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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
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7
4
5
2
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5
8
1
10000
1
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6
4
2
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–
–
–
–
–
–
–
–
–
–
–
–
–
2007
8000
6000
1
.
9
4
1
4000
2000
2
7
0
,
9
0
5
5
,
8
7
5
7
,
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1
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0
2
2
4
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7
1
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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
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Positioned for growth
Ferrexpo plc
Registered Office:
2-4 King Street
London
SW1Y 6QL
www.ferrexpo.com
Ferrexpo plc
Annual Report and Accounts 2007