 –  –  (688)  –  30,750 (3,886) (688) – 633 24,324 87,717 26,340 1,655 41 140,710 2,321 6,927 110,861 91,683 52,737 1,583 35,231 301,343 4,884 10,738 113,525 92,193 66,364 2,000 74,841 364,545 * Mine assets constitute mine stripping costs which are accounted for under the Group’s accounting policy outlined in note 2. US$114,388,000 (2006: US$127,872,000) of property plant and equipment have been pledged for security for liabilities.                                                                                                                                                                                                                                                                                                                 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 87 Note 19: Goodwill and other intangible assets As at 31 December 2007 goodwill and other intangible assets comprised: US$000  As at 31 December 2005 Additions    Acquisition of minority interest in subsidiary    Disposals   Disposal of subsidiary   As at 31 December 2006 Additions    Disposals   As at 31 December 2007 Accumulated amortisation and impairment: As at 31 December 2005 Amortisation charge   Disposals   As at 31 December 2006 Amortisation charge   Disposals   At at 31 December 2007 Net carrying amount as at: 31 December 2006 31 December 2007 Other  intangible  assets  Goodwill  Total – 9,619 9,619 –    155,682  –  –  741  741 –  155,682 (181) (8,833) (181)  (8,833)  155,682 1,346 157,028 –  –  482  (47)  482 (47) 155,682 1,781 157,463 – –  –  – –  –  – 355 148  (9)  494 189  (47)  636 355 148 (9) 494 189 (47) 636 155,682 852 156,534 155,682 1,145 156,827 The major component of other intangible assets as at 31 December 2007 comprises licences in respect of the Group’s mining operations. The  amortisation charge for the year is allocated to production expenses and administrative expenses as appropriate. Impairment of goodwill Goodwill acquired through business combinations has been allocated for impairment testing purposes to one cash generating unit as the  Group only has one primary operational segment which is the production and sale of iron ore. This represents the lowest level within the  Group at which goodwill is monitored for internal management purposes. Based on our review no impairment indications were identified as at the reporting date. Note 20: Investments in associates As at 31 December 2007 investments in associates comprised: TIS-Ruda  Port development  49.9 17,637  16,950 17,637  16,950 Principal activity   Ownership %  As at  31.12.07  US$000  As at 31.12.06 US$000 For the year ended 31 December 2007 summarised financial information for the associate was as follows: Total assets  Total liabilities  Revenue  As at  31.12.07  As at  31.12.06  As at  31.12.07  As at  31.12.06  Year ended  31.12.07  Year         ended  31.12.06  Net Profit/(loss) Year ended  31.12.07  Year ended 31.12.06 34,823  28,662  5,422  762  5,778  –  1,377  –  US$000  TIS-Ruda  The information above is for 100% of the associate named and not as a percentage based on Group ownership. The movement in the  investment in the year represents the Group’s share of profit of US$687,000 in TIS-Ruda. TIS-Ruda operates a port on the Black Sea which the Group uses as part of its distribution channel.                                                                                                                                                                                                                                                                                           88 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 21: Available-for-sale financial assets As at 31 December 2007 available-for-sale financial assets comprised: Current Promissory notes available for sale  Marketable Securities  Investments available for sale – equity instruments:    Vostock Ruda  Non-current Promissory notes available for sale  Investments available for sale – equity instruments:    OJSC Stahanov    LLC Atol    CJSC AMA    CJSC Amtek    First Investment Bank    Slavutich-Ruda Ukrania Ltd    Dopomoga Ltd  Ownership %  Carrying Value 2007  2006  As at  31.12.07  US$000  As at  31.12.06 US$000 –  –  –  –  –  102  97 –  3.20  9.40  2,839  1,354 2,941  1,451  –  –  14  14 9.91  9.95  9.00  9.00  0.32 1.00 19.00  –  9.95 9.00  9.00  0.32  1.00  19.00  12,493  26,720  3,560  4,250  94  2  1  – 26,720 3,560 4,250 94 2 1 47,134  34,641 During the year ended 31 December 2007 the Group acquired 9.91% of the voting rights in OJSC Stahanov, a rail car construction plant located  in the Luhansk region of Ukraine for consideration of US$11,994,000 from an entity under common control. A day one gain was recognised on  the difference between consideration and the closing stock price on the day of acquisition.  The fair value of the unquoted equity investment in LLC Atol, CJSC AMA and CJSC Amtek, companies engaged in the exploration and  development of oil and gas fields in the Poltava region of Ukraine, is determined by management using a discounted cash flow projection,  having taken into account the estimated value of reserves provided by an expert third party valuer. The principal assumptions used are gas  selling price US$205/1,000m3 flat (2006: US$150/1,000m3 average in 2007 with growth of 10% per year converging to US$230   by 2012), Condensate selling price – US$403/ton flat (2006: US$538/ton flat) and a discount rate of 8% real after tax (2006: 8% real   after tax). The fair value of Vostock Ruda was made with reference to its net realisable value, based on the sales value achieved when the Group disposed  of a 6.2% interest in 2007 (refer to note 37 for more details). The gain on revaluation of US$2,384,000 was recognised in the revaluation reserve  in the year. Note 22: Other non-current assets As at 31 December 2007 other non-current assets comprised: US$000  Prepayments for property, plant and equipment  Loan provided to associate  Other non-current assets   Note 23: Inventories As at 31 December 2007 inventories comprised: US$000  Raw materials and consumables   Finished ore pellets  Work in progress  Other   Provision for slow moving and obsolete stock  As at  31.12.07   As at 31.12.06 10,869  4,000  310  15,179  618 – 298 916 As at    31.12.07   As at 31.12.06 50,678  3,251  2,848  –  (232)  36,116 10,640 2,132 49 (450) 56,545  48,487 As at 31 December 2007 the rights to future proceeds from finished goods of US$nil were pledged as collateral for bank loans (note 31) (2006:  US$1,215,000). Stock is held at cost or fully provided for through the provision for slow moving and obsolete stock provision above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 89 Note 24: Trade and other receivables At 31 December 2007 trade and other receivables comprised: US$000  Trade receivables  Other receivables owed by related parties    Allowance for uncollectability  As at   31.12.07  As at 31.12.06 43,976 38,356 –  (401)  19,993 (65) 43,575   58,284  Trade receivables at 31 December 2007 includes US$1,374,000 (2006: US$7,277,000) owed by related parties. Other receivables at 31 December 2006 comprised US$14,902,000 owed by an entity under common control for engineering studies  undertaken on its behalf by the Group and US$5,091,000 relating to unpaid proceeds on disposal of Vostok Ruda (note 37). The Group’s exposure to credit and currency risks and impairment losses are disclosed in note 42. The movement in the allowance for uncollectability in the year was: US$000  Opening balance  Utilisation  Arising in the year  Reversal  Closing balance  Note 25: Prepayments and other current assets As at at 31 December 2007 prepayments and other current assets comprised: US$000  Prepayments to suppliers    Electricity and gas    Materials and spare parts    Services  Loan provided to associate  Accounts receivable and prepaid expenses  Other  Allowance for uncollectability  In 2006 accounts receivable and prepaid expenses included IPO costs of US$7,767,000. Note 26: Other taxes recoverable and prepaid As at 31 December taxes recoverable and prepaid comprised: US$000  VAT receivable  Other taxes prepaid  As at   31.12.07  As at 31.12.06 65 –  336  –  401  507 (625) 183 – 65 As at   31.12.07   As at 31.12.06 3,419  1,587  2,574  1,000  811  1,382  –  4,502 1,753 2,607 – 7,996 280 (20) 10,773   17,118  As at   31.12.07  As at  31.12.06 52,037  325  42,129 360 52,362   42,489  The VAT receivable is as a result of zero rate VAT exports made from Ukraine which is recoverable under Ukrainian tax legislation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  90 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 27: Short term deposits with banks As at 31 December 2007 interest bearing term deposits with a maturity term of less than one year comprised: US$000  Short term deposits held with related parties  Other banks  Interest accrued with related parties  Note 28: Cash and cash equivalents US$000  Cash at bank  Cash held with related parties    Petty cash  As at   31.12.07  As at 31.12.06 –  –  –  –  7,941 1,070 2,032 11,043 As at   31.12.07  As at 31.12.06 78,236  8,727 3  14,718 1,515 3 86,966  16,236 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 42. Note 29: Share capital and reserves Balance as at 31 December 2006   Issue of new shares on 21 May 2007  Subdivision of shares  Issue of new shares on 24 May 2007  Initial public offering on 15 June 2007  Issue of new shares on 25 June 2007  Balance as at 31 December 2007 US$000   –  99  –    105,516  14,434  1,579  121,628  Number of shares 2 49,998   450,000 533,043,489  72,527,361   7,897,016 613,967,866 Share capital represents the nominal value on issue of the Company’s equity share capital, comprising £0.10 Ordinary Shares. At 31 December 2006 the authorised and fully paid share capital was two Ordinary Shares at a par value of £1 paid for in cash, resulting in share  capital of US$4.  On 21 May 2007 Ferrexpo plc allotted and issued 49,998 ordinary shares in the Company at par value of £1 each (US$98,620). Following this  allotment, Ferrexpo plc’s total issued and authorised share capital was subdivided into 500,000 Ordinary Shares.   The Company’s authorised share capital was subsequently increased to £60,050,000 divided into 600,500,000 Ordinary Shares. On 24 May 2007, Ferrexpo plc allotted and issued 533,043,489 Ordinary Shares (£53,304,349 (US$105,515,959)) to Fevamotinico Sàrl in exchange  for 129,944,923 registered shares of CHF1 each in the capital of Ferrexpo AG. Pursuant to such transaction, Ferrexpo plc became the sole  shareholder of Ferrexpo AG. As this transaction involved the combination of businesses under common control, the pooling of interests method of accounting has been  applied in the presentation of the consolidated financial statements for the year ended 31 December 2007 and 31 December 2006, which  present the results of the Group as if the Ferrexpo plc had always been the parent company of the Group.  On 15 June 2007, the Company’s Ordinary Shares were admitted to the Official List of the Financial Services Authority and to trading   on the London Stock Exchange. The global offer comprised 152,097,932 Ordinary Shares at a price of £1.40, of which 72,527,361 new Ordinary  Shares were issued by the Company (US$14,433,743) and 79,570,571 were Ordinary Shares sold by the existing shareholder. Gross proceeds of  £101,538,305 (US$202,072,000) were received by the Company following the issue of the new Ordinary Shares. The authorised and fully paid share capital of Ferrexpo plc at 31 December 2007 was 613,967,866 Ordinary Shares paid for in cash, resulting in  share capital of US$121,627,585 per the balance sheet.                                                                                                                                                                                                                                                                                                                                                          Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 91 Share premium Share premium represents the premium paid by subscribers to the share capital issues, net of costs directly attributable to the share issue. Employee benefit trust shares Treasury shares were originally bought back by Ferroxpo AG and then subsequently transferred to the employee benefit trust. On 25 June 2007 Ferrexpo plc allotted and issued 7,897,016 Ordinary Shares (US$1,579,263) fully paid at a premium of £1.75 to the Ferrexpo AG  Listing Bonus Trust in exchange for 2,000,000 shares of CHF1 each in the share capital of Ferrexpo AG, representing the treasury shares held by  Ferrexpo AG, setting up an employee benefit trust reserve. The reserve is used to satisfy future grants of shares in connection with the listing  bonus, as well as future senior management incentivisation schemes. Uniting of interest reserve The uniting of interest reserve represents the difference between the initial investment by Ferrexpo AG in Ferrexpo Poltava GOK Corporation  to gain control of the subsidiary in 2005 and the net assets acquired, which under the pooling of interests method of accounting are  consolidated at their historic cost, less minority interests. The pooling of interests method of accounting is only applicable on acquisition of control of a subsidiary and therefore has not been applied in  accounting for the increase in Ferrexpo AG’s stake in Ferrexpo Poltava GOK Corporation in 2006 from 60.3% to 85.9% as control had already  passed. These subsequent increases in the stake have been accounted for using the parent extension concept method of accounting as  described in the accounting policy section.  Revaluation reserve The revaluation reserve is used to record increases in the fair value of land and buildings, and decreases to the extent that such a decrease  relates to an increase on the same asset previously recognised in equity.  Net unrealised gains reserve This reserve records fair value changes on available-for-sale investments. Note 30: Shares redemption liability In October 2003, JSC Poltava GOK sold 15% of its shares to DCM Decometal International Trading GmbH (‘DCM’) subject to a deferred  obligation to repurchase these shares at a fixed price of US$11.0m, payable in two instalments on 20 November 2008 and 20 December 2008.  The shares redemption liability represents the present value in respect of this contractual obligation. The movement in the shares redemption  liability comprised: Balance as at 31 December 2005  Interest expense  Balance as at 31 December 2006  Interest expense  Balance as at 31 December 2007 US$000  8,182 880 9,062 974 10,036 The DCM shares of 15% have been diluted, as a result of capital increases by Ferrexpo Poltava GOK Corporation in which DCM did not  participate, to 10.6% as at 31 December 2007. Note 31: Interest bearing loans and borrowings This note provides information about the contractual terms of the Group’s interest bearing loans and borrowings, which are measured at  amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 42. US$000  Current Ukrainian banks   Other banks  Other entities  Promissory notes  Interest accrued  Total current borrowings  Non-current Ukrainian banks   Other banks  Promissory notes  Total non-current borrowings  Total interest bearing borrowings  As at  31.12.07   As at 31.12.06 738  53,532  –  253  14  73,781 – 7,411 – 51 54,537   81,243  2,578  43,708 143,430  161,024 – 83  146,091 204,732 200,628   285,975                                                                                                                                                                                                                                                                                                                              92 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 31: Interest bearing loans and borrowings continued As at 31 December 2007 the Ukrainian bank loans are secured by property, plant and equipment with a carrying amount of US$114,388,000  (2006: US$127,872,000) and finished goods with a carrying amount of US$nil (2006: US$1,215,000). Secured   Ukrainian property, plant and equipment includes pellet production equipment, locomotives, mine transport equipment, excavators   and crushing equipment. Non-Ukraine bank loans are secured by rights to proceeds from future export sales of US$584,218,303  (2006: US$519,794,000). As at 31 December 2007 the Group’s major bank debt facility was a US$335,000,000 pre-export finance facility with an unutilised amount of  US$135,000,000.  The term loan and revolving credit facilities are guaranteed and secured. Ferrexpo AG has assigned the rights to revenue from certain sales  contracts and Ferrexpo Poltava GOK Corporation has assigned all of its rights for 10 export contracts for the pellet sales in 2008. In addition the  Group has also pledged its bank account into which all proceeds from the sale of certain iron ore pellet contracts are received. Ferrexpo has  pledged all its rights under certain contacts for the sale of iron ore pellets and its rights under certain related credit support documents. Borrowings from Finance and Credit Bank Included in the Ukrainian bank loans are interest bearing loans, denominated in USD and UAH, from Finance and Credit Bank, a related party  (note 37), with a carrying value of US$nil as at 31 December 2007 (2006: US$7,200,000). Note 32: Trade and other payables As at 31 December 2007 trade and other payables comprised: US$000  Current trade payables Due for equipment  Materials and services  Letter of credit exercised by the bank   Dividends payable  Other   Trade and other payables, current Non-current payables Due for equipment  Other  Trade and other payables, non-current As at   31.12.07  As at  31.12.06 1,664  21,108  218  1,197  940  9,300 9,279 2,178 641 94 25,127   21,492  2,569  14  10,462 22 2,583   10,484  Current trade and other payables at 31 December 2007 includes US$3,284,000 (2006: US$2,485,000) due to related parties. The Group’s exposure to currency and liquidity risk relating to trade and other payables is disclosed in note 42. Note 33: Defined benefit pension liability Ukrainian defined benefit plan The production companies of the Group have a legal obligation to compensate the Ukrainian state pension fund for additional pensions paid  to certain categories of the employees and former employees who are eligible for early retirement benefits. The average age at which  employees become eligible to receive benefits is 56. In 2007 this defined benefit plan covered 4,098 people (2006: 4,317 people). There are no defined benefit plan assets.  In addition, the Group has a legal obligation to its employees (in the form of a collective agreement) to make a one-off payment on retirement  to employees with a long term of service. Swiss defined benefit plan In the year we recognised a defined benefit liability in Switzerland which was previously deemed immaterial to disclose. With the executive  management function moving to Switzerland and the expansion of the head office function this pension liability has now been evaluated and  recognised in the year. The 2006 total balance does not include any items relating to the Swiss scheme. In 2007 this defined benefit plan covered 18 people (2006: 9 people).                                                                                                                                                                                   Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 93 Changes in the net present value of the defined benefit obligation are as follows: US$000  Opening defined benefit obligation  Recognition of plan liability  Current service cost  Interest cost  Contribution by plan participants  Benefits paid  Actuarial loss  Scheme transfer on disposal of subsidiary   Closing defined benefit obligation Opening assets  Recognition of plan assets  Expected return on plan assets   Employer contribution  Contribution by plan participants  Benefits paid  Actuarial loss  Closing balance Net funded status  Swiss  Ukrainian  Total as at  31.12.07  scheme  scheme  As at 31.12.06 –  1,096  459  45  302  (311)  56  –  1,647 –  832  27  291  302  (311)   (102)  1,039 15,446  –  1,994  1,445  –  (1,972)  1,940  –  18,853 –  –  –  –  –  –   –  – 15,446  1,096  2,453  1,490  302  (2,283)  1,996  –  20,500 –  832  27  291  302  (311)   (102)  1,039 13,538 – 1,894 1,269 – (1,681) 659 (233) 15,446 – – – – – –  – – 608 18,853 19,461 15,446 Unrecognised actuarial losses (417) (2,875) (3,292) (945) Defined benefit liability at the end of the year 191 15,978 16,169 14,501 Benefit expense Current service cost  Interest cost  Amortisation of actuarial loss  Expected return on plan assets   Benefit liability  Balance at beginning of the year Recognition of liability  Benefits expense  Benefits paid  Employer contribution  Scheme transfer on disposal of subsidiary   Foreign exchange translation adjustment    Balance at the end of the year Experience adjustments arising on plan liabilities The asset allocation of the plan assets at fair value of the Swiss scheme is as follows: US$000  Equities  Bonds  Properties  Other  459  45  17  (27)  1,994  1,445  –  –  2,453  1,490  17  (27)  494 3,439 3,933 1,894 1,269 – – 3,163 – 14,501 14,501 13,252 (11)  494  –  (291)  –  (1)  191 417 –  3,439  (1,972)  –  –   10  (11)  3,933  (1,972)  (291)  –  9  – 3,163 (1,681) – (233) – 15,978 16,169 14,501 1,930 2,347 659 As at   31.12.07  As at 31.12.06 17.6% 53.7%  13.8%  14.9%  183  558  143  155  1,039  – – – – –                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        94 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 33: Defined benefit pension liability continued The principal assumptions used in determining the defined benefit obligation are shown below: Discount rate  Retail price inflation  Future benefit increase  Female mortality rate (years)  Male mortality rate (years)  The experience gains and losses for the year ended 31 December 2007 were: Unrecognised gain/(loss) at start of year  Loss on experience on the liability  Gain on change in assumptions  Foreign exchange translation adjustment    Unrecognised loss at the end of year  Year ended  31.12.07  Year ended   31.12.06 Swiss Ukrainian  Ukrainian  scheme scheme  scheme 3.25% 0.7% 1.5% 85.50 82.90 10.0%  6.5%  7.6%  74.74  63.46  10.0% 6.5% 8.5% 74.74 63.46 2007  (945)  (2,347)  –  –  (3,292)  2006  (286)  (659)  –  –  (945)  2005  (5)  (855)  572  2  (286)  2004 376 (380) – (1) (5) Note 34: Provision for site restoration The costs of decommissioning open pit mines are based on the amounts determined by third party experts on the basis of Ukrainian  legislation. The provision represents the discounted value of the estimated costs to decommission and restore the mines at the dates the  deposits are expected to be depleted. The present value of the provision has been calculated using a discount rate of 15% per year (2006: 11%).  The liability becomes payable at the end of the useful life of the mine. Uncertainties in estimating these costs include potential changes in  regulatory requirements, decommissioning and reclamation alternatives and the levels of discount and inflation rates. The addition in the year  represents a re-evaluation of the liability in 2007. Balance as at 31 December 2005  Unwind of the discount  Balance as at 31 December 2006  Unwind of the discount  Arising during the year  Balance as at 31 December 2007   US$000  339 63 402 75 1,269  1,746                                                                                                                                                                                                                                                                                                                                                       Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 95 Note 35: Deferred income tax Deferred income tax assets and liabilities at 31 December 2007 relate to the following: US$000  Interest bearing loans and borrowings  Trade and other receivables  Trade and other payables and advance receivables  Property, plant and equipment    IPO costs netted against share premium  Tax losses recognised  Accrued expenses  Defined benefit liability  Provision for site restoration  Other provisions and accruals    Other items  Deferred tax asset  Thereof netted against deferred tax liabilities  Deferred tax asset per the balance sheet    Inventories  Property, plant and equipment    Exploration rights  Advances and other current assets  Loans and borrowings  Trade and other payables and advance receivables  Deferred tax liability  Thereof netted against deferred tax assets   Deferred tax liability per the balance sheet   Net deferred tax asset/(liability)    The movement in the deferred income tax liabilities and (assets) are as follows: US$000  Beginning of the year  Income statement charge  Transaction costs in share premium account  Disposal of subsidiary  End of the year  Deferred tax assets not recognised Deferred tax assets have not been recognised in respect of the defined benefit liability. Unrecognised deferred tax assets comprised: US$000  Defined benefit liabilities  As at   31.12.07  As at 31.12.06 –  587  57  1,819  5,179  1,564  1,557  552  436  72  35  6 1,756 1,454 – – – 591 – 101 – 25 11,858   3,933  (3,751)  8,107  (3,933) – (1,232)  (295)  (154)  (1,803)  (507)  (785)  (2,609) (2,508) (71) (1,266) (14) – (4,776)   (6,468)  3,751 (1,025)  3,933 (2,535) 7,082   (2,535)   2007   2006 2,535  (4,438)  (5,179)  –  6,987 (1,613) – (2,839) (7,082)  2,535  As at   31.12.07  As at  31.12.06 3,478  3,625                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     96 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 36: Accrued liabilities and deferred income As at 31 December 2007 accrued liabilities and deferred income comprised: US$000  Accrued expenses  Accrued interest payable  Accrued employee costs  Advances from customers  As at   31.12.07 As at  31.12.06 2,162  15 11,386 249  2,101 98 10,802 4,985 13,812   17,986  Note 37: Related party disclosure During the periods presented the Group entered into various transactions with entities under common control of the majority owner of   the Group, Kostyantyn Zhevago. The Group also, in the normal course of business, entered into various sales, purchase and service  transactions with associates and other related parties. These transactions were undertaken in a transparent manner at arm’s length. Management considers that the Group has appropriate procedures in place to identify and properly disclose transactions with the   related parties and has disclosed all of the relationships identified and which it deemed to be significant. The significant balances   with related parties are disclosed in the relevant note to the accounts. The significant related party transactions undertaken   by the Group during the periods presented are disclosed below. US$000  Iron ore pellet sales  Other sales  Purchase of materials  Purchase of services  General and administrative expenses  Selling and distribution  Other expenses  Finance income  Finance expense  Sale of property, plant and equipment  Purchase of property, plant and equipment  Year ended 31.12.07    Year ended 31.12.06 Entities   under common control – 3,013 18,417 2,460 361 1,801 202 415 141 690 5,450 Other  related  parties  –  4,336  13,731  767  19  1,797  76  212  –  –  62  Entities under  common  control   2,825  407  5,002  1,821  –  –  –  1,303  1,996  280  1,481  Other related parties – 1,855 11,198 3,059 – – – – – – – Additionally the Group incurred US$1,555,000 of distribution costs with its associate, TIS-Ruda (2006: US$nil). Investment activity During the year ended 31 December 2007 the Group acquired 9.91% of the voting rights in OJSC Stahanov from an entity under common  control. More details of this transaction are disclosed in note 21. During the year ended 31 December 2006 the Group acquired a further 25.6% of the voting rights in Ferrexpo Poltava GOK Corporation for a  consideration of US$238,986,000 from entities under common control. In 2006, the Group acquired the minority interest of United Energy Company LLC from an entity under common control for consideration of  US$3,609,000 increasing the Group’s interest in the net assets to 100%.  Disposals relating to Vostok Ruda In 2007 the Group sold a 6.2% interest in Vostock Ruda, an available-for-sale investment, to entities under common control for consideration of  US$5,613,000, resulting in a gain on disposal of US$4,714,000. The consideration was received in full during 2007. In 2006 the Group sold a 90.6% interest in its then subsidiary Vostock Ruda to entities under common control for consideration of  US$9,474,000, resulting in a loss on disposal of US$3,524,000. As at 31 December 2006, of the total consideration, US$4,383,000 was received  during 2006 and US$5,091,000 remained unpaid and is included in the comparative of current assets within other receivables (note 24). As part  of the disposal of Vostock Ruda loans totalling US$19,347,741 to entities under common control were disposed of. Distributions under 50/50 tax rulings Prior to the listing on 15 June 2007 the Group made distributions totalling US$6,569,000 (31 December 2006: US$21,190,000) under the 50/50  Swiss tax ruling to the ultimate beneficial owner. The ruling allows for a qualifying company to distribute a percentage of its profits free of tax.  On listing the Group no longer qualifies for this tax treatment. Share buyback During the year ended 31 December 2007, Ferrexpo AG entered into a share buyback arrangement with its then shareholder, Collaton Limited,  under which Ferrexpo AG repurchased 5,178,877 shares of CHF1 each in exchange for cash in a number of transactions which took place  between 13 February and 18 May 2007. The total consideration paid under the arrangement was US$64,055,329.                                                                                                                                                                                                                                                                                                                                          Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 97 Banking transactions The financing of the Group is principally undertaken with third party financial institutions outside of Ukraine. The Group also operates  transactional banking arrangements with a financial institution in Ukraine under common control which were undertaken in a transparent  manner at arm’s length. Ferrexpo AG share issue On 24 August 2006 Ferrexpo AG issued 135,123,800 Ordinary Shares with a nominal value of CHF1 to an entity under common control   at par for cash consideration of US$109,329,000  Acquisition of minority interest in Ferrexpo Poltava GOK Corporation During 2006 Ferrexpo AG acquired a further 25.6% of the voting rights of Ferrexpo Poltava GOK Corporation for consideration of  US$238,986,000 of which US$231,945,000 was settled in cash during 2006. Purchase and sale of property, plant and equipment During 2007 land and buildings not used by the Group were disposed of to an entity under common control for US$690,000. The Group purchased 110 rail cars from OJSC Stahanov for US$4,965,000 during the year. Remuneration and benefits received by Directors is disclosed in the Directors’ remuneration report. Remuneration and benefits of other key  management personnel is given in note 40. Note 38: Reconciliation of profit before income tax to net cash flow from operating activities US$000  Profit before income tax  Adjustments for:  Depreciation of property, plant and equipment and amortisation of intangible assets  Interest expense  Interest income  Dividend income  Movement in allowance for doubtful receivables  Loss on disposal of property, plant and equipment  Write-off and impairment losses   Site restoration provision  (Gains)/losses on disposal of investments available for sale  Losses from disposal of subsidiaries and associates    Initial public offering costs   Share of income from associates  Defined benefit plan expense  Foreign exchange loss  Year   ended  31.12.07  Year ended 31.12.06   160,760  80,737 28,265  24,488  (3,242) –  336  –  1,568  1,269  (4,714)  –  34,004  (687)  3,915  3,467  28,563 27,425 (2,326) (17) 183 601 2,021 – 31 3,524 – – 3,163 645 Operating cash flow before working capital changes  249,429   144,550  Changes in working capital Decrease/(increase) in trade accounts receivable and other receivables  (Increase)/decrease in inventories  Increase/(decrease) in trade and other accounts payable  (Increase)/decrease in other taxes receivable  Operating cash flows after working capital changes  Interest paid  Income tax paid  Post employment benefits paid   Net cash flows from operating activities  Note 39: Net financial indebtedness US$000  Cash and cash equivalents  Term deposits  Current borrowings  Non-current borrowings  Short term due for equipment    Long term due for equipment  Net financial indebtedness  13,951  (7,840)  6,534  (14,411)  (38,658) 9,237 (2,467) – 247,663   112,662  (24,525)  (32,018)  (2,274)  (28,119) (14,562) (1,681)   188,846   68,300  Notes As at  31.12.07  As at 31.12.06 28  27  31  31  32  32  16,236 86,966  11,043 –  (54,537)  (81,243) (146,091)  (204,732) (9,300) (10,462) (1,664)  (2,569)  (117,895)  (278,458)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         98 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 39: Net financial indebtedness continued Net financial indebtedness as defined by the Group comprises cash and cash equivalents, term deposits, interest bearing loans and borrowings  and amounts payable for equipment. Payables for equipment comprised balances due to foreign suppliers for mining equipment denominated in US dollar and euros which are  interest bearing. Note 40: Employee benefits expense US$000  Wages and salaries  Social security costs  Post employment benefits  Other employee costs  Year   ended   31.12.07  65,885  17,369  2,417  5,175  Year ended 31.12.06 56,178 18,373 1,916 4,147 90,846   80,614  Wages and salary costs of US$65,885,000 includes US$19,556,000 of costs included within initial public offering costs. Social security costs of  US$17,369,000 includes US$1,863,000 of social security costs included within initial public offering costs. Average number of employees Number  Production  Marketing and distribution  Administration  Compensation for key management was as follows: US$000  Wages and salaries  Social security costs  Other employee costs  Note 41: Commitments and Contingencies Commitments US$000  Capital commitments on purchase of property, plant and equipment  Guarantees provided  Year   ended   31.12.07  Year ended 31.12.06 7,796  185  2,131  8,541 185 2,624 10,112  11,350  Year   ended  31.12.07  Year ended 31.12.06 15,589  2,236  8,721  26,546  1,420 – 3,508 4,928 As at   31.12.07  As at  31.12.06 60,904 335,000  11,111 12,185 Taxation Ukrainian legislation and regulations regarding taxation and custom regulations continue to evolve. Legislation and regulations are not always  clearly written and are subject to varying interpretations and inconsistent enforcement by local, regional and national authorities, and other  governmental bodies. Instances of inconsistent interpretations are not unusual. The uncertainty of application and the evolution of Ukrainian  tax laws, including those affecting cross border transactions, create a risk of additional tax payments having to be made by the Group, which  could have a material effect on the Group’s financial position and results of operations. The Group does not believe that these risks are any  more significant than those of similar groups with operations in Ukraine. Management’s assessment of these risks remains unchanged from  that disclosed at 31 December 2006.  Management is of the opinion that the Group has applied an appropriate interpretation of relevant legislation, has complied with all  regulations and paid or accrued all taxes and withholdings as applicable. However, due to the complexities of the local tax legislation where  the Group operates it is possible that the tax basis of certain transactions undertaken by the Group may be challenged, which   may mean that the Group incurs additional tax liabilities, the quantum of which is not practical to determine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 99 Note 42: Financial instruments Credit risk Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date  was: US$000  Cash and term deposits  Trade receivables  VAT receivable  Other financial assets  Available-for-sale financial assets  Total maximum exposure to credit risk    As at   31.12.07   As at 31.12.06 86,966  43,575  52,037  10,650  50,075  27,279 58,284 42,129 1,424 36,092 243,303    165,208 The Group’s most significant customer accounts for US$12,437,000 (2006: US$7,845,000).  Impairment losses The ageing of trade and VAT receivables at the reporting date was: As at 31 December 2007 US$000 Trade and other receivables   Associated Impairment Provision  Current debtors 33,694 – 1 to 3 months 8,453 – 33,694 8,453 3 to 6 months months 6 to 12 Greater than 12 months Total 741 (66) 675 738 (90) 648 350 43,976 (401) (245) 105 43,575 VAT receivable  37,774 – – 13,555 708 52,037 Trade and other receivables  Associated Impairment Provision      As at 31 December 2006 Current   debtors  41,197  –  1 to 3  months  16,421  –  41,197  16,421  3 to 6  months  6 to 12  Greater than 12 months  months  Total  683  (48)  635  24  (9)  15  24  58,349 (65) (8)  16  58,284 VAT receivable  27,263  –  –  14,866  –  42,129 Liquidity risk The following are the contractual maturities of financial liabilities by interest type: US$000  Interest bearing Ukrainian banks (fixed rate interest)  Other banks (floating rate interest)  Related party banks  Promissory notes (fixed rate interest)  Due for equipment (fixed rate interest)  Interest accrued  Non-interest bearing Trade and other payables   Share redemption liability  Other financial liabilities  Total cash flow maturity  As at 31 December 2007 Less Between Between 2 to 5 1 to 2 than years years 1 year Total 738 53,532 – 253 1,664 14 23,463 10,036 7,229 738 71,715 – 83 2,569 – 1,840 3,316 71,715 196,962 – 336 4,233 14 – – – – 14 – – – – – 23,477 10,036 7,229 96,929 75,119 73,555 245,603                                                                                                                                                                                                                                                                                                                                                                                                                             100 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 42: Financial instruments continued US$000  Interest bearing  Ukrainian banks (fixed rate interest)  Other banks (floating rate interest)  Related party banks (fixed rate interest)  Promissory notes (fixed rate interest)  Due for equipment (fixed rate interest)  Interest accrued  Non-interest bearing  Trade and other payables  Share redemption liability  Other financial liabilities  Total cash flow maturity   As at 31 December 2006 Less   than   1 year  Between  1 to 2  years  Between 2 to 5  years  Total 73,781  7,411  –  –  9,300  51  12,192  –  9,132  30,175  6,333  110,289 36,948  124,076  168,435 7,200 7,200  –  – 19,762 3,203  51 –  –  –  7,259  –  22  9,062  –  –  –  –  12,214 9,062 9,132   111,867  83,466  140,812  336,145 Currency risk The Group’s exposure to foreign currency risk was as follows based on notional amounts: As at 31 December 2007 US$000 Financial assets  Financial liabilities  Ukrainian banks  Other banks  Related party banks  Promissory notes  Interest accrued  Borrowings Due for equipment  Trade and other payables  Share redemption liability  Other financial liabilities  Total financial liabilities  Ukraine hyrivna US dollar 121,220 121,219 –  –  –  (336)  –  (3,316)  (196,962)  –  –  (14)  (336) (200,292) (690)  (6,266)  (10,036)  –  –  (12,393)  –  (5,221)  Euro – –  –  –  –  –  – (3,543)  (3,383)  –  –  (17,950) (217,284) (6,926) Russian rouble Swiss Other franc currencies Total 29 308 527 243,303 –  –  –  –  –  – –  –  –  –  – –  –  –  –  –  – –  (589)  –  (2,008)  (3,316) –  (196,962) –  – –  (336) –  –  (14) – (200,628) (4,233) –  (23,477) (846)  (10,036) –  (7,229) –  (2,597) (846) (245,603) Net financial assets/(liabilities)    103,270 (96,065) (6,926) 29 (2,289) (319) (2,300) US$000  Financial assets Financial liabilities Ukrainian banks  Other banks  Related party banks  Promissory notes  Interest accrued  Borrowings Due for equipment  Trade and other payables  Shares redemption liability  Other financial liabilities  Total financial liabilities Net financial assets/(liabilities)  As at 31 December 2006 Ukraine   hyrivna  US dollar  Euro   Russian  rouble  Swiss  Other franc  currencies  Total 114,281  50,693  4  –  –  –  –  –  –  –  (5,625)  –  (7,166)  (109,564)  (168,435)  (7,200)  –  (51)  (285,250)  (16,771)  (5,280)  (9,062)  (1,527)  (725)  –  –  –  –  (725)  (2,991)  (575)  –  –  (12,791)  (317,890)  (4,291)  101,490  (267,197)  (4,287)  –  –  –  –  –  –  –  –  –  –  –  –  –  173  57  165,208 –  –  –  –  –  –  –  (93)  –  (35)  –  –  –  –  –  –  –  (641)  –  (404)  (110,289) (168,435) (7,200) – (51) (285,975) (19,762) (12,214) (9,062) (9,132) (128)  (1,045)  (336,145) 45  (988)  (170,937)                                                                                                                                                                                                                                                                                                                                                                                                                         Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 101 Interest rate risk Profile At the reporting date the interest rate profile of the Group’s interest bearing financial instruments was: US$000  Financial assets  Cash and term deposits  Available-for-sale investments  Trade receivables  VAT recoverable  Other financial assets  Total financial assets  As at 31 December 2007 Floating interest Fixed interest Other non- interest bearing Equity 78,247 102 – – 5,304 8,702 – – – – – 49,973 – – – 17 – 43,575 52,037 5,346 Total 86,966 50,075 43,575 52,037 10,650 83,653 8,702 49,973 100,975 243,303 Weighted average interest rate (%)  5.0 1.5 Financial liabilities Borrowings  Trade and other financial liabilities  Total financial liability exposure  196,045 4,233 4,247 – – – 336 200,628 44,975 40,742 200,278 4,247 – 41,078 245,603  Weighted average interest rate (%)  7.6 8.2 US$000  Financial assets Cash and term deposits  Available-for-sale investments  Trade receivables  VAT recoverable  Other financial assets  Total financial assets   As at 31 December 2006 Floating   interest  Fixed  interest    Other non- interest bearing  Equity  13,639  –  –  –  –  11,516  –  –  –  –  –  35,995  –  –  –  2,124  97  58,284  42,129  1,424  Total 27,279 36,092 58,284 42,129 1,424 13,639  11,516  35,995  104,058  165,208 Weighted average interest rate (%)  2.0  2.0  Financial liabilities Borrowings  Trade and other financial liabilities  Total financial liability exposure    102,742  183,233  –  19,762    122,504   183,233  –  –  –  –  285,975 50,170 30,408  30,408   336,145 Weighted average interest rate (%)  8.3  9.2  The interest rate maturity profile for financial liabilities is shown under the liquidity risk section. The interest rate maturity profile for financial  assets is all current for both years, except for US$4,000,000 of the floating rate loan to associate which matures between two to five years as at  31 December 2007 (2006: US$nil) and US$14,000 of promissory notes attracting no interest, which matures between one to two years (2006:  US$14,000, between two to five years).                                                                                                                                                                                                                                                                                                                                         102 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 42: Financial instruments continued Sensitivity analysis A 5% strengthening of the US dollar against the following currencies at 31 December 2007 would have increased/(decreased) equity and profit  and loss by the amounts shown below. This assumes that all other variables, in particular interest rates, remain constant. The analysis is  performed on the same basis for 2006. US$000  UAH  EUR  As at  31.12.07  As at 31.12.06 (4,673) (5,262)  (3,467) 215 (9,935)  (3,252) A 5% weakening of the US dollar against the above currencies would have an equal but opposite effect to the amounts shown above, on the  basis that all the other variables remain constant. Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit and loss, and the Group does not hold  any derivatives (e.g. interest rate swaps). Therefore a change in interest rates at the reporting date would not affect profit or loss. Cash flow sensitivity for fixed and variable rate instruments An increase of 100 basis points (‘bp’) in interest rates would have increased/(decreased) equity and profit or loss by the amounts shown below.  This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis  for 2006. US$000  Net finance charge  Year ended  31.12.07  Year ended 31.12.06 (3,182)  (3,391) A decrease of 100 bp would have an equal but opposite effect to the amounts shown above, on the basis that all the other variables remain  constant. Set out below is the comparison by category of carrying amounts and fair values of all the Group’s financial instruments that are carried in the  consolidated balance sheet: US$000  Financial assets Available-for-sale investments  Short term deposits with banks   Cash and cash equivalents  Financial liabilities  Interest bearing loans and borrowings  Carrying amount  Fair value As at  31.12.07  As at  31.12.06  As at  31.12.07  As at 31.12.06 50,075 –  86,966  36,092 11,043  16,236  50,075  –  86,966 36,092 11,043 16,236 200,628 285,975 200,628 285,975 The fair values of interest bearing loans and borrowings are based on the cash flows discounted using market interest rates.  The fair values of cash and cash equivalents, trade and other receivables and payables are approximately equal to their carrying amounts due  to their short maturity. Note 43: Share-based payments Listing bonus share award Share awards were granted in the year to certain senior management following the successful listing of the Company on the London Stock  Exchange in June 2007. A proportion of the award vests immediately with the remainder vesting over a period of up to four years, provided  that the individual is still in the employment of the Group on the date of vesting. It has been assumed that all awards will vest. The fair value of the awards were determined to be the closing share price on the date of award. The weighted average fair value (WAFV) of  awards granted was determined at the date of grant to be US$3.33 per share. The unvested portion of the award does not accrue dividends. There are no cash settlement alternatives. The expense recognised under the scheme during the year to 31 December 2007 is US$9,124,000 (2006: US$nil), all of which arose from equity- settled share-based payment transactions. Beginning of the year  Award granted during the year    Vested during the year  Outstanding at end of year   2007  WAFV  $  –  3.33  2.92  3.63  2006  WAFV  $  –  – –  – 2007  No.  –  4,166  (1,763)  2,403  2006 No. – – – –                                                                                                                                                                                                                                                                                                                                                                       Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 103 Note 44: Operating leases Non-cancellable operating lease rentals are payable as follows: US$000  Less than one year  Between one and five years  More than five years  2007  1,035  3,617  9,092  2006 592 3,242 6,403 13,744  10,237 During the year ended 31 December 2007 US$610,000 was recognised as an expense in the income statement in respect of operating leases  (2006: US$556,000). The Group leases land and buildings under operating leases. The lease on land typically runs for 49 years, with a lease period of five to 10 years  on buildings. Note 45: Operating profit by function Before  US$000  Revenue  Cost of sales  Gross profit  Selling and distribution expenses  General and administrative expenses  Other income  Other expenses   Operating profit  Net loss on disposal of subsidiary  Gain on disposal of available-for-sale investment  Share of gains of associates    adjusting Adjusting Year ended  31.12.07  items items Notes  Before  adjusting  items  Adjusting  Year ended 31.12.06 items  5  698,216 6  (335,936) – 698,216  547,310  – (335,936)  (296,720)    362,280 – 362,280  250,590  –  547,310 (296,720) –  –  250,590 7  8  9  10  (100,614) (44,308) 4,844 (5,096) – – – (35,572) (100,614)  (44,308)  4,844  (40,668)  (86,376)  (41,140)  2,583  (5,078)  –  –  –  (2,205)  (86,376) (41,140) 2,583 (7,283)   217,106 (35,572) 181,534  120,579  (2,205)  118,374 – – 687 – 4,714 – –  4,714  687  20  –  –  –  (3,524)  –  –  (3,524) – – Total profit from operations and associates    217,793 (30,858) 186,935  120,579  (5,729)  114,850 Summary of adjusting items: US$000  Operating adjusting items  Write-offs and impairment losses  Initial public offering costs  Non-operating adjusting items  Net loss on disposal of subsidiary  Gain on disposal of available-for-sale investment  Adjusting items are defined in note 16. Year   ended   31.12.07   Year ended 31.12.06 Notes  11  13 (1,568)  (34,004)  (2,205) – (35,572)  (2,205) 12  12 –  4,714  4,714  (3,524) – (3,524) Note 46: Subsequent events No material adjusting or non-adjusting events have occurred subsequent to the year end, other than the proposed dividend disclosed in note  16.                                                                                                                                                                                                                                                                                                                                                                            104 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Notes to the consolidated financial information continued Note 47: Financial statements of the parent company a) Balance sheet of the company, Ferrexpo plc US$000  Assets Fixed asset investments  Deferred income taxes  Total non-current assets  Amounts due from subsidiaries   Prepayments and other current assets  Other taxes recoverable and prepaid  Marketable securities  Cash and cash equivalents   Total current assets  Total assets  Equity and liabilities Share capital  Share premium  Employee Benefit Trust reserve   Retained loss  Equity attributable to equity shareholders of the parent  Trade and other payables   Accrued liabilities and deferred income  Income taxes payable  Total liabilities  Total equity and liabilities  The financial statements were approved by the Board of Directors on 8 April 2008. Notes  As at   31.12.07  As at 31.12.06  47c 134,732  6,743  47d    141,475    131,817  80  8  102  233  132,240    273,715  47b  121,628  47b 188,566  (20,092)  47b  (17,401)  47b  47b  272,701  141  749  124  1,014  273,715  – – – – – – – – – – – – – – – – – – – – Mike Oppenheimer Chief Executive Chris Mawe Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                    Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 105 Note 47: Financial statements of the parent company continued b) Statement of changes in equity US$000  At 31 December 2006  Profit for the period  Items recognised directly in equity: Share issue in parent company   Transaction costs associated with issue of shares  Deferred tax on transaction costs  Treasury shares issued to Employee Benefit Trust  Share-based payment  At 31 December 2007  The audit fee in respect of the parent company was US$7,000 (2006: US$nil). c) Fixed asset investments US$000  At 31 December 2005 and 2006  Additions   At 31 December 2007  d) Deferred tax asset Deferred income tax assets at 31 December 2007 relate to the following: US$000  Deferred income tax assets:  Tax loss recognised  IPO costs    Employee  Benefit  Trust  reserve  Share  premium  –  –  –  –  Issued   capital  –  –  Retained  earnings  –  Total equity – (17,401)  (17,401)   121,628  215,275  (31,888)  –  5,179  –  –  –  –  –  –  –  –  (29,216)  9,124  –  336,903 (31,888) –  5,179 –  (29,216) –  9,124 –    121,628  188,566  (20,092)  (17,401)  272,701 Investment   in subsidiary  equity –   134,732   134,732 Year   ended  31.12.07  Year ended 31.12.06 1,564 5,179  6,743  – –  – e) Subsequent events On 27 February 2008, a dividend of CHF82,000,000 (US$75,423,000) was received by the Company from its wholly owned subsidiary Ferrexpo  AG.                                                                                                                                                                                                                                                                                                                                                                                  106 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Accounting policies Basis of preparation The parent company financial statements of Ferrexpo plc are  presented as required by the Companies Act 1985 and were approved  for issue on 8 April 2008. The financial statements are prepared under  the historical cost convention and are prepared in accordance with  applicable accounting standards. No profit and loss account is  presented by the Company as permitted by section 230 of the  Companies Act 1985. The Company has taken advantage of the exemption in paragraph 2D  of FRS 29 ‘Financial Instruments: Disclosures’ and has not disclosed  information required by that standard, as the Group’s consolidated  financial statements, in which the Company is included, provide  equivalent disclosures for the Group under   IFRS 7 Financial Instruments: Disclosures. Deferred tax Deferred tax is recognised in respect of all timing differences that  have originated but not reversed at the balance sheet date where  transactions or events have occurred at that date that will result in an  obligation to pay more, or a right to pay less or to receive more, tax,  with the exceptions of tax losses, where deferred tax assets are  recognised only to the extent that the Directors consider that it is  more likely than not that there will be suitable taxable profits from  which the future reversal of the underlying timing differences can be  deducted. Deferred tax is measured on an undiscounted basis at the  tax rates that are expected to apply in the periods in which timing  differences reverse, based on tax rates and laws enacted or  substantively enacted at the balance sheet date. Foreign currencies The Company’s functional currency and presentation currency is US  dollars. Transactions in foreign currencies are initially recorded in the  functional currency by applying the spot exchange rate ruling at the  date of the transaction. Monetary assets and liabilities denominated  in foreign currencies are retranslated at the functional currency rate  of exchange ruling at the balance sheet date. Non-monetary items  that are measured in terms of historical cost in a foreign currency are  translated using the exchange rates as at the dates of the initial  transactions. 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.  Financial assets Financial assets are recognised when the Company becomes party to  the contracts that give rise to them and are classified as financial  assets at fair value through profit or loss; loans and receivables; held- to-maturity investments; or as available-for-sale financial assets, as  appropriate. The Company determines the classification of its  financial assets at initial recognition and where allowed and  appropriate re-evaluates this designation at each financial year end.  When financial assets are recognised initially, they are measured at  fair value, being the transaction price plus, in the case of financial  assets not at fair value through profit or loss, directly attributable  transaction costs. The Company considers whether a contract  contains an embedded derivative when the entity first becomes a  party to it. The embedded derivatives are separated from the risk  contract which is not measured at fair value through profit or loss  when the analysis shows that the economic characteristics and risks  of embedded derivatives are not closely related to those of the host  contract. Reassessment only occurs if there is a change in the terms of  the contract that significantly modifies the cash flows that would  otherwise be required. The Company has no financial assets classified  as available for sale, fair value through profit or loss, held for trading  or held to maturity in the current or prior periods. All regular way  purchases and sales of financial assets are recognised on the trade  date, being the date that the Company commits to purchase or sell  the asset. Regular way transactions require delivery of assets within  the timeframe generally established by regulation or convention in  the marketplace. The subsequent measurement of financial assets  depends on their classification, as follows. Loans and receivables Loans and receivables are non-derivative financial assets with   fixed or determinable payments that are not quoted in an active  market, do not qualify as trading assets and have not been  designated as either fair value through profit and loss or available for  sale. Such assets are carried at amortised cost using the effective  interest method if the time value of money is significant. Gains and  losses are recognised in income when the loans and receivables are  derecognised or impaired, as well as through the amortisation  process.  Impairment of financial assets The Company assesses at each balance sheet date whether a financial  asset or group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and  receivables carried at amortised cost has been incurred, the amount  of the loss is measured as the difference between the asset’s carrying  amount and the present value of estimated future cash flows  (excluding future credit losses that have not been incurred)  discounted at the financial asset’s original effective interest rate (i.e.  the effective interest rate computed at initial recognition). The  carrying amount of the asset is reduced, with the amount of the loss  recognised in administration costs. If, in a subsequent period, the  amount of the impairment loss decreases and the decrease can be  related objectively to an event occurring after the impairment was  recognised, the previously recognised impairment loss is reversed.  Any subsequent reversal of an impairment loss is recognised in the  profit and loss account, to the extent that the carrying value of the  asset does not exceed its amortised cost at the reversal date. Derecognition of financial assets and liabilities A financial asset or liability is generally derecognised when the  contract that gives rise to it is settled, sold, cancelled or expires.  Where an existing financial liability is replaced by another from the  same lender on substantially different terms, or the terms of an  existing liability are substantially modified, such an exchange or  modification is treated as a derecognition of the original liability   and the recognition of a new liability, such that the difference in   the respective carrying amounts together with any costs or fees  incurred are recognised in profit or loss.  Share-based payments Equity-settled transactions The cost of equity-settled transactions with employees is measured  by reference to the fair value at the date of grant and are recognised  as an expense over the vesting period, which ends on the date on  which the relevant employees become fully entitled to the award.  Fair value is determined by reference to the quoted closing share  price on the day of grant. In valuing equity-settled transactions, no account is taken of any  vesting conditions, other than conditions linked to the price of the  shares of the Company (market conditions). No expense is recognised for awards that do not ultimately vest,  except for awards where vesting is conditional upon a market  condition, which are treated as vesting irrespective of whether or not  the market condition is satisfied, provided that all other performance  conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is  calculated, representing the extent to which the vesting period has  expired and management’s best estimate of the achievement or  otherwise of non-market conditions and of the number of equity  instruments that will ultimately vest or, in the case of an instrument  subject to a market condition, be treated as vesting as described  Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 107 Accounting policies above. The movement in cumulative expense since the previous  balance sheet date is recognised in the income statement, with a  corresponding entry in equity. Where the terms of an equity-settled award are modified or a new  award is designated as replacing a cancelled or settled award, the  cost based on the original award terms continues to be recognised  over the original vesting period. In addition, an expense is recognised  over the remainder of the new vesting period for the incremental fair  value of any modification, based on the difference between the fair  value of the original award and the fair value of the modified award,  both as measured on the date of the modification. No reduction is  recognised if this difference is negative. Where an equity-settled  award is cancelled, it is treated as if it had vested on the date of  cancellation, and any cost not yet recognised in the income  statement for the award is expensed immediately. Any compensation  paid up to the fair value of the award at the cancellation or  settlement date is deducted from equity, with any excess over fair  value being treated as an expense in the income statement. Employee benefit trust reserve Ferrexpo plc shares held by the Company are classified in   capital and reserves, as ‘Employee Benefit Trust reserves’ and  recognised at cost. Consideration received for the sale of such shares  is also recognised in equity, with any difference between the  proceeds from sale and the original cost taken to revenue reserves.  No gain or loss is recognised on the purchase, sale issue or  cancellation of equity shares. 108 Ferrexpo plc  Annual Report and Accounts 2007 Glossary Glossary AGM The annual general meeting of the Company to be held on Thursday  15 May 2008 Dragline excavators Heavy excavators used to excavate material. A dragline consists of a  large bucket which is suspended from a boom Audit Committee The audit committee of the Company’s Board DTP DTP Terassement S.A. (France) BF Blast furnace BFP Blast furnace pellets BIP Business Improvement Programme Board The board of directors of the Company BOF Basic oxygen furnace bt Billion tonnes EBITDA Earnings before interest, tax, depreciation and amortisation  EPS Earnings per share Executive Committee The executive committee of the Company’s Board Executive Directors The executive directors of the Company Fe Iron Fe yield A qualitative measure that is calculated by the percentage of   Fe (quantity) contained in ore which results in concentrate Capital employed The aggregate of equity attributable to shareholders, minority  interests and borrowings  Ferrexpo Ferrexpo plc CFR Delivery including cost and freight Ferrexpo AG Group Ferrexpo AG and its subsidiaries including Ferrexpo Poltava CI costs Cash costs per tonne of pellets, ex-works, excluding administrative  and distribution costs Ferrexpo Poltava Ferrexpo Poltava GOK Corporation, a company incorporated under  the laws of Ukraine CIF Delivery including cost, insurance and freight Fevamotinico S.a.r.l. A company incorporated with limited liability in Luxembourg CIS The Commonwealth of Independent States FOB Free on board  Combined Code The Combined Code on Corporate Governance published by the  Financial Reporting Council in June 2006  FPM Ferrexpo Poltava Mine Company Ferrexpo plc, a public company incorporated in England and Wales  with limited liability Concentrate Material which has been processed to increase the percentage of the  valuable mineral to facilitate transportation and downstream  processing CPI Consumer Price Index CSR Corporate Social Responsibility FSU The former Union of Soviet Socialist Republics FSU Classification The classification system and estimation methods for reserves and  resources established by FSU and last revised in 1981 FTSE 250 Financial Times Stock Exchange top 250 companies GAAP Generally Accepted Accounting Practice  GDP Gross Domestic Product of the Republic of the Ukraine CSR Committee The corporate social responsibility committee of the Board of the  Company Global offering The listing of the Company’s Ordinary Shares on the London Stock  Exchange announced on 15 June 2007 DAF Delivered at frontier Directors The directors of the Company GPL Gorishne, Plavninskoye and Lavrikovskoye mine Group The Company and its subsidiaries Ferrexpo plc  Annual Report and Accounts 2007 Glossary 109 HSE Health, safety and environmental IAS International Accounting Standards IASB International Accounting Standards Board IFRS International Financial Reporting Standards, as adopted by the EU IPO Initial public offering Iron ore concentrate Product of the flotation process with an enriched iron content Iron ore fines Fine ground iron ore  Magnetite ore A form of iron ore that is metallic, black and strongly ferromagnetic,  and therefore susceptible to processing using magnetic separation  techniques mm millimetre m3 Cubic metre mt Million tonnes mtpa Million tonnes per annum Nominations Committee The nominations committee of the Company’s Board Iron ore pellets Dried and hardened agglomerate of iron ore concentrate, whose  physical properties are well suited for transportation and  downstream processing in a blast furnace Non-executive Directors Non-executive directors of the Company OH&S Occupational Health & Safety kg kilogramme kt kilotonnes kw kilowatt kWh kilowatt hour LIBOR The London Inter Bank Offered Rate OHSAS 18000 International Safety Standard ‘Occupational Health & Safety  Management System Specification’ Open pit Surface mining in which the ore is extracted from a pit of quarry Ordinary Shares Ordinary shares of 10p each in the Company Ore A mineral or mineral aggregate containing precious or useful  minerals in such quantities, grade and chemical combination to make  extraction economic Listing The admission of the Companies securities to the Main Market of the  London Stock Exchange on 15 June 2007 Output of weight A quantitative measure which is the amount of concentrate obtained  from one tonne of ore Listing Rules Rules relating to the admission to the official List maintained by the  Financial Services Authority in accordance with the Financial Services  and Markets Act 2000 Pig iron Crude iron obtained directly from the blast furnace and cast   in moulds LLC Limited Liability Company LSE London Stock Exchange LTIFR Long term Injury Frequency Rate LTIP The long term incentive plan Lump iron ore In mining, the term given to naturally occurring high-grade iron ore;  consists of: (1) soft ore, such as porous hematite and limonite  (goethite) with minor magnetite and manganese oxides; and (2) hard  ores, such as compact, fine-grained, steel-gray hematite, specular  hematite, magnetite, or martite PPI Ukranian Producer Price Index Probable reserves Those measured and/or indicated mineral resources which are not  yet ‘proved’, but of which detailed technical and economic studies  have demonstrated that extraction can be justified at the time of the  determination and under specific economic conditions  Proved reserves Measured mineral resources of which detailed technical and  economic studies have demonstrated that extraction can   be justified at the time of determination and under specific economic  conditions Relationship agreement The relationship agreement entered into among Fevamotinico   S.a.r.l., Kostyantyn Zhevago, The Minco Trust and the Company  110 Ferrexpo plc  Annual Report and Accounts 2007 Glossary Glossary continued Underlying earnings An alternative measure which the Directors believe provided a clearer  picture of the underlying financial performance of the Group’s  operations. Underlying earnings is presented as profit attributable to  equity shareholders before adjusted items. Adjusted items are those  items of financial performance that the Group believes should be  separately disclosed on the face of the income statement to assist in  the understanding of the underlying financial performance achieved  by the Group. Adjusted items that relate to the operating  performance of the Group include impairment charges and reversals  and other exceptional items. Non-operating adjusting items include  profits and losses of investments and businesses as well as IPO costs Underlying profit Profit for the year after adding back items which are non-recurring or  variable in nature and which do not impact the underlying trading  performance of the business and their resultant tax and minority  interest effects UAH Ukranian hyrivna, the currency of the Republic of the Ukraine UGOK The name of a separate management company formed temporarily  to administer the three major growth projects UkrSEPRO The quality certification system in Ukraine, regulated by law to ensure  conformity with safety and environmental standards US$ or dollars United States dollars, the currency of the United States of America Value in use The implied value of a material to an end user to use one material  relative to other options, e.g. comparing performance of several  types of iron ore pellets into a blast furnace; taking into account the  delivered cost of a material and rates relative to other competition  materials on a quality and landed cost adjusted basis WMS Wet magnetic separation WTO World Trade Organisation Remuneration Committee The remuneration committee of the Company’s Board Reserves Those parts of mineral resources for which sufficient information is  available to enable detailed or conceptual mine planning and for  which such planning has been undertaken. Reserves are classified as  either proved or probable  ROCE Return on capital employed, defined as profit before taxation, finance  items and negative goodwill over capital employed $/t US dollars per tonne Sinter A porous aggregate charged directly to the blast furnace which is  normally produced by firing relatively courser fine iron ore, other  materials, and coke breeze as the heat source Slag Solid waste matter left when metal has been separated from ore   by smelting Slurry Suspension of solids in liquid Smelting Thermal process whereby molten metal is liberated from a  concentrate, with impurities separating into a lighter slag  Spot price The current price of a metal for immediate delivery Sterling/£ UK pound the currency of the United Kingdom Strip ratio The ratio between the volume of overburden compared to the  tonnage of ore mined Tailings The waste material produced from ore after economically  recoverable metals or minerals have been extracted. Changes in  metal prices and improvements in technology can sometimes make  the tailings economic to process at a later date TIS-Ruda Ukrainian port facility on the Black Sea Tolling The process by which a customer supplies concentrate to a smelter  and the smelter invoices the customer the smelting   charge, and possibly a refining charge, and then returns the   metal to the customer  Ton A US short ton, equal to 0.9072 metric tonnes tonne or t Metric tonne Ukraine The Republic of the Ukraine Ferrexpo plc  Annual Report and Accounts 2007 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements 111 111 Notes 112 112 Ferrexpo plc  Annual Report and Accounts 2007 Ferrexpo plc  Annual Report and Accounts 2007 Financial statements Financial statements Company overview Business review Sustainable development review Corporate governance Financial statements IFC Activity and mission statements 01 Operational and financial highlights 02 Ferrexpo at a glance 04 Chairman’s statement 08 Chief Executive Officer’s review 12 Chief Executive Officer’s questions and answers 14 Board of Directors and Executive Committee 18 Overview 19 Market environment 20 Supply 21 Performance review 22 Business Improvement 36 Commitment 37 Health and safety 40 Environment 43 Employees 44 Communities Programme 23 Growth projects 25 Marketing 28 Risks 30 Financial review 33 Key performance indicators 46 Corporate Governance 64 Accounts and notes report 51 Remuneration report 57 Directors’ report 62 Statement of Directors’ responsibilities 63 Independent auditors’ report 108 Glossary Ferrexpo is a resources company listed on the London Stock Exchange and a member of the FTSE 250 index. Ferrexpo is headquartered in Switzerland, with its principal operating assets in Ukraine. The Company is primarily involved in the production and export of iron ore pellets, used in producing steel. We are committed to realising the potential of one of the largest iron ore resources in the world, and aim to be recognised as a leading global supplier of iron ore pellets, providing outstanding service to our customers and strong returns to our shareholders. This Annual Report includes statements that are forward looking in nature, particularly relating to the business, strategy, investments, production, major projects and their contribution to expected production and other plans of the Ferrexpo Group and its current goals, assumptions and expectations relating to its future financial condition, performance and results. Forward looking statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause the actual results, performance or achievements of the Ferrexpo Group to be materially different from any future results, performance or achievements expressed in or implied by such forward looking statements. Past performance is no guide to future performance, and persons in need of advice should consult an independent financial adviser. The forward looking statements reflect knowledge and information available at the date of preparation of this Annual Report. Except as required by the Listing Rules, the Disclosure and Transparency Rules and applicable law, Ferrexpo undertakes no obligation to update or change any forward looking statements to reflect events occurring after the date of this document. Nothing in this Annual Report should be construed as a profit forecast. F e r r e x p o p c l A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 7 Positioned for growth Ferrexpo plc Registered Office: 2-4 King Street London SW1Y 6QL www.ferrexpo.com Ferrexpo plc Annual Report and Accounts 2007 

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