Ferrexpo plc
Registered Office:
2-4 King Street,
London
SW1Y 6QL
Ferrexpo plc
Annual Report and Accounts
2010
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Producing
iron ore pellets
for over 30 years
www.ferrexpo.com
Ferrexpo plc
Annual Report and Accounts 2010
Ferrexpo plc
Annual Report and Accounts 2010
Shareholder Information
Ferrexpo plc is a Swiss-headquartered resources
company with assets in Ukraine and is principally
involved in the production of iron ore pellets which
are used in the manufacture of steel.
How have we performed this year?
> p.01 – Group highlights
Where are our operations?
> p.04 – Our resource base
What is our investment proposition?
> p.08 – Our strategy explained
How have we performed against our strategy?
> p.18 – Key Performance Indicators
How are we going to continue our growth?
> p.06 – Chairman and Chief Executive’s Statement
Registered Office
2–4 King Street
London
SW1Y 6QL
Web: www.ferrexpo.com
Advisors
Share Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
UK
Tel: 0871 384 2030
Overseas +44 121 415 7047
Web: www.equiniti.com
Financial
JPMorgan Cazenove Ltd
20 Moorgate
London EC2R 6DA
Corporate brokers
JP Morgan Cazenove Ltd
20 Moorgate
London EC2R 6DA
Deutsche Bank AG
1 Great Winchester Street
London EC2N 2DB
Legal
Allen & Overy LLP
One Bishops Square
London E1 6AD
Auditors
Ernst & Young LLP
1 More London Place
London SE1 2AF
Ferrexpo plc
Annual Report and Accounts 2010
01
Highlights
2010
Production volumes
Up by 14%
Sales volumes
Up by 8%
record production volumes with the Group
producing over 10.0 million tonnes of pellets,
operating at full capacity.
record sales volumes of 9.7 million tonnes
of pellets
Revenue
Up by 100%
to US$1.3 billion, driven by significantly
higher sales prices and volumes
C1 cash cost of production
US$39.7/t
cost inflation mitigated through full
absorption of fixed costs and Business
Improvement Programme
EBITDA
Up by 324%
to US$585 million, driven by higher revenue
and robust cost control
Diluted earnings per share
Up by 500%
to 72.24 US cents
Total dividend per share
6.6 US cents
per share
final dividend of 3.3 US cents per share
in line with 2009
Year end cash balance
Increased
substantially
to US$320 million
Net cash flow from operating
activities
Up by 394%
to US$380 million
Net debt
Down by 60%
to US$104 million
01 Highlights 2010
02 The production process
04 Our resource base
06 Chairman’s and Chief Executive Officer’s
Statement
10 Our year in review
18 Key performance indicators
20 Operating Review
26 Financial highlights
30 Risks relating to our business
34 Corporate Social Responsibility Review
44 Board of Directors and Executive Committee
46 Corporate Governance Report
52 Remuneration Report
59 Directors’ Report
63 Statement of Directors’ Responsibilities
64
Independent Auditors’ Report to the Members
of Ferrexpo plc
Financial Statements
65 Consolidated Income Statement
66 Consolidated Statement of Comprehensive
Income
67 Consolidated Statement of Financial Position
68 Consolidated Statement of Cash Flows
69 Consolidated Statement of Changes in Equity
70 Notes to the Consolidated Financial Information
120 Parent Company Balance Sheet
121 Parent Company Notes to the Financial
Statements
125 Glossary
129 Shareholder information
02
Ferrexpo plc
Annual Report and Accounts 2010
The Production
Process
We produce iron ore
pellets, which are a
premium input used
in the steel production
industry. Our product
improves blast furnace
productivity in the steel
production process
because of its form,
substance and low
level of impurities.
Mining operations
Iron mines
>
Mining operations based 20 kilometres
from Kremenchuk in central Ukraine, on
banks of the river Dnieper
>
>
10 deposits of magnetite ore with
average iron content of 30%
Total JORC resource of 6.8bt with 14.2bt
of additional GKZ resources
Mining
>
Open cut, hard rock iron ore mining,
using shovel, truck and train
>
>
Mining currently carried out at Gorishne-
Plavninskoe and Lavrikovskoe (Ferrexpo
Poltava Mine) deposits
First ore expected at Yeristovskoye
(Ferrexpo Yeristovskoye Mine) deposit
in 2013
Iron ore mined in 2010
28,930
thousand tonnes
Ferrexpo plc
Annual Report and Accounts 2010
03
Beneficiation
Pelletizing
Transport and logistics
Processing
>
Ore from the mine is crushed and
ground to produce concentrate by
magnetic separation and chemical
flotation
>
During processing, iron content
increased to produce pellets of 62%
and 65% iron content
>
Design capacity of crushers is 34mtpa,
and of concentrators is 11mtpa (wet)
Pellets
>
Four kiln grate units, with name plate
capacity of 3mtpa each for 12mt of
annual capacity
Transport
>
Operations have rail links which allow
transportation to Ukrainian border &
Black Sea ports
>
Kilns heat and form material into pellets
of around 8–20mm
>
Pellets are robust
–
–
Preferred feed source for
steelmakers (limited only by cost)
Steel operators’ best way to rapidly
improve productivity
–
Created in a ‘fit for purpose’ form
–
–
Provide environmental advantages
to customers
Logistics of moving pellets
are superior
>
>
>
>
Direct access to Dnieper River also
allows transportation of material to the
Black Sea by barge
48.6% holding in TIS-Ruda provides
access to captive loading capacity
at Port Yuzhny of up to 5mtpa
Own over 900 rail cars which reduce
reliance on State owned rail cars
Acquisition of Helogistics provides
barge access to the Danube/Rhine river
corridor in Western Europe
Concentrate produced (“WMS”) in 2010
Total pellet production in 2010 (incl
purchased concentrate)
11,226
thousand tonnes
10,031
thousand tonnes
04
Ferrexpo plc
Annual Report and Accounts 2010
Our Resource Base
Ferrexpo’s operations are situated
on the Kremenchuk Magnetic
Anomaly, a 50 kilometres long iron
ore deposit in Ukraine’s Poltava
region making it the largest iron
ore resource in Europe. The
Group holds licences to explore or
mine the entire deposit. Its current
operations are situated at the
southern end of the deposit,
adjacent to the Dnieper River.
4.0bt
Brovarskoye
3.1bt
Manuilovskoye
2.8bt
Kharchenkovskoye
14.2bt
GKZ
Soviet
Classified
2.8bt
Vasilievskoye
1.5bt
Zarudenskoye
0.3bt
Galeshinskoye
1.7bt
Belanovskoye
1.2bt
Yeristovskoye
0.8bt
Lavrikovskoye
3.6bt
Gorishne-
Plavninskoye
6.8bt
JORC
Classified
Ferrexpo plc
Annual Report and Accounts 2010
05
Favourable
location
Traditional
Natural
Growth
Ferexpo
Ferrexpo Transportation Routes
Competitor Routes
EUROPE
CHINA
JAPAN
MIDDLE
EAST
INDIA
Ferrexpo benefits from the location of its
operations in Ukraine, because of a well-
educated workforce and the efforts of the
Government to ensure the survival of its large
mining and metallurgical industry. Being primarily
an exporter, Ferrexpo has minimal exposure to
the Ukrainian steel industry, while approximately
70% of its operating costs are in local currency.
Ukraine is conveniently situated close to our
principal customers in Europe while Ferrexpo is
also the nearest pellet supplier to the Middle East
and Asia.
2010 customer breakdown
% (by sales volume)
1
1. Traditional – 66%
2. Natural – 7%
3. Growth – 27%
3
2
06
Ferrexpo plc
Annual Report and Accounts 2010
Chairman’s and
Chief Executive Officer’s
Statement
Introduction
We are pleased to report that for the year ended 31
December 2010, Ferrexpo responded to increased iron
ore demand and prices with record production, record
sales volumes and robust cost control. These factors
underpinned the highest EBITDA recorded in the Group’s
history of US$585 million compared to US$138 million
in 2009.
In 2009, Ferrexpo’s priority was to conserve cash and to
protect margins by producing and selling at near full
capacity levels throughout the period. As industry
fundamentals recovered in 2010, Ferrexpo was well placed
to benefit from higher prices as it continued to produce at
full capacity. The Group’s increased cash generation and
profitability allowed it to recommence its capital investment
programme to further develop growth opportunities.
The Board approved, in November 2010, US$647 million of
capital expenditure as part of an investment programme to
increase significantly the quantity and quality of its
production. This initial phase is focused on achieving first
ore at the Ferrexpo Yeristovskoye Mine (“FYM”), extending
the life of the Ferrexpo Poltava Mine (“FPM”) as well as on
increasing the quality of the Group’s pellet output.
Ferrexpo’s Board believes the Group’s resource base is
one of the largest in the world with estimated iron ore
resources of over 20 billion tonnes. This will support steady
production growth while low cost mining facilities and
integrated infrastructure from mine to rail, river and port
means that the Group is well placed to deliver sustainable
value to shareholders, employees and its country of
operation throughout the commodities cycle.
Summary of results
The Company’s sales volumes increased 8% to 9.7 million
tonnes of pellets (2009: 9 million tonnes). The Group
achieved significant price increases throughout the year
compared with 2009. These higher sales volumes and
prices saw Group revenues almost double to US$1.3 billion
(2009: US$649 million). The Group produced at full
capacity throughout the period which allowed for full
absorption of the fixed cost base.
Together these factors resulted in an increase in EBITDA of
over four fold to US$585 million (2009: US$138 million).
Group profit after tax increased 500% to US$425 million
(2009: US$71 million).
Operating cash flow for the year improved significantly and
as a result net debt reduced by US$153 million to US$104
million (2009: US$258 million). As of 31 December 2010
the Group had cash balances of US$320 million compared
with US$12 million as of 31 December 2009.
Pricing Environment and Strategy
In 2010, European steel mills recovered from the lows of
the 2009 downturn while Chinese iron ore requirements
Ferrexpo plc
Annual Report and Accounts 2010
07
continued to underpin world demand. The reduction of
capacity by the major iron ore pellet suppliers during 2009
proved an ideal scenario for pellet price recovery in 2010.
ramp up of the Yeristovskoye deposit, which will increase
the Group’s pellet production, allowing the Group to
increase its exports to key Asian markets.
The iron ore pricing methodology, however, adjusted
throughout the year as the industry moved from an annual
global benchmark pricing system, which covered the entire
fragmented steel industry, to shorter-term individual pricing
negotiations with steel mills.
Currently in the global iron ore market, there are a number
of pricing methodologies being applied depending on
geography and customer. In 2010, Ferrexpo agreed a
mixture of pricing arrangements with its customers
including quarterly and six monthly pricing agreements. As
the new pricing mechanisms are increasingly based on
shorter time periods, Ferrexpo believes there is likely to be
increased pricing volatility.
Industry fundamentals recovered in 2010, and
Ferrexpo was well placed to benefit from
higher prices as it continued to produce at full
capacity. The Group’s increased cash
generation and profitability allowed it to
recommence its capital investment
programme to further develop growth
opportunities.
Ferrexpo will continue to focus on maximising prices
relative to its competitors’ based on ‘value in use’ to the
customer. Ferrexpo believes that its geographic proximity
to key steel markets represents an attractive alternative to
the major seaborne suppliers due to the lower costs of
transporting pellets over a shorter distance from Ukraine.
Marketing and logistics strategy
Ferrexpo’s logistics strategy is to manage and control
as much of the delivery chain as possible. This includes
further developing the Group’s port and barge facilities
to allow for CFR delivery to customers in Asia and
Western Europe.
Ferrexpo already has a significant logistics cost advantage
for delivery of pellets via rail and barge direct to customers
in Central and Eastern Europe. The port terminal on the
Black Sea of TIS-Ruda, an associated company of the
Group, provides independent access to the seaborne
markets in Asia as well as to markets in Turkey and the
Middle East.
The Group made further investments in logistics during the
year. It purchased 300 rail cars bringing the Company’s
total holding at 31 December 2010 to over 900. In February
2011 Ferrexpo signed contracts to acquire an additional
400 rail cars over the next year with an option to purchase
a further 600. Purchase of these additional rail cars should
ensure near self sufficiency and full rail car availability for
pellet transportation to the Ukrainian border as well as a
tariff discount from the railway authorities of over 8%.
In December 2010 Ferrexpo acquired Vienna-based
Helogistics, one of the largest inland waterway
transportation companies in Europe. It transports iron ore
as well as other bulk cargos, mainly by barge, along the
Danube and Rhine rivers from Ukraine and Rotterdam to
various locations in Northern, Central and Eastern Europe.
This includes transportation of Ferrexpo pellets to core
customers in Central Europe. Helogistics will enable the
Group to further secure the supply chain, improving
service to existing customers as well as provide further
access to markets throughout Europe, enhancing
Ferrexpo’s presence as the regional market leader in iron
ore pellet supply.
In general, Ferrexpo believes that a developed
logistics infrastructure is essential in high volume bulk
commodity markets like iron ore. It is therefore further
expanding its logistics infrastructure ahead of planned
production growth.
In 2010, over 90% of the Group’s sales volumes, from
own ore, were based on long-term volume framework
agreements compared with circa 70% in 2009. It is
Ferrexpo’s ongoing strategy to allocate approximately 10%
of sales to potential new customers, especially first class
Asian steel mills, through trial spot cargos ahead of its
planned Yeristovskoye mine expansion.
Production
FPM has been producing iron ore pellets continuously for
the last 30 years – through the Soviet administration, the
fall of the Berlin wall, Ukrainian independence and several
Ukrainian governments.
In 2010, the mine produced record levels of pellets
operating at full capacity throughout the period. In
September 2010, FPM achieved the highest monthly pellet
production since 1987, while in October 2010 FPM
produced the highest monthly output of 65% Fe pellets
on record.
The TIS-Ruda port enables Ferrexpo to diversify its
customer mix, avoiding dependence on any one customer
group for pricing and product demand. Ferrexpo is looking
to further develop its ship loading capabilities ahead of the
In total, production increased by 14% in 2010 to
approximately 10 million tonnes of pellets compared with
8.8 million tonnes of pellets produced in 2009.
08
Ferrexpo plc
Annual Report and Accounts 2010
Chairman’s and
Chief Executive Officer’s
Statement continued
Our strategy explained
01 Develop our vast unexploited
resources – starting with the
Yeristovskoye deposit achieving
first ore in 2013.
02 Expand our high quality
customer base – Ferrexpo
allocates approximately 10% of
sales to potential new customers
through trial spot cargos.
03 Maintain a low cost of production
and a high operating efficiency
– according to Metalytics
Ferrexpo is the third lowest pellet
producer on a global FOB basis.
04 Improve the quality of the
product mix – by 2014 Ferrexpo
intends to produce all pellets as
65% Fe from the current mix of
half 62% Fe & half 65% Fe pellets.
05 Enhance the Group’s logistics
capability ahead of the planned
increase in production output
06 Maintain a strong balance sheet
with low levels of gearing and
high liquidity
Production from own ore increased 5% to 9.0 million
tonnes (2009: 8.6 million tonnes) while processing of third
party concentrate increased substantially to meet higher
demand.
The Group produces a mix of 62% and 65% Fe pellets. Of
the total 10 million tonnes of pellets produced, 49% were
higher grade 65% Fe pellets in line with the proportion of
65% Fe pellet production in 2009.
The higher production levels achieved illustrate the benefits
of continuous improvements in production efficiencies as
well as the sustainability of the Group’s operations given
the reduced levels of capital investment in 2009 and 2010.
Costs
The Board believes Ferrexpo is one of the lowest cost
pellet producers in the world on a FOB basis. The Group
aims to reduce costs within its control by at least 1% to 2%
per annum principally through increased output and
efficiency enhancements achieved through the Business
Improvement Programme (‘BIP’). Since the inception of the
BIP in 2006, cumulative productivity gains have saved
approximately US$5.3 per tonne of pellets produced, or
US$48 million on a cumulative basis to 31 December 2010.
Not all costs are directly within Ferrexpo’s control, such as
gas and electricity tariffs. The Group is investigating
managing these exposures, most likely through
acquisitions and partnerships which can secure raw
material supply.
The cost environment in 2010 was impacted by Ukrainian
PPI inflation of 21% as well as cost increases associated
with a stronger commodity price environment.
Approximately 70% of total operating costs, including
freight, are denominated in Ukrainian Hryvnia while all
revenues are received in US dollars. The Hryvnia has
remained broadly stable on average in 2010 compared to
2009 at around UAH8 to the US dollar.
Overall the average C1 cash cost of production was below
US$40 per tonne for 2010. This represented a circa 15%
increase compared to the average 2009 C1 cash cost of
US$34 per tonne but this was, however, lower than the
local inflation rate of approximately 21% for the period.
Ukraine
Ukraine has recovered in many respects in 2010 compared
to the hardships experienced in 2009. There has been a
stable political environment since the presidential elections
in February 2010. In terms of economic recovery, the steel
industry (which is the largest contributor to the economy)
increased production by an estimated 13%1 in 2010 (2009:
negative 20%1). Overall, GDP growth in 2010 was 4%1
compared to a decline of 15%1 in 2009.
1 Source: OECD.
Ferrexpo plc
Annual Report and Accounts 2010
09
As part of the continuing development of the Group’s
capabilities, Ferrexpo appointed Brian Maynard as the
Group Chief Operating Officer in January 2011. Brian has
worked extensively in the mining industry for the last 30
years and is already making a considerable impact on our
operations.
Corporate governance and social responsibility
Ferrexpo has a balanced and experienced Board which
maintains the highest standards of corporate governance
throughout the Group and complies with the UK
Combined Code on Corporate Governance.
The Board’s Corporate Safety and Social Responsibility
(‘CSR’) Committee monitors the management of the
Group’s health, safety, environmental and community
programmes on a regular basis in line with best practice for
mining companies. Safety is fundamental to the success of
Ferrexpo’s future, and safety procedures are integral to the
culture of the Group. Ferrexpo deeply regrets that Ivan
Kharchenko, a machinery repairman, was fatally injured in
the second half of the year in consequence of a failure to
observe the Group’s safety standards. Ferrexpo is
implementing measures to ensure that the Group’s safety
controls are further improved going forward.
Outlook
Following a successful 2010, the new financial year has
started well with strong demand for Ferrexpo’s product.
The Group is, however, aware that it operates in a cyclical
environment and will always look to mitigate any softening
in demand across the industry through its broad, high
quality customer base and established infrastructure for
serving seaborne and regional markets. This should allow
Ferrexpo to continue to produce at full capacity
underpinning a strong financial performance for the rest of
the year.
Michael Abrahams CBE DL
Chairman
Kostyantin Zhevago
Chief Executive Officer
In general, continued political stability, growing credibility of
Government fiscal policies, improving macroeconomic
fundamentals and renewed IMF support have led to a
significant improvement of Ukraine’s credit rating. During
2010, Fitch and Standard & Poor’s raised Ukraine’s
sovereign rating to B (from B-) and B+ (from B) respectively
with a stable outlook.
Ferrexpo continues to regard Ukraine as a good place for
business. The Group is the largest employer in the town of
Komsomolsk and benefits from a well educated workforce
which is able to transfer its skills to the further development
of the Group’s resources.
Investing activities and funding
Ferrexpo’s capital expenditure projects are aimed at the
expansion and upgrade of the existing mine and
processing facilities and to unlock the considerable value in
the Group’s under exploited reserves and resources,
starting with FYM.
During the year, Ferrexpo spent US$167 million on capital
expenditure. In November the Board approved US$647
million of capital investment as part of the first stage of the
Group’s investment programme.
Dividend
It is the Board’s view that cash generated by the Group
should principally finance future growth projects and that
the Group should pay modest consistent dividends
throughout the economic cycle. The Directors therefore
recommend a final dividend in respect of profits generated
for the Group in 2010 of 3.3 US cents per Ordinary Share
(2009 final dividend: 3.3 US cents per Ordinary Share) for
payment on 3 June 2011 to shareholders on the register at
the close of business on 3 May 2011. The dividend will be
paid in UK pounds sterling with an election to receive US
dollars.
People
The Board would like to thank all the management and
staff for their continued hard work and commitment
which formed the foundation for another year of
significant progress.
As previously announced, Simon Wandke the Group
Marketing Officer resigned from the Company during 2010.
Simon’s experience was much valued by the Board and it
would like to thank him for his contribution to the Group.
Ferrexpo is very pleased to welcome Jason Keys as the
new Group Marketing Officer. Jason joins Ferrexpo from
BHP Billiton where he is currently Global Marketing
Manager for Iron Ore. He has significant industry
experience in both the European and Asian iron ore
markets, having led BHP Billiton’s Iron Ore commercial
marketing team over the last five years.
10
Ferrexpo plc
Annual Report and Accounts 2010
Our Year in
Review
January
March
Long-term sales
Following signs of a recovery in
the European steel markets and
improved demand visibility, a
positive trading update confirmed
that 86% of sales in 4Q 2009 were
on a long-term contract basis.
Increase in sales on a long
term contract basis
Traded profitability through
the downturn
Ferrexpo reports its 2009 full year
results where the Group reveals that
despite a sharp fall in iron ore prices
and a collapse in the global economy,
it maintained full production and
traded profitably throughout the
downturn. This was due to Ferrexpo’s
strategy of strict cost control,
continued production at full capacity
and established logistics infrastructure
which enabled the Group to sell all its
production by diverting sales away
from its Traditional customer base to
its Growth markets.
September
November
Refinances principal debt facility
Ferrexpo refinances its principal debt facility, replacing
the previous US$230 million pre-export finance facility
with a new US$350 million loan through a syndicate of
leading international financial institutions.
Record pellet production
Ferrexpo achieves the highest monthly pellet production
on record since 1987
Capital investment programme
The Board approves US$647 million of capital expenditure
following record production and significantly higher cash
flow generation.
The capital investment programme is the first stage of the
Group’s plans to significantly increase the quality and
quantity of its pellet output. This stage will increase the
Group’s pellet output from own ore by one third by 2013,
extend the life of the existing mine by 12 years and
increase the production of 65% Fe pellets to 100% of
production by 2014.
Record pellet production
Ferrexpo produces the highest monthly production of 65%
pellets on record
Ferrexpo plc
Annual Report and Accounts 2010
11
May
June
August
Strong production levels
Ferrexpo reports at it’s AGM that
due to strong production levels the
Group is well positioned to capitalise
on improved conditions in the iron
ore market.
Recovering price
environment
Ferrexpo reports that revenues in the
1Q of 2010 increased 34% compared
to 2009 and that EBITDA increased
30% compared to 2009.
Increase in revenues
and EBITDA
Interim results at 30 June show a 74%
increase in revenues and a 257%
increase in EBITDA.
1H 2010 Increase in EBITDA
257%
December
Acquisition of Helogistics
As part of the Company’s strategy to further develop its
logistics infrastructure, Ferrexpo announces the
acquisition of Helogistics. Vienna-based Helogistics is a
barging company operating on the Rhine/Danube river
corridor. The acquisition allows the Group to access new
markets and improve its service to existing customers in
Western Europe.
New Chief Operating Officer
As part of the development of the Group’s capabilities,
Ferrexpo announces that Brian Maynard is to join the
Company as Chief Operating Officer. Brian joins Ferrexpo
from Vale and has over 30 years experience in the mining
industry.
250 millionth tonne of pellets produced
On 1 December 2010 the 250 millionth tonne of pellets
was produced. The first tonne of pellets was made at
production line no 1 on 25 April 1977.
12
Ferrexpo plc
Annual Report and Accounts 2010
A large resource base
underpins Ferrexpo’s
sustainable growth strategy
Ferrexpo’s world class resource base is situated
along a single ore body, which will allow the Group
to efficiently expand production through
brownfield ventures.
Ferrexpo plc
Annual Report and Accounts 2010
13
The FPM mine has consistent geology and allows for
a longlife production profile while the development
of FYM will utilise known and existing technology
and infrastructure as well as Ferrexpo’s current
workforce.
As of 1 January 2011, Ferrexpo had estimated
resources of over 6.8 billion tonnes classified
according to the JORC code and further estimated
resources of over 14.2 billion tonnes classified
according to the Soviet GKZ code.
JORC reserves
6.8 bn
tonnes
14
Ferrexpo plc
Annual Report and Accounts 2010
Consistent production
and strong cost control
FPM has been producing iron ore pellets
continuously for the last 30 years – through the
Soviet administration, the fall of the Berlin wall,
Ukrainian independence and several Ukrainian
governments. In 2010 record production levels
were reached as the Group produced at full
capacity throughout the period.
Ferrexpo plc
Annual Report and Accounts 2010
15
Ferrexpo is one of the lowest cost producers of
pellets in the world on an FOB basis. The Group’s
cost reduction strategy is to maximise production
outputs and continually implement efficiency
enhancements through the Business Improvement
Programme (‘BIP’).
The BIP has significantly decreased the consumption
of key production inputs such as energy and raw
materials, and reduced the cash costs of production
by US$5.27 per tonne since 2005. For the year ended
31 December 2010, the cash cost of production of
pellets from own ore was approximately US$39.70 per
tonne of pellets. Relative to the peer group, Ferrexpo’s
low cost position enables it to sustain profitability in
periods of downturn such as in 2009. This has
allowed Ferrexpo to maintain a positive operating
cash flow each quarter since 2006.
BIP reduction on C1 cash costs since 2005
$5.27
per tonne of pellets (from own ore)
16
Ferrexpo plc
Annual Report and Accounts 2010
Expand the high quality
customer base
Ferrexpo remains committed to long-term
framework agreements with customers who are
focused on producing sophisticated steel
products. FPM has supplied the vast majority of its
customer portfolio for a number of decades. This
allows Ferrexpo to produce at maximum capacity.
Ferrexpo plc
Annual Report and Accounts 2010
17
Production delivered under long-term volume
framework agreements accounted for over 90%
of sales in 2010, allowing for stable and
reliable revenue.
The Group allocates approximately 10% of sales to
potential new customers through trial spot cargos,
and plans to conduct such trials with several
significant producers in Asia ahead of the planned
production growth from FYM.
% of production in 2010 allocated under long-term
volume contracts
90%
18
Ferrexpo plc
Annual Report and Accounts 2010
Key performance indicators
The Board and the Executive Committee of
Ferrexpo monitor the Group’s performance
using a range of key performance indicators
(‘KPIs’). These KPIs are regularly reported on
and reviewed by management and provide a
useful measure of the Group’s operational,
financial and safety performance. They are
reported in this Annual Report to enable all
stakeholders to assess the Group’s results on
a clear and consistent basis.
1 Lost Time Injury Frequency Rate: The rate of lost time injuries per million man hours worked.
Following the increased focus on safety and the review by DuPont, incidents that previously
went unreported are now being reported.
2 The Group calculates EBITDA as profit from continuing operations before tax and finance
plus depreciation and amortisation (included in cost of sales, administrative expenses and
selling and distribution costs) and non-recurring cash items included in other income,
non-recurring cash items included in other costs plus the net gain/(loss) from disposal of
subsidiaries and associates. The Group presents EBITDA because it believes that EBITDA is
a useful measure for evaluating its ability to generate cash and its operating performance.
See note 5 to the accounts.
3 EPS (Earning per Share) (diluted) is calculated by dividing the profit for the year attributable
to ordinary equity shareholders of Ferrexpo plc by the weighted average number of Ordinary
Shares adjusted by any dilutive share awards that have not yet vested.
Safety
Fatalities
2007
2008
2009
2010
Definition
Work-related fatal accidents
Target
No fatalities
LTIFR
2007
2008
2009
2010
Definition
Lost-time injury frequency rate1
Target
Below 0.75
1
3
0
1
0.57
0.95
1.11
1.43
Ferrexpo plc
Annual Report and Accounts 2010
19
Operations
Financials
Production from own ore
000 tonnes
Revenue
US$ million
2007
2008
2009
2010
8,793
2007
8,608
2008
8,609
2009
9,033
2010
Definition
Pellet production from own produced concentrate
Target
Increase revenue
Target
Increase production
Production from third party concentrate
000 tonnes
EBITDA
US$ million
2007
2008
2009
2010
279
427
157
2007
2008
2009
998
2010
698
1,117
649
1,295
246.1
503.9
138.1
585.3
Definition
Pellet production from bought-in concentrate
Definition
Earnings before interest, tax, depreciation and amortisation2
Target
To utilise spare processing capacity
Target
Increase EBITDA
Total production
000 tonnes
EPS (diluted)3
US cents per share
2007
2008
2009
2010
Definition
Total pellet production
Target
Increase production
9,072
2007
9,035
2008
8,766
2009
10,031
2010
Definition
Earnings per share (diluted)
Target
Increase EPS
20.33
48.46
12.05
72.24
20
Ferrexpo plc
Annual Report and Accounts 2010
Operating Review
Ferrexpo holds exclusive licences to one of
the largest iron ore resources in the world,
consisting of a single 50 kilometre long strike
divided into 10 adjacent deposits with an
average iron ore grade of 30%. The resource
is located near the town of Komsomolsk in
north-eastern Ukraine. The Group currently
has JORC classified resources of 7 billion
tonnes and GKZ (Soviet classified) resources
of 14 billion tonnes.
Operations
Ferrexpo holds exclusive licences to one of the largest
iron ore resources in the world, consisting of a single
50 kilometre long strike divided into 10 adjacent deposits
with an average iron ore grade of 30%. This resource is
located near the town of Komsomolsk in central Ukraine.
The Group currently has JORC classified resources of
6.8 billion tonnes and GKZ (Soviet classified) resources
of 14.2 billion tonnes.
Ferrexpo is the largest exporter of pellets in the CIS and
one of the top 10 pellet producers in the global seaborne
iron ore market.
Ferrexpo Poltava Mine (‘FPM’)
The Group’s current operating asset is the Ferrexpo
Poltava Mine (‘FPM’). The mine and processing facilities
(crushing, concentrating and pelletising plant) exploits the
Gorishne-Plavninskoye and Lavrikovskoye (“GPL”) deposit
which is immediately adjacent to rail as well as port
facilities which are located on the Dnieper River.
The FPM mine is approximately 330 metres deep and 6
kilometres long. The Mine Life Extension programme (see
Growth Projects below) will extend the life of the mine to
2038. In 2010, FPM mined approximately 28.9 million
tonnes (2009: 28.5 million tonnes) of ore producing 11.2
million tonnes of concentrate (2009: 10.6 million tonnes)
and 9.0 million tonnes of 62% Fe and 65% Fe pellets
(2009: 8.6 million tonnes). FPM’s nominal processing
capacity is 12 million tonnes of pellets per annum. During
2010, FPM produced 998 thousand tonnes of pellets from
purchased third party concentrate. FPM plans to continue
to purchase third party concentrate, provided acceptable
margins can be realised, in order to utilise its surplus
pelletising capacity and to extend Ferrexpo’s brand
through increased sales. In total during 2010, the Group
produced 10 million tonnes of pellets of which 5.2 million
tonnes were 62% Fe pellets (2009: 4.5 million tonnes)
and 4.9 million tonnes were 65% Fe pellets (2009:
4.3 million tonnes).
Ferrexpo plc
Annual Report and Accounts 2010
Ferrexpo JORC resources:
Gorishne-Plavninskoye & Lavrikovskoye
Yersitovskoye
Belanovskoye
Galeschinskoye
Total
Resources
Proved &
probable
(Mt)
Fe grade
(total)
%
Measured &
indicated
(Mt)
Fe grade
(total)
%
870
632
–
–
1,502
30
34
–
–
31
2,170
828
1,485
268
4,751
30
34
31
55
33
Fe grade
Inferred
(Mt)
1,449
364
217
58
2,088
21
(total)
%
31
30
30
55
32
Note: this is JORC resources only and excludes 14.2 billion tonnes of additional iron ore resources classified according to the Soviet GKZ Code.
Ferrexpo Yeristovskoye Mine (‘FYM’)
The Yeristovskoye deposit is the next deposit being
exploited by the Group. It is located just to the north of
FPM. The deposit has JORC iron ore reserves of 632
million tonnes below 70 metres of overburden. At an iron
ore production rate of 27 million tonnes per annum (broadly
similar to FPM’s current production), it has the capacity to
add 23 years to the Group’s production profile. Overburden
is currently being stripped by five draglines and 12 trucks.
Initial ore is expected by the first half of 2013.
First ore from FYM is planned to be processed by FPM
using spare capacity enabling the Group to produce 12
million tonnes of pellets per annum. Ferrexpo intends to
build further processing facilities which would ultimately
double the Group’s output to 20 million tonnes of pellets or
concentrate equivalent per annum if the associated capital
investment programmes are approved (for further details
see Growth Projects).
Belanovskoye and Galeschinskoye
Ferrexpo holds iron ore extraction licences for the
Belanovskoye and Galeschinskoye deposits. Belanovskoye
has total JORC resources of 1,702 million tonnes, while
Galeschinskoye’s are 326 million tonnes.
Ferrexpo holds exploration licences for five additional
deposits, namely Vasilievskoye, Kharchenkovskoye,
Manuilovskoye, Brovarskoye and Zarudenskoye all located
to the north of Galeshinskoye. An initial assessment of
these deposits has been undertaken and total in situ
resources of 14 billion tonnes have been delineated.
All of the above deposits are on the same ore body that
Ferrexpo is currently exploiting and are situated adjacent to
the Group’s existing logistics infrastructure. As a result, any
development represents low risk additions of new iron ore
capacity compared to many other greenfield iron ore
projects worldwide.
Pricing and Marketing
For over 40 years, the iron ore industry determined prices
with steel mills once a year based on the Japanese fiscal
year, which began on 1 April. The initial price settlement by
the first major iron ore producer with the first major steel
mill typically set the “benchmark” price for the year and all
other iron ore producers would typically follow that
benchmark. During the financial crisis in late 2008 and
2009, iron ore spot prices fell well below the annual
benchmark price. During this period steel mills increasingly
opted to buy iron ore from the spot market. Since then, a
variety of pricing mechanisms have been introduced which
vary from six monthly agreements to quarterly agreements
and increasingly shorter time periods based on quoted
spot prices. Ferrexpo, as a price follower, will continue to
focus on capturing the maximum price relative to its
competitors’ delivered cost through ‘value in use’ to the
customer. Ferrexpo’s geographic proximity to key steel
customers in Europe and other markets represents a
natural advantage due to the lower costs of transporting
pellets over a shorter distance from Ukraine.
In 2011, Ferrexpo plans to further develop its logistics
capabilities through the acquisition of rail cars and where
appropriate other infrastructure. This will enable it to more
competitively deliver to customers in Europe and Asia.
Ferrexpo supplies the key steel markets of the world,
both in its Traditional markets and in its Natural and
Growth markets. Descriptions of the key market
segments are below:
Traditional Markets
Ferrexpo’s Traditional markets lie within Central and
Eastern Europe and include steel plants that were
designed to use FPM iron ore pellets. FPM has been
supplying some of these customers for more than 20
years. Ferrexpo has a well established logistics
infrastructure to these markets by both river barge and rail.
Traditional markets include Austria, Czech Republic,
Russia, Slovakia, Serbia and Hungary.
66% of sales volumes in 2010 went to Traditional Markets,
compared with 53% in 2009 as demand recovered from
the 2009 downturn.
Natural Markets
‘Natural Markets’ are regions where the Group has a
competitive advantage due to proximity, but which are not
yet fully exploited. This segment includes Western Europe,
Turkey and the Middle East. Ferrexpo’s proximity across
the Black Sea to Turkey and the Middle East provides a
competitive advantage to both the Group and iron ore
buyers in the region.
7% of sales volumes in 2010 went to Natural Markets, in
line with 2009. Ferrexpo is building commercial and
technical relationships in the Middle East as a base for
future sales.
22
Ferrexpo plc
Annual Report and Accounts 2010
Operating Review continued
Production – operating statistics table
The table below highlights FPM’s production statistics in 2010 and 2009. In 2010, Ferrexpo increased the amount of iron
ore mined by 1.3% to 28.9 million tonnes while processing efficiencies allowed FPM to increase the production of pellets
from own ore by 4.9%.
(’000t unless otherwise stated)
Iron ore mined
Average Fe content
Iron ore processed
Concentrate produced (‘WMS’)
Average Fe content
Floated concentrate
Higher grade
Average Fe content
Purchased concentrate
Average Fe content
Purchased iron ore
Pellets produced from own ore
Higher grade
Average Fe content
Lower grade
Average Fe content
2010
2009
+/-
%
Change
28,929.77 28,547.28
30.29
30.25
382.49
-0.04
29,096.90 27,720.20
1376.7
11,225.50 10,564.60
63.33
62.96
6,195.20 6,671.40
4,426.20 4,674.80
67.05
67.19
660.90
-0.37
-476.2
-248.6
0.14
1.3%
-0.1%
5.0%
6.3%
-0.6%
-7.1%
-5.3%
0.2%
1,141.90
66.63
180.10
65.39
961.80
1.24
534.0%
1.9%
–
0.00
–
0.0%
9,033.00 8,609.20
4,060.70 4,304.10
64.94
4,972.30 4,305.10
62.17
64.97
62.16
423.8
-243.4
0.03
667.2
-0.01
840.7
817.9
64.97
22.8
-0.04
4.9%
-5.7%
0.0%
15.5%
0.0%
534.1%
–
–
14.5%
-0.1%
Pellets produced from purchased concentrate and ore
Higher grade
Average Fe content
Lower grade
Average Fe content
998.10
817.90
64.97
180.20
62.16
157.40
0.00
0.00
157.40
62.20
Total pellet production
Pellet sales volume
Gravel output
Stripping volume
10,031.10 8,766.60
1264.5
14.4%
9,720.67 9,015.12
705.547
2,904.60 2,846.10
58.5
25,480.50 23,558.90
1921.6
7.8%
2.1%
8.2%
Growth Markets
‘Growth Markets’ are those which offer to add new and
significant tonnage to the Group, especially in Asia.
Ferrexpo currently has four long-term contracts in place in
Asia as part of its strategy to build a sustainable customer
portfolio in these markets. The Group currently has trial
cargoes with several other significant producers in
the region.
27% of sales volumes went to Growth Markets in 2010,
compared with 39% in 2009. The 2009 figure reflects a
higher proportion of spot sales to Asia given the impact of
the economic recession on Traditional Markets customer
demand. In 2010, the Group witnessed a return of demand
in Traditional Markets, over 90% of sales from own ore
were based on long-term volume agreements compared
to only 70% in 2009.
2009 customer breakdown
% (by sales volume)
1
1. Traditional – 53%
2. Natural – 8%
3. Growth – 39%
3
2
2010 customer breakdown
% (by sales volume)
1
1. Traditional – 66%
2. Natural – 7%
3. Growth – 27%
3
2
Ferrexpo plc
Annual Report and Accounts 2010
23
Enhancing logistics capabilities ahead
of increases in production output
Ferrexpo’s current logistics platform includes over 900 rail
cars, 5 million tonnes of port capacity for export to the
seaborne market, and over 250 river vessels for
transportation on the Rhine/Danube River corridor through
the recent acquisition of Vienna-based Helogistics. Ahead
of planned production growth from FYM, Ferrexpo’s
strategy is to further secure the logistics supply chain for
delivery of increased product to customers. This includes
acquiring up to 1,000 additional rail cars during 2011, as
well as developing the Group’s ship loading capabilities at
its Black Sea port terminal. This will allow Ferrexpo to
further capitalise on its geographic proximity to the Middle
Eastern and Asian markets compared to other seaborne
pellet producers in the Americas and Scandinavia.
Helogistics
In December 2010, Ferrexpo acquired Helogistics, paying
$37.8 million cash to settle the company’s existing bank
debt. Helogistics is one of the largest inland waterway
transportation companies operating on the Danube/Rhine
river corridor. In 2009 and 2010, Helogistics transported
approximately 504 thousand tonnes and 636 thousand
tonnes of Ferrexpo pellets, respectively, to customers in
Central Europe. Helogistics will enable the Group to further
secure the supply chain, improving service to existing
customers as well as provide further access to markets
thorough out Europe, enhancing Ferrexpo’s presence as
the regional market leader in iron ore pellet supply.
Ferrexpo believes that a
developed logistics infrastructure
is essential in high volume bulk
commodity markets such as
iron ore.
24
Ferrexpo plc
Annual Report and Accounts 2010
Operating Review continued
Logistics
The Group’s strategy is to manage the delivery chain to
customers where possible. Approximately half of pellet
sales volumes are railed about 700 kilometres to the
Western Ukrainian border for delivery to customers in
Central and Eastern Europe. The remaining pellets are
railed about 550 kilometres to the Black Sea port terminal
of TIS-Ruda, an associated company of the Group, for
shipment to Natural and Growth Markets as well as to the
Port of Izmail, also on the Black Sea, which then barges
pellets to customers in Central Europe.
The Group currently owns over 900 rail cars, which
ensures rail car availability for pellet transportation as well
as an approximate rail tariff discount of over 8%. Ferrexpo
has signed a contract for the supply of a further 400 rail
cars which will be supplied over the next year commencing
in May 2011. The Group has an option to purchase a
further 600, allowing it to be broadly self sufficient in
rail cars.
International freight costs relate mainly to sea
transportation utilising Panamax vessels. These increased
66% to US$75 million (2009: US$45 million) as a growing
portion of the Group’s sales to customers in Asia were
made on a CFR or similar basis rather than on a
FOB basis.
In December 2010, Ferrexpo acquired Helogistics paying
US$37.8 million cash to settle the company’s existing
bank debt.
Helogistics is one of the largest inland waterway
transportation companies operating on the Danube/Rhine
river corridor. In 2009 and 2010, Helogistics transported
approximately 504 thousand tonnes and 636 thousand
tonnes of Ferrexpo pellets, respectively, to customers in
Central Europe.
Helogistics will enable the Group to further control the
supply chain securing existing customer relationships and
provide new access to European markets, solidifying
Ferrexpo’s presence as the regional market leader in iron
ore pellet supply.
Operating costs
Ferrexpo is the third lowest cost pellet producer in the
world on a FOB basis. Its favourable geographic location
and established logistics infrastructure helps to ensure that
it is able to maintain output at full capacity throughout the
commodities cycle.
FOB cash costs for 2011
Pellets only
100
80
60
40
20
0
s
m
r
e
t
)
0
1
0
2
(
l
a
e
r
n
i
e
n
n
o
t
y
r
d
/
$
S
U
a
v
a
t
l
o
P
o
p
x
e
r
r
e
F
j
s
á
a
r
a
C
o
ã
r
a
b
u
T
a
n
u
r
i
K
e
k
a
L
l
o
r
a
C
20
0
60
Cumulative production capability – wet Mt
100 120 140
80
40
160 180 200 220
The cost environment in 2010 included high Ukrainian
PPI inflation of 21% and cost increases from a stronger
commodity price environment. PPI inflation was driven
by increases in electricity tariffs over the year, compared
to December 2009, of 24%. Diesel costs increases
were driven by higher oil price rises whilst the cost
of steel grinding bodies were in line with increased
world steel prices.
Approximately 70% of total operating costs, including
freight, are in Ukrainian Hryvnia while all revenues received
are in US dollars. The Hryvnia has remained broadly stable
on average since the end of 2009 at around UAH8.0 to the
US dollar.
The Group’s strategy is to reduce operating costs by
around 1% to 2% per annum principally through increased
production and the BIP. Since 2006 the BIP programme
has reduced the C1 cash cost per tonne by approximately
US$5.3 on a cumulative basis, largely by reducing
consumption of electricity, gas and grinding media per unit
of output as well as increasing labour productivity on the
same basis. During the period under review, FPM was able
to reduce the consumption per tonne of electricity and
grinding media by approximately 3% each compared to
average consumption levels in 2009.
Overall, the average C1 cash cost of production was below
US$40 per tonne for 2010, in line with the Company’s
expectations. This represented a 15% increase compared
to the average 2009 C1 cash cost of US$34 per tonne.
The increase was, however, lower than the local inflation
rate of 21% for the period.
Ferrexpo plc
Annual Report and Accounts 2010
25
Ferrexpo is the third lowest cost pellet
producer in the world on a FOB basis. Its
favourable geographic location and
established logistics infrastructure helps to
ensure that it is able to maintain output at full
capacity throughout the commodities cycle.
Growth projects
Ferrexpo’s capital expenditure projects are aimed at the
expansion and upgrade of the existing mine and
processing facilities and to unlock the considerable value
in the Group’s under-exploited reserves and resources,
starting with FYM.
As part of this strategy, in November 2010, the Board
approved US$647 million of capital expenditure projects
which are described below.
Ferrexpo Yeristovskoye Mine (‘FYM’)
The Board authorised expenditure of US$267 million to
achieve first ore from the Yeristovskoye deposit which
will deliver circa 5.5 million tonnes of primary crushed ore
to the FPM processing facilities for conversion into
approximately 1.9 million tonnes of pellets. This is expected
to be completed by the first half of 2013 and will increase
total Group pellet output to 12 million tonnes per annum
of own ore.
The next phases of FYM’s capital investment programme
will involve the construction of concentrating and pelletising
facilities in order to process the remaining circa 21.5 million
tonnes of annual ore capacity at FYM. These stages are
subject to the Group’s continuing technical review and
analysis, availability of funds and Board approval.
Quality upgrade project at FPM
The Board has approved expenditure of US$212 million for
the upgrade of the existing concentrator facilities at the
FPM processing facilities to increase the proportion of 65%
Fe pellets to 100%. This will allow access to new markets
and increase the average price that Ferrexpo receives for
its pellets. Currently approximately half of the Group’s
production is 65% Fe pellets and the other half is 62% Fe
pellets. The project is scheduled for completion by the end
of 2014.
Mine life extension project at FPM
The Board has approved expenditure of US$168 million
over a period of eight years to extend the life of the existing
FPM mine to 2038. The project will involve additional
stripping works in 2011 of around 15 million cubic metres
to allow access to additional ore from 2014. As a result, the
ore output from the existing mine will peak at 35 million
tonnes per annum by 2014 compared to the current output
of 28 million tonnes per annum.
Ferrexpo’s capital expenditure
projects are aimed at the
expansion and upgrade of the
existing mine and processing
facilities and to unlock the
considerable value in the Group’s
under-exploited reserves and
resources, starting with FYM.
26
Ferrexpo plc
Annual Report and Accounts 2010
Financial Highlights
>
>
>
>
>
>
Revenue doubled to US$1.3 billion
EBITDA up over 300% to US$585.3 million
Diluted eps up 500% to 72.24 US cents
Cash flow from operations up over 350% to
US$379.8 million
Cash at 31 December 2010 up significantly
to US$319.5 million
Net debt reduced by 60% to US$104.4
million as at 31 December 2010
Revenue
For the year ended 31 December 2010, the Group’s sales
volumes increased 7.8% to 9.7 million tonnes (2009: 9.0
million tonnes) of pellets. Pricing for the first quarter of 2010
was largely based on the annual benchmark price to 31
March 2010 while for the remainder of the year quarterly
and six monthly pricing was agreed with the customer
base. Overall Ferrexpo achieved an 88.4% increase in its
average DAF/FOB price in 2010. Higher sales volumes and
prices resulted in Group revenues almost doubling to
US$1.3 billion (2009: US$648.6 million).
In 2010, over 90% of sales volumes from own ore were
based on long term volume agreements compared to 70%
in 2009 as the Group witnessed a return in demand from
its Traditional Markets customer base in 2010.
Cost of sales
The C1 cash cost of production per tonne is defined as the
cash costs of production of own ore divided by production
volume of own ore. This excludes non-cash costs and
one-off items.
For the year ended 31 December 2010, Ferrexpo
maintained robust cost control in the face of rising
commodity prices and local inflation. The average C1 cash
cost increased 15.4% to US$39.70 per tonne. This
compared with US$34.40 in 2009. The Group experienced
cost increases from commodities used in the production
and processing of iron ore such as oil and steel, as well as
local PPI inflation of 20.9%. The C1 cash cost per tonne
once more benefited from production at full capacity
throughout the period under review. This allowed for
efficient absorption of the fixed cost base which along with
the Business Improvement Programme (BIP) helped
mitigate inflationary cost pressures. As a result, the
increase in C1 cash costs was lower than the local PPI
inflation rate.
Just over half of the C1 cash costs are denominated in
Ukrainian Hryvnia. The Hryvnia remained on average
broadly stable in 2010 compared to 2009 at around
UAH8.0 to the US Dollar.
Approximately half of Ferrexpo’s C1 cash costs are energy
related. Electricity tariffs increased by 21.5% in 2010, and
diesel cost increases reflected higher oil prices. Costs for
grinding media, which are 10.0% of the C1 cash cost,
increased inline with higher steel prices. The increase in
steel prices was more than reflected in higher sales prices
for our iron ore pellets during the period under review. The
breakdown of the Group’s C1 cash cost is shown in the
table on page 28.
Since the inception of the BIP in 2006, the cumulative
productivity gains have reduced costs by approximately
US$5.27 per tonne of pellets produced, or US$47.6 million
Ferrexpo plc
Annual Report and Accounts 2010
27
Change
99%
324%
516%
641%
499%
500%
0%
Year ended
31.12.2010
Year ended
31.12.2009
1,294,900
585,297
45%
498,126
73,002
425,124
72.24
3.3
648,667
138,136
21%
80,850
9,852
70,998
12.05
3.3
Summary of financial results
US$ 000
Revenue
EBITDA
As % of revenue
Profit before taxation
Income tax
Profit for the period
Diluted earnings per share (US cents)
Final dividend per share (US cents)
to the 31 December 2010. This has been achieved through
reduced consumption norms as highlighted in the table on
page 29.
The following table shows the geographic split of pellet
sales by volume:
Purchased concentrate
The Group has nameplate pelletising capacity of 12.0
million tonnes of pellets per year. Ferrexpo is currently able
to mine ore sufficient to produce around 9.0 million tonnes
of pellets. To efficiently utilise the spare processing
capacity, third party concentrate was purchased which
increased sales in the high demand environment. The
Group will continue to purchase third party concentrate
provided adequate margins can be achieved. During the
year, 998.1 thousand tonnes of pellet equivalent third party
concentrate was acquired (2009: 157.4 thousand tonnes)
which generated a positive contribution.
Overall, cost of sales for the year ended 31 December
2010 was US$481.9 million (2009: US$341.1 million) with
total production volumes increasing by 14.4%.
Selling and distribution expenses
The main components of Ferrexpo’s selling and distribution
costs are railway freight costs to the Ukrainian border as
well as port charges and international freight expenses
for pellets shipped by sea and river to customers on a
CFR basis.
The following table highlights the selling and distribution
expenses for the periods indicated:
(US$ millions unless otherwise stated)
Railway transportation
Port charges
International freight
Other (commissions, insurances,
personnel, depreciation, advertising)
Year ended
31.12.2010
Year ended
31.12.2009
81.5
32.3
74.9
69.5
35.3
45.2
23.3
12.3
Total selling and distribution
expenses
Total sales volume, kt
Cost per tonne of pellets sold
(incl international freight)
DAF/FOB per tonne of pellets sold
212.0
9,721
162.3
9,015
21.8
13.1
18.0
12.0
Selling and distribution expenses increased by 30.7% to
US$212.0 million, compared to US$162.3 million in 2009.
This increase reflected 7.8% higher sales volumes and
higher international freight costs as a larger proportion of
sales were made including freight.
Year ended
Year ended
31 December 31 December
2009
2010
Traditional1
Natural2
Growth3
Total
65.5%
7.2%
27.3%
52.8%
7.9%
39.3%
100%
100%
1 Traditional Markets include Austria, Czech Republic, Hungary,
Russia, Serbia, Slovakia, Russia and Ukraine.
2 Natural Markets include Western Europe, Turkey and the
Middle East.
3 Growth Markets include China, India, Japan and South Korea.
Of the volumes sold, 65.5% was sold to our Traditional
Markets customers in Central and Eastern Europe
compared with 52.8% in 2009. The increased volumes
resulted in a 17.3% increase in railway transportation costs
to US$81.5 million in 2010 (2009: US$69.5 million), as our
Traditional Markets customers largely receive their product
by rail.
Port charges reduced by 8.5% to US$32.3 million (2009:
US$35.3 million), reflecting lower seaborne sales to our
Growth Markets customers as their share of sales volume
fell to 27.3% in 2010 compared with 39.3% in 2009.
International freight costs increased by 65.7% to US$74.9
million (2009: US$45.2 million) as a growing proportion of
the Group’s sales to customers in Asia were made on a
CFR or similar basis rather than on a FOB basis.
General and administrative expenses
General and administrative expenses increased by 13.9%
to US$49.2 million for the year ended 31 December 2010
(2009: US$43.2 million). The increase was primarily due to
professional fees related to increased business
development activities including fees for the Helogistics
acquisition amounting to US$1.6 million.
Other contributing factors were higher depreciation and
maintenance following increased levels of investment and
an increase in personnel costs reflecting local inflation
in Ukraine.
Other income and expense
Other income was US$4.5 million for the year ended 31
December 2010 (2009: US$4.1 million). The higher amount
in the 2010 reflected increased sales of spare parts.
28
Ferrexpo plc
Annual Report and Accounts 2010
Financial Highlights continued
The table below sets out the breakdown of the Group’s C1 cost of sales.
Electricity
Gas
Fuel
Grinding media
Explosives
Other materials
Spare parts, maintenance and consumables
Personnel costs
Royalties and levies
C1 Cost Of Sales
C1 Cost per tonne
Other expenses increased by US$2.5 million to US$5.9
million compared with US$3.4 million in 2009. The increase
primarily reflected a lower release of allowance for doubtful
debts compared to the previous year and an increase in
charitable donations.
EBITDA
Ferrexpo defines EBITDA as profit from continuing
operations before:
>
depreciation and amortisation (included in cost of sales,
administrative expenses and selling and distribution
costs)
non-recurring cash items included in other income and
other expenses
net gains and losses from the disposal of investments
and property, plant and equipment
tax and finance
>
>
>
EBITDA increased by 324% to US$585.3 million for the
year ended 31 December 2010 compared with US$138.1
million in 2009. The increase was due to 7.8% higher sales
volumes and a significantly higher average DAF/FOB sales
price. This was partially offset by a 15.4% increase in C1
cash costs per tonne. The EBITDA margin in 2010 was
45.2% compared with 21.3% in 2009.
Disposal of VAT bonds
During 2010, VAT bonds were issued to Ferrexpo by the
Ukrainian Government with a face value of UAH658.6
million (US$81.3 million) in compensation for VAT
outstanding as of 31 December 2009. These instruments
were subsequently sold realising a loss of UAH86.5 million
(US$10.9 million) reflecting prevailing conditions in the local
bond market.
Finance income and expense
Finance income was US$2.6 million in 2010 compared to
US$2.9 million in 2009. The decrease was due to lower US
Libor rates on deposits in 2010 compared to 2009.
Year ended 31.12.2010
|
Year ended 31.12.2009
US$ 000
97,251
43,073
31,169
35,918
8,148
31,351
58,940
45,432
7,237
%
of total
27.1%
12.0%
8.7%
10.0%
2.4%
8.7%
16.4%
12.7%
2.0%
US$ 000
78,534
36,942
27,297
29,020
9,042
22,475
49,170
37,717
6,285
%
of total
26.5%
12.5%
9.2%
9.8%
3.1%
7.6%
16.5%
12.7%
2.1%
358,519
296,482
39.7
–
34.4
–
Finance expenses increased to US$42.8 million for the year
ended 31 December 2010 (2009: US$23.7 million) due to
higher interest margins charged on Group borrowings. The
Group’s average weighted interest rate increased in 2010
to 7.2% compared to 5.1% in 2009. In 2010, finance
expense also included arrangement fees for debt financing
of US$5.5 million carried forward from earlier periods.
Foreign exchange gain/(loss)
Operating foreign exchange gains and losses
Ferrexpo prepares its financial statements in US dollars
and operating foreign exchange gains and losses reflect
the revaluation of trade receivables and trade payables that
are denominated in a currency other than the Group’s
reporting currency at the balance sheet date.
In 2010, the Ukrainian Hryvnia remained broadly stable
against the US dollar, appreciating slightly from UAH 7.99
to UAH 7.96 compared with UAH 7.70 to UAH 7.99 in 2009.
As a result in 2010, there were no significant operating
foreign exchange gains and losses, with a loss of US$1.1
million recorded (2009: gain of US$2.5 million).
Non-operating foreign exchange gains and losses
Non-operating foreign exchange losses result from the
re-translation of financial liabilities, loans and other similar
items. Non-operating foreign exchange losses increased
from US$2.6 million to US$3.9 million due to the
depreciation of the US dollar compared with the
Swiss Franc.
Income tax expense
The Group pays tax in various jurisdictions. The effective
income tax rate for the period was 14.7% compared with
12.2% for the equivalent 2009 period. This is influenced
by the Group’s mix of profits between Switzerland
and Ukraine.
Ferrexpo plc
Annual Report and Accounts 2010
29
The table below highlights the reduction in consumption norms of key inputs achieved since 2005:
Consumption norms
UOM
2005
2006
2007
2008
2009
Electricity
Gas
Grinding media
Personnel
kWh per t of pellets
m3 per t of pellets
kg per t of concentrate
kg per t of pellets
‘000 tonnes per head
205.5
22.0
5.5
6.4
0.7
195.6
19.2
5.0
6.0
1.0
190.9
18.4
4.8
5.8
1.2
183.7
17.4
4.7
5.7
1.3
184.6
16.3
4.7
5.8
1.4
% change
2010 2010 vs. 2005
179.5
16.7
4.5
5.6
1.5
-13%
-24%
-18%
-13%
103%
Statement of financial position and cash flow
The Group’s cash flow from operating activities increased
by 394% to US$379.8 million (2009: US$76.9 million). This
was after a working capital outflow of US$136.8 million
(2009: US$13.8 million working capital outflow). The
working capital outflow was largely due to a US$74.0
million increase in trade receivables reflecting higher prices,
a US$20.4 million increase in VAT receivables and a
US$42.9 million increase in inventory due to stocks of third
party concentrate and pellets at the year end.
Total capital expenditure in 2010 was US$167.1 million
(2009: US$86.2 million). Of the total, US$49.1 million was
for sustaining capital expenditure at FPM. Total
development capital expenditure amounted to US$118.0
million. This consisted of US$54.9 million for FPM which
included capitalised stripping and mining equipment for the
Mine Life Extension Project and the Quality Upgrade
Project. US$42.6 million was for the development of FYM,
which included US$27.4 million for mining equipment.
US$2.4 million was spent on development of the northern
deposits while US$18.1 million was spent on infrastructure
including the purchase of over 300 rail cars during the year.
In November 2010, the Board approved a capital
expenditure budget of US$647 million as part of the first
stage of the Group’s capital investment programme. This
first stage of the programme will be funded from the
Group’s cash flow generation.
Borrowings
Net financial indebtedness (‘NFI’) reduced by US$153.2
million to US$104.4 million (2009: US$257.6 million).
Ferrexpo secured a new Pre-Export Financing (“PXF”)
facility in September 2010 for US$350 million. The facility
matures on 31 March 2014, amortising over 24 months
following an 18 month grace period.
As of 31 December 2010, total credit lines amounted to
US$596.9 million of which US$423.9 million had been
drawn. This compares to credit lines of US$319.5 million at
31 December 2009 of which US$269.5 million had been
drawn. The average life to maturity of Ferrexpo’s debt as of
31 December 2010 was 2.3 years compared to one year
as of 31 December 2009.
As of 31 December 2010 the Group had cash balances of
US$319.5 million compared with US$12.0 million as of 31
December 2009. The balance at 31 December 2010
included restricted cash held in escrow of US$37.8 million
for payment of the Helogistics acquisition.
As of 31 December 2010 net debt to EBITDA decreased
significantly to 0.2 times (31 December 2009: 1.9 times).
The following table analyses the net financial indebtedness
of the Group:
US$ 000
Cash and cash equivalents
Current borrowings
Non-current borrowings
As at
31.12.2010
As at
31.12.2009
319,470
(22,563)
(401,290)
11,991
(251,379)
(18,143)
Net financial indebtedness
(104.384)
(257,655)
Related party transactions
The overview of the Group’s related party transactions
undertaken during the financial year 2010 is disclosed in
note 35 to the accounts.
Key relationships and significant contracts
The Group has several key relationships and significant
contracts which are critical to its business. These include,
but are not limited to, the Group’s relationships with its
majority shareholder, customers, lenders and employees.
Majority shareholder
The majority shareholder of the Group is Fevamotinico
S.a.r.l. (‘Fevamotinico’), a company owned by The Minco
Trust, one of the beneficiaries of which is Kostyantin
Zhevago, the Group’s Chief Executive Officer. At the time
that this report was published, Fevamotinico held 51.0%
(2009: 51.0%) of Ferrexpo plc’s issued share capital.
Ferrexpo plc entered into a Relationship Agreement with
Fevamotinico, The Minco Trust and Mr Zhevago in
June 2007.
Further detail and material terms relating to the
Relationship Agreement are available in the Group’s Listing
Prospectus dated 15 June 2007.
Principal customers
The Group sells approximately 54.5% (2009: 41.2%) of its
production on the basis of long-term supply contracts to its
two largest customers, Voestalpine AG (‘Voestalpine’) in
Austria and the Slovakian and Serbian operations of United
States Steel Corporation (‘USS’). The long-term supply
contract with Voestalpine expires in March 2020 and with
US Steel in March 2011.
Employees
Critical employees are the members of the Group’s
Executive Committee, details of whom can be found on
pages 44 and 45 of this Annual Report.
30
Ferrexpo plc
Annual Report and Accounts 2010
Risks relating to our business
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.
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.
Risks relating to the Group’s operations
Iron ore prices and market
Description:
The Group’s business is dependent on demand and price
developments in the international iron ore market.
Impact:
Fluctuations in iron ore prices and demand may negatively impact the
financial result of the Group.
Mining risks and hazards
Description:
The Group’s operations are subject to risks and hazards, including
industrial accidents, equipment failure, unusual or unexpected
geological conditions, environmental hazards, labour disputes,
changes in the local 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.
Mitigation:
The management of the Group closely monitor developments in the
international iron ore market in order for the Group to be in a position
to react in a timely manner to changes to iron ore prices and
demand.
The Group successfully reacted to adverse market conditions during
the 2009 financial year by recognising the importance of cost
reduction and marketing flexibility at an early stage.
Impact:
The Group may experience material mine or plant shutdowns or
periods of reduced production as a result of any of the before
mentioned factors, and any such events could negatively affect the
Group’s results of operations.
Mitigation:
The Group is dedicated to a zero-harm objective and the mitigation
of mining risk is one of the primary operational goals of the Group.
However, given the nature of mining operations there is no guarantee
that accidents and fatalities will not occur in the future, despite all the
safety initiatives undertaken and processes put in place. In 2010 the
Group had one operational fatality, compared with none in 2009 and
three in 2008. Throughout the Group’s 40 year history of operation it
has not experienced any significant shutdowns.
Ferrexpo plc
Annual Report and Accounts 2010
31
Risks relating to the Group’s operations continued
Reliance on State monopolies
Description:
Changes in costs of the Group’s mining and processing operations
could occur and consequently result in changes in profitability or the
feasibility in mining existing and future 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.
The Group is dependent on gas provided by the State which in turn
receives its gas from Russia. In January 2009 Russia and Ukraine
were in dispute with regards to gas prices which resulted in a two
week gas supply disruption.
Logistics
Description:
The Group is dependent on logistics services provided by third
parties and State-owned organisations. The dependency is primarily
related to the rail freight network services, services from port facilities
and barging companies and may result in logistics bottlenecks.
Impact:
Increased energy and railway tariffs as well as increased royalties will
affect the Group’s costs. Furthermore, if gas supplies are disrupted in
future for any substantial period of time, this may have a detrimental
effect on the Group’s ability to conduct its operations.
Mitigation:
The factors having an impact on the Group’s future cost structure are
closely monitored by management and cost reduction initiatives are
planned and reported to the Board. The Business Improvement
Programme (‘BIP’) focuses on the reduction of consumption norms.
Since 2005 it has reduced the C1 cash cost by US$5.27 per tonne of
pellets. In addition the Group, where possible, seeks to mitigate
supply disruption of key inputs by entering into contracts with
independent suppliers and traders thus reducing its reliance on State
monopolies. This was the case in January 2009 where the Group’s
production was not impacted by the gas dispute between Russia
and Ukraine.
Impact:
The identified potential logistics bottlenecks, if left unmanaged, could
adversely impact the ability of the Group to distribute its products on
time and may affect its future growth strategy.
Mitigation:
The Group has embarked upon a programme of investing in its own
rail cars. It also acquired, in January 2011, Helogistics a barging
company operating on the Danube/Rhine river corridor reducing its
reliance on 3rd party barging companies. The 49% investment in the
port of TIS-Ruda provides the Group with independent access to the
seaborne markets in Asia as well as to markets in Turkey and the
Middle East.
Counterparty risk
Description:
During the year ended 31 December 2010, sales made to three
customers accounted for approximately 63% of sales revenue
(2009: 52%)
Impact:
Financial instability on the part of the Group’s counterparties,
especially its major customers, could adversely affect its financial
results.
Licences
Description:
Licences are critical to the Group’s operations, and there is no
guarantee of their renewal or reconfirmation in the future, nor is there
a guarantee that the Group will be able to obtain any additional
licences. See also ‘Risk relating to the Group’s strategy –
Government approvals of expansion’.
Mitigation:
Customers’ financial strength is subject to regular and thorough
review. The results of these reviews are used to change sales terms
with customers in order to mitigate the risk of uncollectible receivable
balances. As a result of the rigorous procedures put in place, the
Group has not experienced any significant bad debt losses.
Impact:
The lapse of licences held by the Group as well as any failure to
obtain any additional licences may adversely affect the Group’s ability
to meet future growth targets.
Mitigation:
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.
32
Ferrexpo plc
Annual Report and Accounts 2010
Risks relating to our business continued
Risks relating to finance
Exchange rate risk
Description:
The Group receives the majority of its income in US dollars,
however, a large proportion of the Group’s costs are denominated
in Ukrainian Hryvnia.
Impact:
An appreciation of the Ukrainian Hryvnia versus the US dollar would
have a negative impact on the profitability of the Group.
Mitigation:
The exposure to foreign currency fluctuation is closely monitored by
the Group in order to make appropriate decisions on a timely basis, if
needed. The Group did not enter into any foreign currency hedging
agreements during 2010.
Interest rate risk
Description:
The majority of the Group’s borrowings are linked to floating US dollar
LIBOR rates exposing the Group to interest rate changes.
Impact:
An increase in interest rates will have a negative impact on the
financial costs of the Group’s borrowing affecting profitability.
Financing risk
Description:
Development projects require additional funding above the cash
generation capabilities of the existing operations which need to be
covered with specific finance arrangements.
The Group’s principal loan facility contains covenants relating to its
net financial leverage, defined as total debt less cash and cash
equivalents as a ratio to Earnings Before Interest, Tax, Depreciation
and Amortisation (‘EBITDA’).
Mitigation:
The Group monitors its proportion of fixed and floating interest rate
borrowings in order to maximise profitability. The Group did not
enter into derivative financial instruments such as interest rate
swaps in 2010.
Impact:
In the event of a severe market downturn the Group may not earn
sufficient EBITDA to meet the required net financial leverage ratio.
Mitigation:
The Group’s financial policies are designed to meet the covenant
obligations, under its principal loan facility, in all stages of the
commodities cycle. The Group expects to have sufficient liquidity to
operate successfully throughout 2011 and sufficient long-term
contracts in order to meet the requirements of all debt covenants.
Ferrexpo plc
Annual Report and Accounts 2010
33
Risks relating to the Group’s strategy
Expansion capital expenditure
Description:
Our future financial and operational performance depends on our
ability to successfully upgrade existing facilities and develop currently
unexploited mining assets.
Impact:
As with all major capital projects of this kind, there is a risk of
insufficient controls and cost overruns which could impact the time to
completion of these projects and the return on the capital invested.
Government approvals of expansion
Description:
The Group does not yet have all governmental approvals required to
implement all of its expansion projects. Although all approvals which
have been applied for have been granted, there is no guarantee that
others will be granted in the future.
For example, there are some small communities located on the
proposed site of the Group’s expansion projects at 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.
Risks relating to operations in Ukraine
Ukrainian producer price inflation (‘PPI’)
Description:
Ukraine has experienced double digit inflation over a number of
years. In 2010 PPI was over 20%.
Ukrainian labour and social unrest
Description:
The failure of salaries and benefits generally to keep pace with the
cost of living have led in the past, and could lead in the future, to
labour and social unrest. Labour and social unrest could have
political, social and economical consequences, such as increased
renewal of centralised authority.
Ukrainian VAT receivable
Description:
FPM and FYM do not have substantial amounts of VAT on revenues
to offset against VAT incurred on purchases. The Ukrainian
Government does not always repay VAT receivable on a timely basis.
Mitigation:
The Group has established procedures to control, monitor and
manage capital expenditure, and has also appointed a Chief
Operating Officer. Monthly asset reviews occur on site, and
investment risks are periodically reviewed by the Board.
Impact:
A failure to receive governmental approvals will have a negative
impact on achieving the Group’s growth plans.
Mitigation:
The Group maintains an open and proactive relationship with the
different governmental authorities and is aware of the importance of
compliance with local legislation and standards.
Impact:
If not mitigated by devaluation of the Ukrainian currency and
efficiency improvements, the inflationary environment poses a risk to
the costs and profitability level of the Group’s business.
Mitigation:
Ukrainian inflation is closely monitored to assess and address the
implications for the Group in a timely manner. Since the inception of
BIP programme in 2006, the cumulative productivity gains have
saved Ferrexpo approximately US$47.6 million.
Impact:
The uncertainties in the Ukrainian economic and political
environment could have an adverse effect on the Group’s business
and financial results.
Mitigation:
The Board closely monitors any developments and changes in the
political and social environment and maintains regular contact with
regional and national government authorities.
Impact:
The late repayment of VAT results in increased working capital which
is funded by the Group.
Mitigation:
The repayment of VAT is closely monitored by management.
Funding plans are developed to manage temporary increases
in the VAT receivable.
34
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Social Responsibility Review
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 has been to use legal
requirements as the sole benchmark for
CSR compliance. By contrast, we view legal
standards for CSR as a minimum level and
we are committed to striving to achieve
the highest international standards of
performance in CSR matters. We will
ensure that during 2011 investment in
health, safety and the environment
is maintained.
The Board’s approach to CSR
The Board demonstrates its commitment to CSR through:
>
>
>
>
Group policies;
Board and management focus;
Asset level management systems; and
Performance management at all levels.
The Board believes that Ferrexpo has made good progress
during the year. A Group-wide Code of Corporate
Responsibility and Business Ethics (the ‘Code’), which has
been translated into Ukrainian and Russian and
communicated to employees, enshrines the Company’s
values in three main areas. These are:
Business principles
Ferrexpo must maintain high standards of behaviour with
all those it deals with, both inside and outside the Group.
Its conduct and business dealings should be associated
with honesty and integrity, making it an attractive and
reliable business partner.
Community relations
Ferrexpo’s presence should benefit those around it, and its
operations will benefit if local communities are thriving. Any
member company of the Group should be considered an
attractive local employer.
Stewardship
Ferrexpo must develop and manage its resources
and facilities in a sensible manner, having regard for
the natural and social environment in which it operates.
Companies within the Group should be associated
with a commitment to achieving the highest
environmental and safety standards.
The Corporate Safety and Social Responsibility
Committee
The Group has a Corporate Safety and Social
Responsibility Committee (the ‘CSR Committee’) which
monitors the implementation of CSR policies.
Ferrexpo plc
Annual Report and Accounts 2010
35
The CSR Committee is chaired by Viktor Lotous (Ferrexpo
Poltava Mining (‘FPM’) Chief Operating Officer). The other
members of the CSR Committee are Michael Abrahams
(Chairman of the Board), Kostyantin Zhevago (Chief
Executive Officer) and Brian Maynard (Group Chief
Operating Officer). To assist them in the exercise of their
duties, the CSR Committee will, from time to time, engage
specialist technical advisers. The CSR Committee met
once during 2010. In addition, the whole Board received a
detailed presentation on safety when it visited the site
during the year.
During the year the business reviewed by the CSR
Committee included the following items:
>
Overall review of safety in mining and processing
operations, including analysis of industrial injuries and
sickness, workplace conditions, and labour safety
audits.
Update on the work of DuPont Safety Resources
(‘DuPont’) and their recommendations.
CSR Reporting.
>
>
The CSR framework
Management recognises that reaching the highest
standards will entail a continuous process of evaluation
and improvement founded on a sound CSR framework.
Ferrexpo has adopted a seven point CSR framework
covering values, strategy, policies, objectives, targets,
monitoring and auditing, and communication.
CSR at FPM
As it is still much the largest asset within the Group, FPM
provides the main focus for development and
implementation of the Group’s CSR procedures, based on
established Group policies. Within FPM a single
department has 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.
CSR at FYM
The number of staff at FYM grew steadily during the year,
from under 70 to over 350, but is still only a small fraction
of the total workforce. CSR matters form part of FYM’s
regular reporting procedures.
All Group employees are expected to take personal
responsibility for their conduct, and management
recognises the need to create a cultural and behavioural
environment among the Group’s workforce that
will allow the policies agreed by the Board to be
successfully implemented.
Health and safety
Ferrexpo’s health and safety policy
>
The prevention of injuries to employees is the highest
priority of the Board and management. Policies and
practices at all levels need to reflect this.
Within Ferrexpo’s 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 reflect 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 objectives
The objective set in 2009 of achieving the best mining
safety record in Ukraine is supported by targets including a
reduction of 20% in the lost-time injury frequency rate. In
this respect 2010 was a disappointing year (see under
“Health and safety performance” below), and comparisons
with other mining companies in Ukraine on the basis of the
limited information that they publish suggest that Ferrexpo
still has some way to go to reach its objective. However,
comparisons with past performance should take account
of the likelihood that raising the profile of safety in the
Company has made the under-reporting of accidents
much more rare than in the past. The particularly severe
winter weather of early 2010 was also a contributing factor,
with least one injury caused by a fall on an icy road.
For 2011 management is determined to do everything
possible to reinforce further the safety culture at Ferrexpo,
through an increase In safety spending as a proportion of
sales revenue, through the development of the safety
training programme, and through a continuing link between
safety performance and staff remuneration (safety KPIs
now apply to all staff down to middle management level).
36
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Social Responsibility Review continued
Monitoring the effectiveness of health and safety policies
includes the review of health and safety performance, as
measured by key KPIs as shown below:
Health and safety performance
2010
2009
2008
Lost Time Injury Frequency Rate
(LTIFR – see note)
Fatal accidents
Total accidents
Lost days
1.43
1
20
916
1.11
0
15
530
0.95
3
17
591
Note
LTIFR – Number of work-related lost time injuries per million man hours.
Health and safety management systems
In accordance with Ukrainian law, FPM has developed a
health and safety policy applicable to its 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 government personnel.
Following a restructuring of the Labour Safety Department
in 2009, there is a centralised Directorate for Industrial
Labour Safety and Environmental Protection taking the
place of the previous more localised structure.
Remuneration of safety engineers is no longer directly
linked to operational output. The purpose of setting up
the Directorate was to develop a uniform policy and
achieve the maximum degree of co-ordination of progress
towards achievement of the goals set in the field of
labour safety. Procedural manuals on labour safety
and environmental protection at the operational level
continue to be developed.
As it updates the current procedures of the labour safety
management system, the FPM management continues
to take into account best practice both in Ukraine and
abroad. In 2010 this took the form of co-operation with
the labour safety consultants DuPont in the area of
labour safety training and auditing (see under ‘Safety
Initiatives’ below).
In 2006 FPM initiated the development of a health and
safety management system consistent with the
requirements of OHSAS 18001, the internationally
recognised standard for health and safety management.
This system was externally audited under the Ukrainian
UkrSEPRO system in March 2007 and accreditation was
obtained in April 2007. The system was audited again in
March 2008, March 2009 and March 2010, and the
accreditation was confirmed by external auditors on
each occasion.
Fatalities and reportable accidents
The prevention of injuries to employees is the highest
priority of the Board and management who follow the
principle that all accidents are avoidable.
In line with policy at FPM, all accidents are investigated to
determine the cause and identify appropriate remedial
action. This analysis, which also covers minor accidents
not involving time spent off work (‘microtraumas’) is carried
out according to a methodology agreed with DuPont.
Fatalities and other serious accidents are additionally
investigated by the State authority. The Board, the CSR
Committee and the 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.
Tragically, there was one fatal accident at FPM in 2010,
to the machinery repair man Ivan Kharchenko. A full
investigation was carried out by both the Company and,
as is usual in such cases, the State authorities, which
attributed the accident to the failure of an item of electrical
equipment. All similar items of equipment were then
checked and replaced if appropriate. Also, measures
have been taken for the total replacement of electrical
equipment on cranes in the crushing plant during
2011-2012.
In accordance with Ukrainian compulsory social insurance
laws, compensation equivalent to up to 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.
Ferrexpo plc
Annual Report and Accounts 2010
37
Safety initiatives
In 2010 FPM continued to implement safety programmes
to improve the health and safety of its workers. These
included:
>
Work with DuPont (under the contract entered into at
the end of 2009) on behavioural audits, with training
sessions for 150 line managers, carried out in
conjunction with a DuPont consultant, on how to carry
out these audits, whose purpose is to improve
company safety culture and eliminate dangerous work
practices.
Now that most of middle management has been trained
in safety matters, training is being provided for more
junior staff (additional to what they receive by law at the
state safety institutes).
Periodic revision of Company safety standards which
are promulgated throughout the organisation, both
orally and in writing (via procedure manuals).
>
>
Evidence that these and previous initiatives are bearing
fruit, and that a safety culture is taking root, has been seen
in the increasing readiness of staff to raise safety problems
with management and suggest solutions to them.
FPM is required by Ukrainian labour protection laws to
dedicate at least 0.5% of sales revenue to labour protection
and safety. This statutory payment amounted in 2010 to
approximately UAH 41.5 million (US$5.2 million, or 0.7% of
sales) (2009: US$3.3 million, or 0.6% of sales).
FYM is starting to implement a full-time safety programme
at the pit, which includes ensuring that Health and Safety
technicians have the constant use of a car in which to
patrol all areas.
Occupational health initiatives
In accordance with the requirements of the Ministry of
Health in Ukraine and to prevent or detect occupational
diseases at an early stage, FPM employees, particularly
those engaged in potentially hazardous work, are given
medical examinations both upon recruitment and at regular
intervals during their employment. The health of employees
who have worked for 10 years or more under potentially
hazardous working conditions is assessed more rigorously.
As an integral part of the Directorate of Industrial and
Labour Safety and Environmental Protection, FPM owns an
on-site health centre. The health centre carries out medical
examinations of staff on joining the company, as well as
annual medical examination of the employees aimed at
preventing and treating occupational diseases, according
to the requirements of the current labour legislation of
Ukraine. Additionally, on a contract basis, the health centre
provides services for subcontractors’ employees. The cost
of providing medical services in 2010 was UAH 7.3 million
(US$0.9 million), the majority of which was spent on
maintaining the health centre and ambulance, and on
medical check-ups for staff.
In the past three years, there have been eight recorded
cases of industrial disease (three in 2008, two in 2009 and
three in 2010); most cases are associated with prolonged
exposure to high dust concentrations. Other diseases
included auditory impairment due to excessive 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 directly
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 in the
production area in the mine and at the processing plants
and workshops, the pit-face and roads in and around
the mine are watered each shift (depending on the
weather pattern).
Employees
Ferrexpo’s employment principles include policies and
practices on company standards, security, recruitment,
remuneration, equal opportunities and training and
development. These are backed up by subsidiary
company employment manuals to cover local legal and
regulatory requirements.
As part of the restructuring process involving an
outsourcing of non-core mining activities, during 2009 25
security staff previously employed directly were transferred
to the local security company that provides services to
FPM. Additionally, the Specialised Electric Equipment and
Networks Repairs Department (212 staff) was moved
outside the company structure. No further staff were
transferred in 2010.
FPM continues to recruit specialist graduates from
Dnepropetrovsky Mining Academy, Kyiv University,
Krivoy-Rog Institute and Komsomolsk Polytechnical
School among other places to fill available technical and
financial positions.
Ferrexpo is aware of the increasing demand for staff with
mining expertise in the CIS countries and elsewhere, and is
constantly looking for ways to motivate and retain its key
employees. (For an example of this, see case study on the
social loyalty housing programme on page 39.)
Further information on employee numbers is set out in note
36 to the accounts.
38
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Social Responsibility Review continued
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. In 2010, 103 employees were
sponsored by Ferrexpo at institutes of higher education.
Total educational spending for employees in higher
educational establishments was UAH0.4 million
(US$0.1 million).
Trade unions and industrial relations
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’). FPM entered into a new collective
bargaining agreement with the Poltava Trade Union in
2008. A protocol of intent with the Poltava Trade Union for
the period from 2008 to 2010 states 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) up to an agreed
maximum. Management believes, having conducted
market research, 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.
There has been no major industrial action or labour dispute
at Poltava since its privatisation in 1995. In the summer of
2010, following the introduction of more modern, safe and
comfortable dump trucks and excavators on the site and a
consequent significant improvement in the working
conditions of the staff operating them, there was a
re-certification of workplaces. This meant that the
retirement age of the staff concerned (who had previously
been allowed to retire early without loss of benefit because
of their hard working conditions) was changed from 50 to
55. Some of the staff objected to this and took unofficial
industrial action in the form of a limited ‘go-slow’ in the first
week of August, after which normal working was resumed.
Most of the staff did not support the go-slow, and there
was no impact on production. FPM then participated in a
working group including representatives of the government
authorities, which found that FPM had acted correctly in
the re-certification of workplaces.
Environment
Ferrexpo’s Environmental policy
>
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.
The mines 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.
>
>
Monitoring the effectiveness of environmental policy
includes the review of key KPIs for emissions which are
shown below.
Emissions in tonnes
Total gas emissions
Of which:
Nitrogen dioxide
Carbon monoxide
Sulphur dioxide
Total solid emissions
2008
2009
2010
6,177
6,167
6,294
2,879
2,312
888
3,224
2,876
2,306
886
3,212
2,922
2,336
937
3,575
9,869
Total emissions
9,401
9,379
In 2010 FPM spent UAH46 million (US$5.8 million) on the
implementation of environmental measures. Payments
for emissions and waste placement amounted to
UAH23 million (US$2.9 million).
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 industrial 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 the
Ukrainian UkrSEPRO authority and given a certificate of
conformity with ISO 14001 in the second quarter of 2007.
Ferrexpo plc
Annual Report and Accounts 2010
39
Social loyalty housing programme
In view of the difficulties that individuals in Ukraine
face when obtaining housing finance, FPM has
recommenced its social housing programme (last
operated in 2006 before the IPO).
This is an arrangement, fairly common in Ukraine, under which
financial assistance in the form of a housing loan at a favourable
rate is provided to employees at Komsomolsk. The loan is
extended and administered by a commercial bank but
guaranteed by FPM, with the aim of motivating and retaining
selected employees in the face of increasing demand for their
services by Ferrexpo’s competitors in Ukraine and elsewhere.
FPM will act as guarantor for the housing loans provided to key
members of staff with high potential and a good performance
record. The total amount of the loans is expected to be around
US$3.5 million; this will allow assistance to be given to up to 100
employees to buy flats in and around Komsomolsk. The
programme is expected to run for 10 to 15 years.
40
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Social Responsibility Review continued
The system was audited again in May 2010, and the
accreditation was confirmed by external auditors.
Project evaluation
The Group has 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 evaluation documents presented to
the Board for approval. During 2009 Ferrexpo completed
an independent review of the Ukrainian EIA (OVOS), which
covers our regulatory environmental requirements, for the
Yeristovo mine pre-strip and the actual environmental
performance of the current Yeristovo operations against
the requirements of the International Finance Corporation’s
(‘IFC’) Environmental and Social Performance Standards.
Ferrexpo remains committed to applying the IFC
requirements as it prepares plans for further development
of the Yeristovo project. During 2010 FYM completed
a study that sets out guidelines for monitoring the
environmental and social impact of the project as
it develops.
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. Progress during 2010 is set out below.
Water management
FPM uses some 491 million cubic metres of water each
year, much of which is recycled through the tailings facility,
although approximately 3.5 million cubic metres is
extracted from a combination of the local river and the
municipal drinking water supply.
The Tailings Storage Facility (‘TSF’) also receives the
treated effluent from Komsomolsk’s sewage treatment
plant. Excess water from the TSF is passed through an
extensive bio-engineered treatment system commissioned
in May 2002.
Storm water from the site is treated in a new cascade
treatment plant with a filtering dam commissioned in late
2005. The plant is designed to remove suspended solids
and organic pollutants. Other rain and melt water is
pumped to the slurry pit for clarification; in the case of
excess water it is directed to the bio-engineered treatment
unit for additional treatment together with the remainder of
TSF dam-filtered water.
During 2006 and 2007, the washing facilities of the mining
transport department were rebuilt to prevent the pollution
of ground water by oil products that had been carried by
the surface water as it drained away. This had previously
occurred due to damage of the washing area and
dirt collector.
Progress in 2010
>
Protection of the local river system (including advanced
water treatment of clarified water at the sludge
depository in the biological purification plant so as to
prevent excessive discharge of pollutants into the local
river system) – spending of US$0.2 million in 2010.
Modernisation of the bulldozer washing station in the
Mining Transport department will prevent fuel and
lubricants from escaping and polluting groundwater.
The TSF was inspected In October 2010 by experts
from the Ministry of Emergencies, who found that the
tailing ponds and the refuse pumping system were in a
safe condition.
Reduction of air pollution (stabilising banks of dry waste
material by sowing grass on them, and intensively
watering the work face in the pit after blasting and in dry
weather) – spending of US$1.3 million in 2010.
Waste management (including management of the
depositing sites and tailings dam to allow for use of
slurry (tailings) and stripping material in production, as
well as securing continuous operation of water recycling
system of water supply to the company departments) –
spending of US$4.2 million in 2010.
>
>
Waste rock management
The currently operating Gorischne-Plavninskoye
Lavrikovskoye (‘GPL’) open pit has generated some
517 million cubic metres of waste rock that is deposited in
two dumps. Annual monitoring of the western and eastern
dumps indicates that run-off from the waste rock dumps
has no negative effect on air quality or water basins, and
vegetation has been successfully cultivated on the
inaccessible and abandoned areas of the rock dumps.
Waste rock from future operations, including the
Yeristovskoye pit now being excavated, is being deposited
on these two dumps or 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.
Ferrexpo plc
Annual Report and Accounts 2010
41
Local communities
FPM believes that supporting local communities is
one of its key social obligations. In 2010 it allocated
UAH35.0 million (2009: UAH30.3 million) to the town
of Komsomolsk, surrounding communities and
various local organisations.
The main areas of spending were the local Centre of Culture and
the Arts (UAH4.3 million) and a number of funds for municipal
development and social activity for young people. The Company
also subsidised medical treatment for some local residents and
provided financial assistance to the medical establishments in
the town (UAH2.1 million). Considerable assistance was also
given to the local authority in improving the living environment in
and around Komsomolsk (UAH2.6 million).
42
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Social Responsibility Review continued
Mine closure and rehabilitation
FPM recognises that its activities have an impact on the
environment and communities in which it operates. We are
aware that a commitment to sustainability requires FPM to
prepare now for the cessation of mining operations even
though that eventuality remains many years in the future. In
2005, we developed a closure and rehabilitation plan for
the existing GPL pit and associated waste rock dumps.
The site will be restored primarily to forestry, with an area of
open water remaining in part of the open pit.
The Company will provide fully for the costs of mine
closure and rehabilitation as they develop, and it is
committed to complying fully with the terms of its operating
licences and the requirements of Ukrainian law.
Communities
Ferrexpo’s 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
The Poltava region 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.). FPM is still by far
the largest employer in the town, which has a population of
around 55,000 people, with approximately 24.3% of the
working population of Komsomolsk being employed by the
mine in one capacity or another.
Community initiatives
FPM
FPM has been a significant investor in local community
initiatives from the outset, investing substantial funds
in the social infrastructure of Komsomolsk and the
surrounding area.
Links with the local community are strengthened by
meetings of senior management with heads of schools
and colleges, supporting local celebration days, giving
vocational guidance and vacation work to the students
of local schools (including providing financial sponsorship
to Individual students whom FPM may subsequently
employ) and organising student excursions to FPM
and its museum.
Historically, FPM has employed a significant number of
people in providing 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 improves the viability
and sustainability of the local economy. To encourage this
process, FPM has offered finance and other support to
employees who provide these in-house services so as to
encourage them to transform internal departments into
stand-alone businesses. In 2010 the objects of such
support included railcar repair operations, lift repair and
some cleaning services.
See also case studies on pages 41 and 43.
FYM
FYM strives to contribute to all spheres of the life of the
local community, believing that a healthy and flourishing
community is of crucial importance for sustainable growth
in our operations. As a young and expanding company,
FYM has been able to provide significant employment
opportunities for local people. FYM aims to have good
relationships with the communities adjacent to its
operations, and 2010 saw the start of its involvement
in a programme to upgrade the medical equipment
at the local hospital.
Ferrexpo plc
Annual Report and Accounts 2010
43
Supporting educational establishments
Ferrexpo recognises the importance of earning the
support of the local communities and encouraging
the growth of the skilled workforce of the district.
It therefore pays close attention to the local
schools and colleges.
In 2010 FPM allocated more than UAH1.1 million for the needs of
local secondary and technical schools, as well as providing
financial help to pre-school institutions in the town and region.
Managers from both FPM and FYM took part in the key school
events throughout the year. Managers and employees also
participated in meetings with the students and contributed to
the training process at the technical schools.
Ferrexpo devotes much effort to providing information about its
activities to the students and making them aware of the career
possibilities that it offers.
44
Ferrexpo plc
Annual Report and Accounts 2010
Board of Directors and Executive Committee
1.
6.
The Board
2.
7.
3.
8.
1. Michael Abrahams, CBE DL (73)
Non-executive Chairman
Michael Abrahams joined the Board on 14 June 2007. He
is chairman of the London Clinic, the Prudential Staff
Pension Scheme and imJack 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. Kostyantin Zhevago (37)
Chief Executive Officer
Kostyantin Zhevago joined the Board as a Non-executive
Director on 14 June 2007 and was appointed Chief
Executive on 1 November 2008. He 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, he
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 (‘Bank F&C’) and as a member of
the supervisory board of JSC Ukrnafta. Between 1993 and
1996, he was financial director of Bank F&C. He is a
non-executive director of New World Resources NV, a
subsidiary of BXR Group Limited. Kostyantin Zhevago
graduated from the Kyiv State Economic University in
1996, specialising in international economics.
4.
5.
3. Christopher Mawe, FCA (49)
Chief Financial Officer
Chris Mawe joined the Board on 7 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, first with IMI plc in both
the UK and Europe, and then with Carclo plc as finance
director. Most recently he was finance director of UK
Coal plc.
4. Oliver Baring (66)
Senior Independent Non-executive Director
Oliver Baring joined the Board on 1 December 2007. He
has been chairman of Mwana Africa plc since its reverse
takeover of African Gold plc in September 2005. He 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. He was a partner in Rowe
and Pitman before its merger with SG Warburg. He is
non-executive chairman of First Africa Holdings Limited,
and is a non-executive director of BlackRock World Mining
Trust plc, and a member of the Advisory Council of
Sentient Resources Fund.
5. Raffaele (Lucio) Genovese (49)
Independent Non-executive Director
Lucio Genovese joined the Board on 14 June 2007. He is
the chief executive officer of Nage Capital Management, a
Swiss-based advisory and proprietary company
specialising in the metals and mining sector, and serves on
a number of boards of directors. 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).
Ferrexpo plc
Annual Report and Accounts 2010
45
6. Wolfram Kuoni (44)
Independent Non-executive Director
Wolfram Kuoni joined the Board on 14 June 2007. He is the
founder and senior partner of Kuoni Attorneys-at-Law,
Zurich, Switzerland, and serves on a number of boards of
directors. He has over 12 years of experience in investment
banking. Prior to 2005, 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. He
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.
7. Ihor Mitiukov (58)
Independent Non-executive Director
Ihor Mitiukov joined the Board on 14 June 2007. He is the
managing director and head of country for Ukraine,
Morgan Stanley. He was the general director of the
Financial Policy Institute until March 2008. From 2002 to
2005 he 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).
8. Miklos Salamon (56)
Non-executive Director
Mike Salamon joined the Board on 27 March 2009. He is
executive chairman of New World Resources NV, a
subsidiary of BXR Group Limited. He is also a non-
executive member of the board of directors of OKD,
Co-President of AMCI Capital and a non-executive director
of Central Rand Gold and of Gem Diamonds. With a career
spanning more than 30 years, recently with BHP Billiton, he
has extensive knowledge of the international mining and
extractive industries. Between 2003 and 2006, he served
as an executive director of BHP Billiton with responsibilities
for the aluminium, copper and nickel businesses. From
2001 to 2006, he also chaired BHP Billiton’s Operating
Committee, which was accountable for inter alia the BHP
Billiton group’s health, safety and environment, projects,
purchasing and operating excellence. In 2001 Mr. Salamon
oversaw the merger integration of Billiton plc and BHP
Limited. He was a co-founding director of Billiton plc in
1997, and oversaw the company’s listing on the London
Stock Exchange in 1997. Before 1997 he held a number of
positions, first at Anglo American and later in the coal
divisions of Shell and Gencor Ltd. He graduated in 1975
from The University of the Witwatersrand, Johannesburg
with a degree in Mining Engineering (Cum Laude) and
obtained an MBA from the London Business School,
University of London in 1981.
The Executive Committee
Kostyantin Zhevago
Chief Executive Officer
(See profile under The Board)
Christopher Mawe, FCA
Chief Financial Officer
(See profile under The Board)
Yaroslavna Blonska (37)
Acting Chief Marketing Officer
Yaroslavna Blonska has worked in the Ferrexpo Poltava
Marketing Group since 2002, and in 2007 she was
appointed the Marketing Manager of the Ferrexpo Group,
where she was responsible for CIS and Eastern European
sales. She has also been a Member of the TIS-Ruda
Supervisory Board since 2007. On 1 January 2011 she
was appointed Acting Chief Marketing Officer of Ferrexpo
plc. Yaroslavna Blonska graduated from Kyiv State
Economic University in 1996, with a degree of MSc in
International management, and completed post graduate
studies in Law at Kyiv State University.
Nikolay Goroshko (51)
Chief Financial Officer, Yeristovo Project
Nikolay Goroshko has worked for Ferrexpo Poltava Mining
since 1984. He was Acting Group Chief Financial Officer in
April 2007 and Chief Commercial Officer in charge of the
Group’s Growth Projects in December 2007 prior to his
current role. He is a graduate of the Kyiv Institute of
National Economics, specialising in Industrial Planning.
Nikolay Kladiev (38)
Chief Financial Officer, Ferrexpo Poltava Mining
Nikolay Kladiev joined FPM in June 2005. Over the course
of his career Nikolay Kladiev spent several years as an
audit manager with Ernst & Young and CFO of a large
Russian factory. He holds a Masters in International
Economic Relations from the Kyiv National University
of Economics.
Viktor Lotous (46)
Chief Operating Officer, Ferrexpo Poltava Mining
Viktor Lotous joined Ferrexpo Poltava Mining in 1986. He
became chief engineer in 1997, and General Director and
Chief Operating Officer in April 2007. He is a graduate of
Kryvy Rih Mining and Ore Institute, and of the Kyiv State
Economic University, specialising in Finance.
Brian Maynard (51)
Group Chief Operating Officer
Brian Maynard joined the Group in January 2011. He spent
30 years with Vale Inco & Vale Australia in their nickel and
coal operations respectively, working in technical,
operations management, and executive roles. In 2007 he
was appointed Vice President, Mining in the Vale Inco
Ontario, Canada operations. He moved to the President’s
role in the Manitoba, Canada operations in 2008 and was
accountable for the fully integrated mining, milling, smelting
and refining complex. Most recently he was the Global
Coal Director – Technical & Administrative Support
(including Finance, Sustainability, Logistics, Technical
Services) in the Brisbane head office of the Vale Australia
operations. He graduated in 1981 from the University of
Manitoba, Canada with a BSc in Geological Engineering.
46
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Governance Report
Introduction
The past year has seen the continued review by the regulatory
authorities of governance standards and practices set in train by the
financial crises of 2008; a number of key themes have come out of
these reviews including the continued focus on risk and executive
remuneration. The Ferrexpo Board remains committed to good
corporate governance practices, in its management of the affairs of
the Group and in its accountability to shareholders, and keeps under
review the Group’s own policies and procedures in these areas. As
detailed in this report, the Directors’ Report and the reports of the
Audit, Nominations and Remuneration Committees, the Group has
implemented an effective corporate governance framework and has
established Board committees, internal procedures and Group
policies which are considered vital for the proper management of the
Group and good governance of Ferrexpo as an international
business. As an English incorporated company with a primary listing
on the London Stock Exchange the Company, in respect of the 2010
financial year, is subject to the Combined Code on Corporate
Governance issued in June 2008 (the ‘Combined Code’). The
Combined Code is available from the Financial Reporting Council’s
website, www.frc.org.uk. The Board and management of the Group
have a policy of conducting all business affairs in a fair and
transparent manner and in maintaining high ethical standards in
dealings with all relevant parties.
The Company has also reviewed the requirements of the 2010 UK
Corporate Governance Code (the ‘2010 Code’), which applies to the
Company with effect from the 2011 financial year, and will report on
compliance in the annual report for 2011. The Board has decided that
all of the Directors should stand for re-election at the AGM in 2011
and in future years, as recommended by the 2010 Code.
Information pursuant to the EU Takeover Directive
The company has provided the additional information required by the
Disclosure and Transparency Rule 7.2.7 of the UK Listing Authority
(Directors’ interests in shares; appointment and replacement of
Directors; powers of the Directors; restrictions on voting rights and
rights regarding control of the company) in the Directors’ Report and
the Remuneration Report.
Statement of compliance
During the year to 31 December 2010 the Company complied with
the provisions of section 1 of the Combined Code.
The Combined Code establishes principles of good governance in
four areas: 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 which are included in the
Remuneration Report on pages 52 to 58.
The Group’s auditor has reviewed those parts of this statement which
it is required to review under the Listing Rules of the Financial
Services Authority.
Directors
The Board
The Board is composed of a Non-executive Chairman: Michael
Abrahams; two Executive Directors: Kostyantin Zhevago, Chief
Executive Officer, and Christopher Mawe, Chief Financial Officer; and
five Non-executive Directors. Oliver Baring is the Senior Independent
Director. The other Non-executive Directors are Lucio Genovese,
Wolfram Kuoni, Ihor Mitiukov and Mike Salamon. Marek Jelinek
retired from the Board on 27 May 2010.
Biographical details of the Directors at the date of this report are set
out on pages 44 and 45 together with details of their membership of
Board committees. A summary of the roles of the Chairman, the
Chief Executive Officer and the Senior Independent Director is
set out below.
The structure and business of the Board are designed to ensure that
the Board focuses its attention on strategy, management,
governance and control issues. The Board has a formal schedule of
matters which sets out those matters requiring Board approval and
specifically reserved to it for decision. The Board is responsible for
setting the Group’s objectives and policies, providing effective
leadership and control required for a public company and for
approving the Group strategy, budgets, business plans and major
capital expenditure. It also monitors financial performance and critical
business issues. Major project approvals, contract awards and key
policies and procedures also require the approval of the Board.
Certain aspects of the Board’s responsibilities have been delegated
to appropriate committees to ensure compliance with the Companies
Act 2006, FSA Listing Rules and the Combined Code. It is the
responsibility of the Chief Executive Officer and the Executive
Committee to manage the day-to-day running of the Group. The
Board is supported by the Executive Committee which meets
approximately monthly. All of the information that is submitted to
the Board by management is reviewed and approved by the
Executive Committee.
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.
The Company Secretary is also responsible for advising the Board on
governance issues.
Directors have the right to request that any concerns they have are
recorded in the appropriate committee or Board minutes.
The Board met five times during the reporting period. Attendance by
Directors at Board meetings and Board committee meetings is
shown on page 48. All Board meetings are held in Switzerland.
Chairman, Chief Executive Officer (‘CEO’) and Senior
Independent Director
The roles of the Chairman and CEO are held by different individuals.
The division of responsibilities between the Chairman and CEO has
been clearly established in writing and agreed by the Board.
The Chairman is responsible for leadership of the Board, ensuring
its effectiveness, setting its agenda and ensuring effective
communication with shareholders. The Chairman also ensures that
there is a constructive relationship between the Executive and
Non-executive Directors. From time to time the Chairman holds
meetings with the Non-executive Directors without the Executive
Directors present.
The Chairman’s other current responsibilities are set out in the
biographical notes on pages 44 and 45. There has been no increase
in those commitments during the reporting period.
Ferrexpo plc
Annual Report and Accounts 2010
47
The role of the CEO is to provide leadership of the executive team,
to develop proposals for the Board to consider, and to oversee
and implement Board-approved actions. Details of Mr Zhevago’s
other appointments are set out in the biographical notes on
pages 44 and 45.
The Senior Independent Director, Oliver Baring, in conjunction with
the other independent Non-executive Directors, assists in
communications with shareholders concerning corporate
governance matters if that is required. He also chairs the Nominations
Committee and the Committee of Independent Directors. At least
once a year, the Senior Independent Director meets the Non-
executive Directors, without the Chairman present, to evaluate the
Chairman’s performance.
Board balance and independence
The Board considers that its membership of two Executive Directors,
a 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 Group in an effective
and successful manner. It also considers that no single Director can
influence or dominate decision making. The Relationship Agreement
with Kostyantin 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, with the exception of Mr Salamon who represents a
significant shareholder, all of the Non-executive Directors as at the
date of this report are independent of the Group within the terms of
provision A.3.1 of the Combined Code.
In 2009, as part of the annual process of performance evaluation (see
below), the Board reviewed the amount of time needed by the
Non-executive Directors to perform their duties, and recognised that
Lucio Genovese and Wolfram Kuoni were required to devote more
time to their duties as Non-executive Directors of Ferrexpo AG than
had been expected at the time of their appointment. The Board
therefore increased their remuneration with effect from 1 January
2009 (as set out in the Remuneration Report on pages 52 to 58). In
reaching this decision the Board also concluded, in the light of the
supervisory and non-executive nature of their duties as directors of
Ferrexpo AG, that both Mr Genovese and Mr Kuoni remained
independent in character and judgement, as defined by provision
A.3.1 of the Combined Code.
Mr Zhevago is a beneficiary of The Minco Trust which owns 100%
of Fevamotinico S.a.r.l., the major shareholder in the Group.
Consequently he and Fevamotinico 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, Fevamotinico 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 Fevamotinico S.a.r.l. and Mr Zhevago on the Board (the
‘Relationship Agreement’).
Conflicts of interest
A procedure is in place to deal with Directors’ conflicts of interest and
the recording, reporting and, where appropriate, approval of related
party transactions and review of relevant disclosures. This procedure
is in line with published guidance, the Company’s Articles of
Association and the provisions in section 175 of the Companies Act
2006 on conflicts of interest. Schedules of a Director’s actual or
potential conflicts and related party transactions have been compiled
based on disclosures made by the Director. These are updated and
reviewed on a regular basis by the Executive Committee, the
Executive Related Party Matters Committee (ERPMC) and the
Committee of Independent Directors (CID). Any changes to the
schedules are noted at the beginning of the next Board meeting. The
Committee of Independent Directors has delegated authority to
carefully consider and (if deemed appropriate in the circumstances)
approve conflicts of interest on behalf of the Board. This procedure
operates effectively, and the Group undertakes to follow emerging
best practice in this area.
The Board has established a Committee of Independent Directors to
consider and, if appropriate, approve related party transactions and
conflicts of interests to the extent foreseen within Chapter 11 of the
Listing Rules (whether in relation to Mr Zhevago or any other Director),
and to consider any matters referred to it concerning the operation of
the Relationship Agreement and ensure that decisions are taken
objectively in the Company’s interest.
Appointments to the Board and re-election
Under its terms of reference the Nominations Committee is
responsible for leading the process for appointments to the Board.
The process for election and re-election of Directors under the
Company’s Articles of Association is set out in the Directors’ Report
on pages 59 to 62.
Information and professional development
Directors receive briefing notes and reports for their consideration in
advance of each Board meeting, including reports on the Group’s
operations to ensure that they are up to date on the latest
developments and are able to make fully informed decisions. These
notes and reports take into account the factors set out in section 172
of the Companies Act 2006 (Directors’ duty to promote the success
of the Company), which are considered by the Executive Committee
when making any proposals and recommendations to the Board.
Decisions made by the Board are set within the framework of the
Directors’ statutory duty to promote the success of the Company for
the benefit of its members as a whole.
Professional development and training are provided in a number of
ways including updates given to the Board on changes and
proposed changes in laws and regulations affecting the Group. Site
visits to ensure Directors are familiar with the Group’s operations are
held at least annually, and Directors may visit the operations of the
Group independently to the extent that they feel this is necessary.
During the year, as in previous years, the Board spent two days
visiting the site in Ukraine.
48
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Governance Report continued
All Directors may take independent professional advice at the
expense of the Group 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. In addition an
appropriate induction programme is provided to a Director on
appointment taking into consideration the individual qualifications and
experience of the Director.
Performance evaluation
A process of evaluation of the Board and its Audit and Remuneration
Committees has been conducted by the chairmen of these bodies.
This is done by the chairman of the relevant body interviewing his
colleagues and then discussing his findings with the body as a whole.
The conclusion of the evaluation process was that the Board as a
whole and its committees had functioned effectively during the year.
The mix of skills and experience on the Board was felt to be
appropriate. The Senior Independent Director and the other Non-
executive Directors have evaluated, and will continue to monitor, the
performance of the Chairman.
Board committees
The Board has a number of committees consisting of certain
Directors, and in the case of the Executive Committee and Corporate
Safety and Social Responsibility (‘CSR’) Committee, certain senior
managers, to which specific responsibilities have been delegated and
for which written terms of reference have been agreed. The terms of
reference of the Audit, Remuneration, Nomination and CSR
Committees are available for inspection on the Group’s website at
www.ferrexpo.com. Membership of the various committees,
including the Chairman of each committee, is shown below.
The Board periodically reviews the membership of its committees to
ensure that committee membership is refreshed. The Group provides
the committees with sufficient resources to undertake their duties,
including access to the Company Secretary.
The table of attendance of members of the Board and its principal
committees at meetings during the financial period together with a
summary of the terms of reference are set out below.
Board
Five Board meetings were held during the year.
Board members
Attendance
record
Michael Abrahams Non-executive Chairman
Kostyantin Zhevago Chief Executive Officer
Chief Financial Officer
Chris Mawe
Senior Independent Non-executive Director
Oliver Baring
Independent Non-executive Director
Lucio Genovese
Independent Non-executive Director
Wolfram Kuoni
Independent Non-executive Director
Ihor Mitiukov
Marek Jelinek1
Non-executive Director
Non-executive Director
Mike Salamon
5/5
5/5
5/5
5/5
5/5
5/5
5/5
3/3
5/5
1 Left the Board on 27 May 2010.
Audit Committee
Four Audit Committee meetings were held during the year.
Committee members
Wolfram Kuoni
Lucio Genovese
Ihor Mitiukov
Chairman
Attendance
record
4/4
4/4
4/4
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. The Committee monitors the integrity of
the financial statements of the Group, including its annual and interim
reports, interim management statements, preliminary results
announcements and any other formal announcement relating to its
financial performance, reviewing significant financial reporting issues
and judgements which they contain. The Audit Committee is also
responsible for reviewing internal controls and risk management
systems, whistleblowing procedures and internal audit processes,
and oversees the relationship with the external auditors.
Remuneration Committee
Five Remuneration Committee meetings were held during the year.
Committee members
Lucio Genovese
Michael Abrahams
Ihor Mitiukov
Oliver Baring
Chairman
Attendance
record
5/5
5/5
5/5
5/5
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 Remuneration Committee are set out
in the Remuneration Report on pages 52 to 58.
Nominations Committee
One Nominations Committee meeting was held during the year.
Chairman
Committee members
Oliver Baring
Michael Abrahams
Wolfram Kuoni
Ihor Mitiukov
Kostyantin Zhevago
Attendance
record
1/1
1/1
1/1
1/1
1/1
Nominations Committee Report
The Nominations Committee meets as required. The role of the
Nominations Committee is to identify and nominate, for the approval
of the Board, candidates to fill Board vacancies, having due regard to
the need for appropriate balance and diversity on the Board. The
Committee consults regularly with the Board while filling vacancies.
The Executive Directors and Chairman also assist in identifying the
scope and required skills for the vacant role. The Committee also
gives consideration to succession planning at the Board and senior
executive levels, including the Chief Executive and the Chief Financial
Officer. Following a review of succession planning in 2010, a Group
Chief Operating Officer was appointed in January 2011.
Ferrexpo plc
Annual Report and Accounts 2010
49
Corporate Safety and Social Responsibility Committee
One Corporate Safety and Social Responsibility (‘CSR’) Committee
meeting was held during the year.
Committee members
Viktor Lotous
Michael Abrahams
Kostyantin Zhevago
Chairman
Attendance
record
1/1
1/1
1/1
Audit Committee Report
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, an
independent Non-executive Director, is Chairman of the Audit
Committee. The terms of reference of the Audit Committee and
attendance by members at its meetings are outlined on page 48.
The CSR Committee’s role is to formulate and recommend to the
Board the Group’s policy on corporate safety and social responsibility
issues as they affect the Group’s operations. In particular it focuses
on ensuring that effective systems and standards, procedures and
practices are in place in the Group. The CSR Committee is
responsible in conjunction with the Executive Committee for
reviewing management’s investigation of incidents or accidents that
occur in order to assess whether policy improvements are required.
Further details concerning the activities of the CSR Committee
are set out in the Corporate Social Responsibility Review on
pages 34 to 43.
Committee of Independent Directors
The Committee of Independent Directors (‘CID’) is composed of the
Senior Independent Director (Oliver Baring), the Chairman of the
Board, and the three other Independent Directors. The Committee
considers and, if appropriate, authorises on behalf of the Board
related party transactions within the terms of Chapter 11 of the Listing
Rules of the Financial Services Authority and otherwise ensures
compliance with Chapter 11 and with the Relationship Agreement
entered into between Fevamotinico S.a.r.l., Mr Zhevago, The Minco
Trust and the Company. The CID holds delegated authority to
consider and, if appropriate, authorise conflicts of interest of any
member of the Board under the relevant section of the Companies
Act 2006. The CID met five times during the year.
The Executive Committee
The Executive Committee is the main decision making body of the
Group. Its members are detailed on page 45. It is responsible for
managing and taking all material decisions relating to the Group apart
from those that are reserved for the entire Board, such as approving
the Group’s strategy, annual and long term capital expenditure plans
and budget. It meets regularly during the year. No meetings are held
in the United Kingdom. It is the responsibility of the Executive
Committee to ensure its duties are at all times set in the context of
the requirements of the Schedule of Matters Reserved for the Board.
The Board has delegated to the Executive Committee the
responsibility for the execution of Board approved strategies for the
Group, ensuring appropriate levels of authority are delegated to
senior management, the review of organisational structures and the
development and implementation of Group policies.
Accountability and audit
Financial Reporting
The Board is aware of its responsibility to present a balanced and
clear assessment of the Group’s financial position and prospects.
This assessment is primarily provided in the Chairman’s and Chief
Executive’s Statement and the Financial Review contained in this
Annual Report. Statements of the respective responsibilities of the
Directors and auditors are set out on page 63.
During the reporting period the Audit Committee met four times and
carried out the following activities:
>
Reviewed with Ernst & Young LLP, the external auditors, the
annual and interim financial statements and associated
documents and the preliminary results statement, ensuring that all
material information was properly and clearly disclosed.
Reviewed with Ernst & Young LLP the scope of the audit work
proposed for 2010 and audit fees.
Reviewed the risk matrix at each meeting, and discussed with the
Head of Internal Audit the internal audit plan for 2010–12 and the
findings of the internal audit reviews conducted during the year.
Reviewed the effectiveness of the external auditors, their
independence and the non-audit services they provided.
>
>
>
A statement on the Board’s position regarding the Group as a going
concern is contained in the Directors’ Report on page 62.
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 Group’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 reviews 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
regularly by the Executive Committee.
On behalf of the Board, the Executive Committee has established a
process for identifying, evaluating and managing the significant risks
faced by the Group in accordance with the Turnbull Guidance. This
process was followed throughout 2010 and up to the date of
approval of this Annual Report. 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 interim and annual financial statements
before their submission to the Board.
50
Ferrexpo plc
Annual Report and Accounts 2010
Corporate Governance Report continued
Full details of the Group’s policy on risk and uncertainties are set out
in note 38 of the ‘Notes to the Consolidated Financial Information’ on
pages 107 to 115. See also the Risks section of the Financial Review
on pages 30 to 33.
>
>
The Board has, through the Executive Committee and the Audit
Committee, reviewed the effectiveness of the Group’s system of
internal controls.
As a result of the continual review of internal control procedures
several key elements have been established within the Group to
ensure a sound system of internal control which is described in
detail below.
These include:
>
Regular review of risk and identification of key risks at the
Executive Committee which are reviewed by the Audit Committee.
Clearly defined organisational and reporting structure and limits of
authority applied to subsidiary companies including FPM and
FYM, the key Ukrainian subsidiaries, and Helogistics Holdings
GmbH, the Austrian subsidiary acquired at the end of 2010.
Clearly defined information and financial reporting
systems, including regular forecasts and a rigorous annual
budgeting process with reporting against key financial
and operational milestones.
Rigorous investment appraisal underpinned by the budgetary
process where capital expenditure limits are applied to delegated
authority limits.
Clearly defined treasury policy monitored and applied in
accordance with pre-set limits for investment and management
of the Group’s liquid resources including a separate
treasury function.
Internal audit by an in-house internal auditor based in Ukraine
(see below) who monitors, tests and improves internal controls
operating within the Group at all levels and reports directly to
the CFO and the Audit Committee.
Fraud management through an independent department
operating in the Group’s key operating subsidiary FPM.
A whistleblowing policy is in place under which staff may in
confidence raise concerns about financial or other impropriety.
>
>
>
>
>
>
>
There are a number of components to the system of internal controls
within the Group which facilitate the control procedures and these are
detailed as follows:
>
A risk matrix has been developed and is monitored and reviewed
by the Executive Committee and the Audit Committee.
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 Executive Committee.
A documented structure of delegated authorities and approvals
for transaction and investment decisions, including any with
related parties.
An Investment Committee (a sub-committee of the Executive
Committee) meets which twice a month to approve capital
expenditures within limits delegated by the Executive Committee
and the Board.
A programme of internal audit reviews has been performed by the
internal auditor.
>
>
>
>
>
The Financial Risk Management Committee (‘FRMC’) reviews
monthly financial information and management accounts, and
meets monthly.
A standard accounting manual is used by the finance teams
throughout the Group, which ensures that information is gathered
and presented in a consistent way that facilitates the production of
the consolidated financial statements.
Treasury
Details of the Group Treasury policy are referred to in the Financial
Highlights section on pages 30 to 33 and in the financial statements
on pages 107 to 115.
Investment proposals
A budgetary process and authorisation levels regulate capital
expenditure. For expenditure beyond specified levels, detailed written
proposals are submitted to the Executive Committee and then to the
Board for approval.
Internal audit
A Group-wide internal audit function has been established using an
experienced internal auditor who is based in Ukraine and is
independent of operational management, reporting directly to the
CFO and the Audit Committee.
An internal audit programme for 2010–12 has been approved by the
Audit Committee and focuses on the areas of risk identified by the
risk reviews carried out on an ongoing basis by the Executive
Committee and the Board.
Auditor independence
The Audit Committee and Board place great emphasis on the
independence and objectivity of the Group’s external 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 the outcome of this review is
relayed to the relevant partners of Ernst & Young. The Audit
Committee has regular discussions with the external auditors,
without management being present.
The Audit Committee has approved separate policies in respect of
the provision of non-audit services and employment of former
employees of the auditors. These policies ensure that the external
auditors are restricted to providing only those services which do not
compromise their independence. The policy on the provision of
non-audit services prohibits the use of the auditors for the provision
of transaction or payroll accounting, outsourcing of internal audit and
valuation of material financial statement amounts. Any assignment
that is proposed to be given to the auditors above a value of
US$500,000 must first be approved by the Audit Committee or its
Chairman. The auditors are also 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 Group pays in proportion to the
overall fee income of the firm, and other regulatory requirements.
Ferrexpo plc
Annual Report and Accounts 2010
51
Fees for audit-related and non-audit-related services performed by
the external auditors are shown in note 9 to the Financial Statements
on page 84.
Relations with shareholders
The Board attaches great importance to 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 Officer, Chief Financial Officer, 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.
JPMorgan Cazenove, the Group’s brokers, also provide regular
reports to the Board on changes to the shareholdings of the Group’s
major investors. Information about the views of major investors is
provided to the Board on a regular basis by the CFO and the Head of
Investor Relations.
The Board uses the Annual General Meeting (AGM) each year to
communicate with shareholders and welcomes their participation.
The Chairmen of the Audit, Remuneration and Nominations
Committees endeavour to be present at the AGMs to answer
questions from shareholders. Notice of the AGM and related papers
are sent to shareholders at least 20 working days before the meeting.
The voting results of the AGM are available on the Company’s
website following the meeting.
Information on matters of interest to investors can be found on the
Group’s website at www.ferrexpo.com.
The Board approved this report on 22 March 2011.
52
Ferrexpo plc
Annual Report and Accounts 2010
Remuneration Report
Introduction
This Report has been prepared by the Remuneration Committee on
behalf of the Board and complies with the requirements of the Listing
Rules of the UK Listing Authority, Schedule 8 of the Large and
Medium-Sized Companies and Groups (Accounts and Reports)
Regulations 2008 and the Combined Code on Corporate
Governance. Part A of the report, which is not subject to audit, sets
out the Company’s remuneration policy and Part B, which has been
audited, provides details of remuneration and share incentives of the
Directors for the year ended 31 December 2010.
This Report will be subject to an advisory shareholder vote at the
Company’s 2011 Annual General Meeting.
Part A: Unaudited Information
Remuneration Committee
The Remuneration Committee is composed of four independent
Non-executive Directors. Lucio Genovese is the Chairman of the
Remuneration Committee and its other members are Michael
Abrahams, Oliver Baring and Ihor Mitiukov. The Remuneration
Committee met five times during the year. Attendance at meetings of
the Remuneration Committee by individual members is detailed in the
Corporate Governance Report on page 48.
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 usually attends 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 retains Kepler Associates as its
advisers to provide advice on remuneration policy, with particular
emphasis on the structure of long-term incentives for senior
management. Other than advice to the Remuneration Committee no
other services were provided by Kepler Associates to the Company.
The Chief Executive Officer provides guidance to the Remuneration
Committee on remuneration packages of senior executives employed
by the Group (but not in respect of his own remuneration).
Activities of the Remuneration Committee
During the year the Remuneration Committee considered the
following items of business:
>
Remuneration packages of Executive Directors and members of
the Executive Committee
Long-Term Incentive Plan performance and the Company’s
performance compared to its peers
General market considerations surrounding executive
remuneration packages and structure
Performance evaluation of the Remuneration Committee.
>
>
>
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
>
Total Shareholder Return (‘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 takes into account the particular business context of the
Ferrexpo Group, the industry segment, 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. No major changes were made to the policy
as a result of the review.
The Remuneration Committee will be keeping under review
remuneration and incentive plan policy during the forthcoming year.
The Remuneration Committee will continue to give full consideration
to the principles set out in the UK Corporate Governance Code in
relation to Directors’ remuneration and to the guidance of investor
relation bodies. It will continue to implement policy so as to align
executive remuneration with shareholders’ interests and also to
engage and retain the talented individuals that the business needs in
order to succeed.
Executive Directors’ remuneration
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 above
average subject to satisfaction of suitably stretching performance
conditions. At target level performance, performance-related pay
makes up the majority of the remuneration of the Chief Financial
Officer. In making this determination, the Committee makes reference
to pay levels of international mining companies and other FTSE-listed
companies of similar size and to pay and conditions, including
average salary increases, elsewhere in the Ferrexpo Group.
Ferrexpo plc
Annual Report and Accounts 2010
53
Incentive Plans
A substantial proportion of Executive Directors’ remuneration is based on performance via the Long-Term and Short-Term Incentive Plans
described below.
>
>
Long-Term Incentive Plan (‘LTIP’) – aims to motivate participants to deliver appropriate longer-term returns to shareholders.
Short-Term Incentive Plan (‘STIP’) – aims to focus management efforts on delivery of annual business priorities, based on a scorecard of
key performance indicators relating to both Company and individual performance.
The Board intends to continue to operate the LTIP and STIP for the Executive Directors and senior executives in 2011 while keeping under
review their motivational effectiveness.
Long-Term Incentive Plan
The LTIP framework was approved by shareholders at the 2008 Annual General Meeting. The LTIP provides for annual awards of
performance shares and options up to an aggregate limit of 200% of salary in normal circumstances. Initial awards were made in 2008 on the
basis of the same number of shares to participants at the same level in the organisation. Further awards were made in 2009 and 2010 to
broadly the same participants, on a similar basis. None of the awards granted in 2009 or 2010 exceeded 100% of salary. These awards are in
the form of performance shares which vest according to the extent to which Ferrexpo’s three year total shareholder return (TSR) matches or
outperforms that of a comparator index (see below).
The Remuneration Committee has chosen 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 Remuneration Committee reviewed the constituents of the comparator index and
their weightings prior to the grant of 2009 LTIP awards and increased the weighting on the focused iron ore miners from 30% to 40% and
reduced the weighting on the single commodity/emerging market miners commensurately. The resulting comparator index for 2009 and 2010
awards is based 50% on the median TSR of global diversified mining companies, 40% on the median TSR of smaller focused iron ore miners
and 10% on the median TSR of selected other single commodity/emerging market miners, as illustrated below.
Index component
Constituents
Global diversified miners (10% each)
Focused iron ore miners (10% each)
Single commodity/emerging market miners
(0.5% each)
Vale
BHP Billiton
Anglo American
Rio Tinto
Xstrata
Cliffs Natural Resources
Fortescue Metals Group
Kumba Iron Ore
Mount Gibson Iron
African Rainbow Minerals
Alcoa
Alumina
Aluminum Corp of China
Antofagasta
Boliden
ENRC
Eramet
First Quantum Minerals
Freeport McMoRan
Industrias Penoles
Katanga Mining
Kazakhmys
KGHM Polska Miedz
Lundin Mining
Norilsk
OZ Minerals
Peabody Energy
Teck Cominco
Vedanta Resources
Aggregate
weighting
50%
40%
10%
TSR is calculated on a common currency basis to ensure that comparisons with international comparators listed overseas are fair.
The Remuneration Committee has discretion to review the comparator index if any of the constituent companies are affected by corporate
events such as mergers and acquisitions.
The Remuneration Committee also reviews the constituents and their weightings prior to the start of each LTIP cycle to ensure they remain
appropriate. The Committee anticipates increasing the number of focused iron ore miners in the comparator index for 2011 LTIP awards.
54
Ferrexpo plc
Annual Report and Accounts 2010
Remuneration Report continued
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 those points. 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 parameters are illustrated below:
Ferrexpo 3-year TSR
% of vesting award
100
80
60
40
20
0
Index
Index +8% p.a.
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 deems it to be in shareholders’ interests to do so.
2008 LTIP award vesting
From 1 January 2008 to 31 December 2010, Ferrexpo’s TSR
performance was 23.9% and Index TSR was 0.5%. This
outperformance of 7.2% p.a. of Index TSR resulted in 92% of 2008
LTIP awards vesting for TSR. The Remuneration Committee has
considered the Company’s overall performance and determined that
the recorded TSR outperformance was a fair reflection of Ferrexpo’s
underlying performance over the performance period and therefore
determined, in accordance with the rules of the plan that 92% of the
2008 LTIP awards vested.
Proposed 2011 LTIP awards
The Remuneration Committee intends to operate the LTIP framework
in 2011 in the same manner as in 2010. However, as intimated in the
2009 Remuneration Report, the Committee has looked at ways to
improve the comparison of the management long-term incentive in
relation to potential short-term share price movements in Ferrexpo’s
share price or the share price of comparator companies. After
consulting the principal shareholders of Ferrexpo in the summer of
2010, the Remuneration Committee determined that it would extend
the TSR share-price averaging period from three to six months to
help eliminate this potential short-erm variability.
This change will be implemented for LTIP awards to be made in 2011.
The TSR performance requirements for threshold and full vesting will
remain unchanged. Existing 2009 and 2010 LTIP cycles will continue
to employ three-month share price averaging.
LTIP: share ownership guidelines
The Committee has agreed that, with effect from 2010, Executive
Directors and members of the Executive Committee should, in line
with the growing practice among FTSE 250 companies, be
encouraged to build up a holding of shares of equivalent value to a
year’s salary (in the case of Executive Directors) or six months’ salary
(for other members of the Executive Committee). Executives will be
encouraged to retain their vested LTIP shares on an after-tax basis
until the applicable guideline is achieved.
Short-Term Incentive Plan
A Short-Term Incentive Plan (STIP) is in place which applies to the
members of the Executive Committee, excluding Mr Zhevago. This
STIP is a discretionary annual bonus scheme. For 2010 the maximum
STIP opportunity for members of the Executive Committee ranged
from 75% to 150% of salary.
Key Performance Indicators (‘KPIs’) for 2010 were set for each
member of the Executive Committee and were weighted to reflect the
contribution of each executive to the achievement of that KPI. In
relation to the Chief Financial Officer the Committee retained a broad
discretion, taking into account both corporate and personal
performance against objectives.
Financial and Operational KPIs during the year related to financial
performance, production output, corporate social responsibility
(CSR), project performance and governance.
Taking into account these results and also his individual performance,
the Remuneration Committee awarded the Chief Financial Officer an
STIP award of 150% of salary. The actual outcome for the other
members of the Executive Committee ranged from 57% to 97% of
salary.
For 2011, financial KPIs have been set and will be adjusted
throughout the period to take account of market and input cost price
developments as appropriate to the extent that these are not under
the direct control of management. Adjustments are at the full
discretion of the Remuneration Committee. CSR, projects and
personal KPIs will continue to be set as in previous years. Weightings
for the Chief Financial Officer in 2011 will be 20% for financial (EBITDA
and net operating profit after tax (NOPAT)), 5% for CSR, 25% for
production and sales volumes, and 50% for personal, projects and
governance.
Ferrexpo plc
Annual Report and Accounts 2010
55
Service agreements, notice periods and termination payments
The Executive Directors are employed under contracts of employment with Ferrexpo AG, a Group company.
The principal terms of the Executive Directors’ service contracts (which have no fixed term) are as follows:
Name
Position
Date of contract
Notice period
Current basic fee (p.a.)
Kostyantin Zhevago
Chief Executive Officer
1 November 2008 Six months from the employee;
US$240,0001
Chris Mawe
Chief Financial Officer
7 January 2008
1 Kostyantin Zhevago’s basic fee of US$240,000 is donated at his request to Ukrainian charities.
six months from the employer
Six months from the employee;
12 months from the employer
CHF613,880
The Remuneration Committee sets notice periods for the Executive Directors at 12 months or less, which reduces the likelihood of having to
pay excessive compensation in the event of poor performance. The policy on termination payments is to pay no more than what may be
stipulated in an individual’s service agreement. The Executive Directors’ service contracts contain a provision exercisable at the option of the
employer to pay an amount on early termination of employment equal to the respective notice period.
If the Company elects to make a payment in lieu of notice, the Executive Director will also be entitled to receive all components of his
remuneration, allowances and expenses for the extent of the notice period. The payment in lieu of notice clauses will be invoked when the
speed and certainty afforded by such clauses are thought to be in the best interests of the shareholders.
Benefits in kind
Under his service agreement, Kostyantin Zhevago is entitled to 25 working days’ paid holiday per year. He is also entitled to furnished
accommodation in Switzerland (and elsewhere in Europe if necessary for the performance of his duties) which cost US$93,000 in 2010, and
up to US$5,000 per annum for professional tax advice.
Under his service agreement, Chris Mawe is entitled to 25 working days’ paid holiday per year. Ferrexpo AG also provides him with
CHF168,000 of accommodation rental assistance per annum, an increase from 2009 reflecting the increase in Swiss rental costs.
Pensions
The Group does not operate a separate pension scheme for Executive Directors. Chris Mawe and Kostyantin Zhevago are members of the
Ferrexpo AG pension plan which is a mandatory insurance scheme under Swiss law provided for all employees of Ferrexpo AG and to which
the Company contributes an average of 10% of their annual base salaries.
Pension benefits earned by the Directors in the year ended 31 December 2010 were:
US$000
Chris Mawe
Kostyantin Zhevago
Accrued
benefit at
1 Jan 2010
Increase in
period (net of
indexation)
259
10
83
7
Age
49
37
Transfer
value of
increase
in period
56
4
Accrued
benefit at
31 Dec 2010
Transfer
value at
1 Jan 2010
Transfer
value at
31 Dec 2010
Forex effect
Movement
in transfer
value during
the period
less Directors’
contributions
Forex effect
54
3
452
24
122
5
214
13
67
6
25
2
Chairman and Non-executive Directors’ remuneration
The remuneration of the Chairman of the Board and the Non-executive Directors consists of fees that are paid monthly. The Chairman and
Non-executive Directors do not participate in any of the Company’s long-term incentive or short-term incentive schemes, nor do they
accumulate 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.
Non-executive Directors’ letters of appointment
Each of the Non-executive Directors has signed a letter of appointment with the Company. The Non-executive Directors are each appointed
for an initial period of three years, and their appointments (with the exception of that of Mike Salamon) may then be renewed on a three-yearly
basis, subject to re-election when appropriate by the Company in general meeting. Unless otherwise determined, neither the Company nor
the Director concerned may give less than three months’ notice of termination of the appointment.
56
Ferrexpo plc
Annual Report and Accounts 2010
Remuneration Report continued
The Non-executive Directors’ fees are reviewed each year. 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 devote to the activities of the Board and its committees. The key appointment
terms of the Non-executive Directors are as follows:
Director
Position
Date of initial appointment
Duration of term
Fees p.a.
Michael Abrahams
Oliver Baring1
Lucio Genovese2,4
Wolfram Kuoni3,4
Ihor Mitiukov
Mike Salamon
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
27 March 2009
3 years5
3 years5
3 years5
3 years5
3 years5
3 years
US$400,000
US$140,000
US$180,000
US$215,000
US$120,000
US$120,000
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. in total for his roles as Senior Independent Director and Chairman of the
Nominations Committee and Committee of Independent Directors.
2 Lucio Genovese receives a fee of US$120,000 p.a. as a Non-executive Director and additional fees of US$20,000 p.a. for his role as Chairman of the Remuneration Committee and US$40,000
for his role as a Non-executive Director of Ferrexpo AG.
3 Wolfram Kuoni receives a fee of US$120,000 p.a. as a Non-executive Director and additional fees of US$20,000 p.a. for his role as Chairman of the Audit Committee and US$75,000 for his role
as a Non-executive Director and as Chairman of Ferrexpo AG.
4 See note on Board balance and independence in Corporate Governance Report on page 47.
5
Initial term was for three years from the date of the 2008 AGM. Appointments were renewed by the Board for a further term of three years (until the date of the 2014 AGM) in March 2011, subject
to the requirement for periodic re-election at the Annual General Meeting.
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 Board and Mr Zhevago. Any such directorships must be formally notified to the Board. Mr Zhevago’s
external directorship is mentioned in the biographical section of the Company Overview on page 44. He does not retain any fees for this
directorship.
Performance review
Source: Bloomberg
Ferrexpo
2010 LTIP Index
FTSE250 Index
350
300
250
200
150
100
50
0
31 May
2007
31 December
2007
31 December
2008
31 December
2009
31 December
2010
The above graph shows the value, at 31 December 2010, of £100 invested in Ferrexpo’s shares at the time of the IPO compared with the
current value of the same amount invested in the FTSE 250 index or in the shares of the LTIP comparator group. The FTSE 250 index is
chosen because Ferrexpo is a constituent member of this group.
Ferrexpo plc
Annual Report and Accounts 2010
57
Part B: Audited Information
Directors’ remuneration for the period from 1 January 2010 to 31 December 2010
Salary, annual bonus and other benefits
Chairman
Michael Abrahams
Executive Directors
Kostyantin Zhevago
Chris Mawe
Non-executive Directors
Oliver Baring
Lucio Genovese
Marek Jelinek
Wolfram Kuoni
Ihor Mitiukov
Mike Salamon
Former Executive Director
Mike Oppenheimer
Total
1 Relates solely to share-based valuation of listing bonus awards.
2 Retired from the Board on 27 May 2010.
3 Relates to accommodation costs.
4 Total for 2009 includes pension related benefits amounting to US$4 thousand.
5 Total for 2009 includes pension related benefits amounting to US$117 thousand.
Directors’ interests in shares of the Company
Interests of the Directors in office as at 31 December 2010
Michael Abrahams
Kostyantin Zhevago1
Christopher Mawe
Oliver Baring
Lucio Genovese
Wolfram Kuoni
Ihor Mitiukov
Mike Salamon
Salary or fees
US$000
Pension
US$000
Benefits
US$000
Bonus
US$000
Total
2010
US$000
Total
2009
US$000
400
–
3311
–
731
906
240
590
140
180
502
215
120
120
–
8
78
933
913
–
885
341
1,644
3224
1,2375
–
–
–
–
–
–
–
–
–
-
–
-
-
–
-
-
-
-
-
-
–
140
180
50
215
120
120
140
180
90
215
120
90
–
18
2,055
86
515
885
3,541
3,318
At
31 December
2010
167,646
300,198,313
0 0
20,130
169,005
28,290
31,327
100,000
At
31 December
2009
242,229
300,198,313
20,130
168,719
28,004
31,011
100,000
1 Kostyantin 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 300,198,313 Ordinary
Shares in the Company.
There have been no changes in the interests of the Directors from the end of the period under review to 14 March 2011, being a date not more
than one month prior to the date of notice of the Annual General Meeting.
Listing bonus awards
The Chairman and the Non-executive Directors were all awarded shares in the Company following their appointment to the Board as follows:
Director
Michael Abrahams
Oliver Baring
Lucio Genovese
Wolfram Kuoni
Ihor Mitiukov
Award date
15 June 2007
1 December 2007
15 June 2007
15 June 2007
15 June 2007
on first
anniversary
award date of award date
Shares vested Shares vested Shares vested
on third
anniversary
of award date
on second
anniversary
of award date
Shares
vested on
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, a deduction of shares was
made during the year in respect of Michael Abrahams.
58
Ferrexpo plc
Annual Report and Accounts 2010
Remuneration Report continued
Long-Term Incentive Plan awards
In 2010 the following performance shares were awarded to Executive Directors as nil cost options under the LTIP. Further details of the LTIP
and the applicable performance conditions are shown on pages 53 and 54.
At
1 January
2010
Granted
(2010 LTIP
Award)
100,000
100,000
–
–
–
100,0001
During year
Exercised
Lapsed
Total at
31
December
2010
Market
price on
date of award
(pence)
Market
price at
date of
exercise
–
–
–
–
–
–
100,0002
100,000
100,000
300,000
411
143
275
–
–
–
Chris Mawe
Total
Date from which
exercisable
01.01.2011
01.01.2012
01.01.2013
Expiry date
16.05.2018
14.09.2019
17.06.2020
1 Date of grant 18 June 2010.
2 This award has vested as to 92% under the TSR performance condition described above. At the date of vesting the market price per share was 415.9p.
Former Executive Directors vesting of LTIP awards
In accordance with the provisions of the LTIP rules and applicable employment contracts, the LTIP award made to Dennis McShane in 2008
vested as follows:
Dennis McShane
2008 LTIP award1 100,0002
31 Dec 2010
61%
61,111
92%
56,222
Grant of shares
Number
of shares
Vesting date
Pro rated
for time
Adjusted
number
of shares
Proportion
of shares
vesting under
TSR test
Number of
shares
vesting
1 A Transitional award of 75,000 shares made in 2008 did not vest and lapsed at the end of 2009.
2 At the date of vesting the market price per share was 415.9p.
Other transactions involving Directors are set out in note 35 (related party disclosure) to the Financial Statements.
This Report was approved by the Board on 22 March 2011.
Signed on behalf of the Board
Lucio Genovese
Chairman of the Remuneration Committee
Ferrexpo plc
Annual Report and Accounts 2010
59
Directors’ Report
The Directors present their report to shareholders for the financial
year ending 31 December 2010.
In compliance with the 2010 UK Corporate Governance Code all of
the Directors will retire at the forthcoming AGM and, being eligible,
will offer themselves for re-election.
Further details about the Directors and their roles within the Group
are given in the Directors’ biographies on pages 44 and 45. Details of
the remuneration of the Directors, their interests in shares of the
Company and service contracts are contained in the Remuneration
Report on pages 52 to 58.
Appointment and replacement of Directors
Directors may be elected by the shareholders (by ordinary resolution)
or appointed by the Board. A Director appointed by the Board holds
office only until the next following AGM and is then eligible for election
by the shareholders.
Powers of the Directors
Subject to the Company’s Articles, the Act 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.
Directors’ and Officers’ insurance
The Company maintains Directors’ and Officers’ Liability Insurance
in respect of legal action that may be brought against its Directors
and Officers.
Directors’ indemnity provision
During the period under review, the Group had in force a qualifying
third-party 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 Act.
Share capital and rights attaching to the Company’s shares
Share capital and rights attaching to the Company’s shares
The Company has a single class of Ordinary Shares of 10p each.
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.
At each AGM, the Board proposes to put in place annual shareholder
authority for the Company’s Directors to allot new shares in
accordance with the guidelines of the Investor Protection Committee.
Details of the issued share capital of the Company are shown in note
29 of the financial statements.
The Company was incorporated under the name Ferrexpo plc as a
public company limited by shares on 22 April 2005. Ferrexpo plc
listed on the London Stock Exchange in June 2007 and is a member
of the FTSE 250 index.
Business review
A review of the business, its principal activities and likely future
developments can be found in the sections listed below which are
incorporated into this Directors’ Report by reference. The pages
referred to incorporate all requirements of section 417 Companies
Act 2006 (the ‘Act’), including details of the principal risks and
uncertainties facing the Group and analysis using Key Performance
Indicators (as set out in the Business Review).
>
>
>
>
>
The Chairman’s and Chief Executive Officer’s Statement on
pages 6 to 9
The Operating Review on pages 20 to 25
The Financial Highlights on pages 26 to 29
The statement of risks on pages 30 to 33
The Corporate Social Responsibility Review on pages 34 to 43.
Directors’ duties
The duties of Directors are set out in sections 170 to 177 of the Act.
The duties that are specifically referred to in the Corporate
Governance Report on pages 46 to 51 include the duties under
section 172 (to promote the success of the Company), section 175 (to
avoid conflicts of interest), section 176 (not to accept benefits from
third parties), and section 177 (to declare any interests in existing or
proposed transactions or arrangements with the Company).
Results and dividends
Results for the year are set out in the Consolidated Income Statement
on page 65.
The Directors recommend a final dividend of 3.3 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 3 June 2011 to
shareholders on the register at the close of business on 3 May 2011.
Shareholders may receive UK pounds sterling dividends by direct
bank transfer, provided that they have notified the Company’s
registrars in advance. Shareholders may also elect to receive
dividends in US dollars (the procedure for this is set out in the Notice
of the AGM).
Directors
The Directors of the Company who served during the year were:
>
>
>
>
>
>
>
>
>
Michael Abrahams
Oliver Baring
Lucio Genovese
Marek Jelinek (retired 27 May 2010)
Wolfram Kuoni
Chris Mawe
Ihor Mitiukov
Mike Salamon
Kostyantin Zhevago
60
Ferrexpo plc
Annual Report and Accounts 2010
Directors’ Report continued
Variation of rights
Subject to the provisions of the Act, the rights attached to a class of
shares may be varied or abrogated 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 shares of that class held as
treasury shares) or with the sanction of a special resolution passed at
a separate meeting of the holders of the issued shares of that class
validly held in accordance with the Articles.
Dividends and distributions
Subject to the provisions of the Act, the shareholders 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 Group, in the opinion
of the Board, justifies their payment.
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. Registration of a transfer
of an uncertificated share may be refused in the circumstances set
out in the Uncertificated Securities Regulations 2001 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.
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 Board may
decline to register a transfer of a certificated share if it is not in the
approved form. The Board may also decline to register any transfer of
any share which is not a fully paid share. The Board may decline to
register a transfer of any of the Company’s certificated shares by a
person with a 0.25% or greater interest if such a person has been
served with a notice and has failed within 14 days to provide the
Company with information concerning interests in those shares
required to be provided under the Act, 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 Act. Any shares
which have been bought back may be held as treasury shares or
cancelled immediately upon completion of the purchase.
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 27 May 2010. This authority will expire at the
conclusion of the Company’s 2011 AGM. 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 make use of the authority mentioned above
during 2010.
Under the Company’s Articles, 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% or greater interest
(as defined in the Articles) if such person has been served with a
notice under section 793 of the Companies Act 2006 and has failed
within 14 days to provide the Company with information concerning
interests in those shares required to be provided under the Acts.
Voting
At a general meeting of the Company, every member has one vote on
a show of hands and on a poll, one vote for each share held. Under
the Act, members are entitled to appoint a proxy or proxies to
exercise all or any of their rights to attend, speak and vote at a
general meeting. 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.
Restrictions on voting
No member is entitled to vote at any general meeting in respect of
any shares held by him if any call or other sum outstanding in respect
of that share remains unpaid. Currently, all issued shares are fully
paid. In addition, subject to the Articles no member shall be entitled
to vote if he has failed to provide the Company with information
concerning interests in those shares required to be provided under
the Act.
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 non financial
interests of the beneficiaries of the EBT or their dependants.
Deadline for voting rights
The Articles provide a deadline for submission of proxy forms of not
less than 48 hours before the meeting. The Directors will also specify
in the notice of any general meeting a time, being not more that 48
hours before the meeting, by which a person must be entered in the
register of members in order to have the right to attend and vote at
the meeting The Directors may decide, at their discretion, that no
account should be taken of any day that is not a working day when
calculating the 48 hour period.
Ferrexpo plc
Annual Report and Accounts 2010
61
Substantial shareholdings
As at 15 March 2011, the Company had been advised in accordance with the Disclosure and Transparency Rules, of the following notifiable
interests in its voting rights:
Name of shareholder
Fevamotinico S.a.r.l.1
Wigmore Street Investments No. 3 Ltd2
Ordinary
Shares
300,198,313
76,656,035
% of the
Company’s
total voting
rights at date
of notification
Number of
voting rights
300,198,313
76,656,035
51.00%
13.02%
1 Fevamotinico S.a.r.l. is a wholly owned subsidiary of The Minco Trust of which Kostyantin Zhevago is a beneficiary.
2 BXR Group Ltd is the ultimate parent undertaking and indirect controller of Wigmore Street Investments No. 3 Ltd, which holds 76,656,035 shares through its nominee Lynchwood Nominees ltd.
In addition, Wigmore Street Investments No. 3 Ltd Is Interested In Total Return Swaps covering 70,500,000 shares.
Significant agreements – change of control
The Company does not have any agreements with Directors or employees that would provide for compensation for loss of office or
employment resulting from a takeover.
There are no circumstances connected with any other significant agreements to which the Company is a party that would take effect, alter or
terminate upon a change of control following a takeover bid, except those referred to below:
Long-Term Incentive Plan
The rules of the Company’s Long-Term Incentive Plan set out the consequences of a change of control of the Company on employee rights
under the plan. Generally, such rights will vest on a change of control to the extent that the performance conditions have been satisfied and
on a time pro-rated basis, subject to the discretion of the Remuneration Committee. Participants will become entitled to acquire shares in the
Company, or in some cases, to the payment of a cash sum of equivalent basis.
Bank loan facility
Under the US$350 million pre-export finance facility with Deutsche Bank AG and other banks, entered into in September 2010, if Kostyantin
Zhevago ceases to own directly or indirectly at least 50% plus one share of the Company, any of the lenders is entitled to demand repayment
of its commitment.
Relationship Agreement
Details of the Relationship Agreement entered into between Fevamotinico S.a.r.l., Kostyantin Zhevago, The Minco Trust and the Company can
be found in the Financial Highlights (page 29) and in the Corporate Governance Report (page 47). The Relationship Agreement ceases to
apply if the holding of Fevamotinico S.a.r.l., The Minco Trust or Mr Zhevago individually or collectively falls below 25% of the issued share
capital of the Company.
Events since the balance sheet date
Information on events since the balance sheet date is provided in note 42 to the financial statements on page 119.
Market value of land and buildings
Land is carried in the balance sheet at deemed cost resulting from a valuation undertaken on 1 January 2003 as part of the Group’s
transition to reporting under IFRS. It is not practicable 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 38 to the Consolidated
Financial Information on pages 107 to 115.
62
Ferrexpo plc
Annual Report and Accounts 2010
Directors’ Report continued
Creditor payment policy and practice
It is the Group’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 2010 for the
Company was 20 days (2009: 27 days).
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 Group’s auditors are unaware,
and that each Director has taken all reasonable steps to make himself
aware of any relevant audit information and to establish that the
Group’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 63.
Amendments to Articles of Association
The Articles may be amended by special resolution in accordance
with the Act.
Annual General Meeting
The Annual General Meeting of the Company will be held at 11.00am
on Thursday 26 May 2011 at the Intercontinental Hotel, 1 Hamilton
Place, Park Lane, London W1J 7QY. A separate letter from the
Chairman summarising the business of the meeting and the Notice
convening the AGM have been sent to shareholders with this
Annual 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 2011
Annual General Meeting.
This report was approved by the Board on 22 March 2011.
David Leonard
Company Secretary
Ferrexpo plc
Registered Office:
2–4 King Street
London SW1Y 6QL
Registered number: 5432915
Headquarters:
Bahnhofstrasse 13
CH–6340 Baar
Switzerland
Charitable and political donations
The Group made no political donations during the year. Group
donations to charities worldwide were US$4,418,000 (2009:
US$4,043,000), with UK charities receiving US$nil (2009: US$nil).
Risk management policies
Full details of the Group’s policy on risk and uncertainty and an
overview of the Group’s exposure to credit, liquidity and market risks
are set out in note 38 of the ‘Notes to the Consolidated Financial
Information’ on pages 107 to 115. Further references to risk are made
on pages 30 to 33 and in the Internal Control section of the Corporate
Governance Report on page 49 which provides a summary of the
internal control procedures put in place by the Board to identify key
risks and review risk management and its effectiveness.
Going concern
The Group’s business activities, together with the risk factors likely to
affect its future development, performance and position are set out
on pages 26 to 33. The financial position of the company, its cash
flows, liquidity position and borrowing facilities are described in the
Financial Review on pages 26 to 29. In addition, note 38 of the ‘Notes
to the Consolidated Financial Information’ on pages 107 to 115 sets
out the Group’s objectives, policies and processes for managing its
capital; its financial risk management objectives and details of its
financial instruments; and its exposures to credit risk, liquidity risk,
currency risk and interest rate risk.
The Group’s forecasts and projections, taking into account possible
changes in the iron ore market and general economic environment,
show that the Group generates sufficient operating cash flows to
comply with the amortisation schedule for the existing major debt
facility and to finance the anticipated development projects.
After making enquiries, the Directors have a reasonable expectation
that the Group has adequate financial resources to continue in
operational existence for the foreseeable future. For this reason, the
Directors continue to adopt the going concern basis of accounting in
preparing the financial statements of the Group.
Corporate governance statement
The Disclosure and Transparency Rules (DTR 7.2) require certain
information to be included in a corporate governance statement set
out in a company’s Directors’ Report. In common with many
companies, Ferrexpo has an existing practice of issuing, within its
annual report, a Corporate Governance Report that is separate from
its Directors’ Report. The information that fulfils the requirements of
DTR 7.2 is located in Ferrexpo’s Corporate Governance Report on
pages 46 to 51 (and is incorporated into this Directors’ Report by
reference), with the exception of the information referred to in DTR
7.2.6, which is located in this Directors’ Report.
Ferrexpo plc
Annual Report and Accounts 2010
63
Statement of Directors’ Responsibilities
In relation to the Group financial statements
The Directors are responsible for preparing the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have prepared
the financial statements in accordance with International Financial
Reporting Standards as adopted by the EU. Under company law the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Group and of the profit or loss of the Group for that period. In
preparing those financial statements, the Directors are required to:
>
select suitable accounting policies and then apply them
consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable International Financial Reporting
Standards have been followed, subject to any material departures
disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
>
>
>
In relation to the parent company financial statements
The Directors are responsible for preparing the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have elected to
prepare the financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company law the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and of the profit or loss for that period. In preparing those
financial statements, the Directors are required to:
>
select suitable accounting policies and then apply them
consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
>
>
>
In relation to the Group and parent company financial
statements
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s and
Company’s transactions and disclose with reasonable accuracy at
any time the financial position of the Group and Company and enable
them to ensure that the Group and Company financial statements
comply with the Companies Act 2006 and, with respect to the Group
financial statements, Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Group and Company
and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable UK law and requirements of the Financial Services
Authority, the Directors are responsible for the preparation of a
Directors’ report, Directors’ remuneration report and corporate
governance report that comply with these laws and requirements. In
addition the Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from legislation
in other jurisdictions.
Under the requirements of Chapter 4 of the Disclosure and
Transparency Rules the Directors are responsible for including a fair
review of the development and performance of the business and the
position of the Group taken as a whole, together with a description of
the principal risks and uncertainties that they face.
Responsibility Statement of the Directors in respect of the
Annual Report and Accounts
We confirm on behalf of the Board that to the best of our knowledge:
(a) the financial statements give a true and fair view of the assets,
liabilities, financial position and profit of the Company and the
undertakings included in the consolidation taken as a whole; and
(b) the management report (entitled ‘Business Review’) includes a fair
review of the development and performance of the business, and
the principal risks and uncertainties that they face.
For and on behalf of the Board
Michael Abrahams
Chairman
Christopher Mawe
Chief Financial Officer
64
Ferrexpo plc
Annual Report and Accounts 2010
Independent Auditor’s Report to the
Members of Ferrexpo plc
We have audited the financial statements of the Group and parent
company for the year ended 31 December 2010 which comprise the
Consolidated Income Statement, the Consolidated Statement of
Comprehensive Income, Consolidated, Statements of Financial
Position, the Consolidated Statement of Cash Flows, Consolidated
Statement of Changes in Equity, Parent Company Balance Sheet and
the related notes 1 to 41 for the Group financial statement and notes
1 to 10 for the Parent Company financial statements. The financial
reporting framework that has been applied in the preparation of the
Group financial statement is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union. The
financial reporting framework that has been applied in the preparation
of the parent company financial statements is applicable law and
United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice).
This report is made solely to the company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we have
formed.
>
>
>
Opinion on other matters prescribed by the Companies Act
2006
In our opinion:
>
The part of the Directors’ Remuneration Report to be audited has
been properly prepared in accordance with the Companies Act
2006
The information given in the Directors’ Report for the financial year
for which the financial statements are prepared is consistent with
the financial statements
>
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
>
Adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us, or
The parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and return, or
Certain disclosures of directors’ remuneration specified by law are
not made, or
We have not received all the information and explanations we
require for our audit
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement
set out on page 63, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an opinion on
the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the group’s and the parent company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness of
significant accounting estimates made by the directors; and the
overall presentation of the financial statements.
Under the Listing Rules we are required to review:
>
The directors’ statement, set out on page 62, in relation to going
concern
The part of the Corporate Governance Statement relating to the
company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review
Certain elements of the report to shareholders by the Board on
directors’ remuneration
>
>
Ernst & Young LLP
Bob Forsyth (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
22 March 2011
Opinion on financial statements
In our opinion:
>
The financial statements give a true and fair view of the state of the
group’s and of the parent company’s affairs as at 31 December
2010 and of the group’s profit for the year then ended
The group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union
The parent company financial statements have been properly
prepared in accordance with United Kingdom Generally Accepted
Account Practice; and
The financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the
group financial statements, Article 4 of the IAS Regulation
>
>
>
Ferrexpo plc
Annual Report and Accounts 2010
65
Consolidated Income Statement
US$000
Revenue
Cost of sales
Gross profit
Selling and distribution expenses
General and administrative expenses
Other income
Other expenses
Operating foreign exchange (losses)/gains
Operating profit from continuing operations before adjusted items
Under recovery of VAT receivable
Write-offs and impairment losses
Share of profit of associates
Gain on bargain purchase
Initial public offering costs
(Losses)/gains on disposal of property, plant and equipment
Profit before tax and finance from continuing operations
Finance income
Finance expense
Non-operating foreign exchange losses
Profit before tax
Income tax expense
Profit for the year from continuing operations
Attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
Earnings per share:
Basic (US cents)
Diluted (US cents)
Notes
Year ended
31.12.10
Year ended
31.12.09
6 1,294,900
7
(481,857)
648,667
(341,067)
813,043
307,600
8
9
10
11
12
(212,006)
(49,175)
4,515
(5,938)
(1,078)
(162,266)
(43,161)
4,102
(3,418)
2,534
549,361
105,391
27
13
14
15/41
39
(10,936) –
(1,618)
4,155
2,623
(55)
(1,305)
(2,757)
1,304
503
(427)
213
542,225
104,227
16
16
12
17
2,632
(42,843)
(3,888)
498,126
(73,002)
2,893
(23,718)
(2,552)
80,850
(9,852)
425,124
70,998
422,906
2,218
70,627
371
425,124
70,998
18
18
72.34
72.24
12.08
12.05
66
Ferrexpo plc
Annual Report and Accounts 2010
Consolidated Statement of Comprehensive Income
US$000
Profit for the period
Exchange differences on translating foreign operations
Exchange differences arising during the year
Exchange differences arising on hedging of foreign operations
Available-for-sale investments
Gain arising on revaluation during the year
Income tax effect
Other comprehensive income for the period, net of tax
Total comprehensive income for the period, net of tax
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
Year ended
31.12.10
Year ended
31.12.09
425,124
70,998
533
110
(20,842)
(3,697)
1,915
(492)
400
2,895
2,066
(21,244)
427,190
49,754
424,923
2,267
49,633
121
427,190
49,754
Ferrexpo plc
Annual Report and Accounts 2010
67
Consolidated Statement of Financial Position
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 assets
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
Cash and cash equivalents
Assets classified as held for sale
Total current assets
Total assets
Equity and liabilities
Issued capital
Share premium
Other reserves
Retained earnings
Equity attributable to equity shareholders of Ferrexpo plc
Non-controlling interests
Total equity
Interest bearing loans and borrowings
Defined benefit pension liability
Provision for site restoration
Deferred tax liabilities
Total non-current liabilities
Interest bearing loans and borrowings
Trade and other payables
Accrued liabilities and deferred income
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 22 March 2011.
Kostyantin Zhevago
Chief Executive Officer
Christopher Mawe
Chief Financial Officer
Notes
As at
31.12.10
As at
31.12.09
19
20
14
21
22
23
24
25
26
27
27
21
28
647,137
102,715
21,132
3,356
24,767
16,596
452,100
100,354
19,915
2,917
9,824
13,673
815,703
598,783
104,827
111,890
18,922
35
103,647
–
319,470
59,636
38,117
19,394
9,741
81,284
626
11,991
658,791
220,789
3,149 –
661,940
220,789
1,477,643
819,572
29
29
29
121,628
185,112
(344,420)
885,353
121,628
185,112
(347,858)
501,175
847,673
460,057
13,801
11,387
861,474
471,444
401,290
17,819
2,746
2,432
18,143
14,529
1,268
3,739
424,287
37,679
22,563
88,089
25,496
41,811
13,923
251,503
27,802
12,146
11,105
7,893
191,882
310,449
616,169
348,128
30
32
33
23
30
31
34
27
27
1,477,643
819,572
68
Ferrexpo plc
Annual Report and Accounts 2010
Consolidated Statement of Cash Flows
US$000
Profit before tax
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets
Interest expense
Under recovery of VAT receivable
Interest income
Share of income of associates
Movement in allowance for doubtful receivables
Losses/(gains) on disposal of property, plant and equipment
Write-offs and impairment losses
Site restoration provision
Employee benefits
IPO costs
Share-based payments
Gain recognised on rights issue at subsidiary
Gain on bargain purchase from business combination
Operating foreign exchange (losses)/gains
Non-operating foreign exchange losses
Operating cash flow before working capital changes
Changes in working capital:
(Increase)/decrease in trade and other receivables
(Increase)/decrease in inventories
Increase/(decrease) in trade and other accounts payable
(Increase) in VAT recoverable and other taxes prepaid1
Cash generated from operating activities
Interest paid
Income tax paid
Post-employment benefits paid
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
Purchases of intangible assets
Interest received
Proceeds from loans to associates
Pre-acquistion loans provided
Acquisition of subsidiaries, net of cash acquired
Net cash flows used in investing activities
Cash flows from financing activities
Proceeds from borrowings and finance
Repayment of borrowings and finance
Arrangement fees paid
Dividends paid to equity shareholders of Ferrexpo plc2
Dividends from associates
Dividends paid to non-controlling shareholders
Net cash flows from/(used) in financing activities
Net increase/(decrease) 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 3
Notes
Year ended
31.12.10
Year ended
31.12.09
498,126
80,850
16
27
16
14
25
13
33
39
15
41
12
12
27
27
19
20
22/26
41
41
30,415
42,843
10,936
(2,632)
(4,155)
(3,685)
1,305
1,618
1,478
3,281
55
1,366
–
(2,623)
1,078
3,888
28,018
20,622
–
(2,893)
(1,304)
(5,199)
(213)
2,757
159
5,474
427
3,423
(503)
–
(2,534)
2,552
583,295
131,636
(74,020)
(42,938)
11,215
(31,062)
14,961
1,777
(6,474)
(24,038)
446,490
117,862
(25,437)
(37,827)
(3,468)
(19,197)
(18,899)
(2,897)
379,758
76,869
(166,775)
–
(633)
1,270
1,550
(10,881) –
582
(85,823)
213
(598)
2,104
6,450
–
(174,887)
(77,654)
668,802
(505,359)
(21,074) –
(41,744)
2,931 –
(47)
35,637
(73,168)
(36,325)
(234)
103,509
(74,090)
308,380
11,991
(901)
(74,875)
87,822
(956)
28
319,470
11,991
1 The movement includes effect of VAT receivable amounting to US$72,318 thousand, which was recovered through VAT bonds. See note 27 for further details
2 Difference to statement of change in equity represents unpaid withholding tax amounting to US$3,163 thousand on dividend paid in the prior year.
3 The balance of cash and cash equivalents includes restricted cash of US$37,768 thousand (2009: US$ nil).
Ferrexpo plc
Annual Report and Accounts 2010
69
Consolidated Statement of Changes in Equity
US$000
Issued capital
(Note 29)
Share
premium
(Note 29)
Attributable to equity shareholders of Ferrexpo plc
Uniting of
interest
reserve
(Note 29)
31,780
–
Treasury
share reserve
(Note 29)
Employee
benefit trust
reserve
(Note 29
and 40)
Net
unrealised
gains
reserve
(Note 29)
Translation
reserve
(Note 29)
Retained
earnings
Total capital
and reserves
Non-
controlling
interests
(Note 1)
Total equity
(77,260)
–
(15,443)
–
813
–
(270,604) 470,098
70,627
–
446,124
70,627
11,769
371
457,893
70,998
–
–
–
–
–
–
–
–
–
–
–
301
(21,295)
–
(20,994)
(250)
(21,244)
–
301
(21,295)
70,627
49,633
121
49,754
–
–
–
–
–
–
3,850
–
(39,550)
(39,550)
–
3,850
–
–
(39,550)
3,850
–
–
(503)
(503)
121,628
–
185,112
–
–
–
–
–
–
–
–
–
–
–
121,628
185,112
31,780
(77,260)
(11,593)
1,114
(291,899) 501,175
460,057
11,387
471,444
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
422,906
422,906
2,218
425,124
1,401
616
–
2,017
49
2,066
–
1,401
616
422,906
424,923
2,267
427,190
–
1,421
–
–
–
–
–
–
(38,581)
(38,581)
–
1,421
–
–
(38,581)
1,421
–
(147)
(147)
147
–
121,628
185,112
31,780
(77,260)
(10,172)
2,515
(291,283) 885,353
847,673
13,801
861,474
At 1 January 2009
Profit for the period
Other comprehensive
income
Total
comprehensive
income for the
period
Equity dividends paid
to shareholders of
Ferrexpo plc
Share-based
payments (note 39)
Adjustments relating
to the decrease
in non-controlling
interests
At 31 December
2009
Profit for the period
Other comprehensive
income
Total
comprehensive
income for the
period
Equity dividends paid
to shareholders of
Ferrexpo plc
Share-based
payments (note 39)
Adjustments relating
to the decrease
in non-controlling
interests1
At 31 December
2010
1 Transfer of shareholdings in subsidiaries resulted in change of non-controlling interests. See note 2 for further details.
70
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information
Note 1: Corporate information
Organisation and operation
Ferrexpo plc (the ‘Company’) is incorporated in the United Kingdom with registered office at 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, an interest in a port in
Odessa and a sales and marketing company in Switzerland and Kiev. The Group also owns a logistic group located in Austria which operates
a fleet of vessels operating on the Rhine and Danube waterways. The Group’s operations are vertically integrated from iron ore mining through
to iron ore concentrate and pellet production and subsequent logistics. 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 majority shareholder of the Group is Fevamotinico S.a.r.l. (‘Fevamotinico’), a company owned The Minco Trust, of the beneficiaries of
which is Kostyantin Zhevago, the Group’s Chief Executive Officer. At the time this report was published, Fevamotinico held 51.0% (2009:
51.0%) of Ferrexpo plc’s issued share capital.
The Group’s operations are largely conducted through Ferrexpo plc’s principal subsidiary, Ferrexpo Poltava GOK Corporation and logistics for
Western Europe are managed through the Helogistics subsidiaries. The Group comprises of Ferrexpo plc and its consolidated subsidiaries as
set out below:
Name
Ferrexpo Poltava GOK Corporation1
Ferrexpo AG2
DP Ferrotrans3
United Energy Company LLC3
Ferrexpo Finance plc (formerly Ferrexpo UK Limited1)
Ferrexpo Services Limited1
Ferrexpo Hong Kong Limited1
Ferrexpo Yeristovo GOK LLC4
Ferrexpo Belanovo GOK LLC4
Nova Logistics Limited3
Helogistics Holding GmbH5
EDDSG GmbH5
DDSG Tankschiffahrt GmbH5
Helogistics Transport GmbH5
Mahart Duna Cargo Kft.5
Pancar Kft.5
Country of
incorporation
Ukraine
Switzerland
Ukraine
Ukraine
England
Ukraine
China
Ukraine
Ukraine
Ukraine
Austria
Austria
Austria
Austria
Hungary
Hungary
Principal activity
Iron ore mining
Sale of iron ore pellets
Trade, transportation services
Holding company
Finance
Management services and procurement
Marketing services
Iron ore mining
Iron ore mining
Service company (dormant)
Holding company
Logistic company
Logistic company
Logistic company
Logistic company
Logistic company
Equity interest
owned at
31 December
2010
%
97.3
100.0
97.3
97.3
100.0
100.0
100.0
100.0
100.0
51.0
100.0
100.0
100.0
100.0
100.0
100.0
2009
%
97.3
100.0
97.3
97.3
100.0
100.0
100.0
98.6
98.6
51.0
–
–
–
–
–
–
1 The Group’s interest in these entities is held through Ferrexpo AG. For details in respect to the change in equity interest we refer to note 15.
2 Ferrexpo 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.
4 The Group’s interest in this entity is held through both Ferrexpo AG and Ferrexpo Service Limited. The shares initially held by Ferrexpo Poltava GOK Corporation have been transferred as of
31 August 2010 to Ferrexpo AG and Ferrexpo Services Ltd.
5 The Group’s interest in these entities are held through Ferrexpo AG. Helogistics Holding GmbH and its subsidiaries were acquired on 14 December 2010 and have been consolidated for the first
time as of 31 December 2010. Legal completion of the acquisition occurred on 19 January 2011. The details of the business combination are disclosed in note 41.
The Group also holds an interest of 48.6% (2009: 48.6%) in TIS Ruda, a Ukrainian port located on the Black Sea. As this is an associate, it is
accounted for using the equity method of accounting and further disclosed in note 14.
Note 2: Summary of significant accounting policies
Basis of preparation
The consolidated financial statements of Ferrexpo plc and its subsidiaries have been prepared in accordance with International Financial
Reporting Standards (IFRS) 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 would be no different had the
Group applied IFRS as issued by the IASB, as it applies to accounting periods ended 31 December 2010.
The consolidated financial statements have been prepared on a historical cost basis, except for post-employment benefits and available-for-
sale financial instruments, the latter 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 financial statements are presented
in thousand of US dollars and all values are rounded to the nearest thousand except where otherwise indicated.
Ferrexpo plc
Annual Report and Accounts 2010
71
Note 2: Summary of significant accounting policies continued
The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed in the
preparation of the Group’s annual financial statements for the year ended 31 December 2009, except for those changes detailed in note 3.
Risks in relation to the facilities and re-financing are contained in the Business Review of this report.
Basis of consolidation
The consolidated financial statements comprise 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.
Subsidiaries acquired are fully consolidated from the date of effective control, when Group obtains effective control. Similarly, subsidiaries
disposed of are deconsolidated from the date on which the Group ceases to hold effective control.
All intercompany 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 combination and goodwill
Business combinations from 1 January 2010
On the acquisition of a subsidiary, the business combination is accounted for using the acquisition method. The cost of an acquisition is
measured as the aggregated amount of the consideration transferred, measured at the date of acquisition. The consideration paid is allocated
to the assets acquired and liabilities assumed on the basis of fair values at the date of acquisition. Acquisition costs are expensed when
incurred and included in general and administrative expenses.
If the cost of acquisition exceeds the identifiable net assets attributable to the Group, the difference is considered as purchased goodwill,
which is not amortised but annually reviewed for impairment or in case of an indication of impairment. In the case that the identifiable net
assets attributable to the Group exceed the cost of acquisition, the difference is recognised in profit and loss as a gain on bargain purchase.
For each business combination, the Group measures the non-controlling interest in the acquiree either at fair value or at the proportionate
share of the acquiree’s identifiable net assets. If the initial accounting for a business combination cannot be completed by the end of the
reporting period in which the combination occurs, only provisional amounts are reported, which can be adjusted during the measurement
period of 12 months after acquisition date.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Details to the impairment testing are given in
section Impairment testing of assets on page 90.
Business combinations prior to 1 January 2010
The following accounting treatment was applied for business combination prior to 1 January in comparison to the above-mentioned policy:
Transaction costs directly attributable to the acquisition were considered as acquisition costs and had an impact on the goodwill calculation.
The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree’s identifiable
net assets.
Business combinations achieved in stages were accounted for as separate steps and any additional acquired share of interest did affect
either previously recognised goodwill or profit and loss in case of a bargain purchase.
Similar procedures are applied in accounting for the purchase of interests in associates.
Investments in associates
The Group’s investments in associates are accounted for using 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 statement of financial position 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 nor individually tested for impairment. 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 investment in the associate.
The share of profit of an associate is shown on the face of the income statement. This is the profit attributable to the Group and therefore is
profit after tax and non-controlling interests in the subsidiaries of the associate.
The reporting dates of the associates and Ferrexpo plc are identical and the associates’ accounting policies are generally in conformity of
those applied by the Group.
72
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 2: Summary of significant accounting policies continued
Functional and presentational currencies
Based on the economic substance of the underlying business transactions 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 based on its own
circumstances. The Group has chosen the US dollar as its presentation currency and Ferrexpo Poltava GOK Corporation (the principal
subsidiary) has determined that its functional currency is Ukrainian hryvnia.
Foreign currency translation
For individual subsidiary Company accounts, transactions in foreign currencies (i.e. other than the functional currency) 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 reporting date and non-monetary assets and liabilities at the historic rate. Foreign exchange differences
arising on translation are recognised in the income statement.
For presentation of Group consolidated accounts, if the functional currency of a subsidiary is different to the presentation currency as at the
reporting date, the assets and liabilities of this entity are translated into the presentation currency at the rate ruling at the reporting 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.
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. The following specific recognition criteria must also be met before revenue is recognised:
Sale of goods including pellet sales
Revenue is recognised when the 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, customs duties and sales taxes. Risks and rewards of the ownership of goods passes when
title for the goods passes to the customer as determined by the terms of the sales agreement. The sales are typically made under the
following terms:
>
>
>
>
>
CIF (Cargo Insurance and Freight);
CFR (Cargo and Freight);
DAF (Delivery At Frontier);
DES (Delivered Ex Ship); or
FOB (Free on Board).
Under the CFR and FOB terms the title passes on the bill of lading date whereas under the other terms revenue is recognised when goods
arrive at agreed destination or at boarder crossing.
If the sales agreement allows for adjustment of the sales prices based on survey of the goods by the customer (e.g. ore content) the revenue is
recognised based on the most recent determined product specification.
Other sales
Other sales include the processing and sale of ore and ore concentrate, the sale of parts, materials and crushed rocks and the repair and
rental of railway wagons.
Logistic services
Revenue from logistic services rendered is recognised as the services are completed. Where services are invoiced in advance of discharge,
amounts attributable to the time between the end of the reporting period and the discharge date are deferred.
Rendering of services
Revenue from the rendering of services is recognised when services are complete. Sales of services primarily include repairs and spare parts,
canteen revenue and recharges to local customers for electricity consumption and railway usage.
Rental income
Rental income arising from operating leases is accounted for on a straight-line basis over the lease terms.
Foreign exchange gains and losses
Foreign exchange gains and losses are reported on a net basis. Operating foreign exchange gains and losses are those items that are directly
related to the production and sale of pellets (e.g. trade receivables, trade payables on operating expenditure). Non-operating gains and losses
are those associated with the Group’s financing and treasury activities (e.g. interest-bearing loans, cash and cash equivalents).
Ferrexpo plc
Annual Report and Accounts 2010
73
Note 2: Summary of significant accounting policies continued
Finance income and expense
Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in the income statement using the
effective interest method.
Finance expenses comprise the interest expense on borrowings and other financial liabilities.
Taxes
Current income tax
Current tax assets and liabilities for the current and prior periods are measured at the amount estimated 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
reporting date.
Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the reporting 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, if it is probable that they become taxable, 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 reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income
tax assets are reassessed at each reporting 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 reporting date.
Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.
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 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 note 27 to the financial statements.
VAT receivable balances are not discounted unless the overdue balances are expected to be received after more than 12 months following
the period end. Where intentions have been communicated officially that VAT repayments which are due are to be converted into bonds
or other financial instruments, these are valued at the estimated market value of such instruments with any adjustment charged to the
income statement.
74
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 2: Summary of significant accounting policies continued
Equity
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 the ‘employee benefit trust reserve’ 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, issue or cancellation of equity shares.
Treasury shares
Own equity instruments which are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is
recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference
between the carrying amount and the consideration is recognised in other capital reserves.
Financial assets
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.
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 assets as at fair value through profit or loss (FVTPL).
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 along with the amortisation process.
Available-for-sale financial assets
All investment, except for investments in associates, are accounted for as 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 loans or receivables, held-to-maturity
investments or financial assets at fair value through profit or loss (FVTPL).
After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses
recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised. At this time the cumulative
gain or loss is recognised in other operating income, or determined to be impaired, at which time the cumulative loss is recognised in the
income statement in finance costs and removed from the available-for-sale reserve.
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 reporting 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.
Financial liabilities
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.
Ferrexpo plc
Annual Report and Accounts 2010
75
Note 2: Summary of significant accounting policies continued
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 reporting 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 either directly or through use of an allowance account. The
amount of the loss is 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.
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
For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment
or a group of investments is impaired.
In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair
value of the investment below its cost. Where there is evidence of impairment, the cumulative loss (measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement) is
removed from other comprehensive income and recognised in the income statement.
Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are
recognised directly in other comprehensive income.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, i.e.
whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the
asset, even it that right is not specified in an arrangement.
Group as a lessee
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at
the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.
Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on
the remaining balance of the liability. Finance charges are recognised in the income statement.
Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain
ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
Group as a lessor
Leases in which the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating
leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over
the lease term on the same bases as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
76
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 2: Summary of significant accounting policies continued
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are
expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing
of funds.
The Group capitalises borrowing costs for all qualifying assets where construction was commenced on or after 1 January 2009. All other
borrowing costs are recognised in profit or loss in the period in which they are incurred.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost
includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the
recognition criteria are met. 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 assets 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
expenditure results in future economic benefits, the expenditure is capitalised as an additional cost.
Property, plant and equipment is depreciated over its estimated useful life which is calculated with 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.
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:
Vessels:
Plant and equipment: 3–15 years
Vehicles:
7–15 years
Fixtures and fittings: 2.5–10 years
20–50 years
30–40 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.
Assets in the course of construction are capitalised as a separate component of property, plant and equipment. On completion, the cost of
construction is transferred to the appropriate category. Assets under construction are not depreciated.
On acquisition the cost of property, plant and equipment is capitalised on the statement of financial position. Depreciation commences when
the item is available for use. Freehold land is not depreciated.
Stripping costs included in mining assets and assets under construction
Stripping costs in relation to mine exploration, evaluation and development costs incurred up to the commencement of the production
are included in assets under construction. Stripping work comprises overburden removed at the pre-production, mine extension and
production stages.
After the commencement of production, the respective pre-production stripping costs are transferred to mining assets and depreciated using
the unit of production method based on the estimated economically recoverable reserves to which they relate.
The production stripping costs are generally charged to the income statement as variable production costs. The production stripping costs
are only capitalised if the stripping activities are related to a betterment of the mining property and the duration of the future benefits is
ascertained without a high degree of judgement. If capitalised, the production stripping costs are included in mining assets and depreciated
using the same methodology as for the capitalised pre-production stripping costs (see above).
The cost of removal of the waste material during a mine’s production phase is expensed as incurred.
Ferrexpo plc
Annual Report and Accounts 2010
77
Note 2: Summary of significant accounting policies continued
Intangible assets
Goodwill
The policies applied for the initial recognition and subsequent measurement of goodwill is described under Goodwill and other intangible
assets and Business combination on page 90 and page 117 respectively.
Other intangible assets
Other intangible assets acquired separately are measured on initial recognition at cost. The cost of other intangible assets acquired in a
business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortisation and accumulated impairment losses, if any.
The useful lives of other intangible assets are assessed as either finite or indefinite.
Amortisation
Other intangible assets, other than goodwill, primarily comprise capitalised software costs, which are amortised on a straight-line basis over
the estimated useful life of the asset, ranging between one and three years.
Capitalised mineral licences are amortised on a unit of production basis.
Impairment of assets (excluding 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. If 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 market-determined 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. Refer to note 20 for details on the impairment testing of goodwill.
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.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
Inventories
Inventories are stated at the lower of cost and net realisable value.
Costs incurred in bringing each product to its present location and condition is accounted for as follows:
>
>
Raw materials – at cost on a first-in, first-out basis.
Finished goods and work in progress – at cost of direct materials and labour and a proportion of manufacturing overheads based on
normal operating capacity, but excluding borrowing costs.
The 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.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount
of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the
reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash
flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Where discounting is used, the
increase in the provision due to the passage of time is recognised as a finance cost.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is
recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
78
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 2: Summary of significant accounting policies continued
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, if 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 of Ferrexpo AG.
Costs relating to these plans are accrued in the consolidated financial statements 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 reporting 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 higher of planned assets/
obligation for funded schemes (corridor approach). These gains or losses are recognised as income or expense over the expected average
remaining working lives of the employees participating in the plan.
The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested.
If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, 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.
Earnings per share
The basic number of Ordinary Shares is calculated based on the weighted average number of shares in issue, excluding shares held
in treasury.
For the current and prior year periods, 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. The number of Ordinary Shares in issue excludes the shares held by the
Employee Benefit Trust and the treasury shares held by the Group. Diluted earnings per share are 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.
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 is 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, except for market conditions.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is dependent upon a market condition. In
these cases, the awards are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other
performance conditions are satisfied.
At each reporting 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 reporting date is recognised in the income statement, with a
corresponding entry in equity.
Ferrexpo plc
Annual Report and Accounts 2010
79
Note 2: Summary of significant accounting policies continued
Long-Term Incentive Plans (LTIPs)
The LTIPs are share-based schemes whereby certain senior management and executives receive rewards based on the relative Total
Shareholder Return (TSR) outperformance of the Group compared with a group of companies, which operate within a similar environment.
The cost of equity-settled awards is measured as described above together with an estimate of future social security contributions payable in
respect of this value. Where the granting of an LTIP is subject to the satisfaction of certain market conditions, a vesting charge is recognised
irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
Where awards terminate before the performance period is complete, any unamortised expense is recognised immediately.
Note 3: New accounting policies
The Group adopted the following new and amended standards as at 1 January 2010:
Standards affecting the reported results and financial positions
IFRS 3 Business combinations
The revised standard was issued in January 2008 and became effective for financial years beginning on or after 1 July 2009. Changes affect
the valuation of non-controlling interest, the accounting for transaction costs, the initial and subsequent measurement of a contingent
consideration and business combinations achieved in stages. Its adoption has affected the accounting for the business combination in the
current period and the acquisition costs incurred have been expensed and included in administrative expenses.
In the current period, the changes contained in IFRS 3 have affected the accounting for the acquisition of Helogistics Group and its
subsidiaries. Acquisition related costs amounting to US$1,624 thousand have been expensed when incurred this reduced the amount of
goodwill resulting from this transaction by this amount.
IAS 27 – Consolidated and separate financial statements
The revised standard was issued in January 2008 and became effective for financial years beginning on or after 1 July 2009. The changes of
the revised standard affect the Group’s accounting policies regarding changes in ownership interests in its subsidiaries that do not result in a
change in control. Under the revised standard, all such increases or decreases are dealt with in equity, with no impact on goodwill or profit
or loss.
The transfer of the shareholdings in Ferrexpo Yeristovo GOK LLC and Ferrexpo Belanovo GOK LLC from Ferrexpo Poltava GOK Corporation
to Ferrexpo AG resulted in a decrease of the non-controlling interests in these subsidiaries. Due to the change of IAS 27, the effect of US$147
thousand from the decrease of the non-controlling interests has been recognised directly in equity.
Standards and interpretations adopted with no effect on reported results, financial position and disclosure
IFRS 2 – Share-based payment – group cash-settled share-based payment transactions
The amendment to the standard was issued in June 2009 and became effective for financial years beginning on or after 1 January 2010.
The amendment clarifies the accounting for group cash-settled share-based payment transactions and supersedes IFRIC 8 and IFRIC 11.
The adoption of this amendment did not have any impact on the reported results, financial position and disclosures.
IAS 28 – Investments in associates
The revised standard was issued in May 2008 and became effective for financial years beginning on or after 1 July 2009. The principle
adopted under IAS 27 – Consolidated and separate financial statements that a loss of control is recognised as a disposal and reacquisition of
any retained interest at fair value is extended by consequential amendment to IAS 28. Therefore, when significant influence is lost, the investor
measures any investment retained in the former associate at fair value, with any consequential gain or loss recognised in profit or loss. The
adoption of the revised standard did not have any impact on the reported results, financial position and disclosures.
IFRIC 17 Distribution of non-cash assets to owners
This interpretation is effective for annual periods beginning on or after 1 July 2009 and provides guidance on how to account for non-cash
distributions to owners. The interpretation clarifies when to recognise a liability, how to measure it and the associated assets, and when to
derecognise the asset and liability. The adoption of the interpretation did not have any impact on the reported results, financial position
and disclosures.
IFRIC 18 Transfers of assets from customers
The new interpretation is effective for annual periods beginning on or after 1 July 2009 and clarifies the requirements of IFRSs for agreements
in which an entity receives from a customer an item of property, plant, and equipment that the entity must then use either to connect the
customer to a network or to provide the customer with ongoing access to a supply of goods or services. The adoption of the interpretation
did not have any impact on the reported results, financial position and disclosures.
80
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 3: New accounting policies continued
New standards and interpretations not yet adopted
The Group has elected not to early adopt the following revised and amended standards:
IAS 24 Related party disclosures
The amended standard was issued in November 2009 and becomes effective for financial years beginning on or after 1 January 2011. The
revised standard introduces a partial exemption of disclosure requirements for government-related parties and clarifies the definition of a
related party to simplify the identification of such relationships and to eliminate inconsistencies in the application. The Group does not expect
any impact on its financial position or performance and does not intend to take advantage of the possibility of an early adoption.
IAS 32 Financial instruments: presentation – classification of rights issues
The amendment to IAS 32 on the classification of rights issues has been issued in October 2009 and is effective for annual periods beginning
on or after 1 February 2011. For rights issues offered for a fixed amount of foreign currency current practice appears to require such issues to
be accounted for as derivative liabilities. The amendment states that if such rights are issued pro rata to an entity’s all existing shareholders in
the same class for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is
denominated. This amendment will have no impact on the Group after initial application and will be adopted by Group for the Group’s
reporting financial statements for the period beginning 1 January 2012.
IFRS 9 Financial instruments: classification and measurement
The IASB has issued the first phase of IFRS 9 that will replace IAS 39. The new standard applies to classification and measurement of financial
assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. The adoption of the first phase
of IFRS 9 might have an effect on the classification and measurement of the Group’s financial assets. The Group will quantify the effect in
conjunction with the other phases, when issued, to present a comprehensive picture. The IASB will address classification and measurement
of financial liabilities, hedge accounting and derecognition in separate phases and the completion of the new standard is expected to be in
early 2011.
IFRIC 14 Prepayment of a minimum funding requirement
The amendment to IFRIC 14 is effective for financial years beginning on or after 1 January 2011 and will have to respectively applied. The
amendment provides guidance on assessing the recoverable amount of net pension assets and permits an entity to treat the prepayment of a
minimum funding requirement as asset. The future application of this amendment is deemed to have no impact on the financial statements of
the Group.
IFRIC 19 Extinguishing financial liabilities with equity instruments
IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The new interpretation addresses the accounting by the entity that
issues equity instruments in order to settle, in full or in part, a financial liability. The adoption of this interpretation will have no effect on the
financial statements of the Group.
Note 4: Use of estimates
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on
information available as at the date of authorising the consolidated financial statements 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:
Property, plant and equipment
The determination of fair value and value-in-use requires management to make estimates and assumptions about expected production and
sales volumes, commodity prices (considering current and historical prices, price trends and related factors), reserves, operating costs,
closure and rehabilitation costs and future capital expenditure. These estimates and assumptions are subject to risk and uncertainty; hence
there is a possibility that changes in circumstances will alter these projections, which may impact the recoverable amount of the assets.
In such circumstances, some or all of the carrying value of the assets may be impaired and the impairment would be charged against the
income statement. The total of property, plant and equipment amounted to US$647,137 thousand as of 31 December 2010 (2009:
US$452,100 thousand).
Pre-production stripping costs
Overburden and other mine waste materials have to be removed prior to the production of the mine in order to become access to the iron ore
body. These activities are referred to as pre-production stripping costs and are capitalised under assets under construction. The pre-
production stripping costs are capitalised based on calculations which require the use of judgement and estimates in terms of estimated
tonnage of overburden and waste material to be removed during the life time of the mine and the expected recoverable reserves that can be
extracted. The change of the mine plan (life and design) in the future may result in changes to the expected stripping ratio (waste to mineral
reserves ratio) and require adjustment of the capitalised pre-production stripping costs. At 31 December 2010, the carrying amount of
capitalised pre-production stripping costs was US$61,243 thousand (2009: US$23,337 thousand).
Ferrexpo plc
Annual Report and Accounts 2010
81
Note 4: Use of estimates continued
Impairment testing of goodwill and intangible assets
As outlined in note 20 the impairment testing of goodwill is based on significant judgements and assumptions made by the management
when performing the annual impairment testing of these non-current assets. Changes to be made to these assumptions may alter the results
of the impairment testing, the impairment charges recorded in profit or loss and the resulting carrying values of the non-current assets tested.
The carrying amount of the goodwill amounted to US$98,747 thousand as of 31 December 2010 (2009: US$94,459 thousand).
Fair value of financial instruments
Where the fair value of financial assets and liabilities recorded in the statement of financial position cannot be derived from active markets,
they are determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. The
judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could
affect the reported fair value of financial instruments. Detailed information on the carrying amounts of financial assets and liabilities are given in
note 38.
Defined benefit pension liability
The valuation for defined benefit superannuation schemes requires management to make judgements as to the nature of benefits provided by
each scheme and thereby determine the classification of each scheme. For defined benefit schemes, management is required to make
annual estimates and assumptions about future returns on classes of scheme assets, future remuneration changes, employee attrition rates,
administration costs, changes in benefits, inflation rates, exchange rates, life expectancy and expected remaining periods of service of
employees. In making these estimates and assumptions, management considers advice provided by external advisers, such as actuaries. At
31 December 2010, the carrying amount of defined benefit pension liability was US$17,819 thousand (2009: US$14,529 thousand).
Provision for site restoration
The Group’s accounting policy for the recognition of site restoration provisions requires significant estimates and assumptions such as:
requirements of the relevant legal and regulatory framework; the magnitude of possible contamination and the timing, extent and estimated
future costs of required closure and rehabilitation activity. These uncertainties may result in future actual expenditure differing from the
amounts currently provided. At 31 December 2010, the carrying amount of the provision for site restoration amounted to US$2,746 thousand
(2009: US$1,268 thousand).
Deferred income tax
The Group’s accounting policy for taxation requires management’s judgement in assessing whether deferred tax assets and certain deferred
tax liabilities are recognised on the statement of financial position. Deferred tax assets, including those arising from unrecouped tax losses,
capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is
dependent on the expected generation of sufficient future taxable profits.. A deviation between expected and effective future taxable profits in
the different local jurisdictions may have an adverse impact on the recognised deferred tax balances in the consolidated financial statements
of the Group.
Assumptions about the generation of expected future taxable profits depend on management’s estimates of future cash flows. These depend
on estimates of future production and sales volumes, commodity prices, reserves, operating costs, closure and rehabilitation costs, capital
expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax
legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances
will alter expectations, which may impact the amount of recognised deferred tax balances in the consolidated financial statement of the Group
and the amounts of other tax losses and temporary differences not yet recognised. In such circumstances, some, or all, of the carrying
amount of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the income
statement. At 31 December 2010, the Group’s consolidated financial statements showed deferred tax assets of US$16,596 thousand (2009:
US$13,673 thousand) and deferred tax liabilities of US$2,432 thousand (2009: US$3,739 thousand).
Note 5: Segment information
The Group is managed as a single entity which produces, develops and markets its principal product – iron ore pellets – for sale to the
metallurgical industry. In December 2010, the Group acquired a logistics company engaged in the transport of bulk commodities and liquids
through the Rhine Danube corridor in Europe and the provision of bunkering fuel services on the same routes. The management of the Group
monitors the operating results of the pellet and logistics business separately for the purpose of making decisions about resource allocation
and performance assessment. In accordance with IFRS 8 Operating Segments, the Group presents its results in a single segment which are
disclosed in the income statement for the Group. The acquired logistics business is below the quantitative thresholds requiring separate
disclosure as set by the standard and its revenue and result for the year is immaterial.
The management monitors the operating result of the Group based on a number of measures including EBITDA, ‘C1’ costs and the net
financial indebtedness.
82
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 5: Segment information continued
EBITDA
The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation (included in cost
of sales, administrative expenses and selling and distribution costs) and non-recurring cash items included in other income and other
expenses plus the net of gains and losses from disposal of investments and property, plant and equipment. The Group presents EBITDA
because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance.
US$000
Profit before tax and finance
Under recovery of VAT receivable
Write-offs and impairment losses
Losses/(gains) on disposal of property, plant and equipment
Initial public offering costs
Share-based payments
Gain on bargain purchase
Depreciation and amortisation
EBITDA
Notes
Year ended
31.12.10
Year ended
31.12.09
27
13
39
39
15/41
542,225
10,936 –
1,618
1,305
55
1,366
(2,623)
30,415
104,227
2,757
(213)
427
3,423
(503)
28,018
585,297
138,136
‘C1’ costs
‘C1’ costs represent the cash costs of production of iron pellets from own ore divided by production volume of own ore, and excludes
non-cash costs such as depreciation, pension costs and inventory movements, costs of purchased ore, concentrate and production cost of
gravel and excludes one-off items which are outside the definition of EBITDA.
US$000
Cost of sales – pellets production
Depreciation and amortisation
Purchased ore and concentrate
Processing costs for purchased ore and concentrate
Production cost of gravel
Inventory movements
Pension service costs
Other
C1 cost
Own ore produced (tonnes)
C1 cash cost per tonne (US$)
Year ended
31.12.10
481,857
(24,662)
(101,351)
(11,042)
(88)
18,608
(2,049)
(2,754)
Year ended
31.12.09
341,067
(23,370)
(8,914)
(1,206)
(357)
(10,543)
(1,857)
1,662
358,519
296,482
9,033,000 8,609,200
34.44
39.69
Net financial indebtedness
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.
US$000
Cash and cash equivalents
Current borrowings
Non-current borrowings
Net financial indebtedness
Notes
Year ended
31.12.10
Year ended
31.12.09
28
30
30
319,470
(22,563)
(401,290)
11,991
(251,503)
(18,143)
(104,384)
(257,655)
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external customers attributable to the country of domicile. The information on the
revenues from external customers attributed to the individual foreign countries is given in note 6.
The Group does not have any significant non-current assets that are located in the country of domicile of the Group. The vast majority of the
non-current assets are located in Ukraine.
Ferrexpo plc
Annual Report and Accounts 2010
83
Note 6: Revenue
Revenue for the year ended 31 December 2010 consisted of the following:
US$000
Revenue from sales of iron ore pellets and concentrate:
Export
Ukraine
Total revenue from sale of iron ore pellets and concentrate
Revenue from services provided
Revenue from other sales
Total revenue
Export sales of iron ore pellets and concentrate by geographical destination were as follows:
US$000
Austria
China
Serbia
Slovakia
Czech Republic
Turkey
Japan
Germany
Hungary
India
Other
Total exports
Year ended
31.12.10
Year ended
31.12.09
1,288,665
453
612,829
34,483
1,289,118
674
5,108
647,312
790
565
1,294,900
648,667
Year ended
31.12.10
Year ended
31.12.09
405,511
320,572
156,806
143,478
99,235
62,166
45,318
24,833
16,575
14,153
18
105,690
241,882
84,193
77,537
21,293
39,272
5,027
5,573
6,539
21,225
4,598
1,288,665
612,829
During the year ended 31 December 2010 sales made to three customers accounted for approximately 62.5% of the sales revenue
(2009: 51.9%).
Sales made to two customers individually amounted to more than 10% of the total sales. These are disclosed below:
US$000
Customer A
Customer B
Note 7: Cost of sales
Cost of sales for the year ended 31 December 2010 consisted of the following:
US$000
Materials
Purchased ore and concentrate
Electricity
Personnel costs
Spare parts and consumables
Depreciation and amortisation
Fuel
Gas
Repairs and maintenance
Royalties and levies
Inventory movements
Other
Total cost of sales
Year ended
31.12.10
Year ended
31.12.09
405,511
300,284
105,690
161,730
Year ended
31.12.10
Year ended
31.12.09
67,661
101,351
101,528
47,930
16,616
24,662
31,299
48,236
45,230
8,489
(18,608)
7,463
60,607
8,914
81,438
41,670
13,007
23,370
23,969
28,744
38,503
6,484
10,543
3,818
481,857
341,067
84
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 8: Selling and distribution expenses
Selling and distribution expenses for the year ended 31 December 2010 consisted of the following:
US$000
Railway transportation
Other transportation and port charges
Agent fees
Custom duties
Advertising
Personnel cost
Depreciation
Other
Total selling and distribution expenses
Note 9: General and administrative expenses
General and administrative expenses for the year ended 31 December 2010 consisted of the following:
US$000
Personnel costs
Buildings and maintenance
Taxes other than income tax and other charges
Consulting and other professional fees
Depreciation and amortisation
Communication
Vehicles maintenance and fuel
Repairs
Audit fees
Non-audit fees
Security
Other
Total general and administrative expenses
Year ended
31.12.10
Year ended
31.12.09
81,451
115,640
2,490
2,562
3,472
1,329
1,757
3,305
69,477
80,998
799
1,423
2,757
1,055
1,581
4,176
212,006
162,266
Year ended
31.12.10
Year ended
31.12.09
26,362
2,475
1,581
4,840
3,867
899
1,222
815
1,094
1,395
1,613
3,012
23,933
2,391
3,930
2,731
2,534
529
854
1,041
1,112
184
1,659
2,263
49,175
43,161
Auditor remuneration
Auditor remuneration paid in respect of the audit of the financial statements of the Group and its subsidiary companies and for the provision of
other services not in connection with the audit is disclosed below:
US$000
Audit services
Ferrexpo plc Annual Report
Subsidiary entities1
Total audit services
Non-audit services
Tax advisory
Assurance related services
Other services2
Total non-audit services
Total auditor remuneration
Year ended
31.12.10
Year ended
31.12.09
680
414
628
484
1,094
1,112
80
102
1,213
1,395
2,489
154
–
30
184
1,296
1 The agreed fees for audit servicices in relation to Helogistics are not included due to the first consolidation as of 31 December 2010. The agreed fees of US$246 thousand is however included in
the amount of the liabilities assumed for the acquired group. See note 41 for further details.
2 Other services include fees paid for due diligence services and assurance services related to raising new debts for the Group.
Ferrexpo plc
Annual Report and Accounts 2010
85
Note 10: Other income
Other income for the year ended 31 December 2010 consisted of the following:
US$000
Sale of surplus maintenance spares
Lease income
Reversal of fines and penalties
Refunds from social security institutions
Other income
Total other income
Note 11: Other expenses
Other expenses for the year ended 31 December 2010 consisted of the following:
US$000
Charitable donations
Movements in allowance for doubtful receivables
Research
Other personnel costs
Other
Total other expenses
Year ended
31.12.10
Year ended
31.12.09
2,909
762
–
–
844
4,515
867
670
4
1,735
826
4,102
Year ended
31.12.10
Year ended
31.12.09
4,418
(3,685)
658
1,551
2,996
4,043
(5,199)
1
830
3,743
5,938
3,418
The allowance for doubtful receivables relates to receivables from certain customers in Russia and other former CIS countries recorded in the
financial year 2008. Following a stabilisation in the markets during the latter part of the financial year 2009 as well as as during the financial
year 2010 the recorded allowance has been partially released in both reporting periods.
Note 12: Foreign exchange gains and losses
US$000
Operating foreign exchange (losses)/gains
Revaluation of trade receivables
Revaluation of trade payables
Total operating foreign exchange (losses)/gains
Non-operating foreign exchange losses
Revaluation of interest-bearing loans
Revaluation of cash and cash equivalents
Other
Total non-operating foreign exchange losses
Year ended
31.12.10
Year ended
31.12.09
222
(1,300)
(1,078)
1,818
716
2,534
258
(767)
(3,379)
(1,639)
84
(997)
(3,888)
(2,552)
Other non-operating foreign exchange losses in 2010 were principally related to the revaluation of income tax payables in Swiss francs.
Note 13: 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 2010 consisted of the following:
US$000
(Reversals)/write-off of inventories
(Reversals)/write-off of property, plant and equipment
Impairment of available-for-sale assets
Total write-offs and impairment losses
Notes
Year ended
31.12.10
Year ended
31.12.09
21
(254)
(251)
2,123
1,618
144
717
1,896
2,757
86
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 14: Investments in associates
As at 31 December 2010 investments in associates comprised:
TIS Ruda
Principal activity
Country of
incorporation
Ownership
%
As at
31.12.10
US$000
As at
31.12.09
US$000
Port development
Ukraine
48.6
21,132
19,915
For the year ended 31 December 2010 the summarised financial information for the associate was as follows:
US$000
TIS Ruda
Total assets
|
Total liabilities
|
Revenue
|
Net profit
As at
31.12.10
As at
31.12.09
As at
31.12.10
As at
31.12.09
Year ended
31.12.10
Year ended
31.12.09
Year ended
31.12.10
Year ended
31.12.09
26,648
27,187
1,840
4,837
18,486
20,147
8,326
2,614
The information above is for 100% of the associate named and not as a percentage based on Group’s ownership. The movement in the
investment in the year represents the Group’s share of profit of US$4,155 thousand in TIS Ruda (2009: US$1,304 thousand). TIS Ruda paid a
dividend amounting to US$2,931 thousand during the financial year 2010 (2009: nil).
TIS Ruda operates a port on the Black Sea which the Group uses as part of its distribution channel.
Note 15: Bargain purchase
A bargain purchase arose from the acquisition of Helogistics in 2010 and as a result of equity transactions in Ferrexpo Poltava GOK
Corporation during the prior period.
Acquisition of Helogistics
As outlined in detail in note 41, the acquisition of Helogistics resulted in a bargain purchase of US$2,623 thousand in 2010 representing the
difference between the fair value of the net assets acquired and the purchase consideration, not including the costs of acquisition which are
expensed in the income statement.
Treasury shares in Ferrexpo Poltava GOK Corporation
In 2009, treasury shares of Ferrexpo Poltava GOK Corporation were transferred to Ferrexpo AG resulting in an increase of the shareholding
from 97.1% to 97.3%. This transaction resulted in a bargain purchase of US$503 thousand which is included in profit or loss. The Group did
not early adopt IAS 27 Consolidated and separate financial statements for the financial year 2009 so that the effect from change in ownership
was reflected in profit and loss and not in equity as it would be required with under the revised standard.
Note 16: Finance income and expense
Finance income and expenses for the year ended 31 December 2010 consisted of the following:
US$000
Finance income
Interest income
Other finance revenue
Total finance income
Finance expense
Interest expense on financial liabilities measured at amortised cost
Interest on defined benefit plans
Bank charges
Other finance costs
Total finance expenses
Net finance expense
Bank charges include arrangement fees charged in relation to the Group’s major bank debt facility.
Year ended
31.12.10
Year ended
31.12.09
1,357
1,275
2,632
1,894
999
2,893
(24,509)
(3,344)
(12,694)
(2,296)
(16,805)
(2,967)
(535)
(3,411)
(42,843)
(23,718)
(40,211)
(20,825)
Ferrexpo plc
Annual Report and Accounts 2010
87
Note 17: Income tax expense
The income tax expense for the year ended 31 December 2010 consisted of the following:
US$000
Current income tax
Current income tax charge
Amounts under/(over) provided in previous years
Total current income tax
Deferred income tax
Origination and reversal of temporary differences
Effect from changes in tax laws and rates
Total deferred income tax
Total income tax expense
Year ended
31.12.10
Year ended
31.12.09
73,700
270
73,970
12,659
(2,497)
10,162
(4,494)
3,526 –
(310)
(968)
(310)
73,002
9,852
A breakdown of the deferred tax balances is contained in note 23.
The effective income tax rate differs from the corporate income tax rates. The weighted average statutory rate was 13.1% for 2010 (2009:
13.0%). This is calculated as the average of the statutory tax rates applicable in the countries in which the Group operates, weighted by the
profits/(losses) before tax of the subsidiaries in the respective countries, as included in the consolidated financial information. The effective tax
rate is 14.7% (2009: 12.2%).
A reconciliation between the income tax charged in the accompanying financial information and income before taxes multiplied by the
weighted average statutory tax rate for the year ended 31 December 2010 is as follows:
US$000
Profit before tax
Notional tax computed at the weighted average statutory tax rate of 13.1% (2009: 13.0%)
Derecognition of deferred tax asset
Effect from difference in local tax rates
Effect from utilisation of non-recognised deferred tax assets
Effect from capitalised tax loss carry forwards
Inflation related indexation of fixed assets for tax
Expenses not deductible for tax purposes
Tax exempted income
Non recognition of deferred taxes on current year losses
Effect from change in permanent differences
Tax related to prior years
Other
Total income tax expense
Year ended
31.12.10
Year ended
31.12.09
498,126
65,254
(902)
3,526 –
(274) –
(293) –
–
7,338
(623)
555
(2,079) –
270
230
80,850
10,526
135
(1,792)
3,359
(942)
780
(2,497)
283
73,002
9,852
Note 18: Earnings per share and dividends paid and proposed
Basic earnings per share (EPS) is calculated by dividing the net profit for the year attributable to ordinary equity shareholders of Ferrexpo plc
by the weighted average number of Ordinary Shares.
Profit for the year attributable to equity shareholders:
Basic earnings per share (US cents)
Diluted earnings per share (US cents)
Underlying earnings for the year:
Basic earnings per share (US cents)
Diluted earnings per share (US cents)
Year ended
31.12.10
Year ended
31.12.09
72.34
72.24
12.08
12.05
72.98
72.91
12.80
12.77
88
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 18: Earnings per share and dividends paid and proposed continued
The calculation of the basic and diluted earnings per share is based on the following data:
Thousand
Weighted average number of shares
Basic number of Ordinary Shares outstanding
Effect of dilutive potential Ordinary Shares
Diluted number of Ordinary Shares outstanding
Year ended
31.12.10
Year ended
31.12.09
584,568
854
584,652
1,361
585,422
586,013
The basic number of Ordinary Shares is calculated by reducing the total number of Ordinary Shares in issue by the shares held in treasury
(refer to note 29).
Diluted earnings per share is calculated by adjusting the weighted average 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 non-controlling 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 and impairment losses
IPO costs
Gain on bargain purchase
Losses/(gains) on disposal of property, plant and equipment
Non-operating foreign exchange losses
Tax on adjusted items
Underlying earnings
Notes
Year ended
31.12.10
Year ended
31.12.09
13
39
15/41
12
422,906
1,618
55
(2,623)
1,305
3,888
(346)
70,627
2,757
427
(503)
(213)
2,551
(823)
426,803
74,823
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 adjusted items
include gains and losses on disposal of investments and businesses and non-operating foreign exchange gains and losses.
Dividends paid and proposed
US$000
Dividends proposed
Final dividend for 2010: 3.3 US cents per Ordinary Share
Total dividends proposed
Dividends paid during the period
Interim dividend for 2010: 3.3 US cents per Ordinary Share
Final dividend for 2009: 3.3 US cents per Ordinary Share
Total dividends paid
US$000
Dividends proposed
Final dividend for 2009: 3.3 US cents per Ordinary Share
Total dividends proposed
Dividends paid during the period
Interim dividend for 2009: 3.3 US cents per Ordinary Share
Final dividend for 2008: 3.3 US cents per Ordinary Share
Total dividends paid
Year ended
31.12.10
19,289
19,289
19,292
19,289
38,581
Year ended
31.12.09
19,289
19,289
19,289
20,261
39,550
Ferrexpo plc
Annual Report and Accounts 2010
89
Note 19: Property, plant and equipment
As at 31 December 2010 property, plant and equipment comprised:
US$000
Cost:
At 1 January 2009
Additions
Transfers
Disposals
Translation differences
At 31 December 2009
Additions
Acquisition of subsidiaries
Transfers
Disposals
Translation differences
At 31 December 2010
Depreciation:
At 1 January 2009
Depreciation charge
Disposals
Transfers
Impairment
Translation differences
At 31 December 2009
Depreciation charge
Disposals
Transfers
Impairment
Translation differences
At 31 December 2010
Net book value at:
31 December 2009
31 December 2010
Land
Mining
assets1
Buildings
Vessels
Plant &
equipment
Vehicles
Fixtures
and fittings
Assets
under
construction1
Total
3,225
15,749
112,531
535
24,289
(3,409)
(4,008)
(115)
(562)
3,110
15,187
129,938
–
–
–
–
–
–
141,742
109,752
4,201
137,020
524,220
5
57,524
(3,033)
(5,059)
5,719
(1,154)
(3,917)
21
575
(53)
(66)
85,445
(88,107)
(530)
(3,342)
86,006
–
(8,179)
(17,069)
191,179
110,400
4,678
130,486
584,978
–
14
–
–
10
1,248
–
3,189
–
44
5,308
162
17,153
(1,498)
381
–
61,863
–
–
–
1,691
163
29,888
(1,797)
560
709
5
62,059
(3,009)
323
318
79
561
(1,897)
7
156,501
3,062
(112,850)
(468)
252
166,775
65,348
–
(8,669)
1,577
3,134
19,668
151,444
61,863
221,684
170,487
3,746
176,983
809,009
–
–
–
–
–
–
–
–
–
–
–
–
–
543
20,091
278
–
–
–
(20)
801
334
–
–
–
2
5,366
(1,657)
–
450
(874)
23,376
7,531
(772)
–
(271)
73
1,137
29,937
–
–
–
–
–
–
–
–
–
–
–
–
–
67,628
21,411
2,107
–
111,780
15,124
(2,413)
–
14
(2,441)
7,924
(908)
–
233
(764)
829
(37)
–
(1)
(26)
77,912
27,896
2,872
18,069
(1,556)
–
–
228
8,875
(2,593)
–
–
82
861
(1,892)
–
–
3
94,653
34,260
1,844
–
–
–
21
–
21
–
–
–
20
–
41
29,521
(5,015)
–
717
(4,125)
132,878
35,670
(6,813)
–
(251)
388
161,872
3,110
14,386
106,562
–
113,267
82,504
1,806
130,465
452,100
3,134
18,531
121,507
61,863
127,031
136,227
1,902
176,942
647,137
1 Mining assets and assets under construction constitute mine stripping costs which are accounted for under the Group’s accounting policy outlined in note 2. Capitalised pre-production
stripping costs are included in assets under construction whereas the production stripping costs are shown under mining assets.
The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 December 2010 was US$27,457
thousand (2009: US$20,204 thousand). During the year, a sale and lease back transaction for assets of plant and equipment was completed
and is considered to be a finance lease. No gain or loss was realised on the sale of the assets subject to this finance lease. Leased assets and
assets under hire purchase contracts are pledged as security for the related finance lease and hire purchase liabilities.
US$88,498 thousand (2009: US$82,505 thousand) of property, plant and equipment have been pledged as security for liabilities.
The gross value of fully depreciated property, plant and equipment that is still in use is US$38,847 thousand (2009: US$30,149 thousand).
90
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 20: Goodwill and other intangible assets
As at 31 December 2010 goodwill and other intangible assets comprised:
US$000
At 1 January 2009
Cost:
Additions
Disposals
Translation differences
At 31 December 2009
Additions
Acquisition of subsidiaries
Disposals
Translation differences
At 31 December 2010
Accumulated amortisation and impairment:
At 1 January 2009
Amortisation charge
Disposals
Translation differences
At 31 December 2009
Amortisation charge
Disposals
Translation differences
At 31 December 2010
Net book value at:
31 December 2009
31 December 2010
Other
intangible
assets
Goodwill
Total
102,104
2,240
104,344
–
–
(3,646)
598
(53)
(74)
598
(53)
(3,720)
98,458
2,711
101,169
–
–
–
289
633
1,637
(63)
7
633
1,637
(63)
296
98,747
4,925
103,672
–
–
–
–
–
–
–
–
–
589
301
(53)
(22)
815
203
(63)
2
957
589
301
(53)
(22)
815
203
(63)
2
957
98,458
1,896
100,354
98,747
3,968
102,715
The goodwill acquired through business combinations in previous periods has been allocated for impairment purposes to one cash-
generating unit, as the Group only had one operating segment, being the production and sale of iron ore. This represents the lowest level
within the Group at which goodwill is monitored for internal management purposes.
During the financial year 2010, the Group acquired the Helogistics Holding GmbH and its subsidiaries. This resulted in a gain on bargain
purchase of US$2,623 thousand recognised in profit or loss and not affecting the balance of capitalised goodwill as of 31 December 2010.
Further details on the business combination are given in note 41.
Goodwill from business combinations are not amortised, but reviewed for impairment losses at every balance sheet date and whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable.
Impairment testing was performed at 31 December 2010 based on a value-in-use calculation using cash flow projections over the remaining
estimated life of the mine (27 years), a common practice in the mining industry. The cash flow projection was based on the financial budget
covering the next four years and approved by senior management.
The major component of other intangible assets as at 31 December 2010 comprises purchased software.
Ferrexpo plc
Annual Report and Accounts 2010
91
Note 20: Goodwill and other intangible assets continued
Key assumptions
The principal key assumptions are:
Estimates/assumptions
Basis
Future production:
Commodity prices:
Cost of raw materials and other production/distribution costs:
Exchange rates:
Discount rates:
Proved and probable reserves and resource estimates
Contract prices and longer-term price estimates
Expected future costs
Current market exchange rates
Cost of capital risk adjusted for the resource concerned
Cash flows are projected based on management expectations regarding the development of the iron ore and steel market and the cost of
producing and distributing the pellets.
The Company takes into account two principal key assumptions, selling price and total production costs. Within this both macro and local
factors which influence these are considered.
In determining the future long-term selling price, the Company takes into account external and internal analysis of the long-term and shorter-
term supply and demand dynamics in the local region and throughout the world along with costs of production of competitors and the
marginal cost of incremental production in a particular market. The Company considers local supply demand balances affecting its major
customers and the effects this could have on the longer-term price.
Cost of production and shipping is considered taking into account local inflationary pressures, major exchange rate developments between
local currency and the US dollar, and the longer-term and shorter-term trends in energy supply and demand and the effect on costs along
with the expected movements in steel related commodity prices which affect the cost of certain production inputs.
For the purpose of the goodwill impairment test, the future cash flows were discounted using the real pre-tax discount rate of 10% (2009:
15%) per annum. These rates reflect the time value of money and risk associated with the asset, and is in line with the rates used by
competitors with a similar background.
Sensitivity to changes in assumptions
Management believes that due to the high value of the projects and resulting reserve base no reasonable change in the above key
assumptions would cause the carrying value of the unit to materially exceed its value-in-use.
Note 21: Available-for-sale financial assets
As at 31 December 2010 available-for-sale financial assets comprised:
US$000
Current
Investments available for sale – equity instruments:
Vostock Ruda
Total current
Non-current
Investments available-for-sale – equity instruments:
OJSC Stahanov
Vostock Ruda
LLC Atol
CJSC AMA
CJSC Amtek
Total non-current
All investments relate to companies incorporated in Ukraine.
Ownership %
|
Carrying value
As at
31.12.10
As at
31.12.09
As at
31.12.10
As at
31.12.09
–
1.10%
–
–
626
626
3.14%
1.10%
9.95%
9.00%
9.00%
3.14%
–
9.95%
9.00%
9.00%
2,728
628
–
–
–
3,356
813
–
2,104
–
–
2,917
92
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 21: Available-for-sale financial assets continued
Impairment testing
Ferrexpo Petroleum
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 key assumptions used in this calculation were gas/condensate prices, gas/oil/condensate conversion rates, production volumes,
production costs, tax rates, projected capital expenditure, the Ukrainian hryvnia to US dollar exchange rate and the discount rate. The
calculation took into account the projected future cash flows attributable to the Lubachevsko-Sherbakivska licence (projected to make up
90% of the total value of the investment) over a period of 19 years (the length of the licence) with an applied pre-tax discount rate of 15.0%
(2009: 15.0%) per annum.
As a result of the above review, management recognised an additional impairment charge against the carrying value of the investments in LLC
Atol in 2010 resulting in fully impaired investments as of 31 December 2010 (2009: US$2,104 thousand). The decrease of the carrying value of
the investment is related to the impairment testing performed for the interim report as of 30 June 2010, when an additional impairment loss
was recorded through the income statement.
There are no indications at the year-end that require a reversal of any impairment losses booked in previous periods.
OJSC Stahanov
The value of OJSC Stahanov was increased due to a higher quoted market price for its shares on the Ukrainian stock exchange (PFTS) as of
31 December 2010. The increase of the fair value in the amount of US$1,915 thousand (2009: US$441 thousand) has been recorded against
the net unrealised gains reserve as a reversal of previously recorded impairment losses.
Further details regarding available-for-sale investments can be found in note 13 – write-offs and impairment losses as well as note 35 – related
party transactions.
Note 22: Other non-current assets
As at 31 December 2010 other non-current assets comprised:
US$000
Prepayments for property, plant and equipment
Loan provided to associate
Other non-current assets
Total other non-current assets
As at
31.12.10
As at
31.12.09
23,173
1,000
593
24,767
7,320
2,000
504
9,824
Ferrexpo plc
Annual Report and Accounts 2010
93
Note 23: Deferred income tax
Deferred income tax assets and liabilities at 31 December 2010 relate to the following:
US$000
Trade and other receivables
Inventories
Accrued income and prepaid expenses
Property, plant and equipment
IPO costs netted against share premium
Tax losses recognised
Other financial assets
Trade and other payables
Accrued expenses
Defined benefit pension liability
Provision for site restoration
Other financial liabilities
Other items
Total deferred tax assets
Thereof netted against deferred tax liabilities
Total deferred tax assets as per the statement of financial position
Trade and other receivable
Inventories
Accrued income/prepaid expenses
Property, plant and equipment
Intangible assets
Other non-current assets
Employee benefit trust
Trade and other payables and advance receivables
Lease obligations
Other items
Total deferred tax liabilities
Thereof netted against deferred tax assets
Total deferred tax liabilities as per the statement of financial position
Consolidated statement
of financial position
|
Consolidated
income statement
As at
31.12.10
As at
31.12.09
Year ended
31.12.10
Year ended
31.12.09
4,106
–
294
9,789
726
5,322
2
29
2,004
2,666
411
81
7
2,466
144
–
9,122
1,226
743
187
77
1,602
3,596
298
134
–
(1,584)
132
393
(499)
743
(10)
47
169
504
41
136
1,480
(96)
– –
640
(499)
293
(104)
(48)
45
(944)
112
(55)
– –
25,438
19,595
824
72
(8,842)
(5,922)
16,596
13,673
(1,490)
(3,952)
(3,111)
(2,479)
(112)
(49)
(49)
(29)
(4)
–
(498)
(2,522)
(2,477)
(554)
(277)
(171)
(3,025)
–
(4)
(133)
(992)
(1,424)
(628)
(224)
266
101
3,045
–
–
–
(498)
1,424
(638)
(398)
(69)
(11)
204
360
(4)
(132)
(11,274)
(9,661)
144
238
8,842
5,922
(2,432)
(3,739)
Net deferred tax assets/net change
14,164
9,934
968
310
The movement in the deferred income tax balance is as follows:
US$000
Opening balance
Income statement credit
Charges booked outside of profit or loss
Acquisition of subsidiaries
Foreign currency exchange rate adjustment
Closing balance
Year ended
31.12.10
Year ended
31.12.09
9,934
968
(492)
3,383
371
8,745
310
1,251
–
(372)
14,164
9,934
As at 31 December 2010, the Group had deductible temporary differences on available tax loss carry forwards in the amount of US$100,699
thousand (2009: US$2,182 thousand) for which no deferred tax assets were recognised. The vast majority of the available tax loss carry
forwards relates to the acquired logistics business in Austria and Hungary. Tax loss carry forwards in both tax jurisdictions do not expire. The
balance of available tax loss carry forwards is after the offset of temporary differences on property, plant and equipment in Austria of
US$16,780 thousand. Temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been
recognised amount to US$522,876 thousand (2009: US$147,080 thousand).
94
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 24: Inventories
As at 31 December 2010 inventories comprised:
US$000
Raw materials and consumables
Finished ore pellets
Work in progress
Other
Provision for slow-moving and obsolete inventory
Total inventories
Inventory is held at the lower of cost or net recoverable amount.
Note 25: Trade and other receivables
At 31 December 2010 trade and other receivables comprised:
US$000
Trade receivables
Other receivables
Allowance for doubtful receivables
Total trade and other receivables
As at
31.12.10
As at
31.12.09
70,440
23,668
8,461
2,580
(322)
47,405
5,135
7,565
104
(573)
104,827
59,636
As at
31.12.10
As at
31.12.09
114,923
848
(3,881)
42,956
1,616
(6,455)
111,890
38,117
Trade receivables at 31 December 2010 includes US$1,057 thousand (2009: US$2,098 thousand) owed by related parties. The detailed
related party disclosures are made in note 35.
The movement in the provision for doubtful receivables during the period under review was:
US$000
Opening balance
Recognition
Reversal
Acquisition of subsidiaries
Foreign currency translation
Closing balance
Year ended
31.12.10
Year ended
31.12.09
6,455
146
(3,831)
1,046
65
11,956
187
(5,386)
–
(302)
3,881
6,455
The following table shows the Group’s receivables at the reporting date that are subject to credit risk and the ageing and impairment
profile thereon:
As at 31.12.10
US$000
Trade receivables
Other receivables
As at 31.12.09
US$000
Trade receivables
Other receivables
The Group’s exposures to credit and currency risks are disclosed in note 38.
Receivables
Receivables neither past
due nor
impaired
Gross past due and
impaired
amount
Receivables past due but not impaired
Less than
45 days
45 to
90 days
Over
90 days
114,923
848
3,560
321
105,302
234
5,074
104
529
4
458
185
Receivables
past due and
impaired
Receivables
neither past
due nor
impaired
6,322
133
33,932
1,263
Gross
amount
42,956
1,616
Receivables past due but not impaired
Less than
45 days
2,160
7
45 to
90 days
173
12
Over
90 days
369
201
Ferrexpo plc
Annual Report and Accounts 2010
95
Note 26: Prepayments and other current assets
As at 31 December 2010 prepayments and other current assets comprised:
US$000
Prepayments to suppliers
Electricity and gas
Materials and spare parts
Services
Other prepayments
Loan provided to associate
Accrued income
Other
Total prepayments and other current assets
Note 27: Taxes payable, recoverable and prepaid
The income tax payable balance as of 31 December 2010 is shown below:
US$000
Opening balance
Income statement charge
Tax paid
Changes booked through equity
Acquisition of subsidiaries
Foreign exchange adjustment
Closing balance
Split by:
US$000
Income tax receivable balance
Income tax payable balance
Income tax payable at the year end
As at 31 December 2010 taxes recoverable and prepaid comprised:
US$000
VAT receivable
Other taxes prepaid
Total taxes recoverable and prepaid
As at
31.12.10
As at
31.12.09
5,348
2,606
1,569
946
–
8,337
116
4,036
1,879
1,922
3,110
550
6,062
1,835
18,922
19,394
As at
31.12.10
As at
31.12.09
(1,364)
(73,970)
37,827
–
(81)
(4,188)
(8,604)
(10,162)
18,899
(99)
–
(1,398)
(41,776)
(1,364)
As at
31.12.10
As at
31.12.09
35
(41,811)
9,741
(11,105)
(41,776)
(1,364)
As at
31.12.10
101,683
1,964
As at
31.12.09
81,269
15
103,647
81,284
The VAT receivable results from VAT paid on domestic purchases of goods and services and on the imports of equipment and where relevant
services into Ukraine to the extent that this can not be offset on VAT paid on the sale of goods and services.
The Ukrainian government has not been making timely repayments of VAT in 2009 and the first half of the financial year 2010 due to the
economic downturn and general financial crisis in 2009 allied with the presidential elections in early 2010 and the ongoing negotiations for
financial aid from the IMF. The increase of the VAT receivable balance is related to higher imports of equipment in the period under review.
During the financial year 2010, the Group received VAT bonds from the Ukrainian government relating to the outstanding VAT receivable
balance as of the end of December 2009. All VAT bonds were sold in the latter half of the financial year 2010 with a discount of US$10,936
thousand. Subsequent to the issuance of the VAT bonds in August 2010, the Ukrainian government has started repayments of the
outstanding VAT.
Further information on the Ukrainian VAT situation is provided in the risk section on page 33.
96
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 27: Taxes payable, recoverable and prepaid continued
As at 31 December 2010 other taxes payable comprised:
US$000
Withholding tax
Environmental tax
Source tax
VAT payable
Other taxes
Total taxes payable
Note 28: Cash and cash equivalents
As at 31 December 2010 cash and cash equivalents comprised:
US$000
Cash at bank and on hand
Restricted cash
Short-term deposits
Marketable securities
Total cash and cash equivalents
As at
31.12.10
415
1,045
–
4,250 –
8,213
13,923
As at
31.12.09
3,233
2,267
317
2,076
7,893
Year ended
31.12.10
Year ended
31.12.09
251,572
37,768
30,123
7 –
11,991
–
–
319,470
11,991
The balance of restricted cash of US$37,768 thousand, which is related to an acquisition made in December 2010, is held in an escrow
account at 31 December 2010 (2009: US$nil) and unavailable to the Group. This amount was released subsequent to the year end.
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 38.
Note 29: Share capital and reserves
Balance at 31 December 2010 and 2009
US$000
Number of shares
121,628
613,967,956
Share capital represents the nominal value on issue of the Company’s equity share capital, comprising £0.10 Ordinary Shares.
The fully paid share capital of Ferrexpo plc at 31 December 2010 was 613,967,956 (2009: 613,967,956) Ordinary Shares at a par value of
£0.10 paid for in cash, resulting in share capital of US$121,628 thousand (2009: US$121,628 thousand) per the statement of financial position.
The closing balance as of 31 December 2010 and 2009 includes 25,343,814 shares which are held in treasury and 4,019,759 shares held in
the employee benefit trust reserve (2009: 4,092,285) .
Share premium
Share premium represents the premium paid by subscribers for the share capital issues, net of costs directly attributable to the share issue.
Treasury share reserve
During September 2008, Ferrexpo plc completed a buyback of 25,343,814 shares for a total cost of US$77,260 thousand. These shares are
currently held as treasury shares by the Group. The Companies Act 2006 forbids the exercise of any rights (including voting rights) and the
payment of dividends in respect of treasury shares.
Employee benefit trust reserve
This reserve represents 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 incentive schemes.
Ferrexpo plc
Annual Report and Accounts 2010
97
Note 29: Share capital and reserves continued
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 non-controlling interests.
Subsequent increases in the stake have been accounted for using the parent extension concept method of accounting as described in the
accounting policy section of the financial statements (note 2).
Net unrealised gains reserve
This reserve records fair value changes on available-for-sale investments.
Translation reserve
The translation reserve represents exchange differences arising on the translation of non-US dollar (e.g. hryvnia) functional currency
operations within the Group into US dollars.
Note 30: 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. All loans are in US dollars. For more information about the Group’s exposure to interest rate, foreign currency and liquidity
risk, see note 38.
US$000
Current
Syndicated bank loans – secured
Other bank loans – secured
Commodity loans
Obligations under finance leases
Interest accrued
Total current interest bearing loans and borrowings
Non-current
Syndicated bank loans – secured
Other bank loans – secured
Commodity loans
Obligations under finance leases
Total non-current interest bearing loans and borrowings
Total interest bearing loans and borrowings
Notes
As at
31.12.10
As at
31.12.09
38
38
38
38
38
38
38
38
38
–
18,818
495
2,832
418
207,723
41,662
124
1,264
730
22,563
251,503
341,938
36,128
1,898 –
21,326
–
933
17,210
401,290
18,143
423,853
269,646
As at 31 December 2010 the other bank loans are secured by property, plant and equipment with a carrying amount of US$68,695 thousand
(2009: US$104,579 thousand) and finished goods inventory of US$6,600 thousand (2009: nil) and rights to a purchase contract in respect of
equipment to be delivered of US$20,890 thousand as of the end of the prior year. Secured Ukrainian property, plant and equipment includes
crushing, excavators and mine transport equipment. The syndicated bank loans of US$350,000 thousand (2009: US$207,723 thousand) are
secured by rights to proceeds from future export sales of US$378,310 thousand (2009: US$370,444 thousand).
As at 31 December 2010 the Group’s major bank debt facility was a US$350,000 thousand (2009: US$335,000 thousand) pre-export finance
facility, which was fully drawn down as of 31 December 2010. The remaining outstanding balance of the major bank facility as of 31 December
2009 amounting to US$207,727 thousand was repaid in full on 8 January 2011.
The Group entered into a new bank debt term facility on 23 September 2010 in the amount of US$350,000 thousand, which matures on 31
March 2014, amortising over 24 months following an 18 month grace period. This pre-export finance facility was drawn in full on 7 October
2010 and was used for refinancing of the pre-export finance facility of US$230,000 thousand that was drawn down on 8 January 2011.
98
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 30: Interest bearing loans and borrowings continued
The major bank debt facility as at 31 December 2010 was guaranteed and secured as follows:
>
>
>
>
Ferrexpo AG assigned the rights to revenue from certain sales contracts;
Ferrexpo Poltava GOK Corporation assigned all of its rights of certain export contracts for the pellets sales to Ferrexpo AG;
the Group pledged its bank account into which all proceeds from the sale of certain iron ore pellet contracts are received; and
Ferrexpo AG pledged all its rights under certain contracts for the sale of iron ore pellets and its rights under certain related credit
support documents.
Ferrexpo AG is subject to minimum capital requirements which restrict the amount of profit that can be distributed to the parent.
As at 31 December 2010, the Group has two committed facilities amounting to US$65,000 thousand (2009: US$nil) available that are not
drawn down.
Note 31: Trade and other payables
As at 31 December 2010 trade and other payables comprised:
US$000
Payables for equipment
Materials and services
Dividends payable
Other
Total current trade and other payables
Note
41
As at
31.12.10
4,307
41,616
31
42,135
As at
31.12.09
4,323
20,255
78
3,146
88,089
27,802
Trade and other payables at 31 December 2010 includes US$3,263 thousand (2009: US$1,660 thousand) due to related parties. See
note 35. Included in the balance of other payables stated above is a liability of US$37,768 thousand in relation to an acquisition made
in December 2010.
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 38.
Note 32: Defined benefit pension liability
Ukrainian defined benefit plan
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 to the income statement 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 are unfunded. Costs relating to this plan are accrued using
the projected unit credit method in respect of those employees entitled to such payments. Actuarial techniques have been used in calculating
the liability related to this retirement obligation at the reporting date.
Gains and losses resulting from the use of internal actuarial valuation methodologies are recognised when the cumulative unrecognised
actuarial gains or losses for the scheme exceed 10% of defined benefit obligation. These gains or losses are recognised as income or
expense over the expected average remaining working lives of the employees participating in the plan.
The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested.
If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is
recognised immediately.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognised
reduced by past service cost not yet recognised.
Ferrexpo plc
Annual Report and Accounts 2010
99
Note 32: Defined benefit pension liability continued
At 31 December 2010 this defined benefit plan covered 4,612 current employees (2009: 4,669 people). There are 1,193 former employees
currently in receipt of pensions (2009: 1,246 people).
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; this has also been included in the provision.
Swiss defined benefit plan
The employees of the Group’s Swiss operation are covered under a multi-employer pension plan, which is governed in accordance with the
requirements of Swiss law. The assets of the pension scheme are held separately from those of the Group and are invested with an insurance
company. The annual pension costs and the defined benefit obligation as well as the fair value of the plan assets are assessed annually by an
independent professionally qualified actuary.
The accumulated capital of the employees is subject to interests determined by the local legislation and defined in the regulatory of the
pension scheme.
On retirement employees are entitled to receive either a lump sum or an annual proportion of their accumulated capital as a pension
underpinned by certain guarantees. The Group and in certain cases the employees make contributions to the pension scheme as a
percentage of the insured salaries and depending on the age of the employees.
At 31 December 2010 this defined benefit plan covered 20 people (2009: 21 people).
Austrian defined benefit plan
The Group has an unfunded retirement benefit obligation covering the Austrian employees of Helogistics. At 31 December 2010, 37 current
employees (2009: 42 employees) are covered by this plan. All payments under the scheme are made by the employer as a lump sum in cases
of retirement, occupational disability, death in service or redundancy. The amount payable is dependant on the years of service up to a
maximum of a full annual salary.
The annual costs relating to this plan are accrued using the projected unit credit method. The annual costs and the defined benefit obligation
are assessed annually by an independent professionally qualified actuary.
The principal assumptions used in determining the defined benefit obligation are shown below:
Discount rate
Retail price inflation
Expected future salary increase
Expected future benefit increase
Female life expectancy (years)
Male life expectancy (years)
Year ended 31.12.10
|
Year ended 31.12.09
Swiss
scheme
Austrian
scheme
Ukrainian
scheme
Swiss
scheme
Ukrainian
scheme
2.40%
1.50%
3.00%
0.00%
86.0
82.9
5.00%
2.80%
2.50%
0.00%
n/a
n/a
11.00%
7.00%
7.00%
0.00%
74.5
63.5
3.25%
1.50%
3.00%
0.00%
86.0
82.9
15.00%
7.00%
7.00%
0.00%
74.5
63.5
100
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 32: Defined benefit pension liability continued
Changes in the net present value of the defined benefit obligation are as follows:
Year ended 31.12.10
|
Year ended 31.12.09
Swiss
scheme
Austrian
scheme
Ukrainian
scheme
US$000
Opening defined benefit obligation
Current service cost
Employee contribution
Interest cost
Contribution by plan participants
Benefits paid
Actuarial loss
Past service cost
Acquisition of subsidiaries
Foreign exchange translation adjustment
Closing defined benefit obligation
Opening plan assets
Expected return on plan assets
Employer contribution
Employee contribution
Contribution by plan participants
Benefits paid
Actuarial loss
Foreign exchange translation adjustment
Closing plan assets
Net funded status
Unrecognised actuarial losses
Unrecognised past service cost
Foreign exchange translation adjustment
Closing balance defined benefit pension liability
Benefit expense
Current service cost
Interest cost
Amortisation of actuarial loss
Expected return on plan assets
Recognised past service cost
Employee contribution
Curtailment gain
Current year expense
Net movement on defined benefit pension liability:
Opening balance
Recognition of liability
Benefits expense
Benefits paid
Employer contribution
Foreign exchange translation adjustment
Closing balance
Experience adjustments arising on plan liabilities
Total
26,114
1,856
102
3,417
14
3,688)
27,899
–
819
222
Swiss
scheme
2,096
375
14
66
469
(926)
101
Ukrainian
scheme
22,187
1,142
–
3,074
–
(2,987)
1,230
Total
24,283
1,517
14
3,140
469
(3,913)
1,331
–
39
3,502
(4,268)
3,502
(4,229)
23,880
1,291
–
3,344
–
(3,468) (
28,282
–
–
(27)
53,302
56,755
2,234
23,880
26,114
–
–
–
–
–
–
–
–
–
1,375
45
309
102
14
(220)
(194)
148
1,507
48
474
14
469
(926)
(230)
19
1,579
1,375
–
–
–
–
–
–
–
–
1,507
48
474
14
469
(926)
(230)
19
1,375
–
–
–
–
–
–
–
–
819
-
819
–
–
–
–
–
–
–
–
–
819
53,202
55,176
859
23,880
24,739
–
–
–
(34,046)
(2,664)
–
(34,630)
(2,664)
(63)
(807)
–
(34)
(6,333)
(3,113)
77
(7,140)
(3,113)
43
819
16,592
17,819
18
14,511
14,529
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,291
3,344
496
–
382
–
–
5,513
1,958
3,416
564
(45)
382
(102)
–
6,173
14,511
–
5,514
(3,468)
–
36
14,529
–
6,174
(3,468)
(309)
76
389
66
37
(48)
–
(14)
–
430
62
–
430
–
(474)
–
1,142
3,074
439
–
389
–
–
5,044
1,531
3,140
476
(48)
389
(14)
–
5,474
12,878
–
5,044
(2,897)
–
(514)
12,940
5,474
(2,897)
(474)
(514)
819
16,593
17,820
18
14,511
14,529
–
28,282
27,796
101
1,230
1,331
2,234
565
102
73
14
(220)
(383)
–
–
249
2,634
1,375
45
309
102
14
(220)
(194)
148
1,579
1,055
(584)
–
(63)
408
667
72
68
(45)
–
(102)
–
660
18
–
660
–
(309)
40
409
(383)
Contributions to the defined benefit plans in 2011 are expected to be US$4,065 thousand.
Ferrexpo plc
Annual Report and Accounts 2010
101
Note 32: Defined benefit pension liability continued
The asset allocation of the plan assets of the Swiss scheme is as follows:
US$000
Scheme assets at fair value
Equities
Bonds
Properties
Other
Fair value of scheme assets
As at
31.12.10
%
As at
31.12.10
As at
31.12.09
%
21.5
45.8
18.1
14.6
339
723
286
231
100.0
1,579
18.3
49.7
18.1
13.9
100
As at
31.12.09
252
683
248
192
1,375
The overall expected rate of return on assets is determined based on the market value weighted expected return applicable to the underlying
asset category.
Expected rate of return on plan assets:
Equities
Bonds
Properties
Other
Total
Actual rate of return on plan assets:
Equities
Bonds
Properties
Other
Total
Year ended
31.12.10
Swiss scheme
Year ended
31.12.09
Swiss scheme
4.31%
2.50%
2.35%
4.92%
3.06%
0.91%
2.77%
6.11%
4.72%
4.52%
6.50%
2.50%
4.50%
2.25–4.00%
3.50%
28.53%
8.93%
5.59–33.60%
(44.94)–24.63%
11.60%
The actual returns on the plan assets for the Swiss scheme were US$63 thousand (2009: US$114 thousand).
A change in the assumed discount rates would have the following effects:
US$000
Effect on the aggregated current service costs and interest costs
Effect on the defined benefit obligation
US$000
Effect on the aggregated current service costs and interest costs
Effect on the defined benefit obligation
Increase
Austrian
scheme
(+0.25%)
Year ended 31.12.10
|
Ukrainian
scheme
(+1.00%)
Swiss
scheme
(-0.25%)
–
(16)
(128)
(4,243)
14
78
Swiss
scheme
(+0.25%)
(13)
(74)
Decrease
Austrian
scheme
(-0.25%)
–
17
Ukrainian
scheme
(-1.00%)
144
4,931
Year ended 31.12.09
Increase
|
Decrease
Swiss
scheme
(+0.25%)
(23)
(87)
Ukrainian
scheme
(+1.00%)
(122)
(1,460)
Swiss
scheme
(-0.25%)
25
93
Ukrainian
scheme
(-1.00%)
139
1,650
102
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 32: Defined benefit pension liability continued
The history of experience adjustments (unrecognised losses) is as follows for the current and previous three periods:
Opening balance
Experience adjustments on plan liabilities
Experience adjustments on plan assets
Gain on change in assumptions
Foreign exchange translation adjustment
Closing balance
Year ended
31.12.10
Year ended
31.12.09
Year ended
31.12.08
Year ended
31.12.07
(7,140)
(27,899)
(194)
–
603
(6,294)
(1,331)
(230)
–
715
(3,292)
(6,219)
(84)
–
3,301
(945)
(2,347)
–
–
–
(34,630)
(7,140)
(6,294)
(3,292)
Note 33: Provision for site restoration
The costs of decommissioning open pit mines are based on the amounts determined by third party experts based on various codes of
practice and laws applicable in Ukraine. The provision represents the discounted value of the estimated costs of decommissioning and
restoring the mines at the dates when the deposits are expected to be depleted. The present value of the provision has been calculated using
a nominal pre-tax discount rate of 9.22% per year (2009: 10.25%). The liability becomes payable at the end of the useful life of the mine,
currently estimated to be 2055. Uncertainties in estimating these costs include potential changes in regulatory requirements,
decommissioning and reclamation alternatives and the levels of discount and inflation rates. The increase as of 31 December 2010 is due to
the extension of the expected useful lives of the mines.
US$000
Opening balance
Unwind of the discount
Arising during the year
Translation adjustment
Closing balance
Note 34: Accrued liabilities and deferred income
As at 31 December 2010 accrued liabilities and deferred income comprised:
US$000
Accrued expenses
Accrued employee costs
Advances from customers
Deferred income
Total accrued liabilities and deferred income
As at
31.12.10
1,268
133
1,328
17
2,746
As at
31.12.09
1,071
159
76
(38)
1,268
As at
31.12.10
12,563
10,830
801
1,302
As at
31.12.09
1,582
10,398
166
–
25,496
12,146
Note 35: Related party disclosure
During the periods presented the Group entered into arm’s length transactions with entities under common control of the majority owner of
the Group, Kostyantin Zhevago and with other related parties. Management considers that the Group has appropriate procedures in place to
identify and properly disclose transactions with the related parties.
Entities under common control are those under control of Kostyantin Zhevago. TIS Ruda, in which the Group holds an interest of 48.6%, is the
only associated company of the Group. The other related parties are principally those entities controlled by Olexander Moroz (who was a
supervisory board member of Ferrexpo Poltava GOK Corporation until 14 May 2010).
Ferrexpo plc
Annual Report and Accounts 2010
103
Note 35: Related party disclosure continued
The related party transactions entered into by the Group during the periods presented are summarised below:
Revenue, expenses, finance income and finance costs
Year ended 31.12.10
|
Year ended 31.12.09
US$000
Other sales1
Total revenue
Purchase of materials2
Purchase of services3
General and administration expenses4
Selling and distribution5
Other expenses6
Total expenses
Finance income7
Finance costs7
Net finance income/(expenses)
Entities
under
common Associated
companies
control
Other
related
parties
1,398
951
2,263
1,398
125,093
732
4,612
–
201
130,638
964
(443)
521
951
–
–
–
8,362
–
8,362
96
–
96
2,263
15,105
119
1
18,496
21
33,742
–
–
Entities
under
common
control
506
506
4,458
444
3,315
–
91
8,308
1,329
(816)
Associated
companies
Other
related
parties
–
1,480
–
–
–
–
11,849
–
11,849
267
–
1,480
11,930
23
–
11,736
8
23,697
–
–
–
513
267
–
1 Other sales to other related parties consist of scrap metal sales made to Ferrolit, a company under control of a former supervisory board member of Ferrexpo Poltava (see above). Other sales to
entities under common control are mainly related to sales of power, steam and water and the lease of premises to Kislorod and Vorskla-Steel.
2 Purchase of materials from entities under common control consists of purchased concentrate in the amount of US$104,367 thousand from Vostock Ruda (31 December 2009: US$1,386
thousand) of which US$92,667 thousand are related to third party merchant concentrate purchased by the Group through this company. The Group currently has surplus pelletising capacity
which it utilises where possible by purchasing concentrate produced by third parties on the open market. Concentrate itself is a tradable end product and as such prices paid reflect the market
for that product. As a result, the Group is able to earn a margin by converting this product into pellets albeit of a lower level than from its own produced ore. It is the Group’s strategy to produce
pellets from purchased third party concentrate in order to make full use of the available pelletising capacity where adequate margin can be earned. The Group earned a margin on the third party
concentrate business of US$16,174 thousand. Vostock Ruda earned fees of US$140 thousand which covered only costs incurred which were associated with procuring and delivering of the
purchased third party concentrate. During the financial year 2010, the Group purchased through Ferrexpo Poltava pellets from SIA Wellmark Latvia, which is controlled by Kostyatin Zhevago.
The related party acted on behalf of the Group and earned a handling commission of US$0.10 per ton amounting in total to US$69 thousand (2009: US$nil). The Group purchased compressed
air and oxygen of US$3,667 thousand (31 December 2009: US$1,414 thousand) from Kislorod, company controlled by Kostyantin Zhevago . Purchase of materials from other related parties
includes purchased cast iron balls from Ferrolit of US$14,946 thousand (31 December 2009: US$11,286 thousand), which are used in the production process. Purchase of materials also
comprise the purchase of gas amounting to US$14,432 thousand (2009: nil) OJSC Ukrzakordongeologia, which is a related party to Group, at rates which are competitive to those for supply
from Naftogaz.
3 Kuoni Attorneys at law Ltd. provided an employee secondment to the Group between December 2009 and June 2010. The recharge was made at cost and amounted to US$106 thousand.
Other services provided were US$13 thousand (US$23 thousand). Wolfram Kuoni who is a partner in the law firm is also an independent non-executive Director of Ferrexpo plc. The services
were provided on an arm length basis by other members of Kuoni Attorneys at law Ltd.
4 The Group paid US$3,313 thousand to FC Vorskla under a contract entered into on 1 April 2009 and renewed on 10 December 2009 for advertisement, marketing and general PR related
services (31 December 2009: US$2,631 thousand).
5 Selling and distribution services are purchased from TIS Ruda, an associated company as the Group holds an interest of 48.6%. These services relate to port services including port charges,
handling costs, agent commissions and storage costs. Services from other related parties are mainly provided by Slavutich Ruda which is under control of Olexander Moroz, a supervisory board
member of Ferrexpo Poltava until 14 May 2010. Slavutich Ruda provided logistic management services mainly related to custom clearance services and coordination of rail transit. The total
billings amounted to US$18,294 thousand (31 December 2009: US$11,507 thousand) and Slavutich Ruda earned commission income of US$755 thousand on these services (31 December
2009: US$793 thousand). These purchases were at prevailing market rates.
6 Other operating expenses mainly relate to communication services provided by TV & Radio Co amounting to US$108 thousand (31 December 2009: US$60 thousand).
7 The Group has transactional banking arrangements with Bank Finance & Credit (Bank FC), which is under common control of Kostyantin Zhevago. Finance income and expenses relate to these
transactional banking arrangements. Further information is provided under transactional banking arrangements in this note.
Sale and purchases of property, plant and equipment and investments
US$000
Year ended 31.12.10
|
Year ended 31.12.09
Entities
under
common Associated
companies
control
Other
related
parties
Entities
under
common
control
Associated
companies
Purchase of property, plant and equipment1
22,459
–
–
2,200
–
Other
related
parties
–
1 Between October and December 2010, the Group purchased 300 rail cars from a related party named Trading house Wagonplant LLC in the amount of US$17,500 thousand (31 December
2009: nil). In 2010, drilling programmes have been conducted by OJSC Donbasgeology at the Northern deposit of Ferrexpo Poltava and at Ferrexpo Belanovo amounting to US$4,959 thousand
(31 December 2009: nil). On 31 March 2009, the Group acquired a trial filter press from Progress Plant Company, an entity under common control, for US$2,200 thousand. All transactions were
on arm’s length basis and supplied after a competitive tender process.
104
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 35: Related party disclosure continued
The outstanding investments/balances with related parties for the periods presented are as follows:
US$000
Investments available-for-sale1
Prepayments for PPE2
Loans3
Total non-current assets
Investments available-for-sale1
Loans3
Trade and other receivables4
Prepayments and other current assets2
Cash and cash equivalents5
Total current assets
Trade and other payables6
Total current liabilities
Year ended 31.12.10
|
Year ended 31.12.09
Entities
under
common Associated
companies
control
Other
related
parties
3,353
182
–
3,535
–
–
514
95
156,807
157,416
1,563
1,563
–
–
–
–
–
1,000
203
27
–
1,230
12
12
–
–
–
–
–
–
15
1
–
16
1,668
1,668
Entities
under
common
control
2,917
–
2,917
626
1,999
995
2,123
5,742
514
514
Associated
companies
–
2,550
2,550
–
93
–
–
93
–
–
Other
related
parties
–
–
–
–
6
1
–
7
1,146
1,146
1 The investments available-for-sale comprised of shareholdings in LLC Atol (9.95%), OJSC Stahanov (3.14%) and Vostock Ruda (1.10%). The majority ownership of these companies is held by the
principal shareholder of Ferrexpo plc and OJSC Stahanov is also listed at the Ukrainian stock exchange. The changes of the values in the table above are related to fair value adjustments
recorded during the financial year 2010. The shareholdings for all investments remained unchanged during the periods disclosed above. The investment in LLC Atol was subject of an additional
impairment of US$2,124 thousand recorded as of 30 June 2010 (31 December 2009: US$nil) resulting in a full impairment of this investment. Further information is provided in note 21 of the
Annual Report & Accounts 2010.
2 Prepayments for drilling programmes on the Northern Deposits in the amount of US$182 thousand have been made to OJSC Donbasgeology in period ended 31 December 2010 (31 December
2009: US$nil). The company is controlled by Kostyantin Zhevago.
3 Loans were granted to TIS Ruda in 2007 and 2008, which have been partially repaid during the financial year 2009 and 2010. The Group holds an interest of 48.6% in this Ukrainian company
operating a port located on the Black Sea and is an associated company of the Group. The company provides port services to the Group (see above).
4 As of 31 December 2010 trade and other receivables included outstanding amounts from Kislorod amounting to US$311 thousand, which are mainly related to sales of power, steam and water
(31 December 2009: US$368 thousand). The outstanding balances as of the end of the prior year included US$1,169 thousand relating to the disposal of shares in Vostock Ruda to Progress
Plant Company during the financial year 2008. Both companies are under common control of Kostyantin Zhevago.
5 As of 31 December 2010 cash and cash equivalents with Bank F&C were US$156,807 thousand (31 December 2009: US$2,123 thousand). Further information is provided under transactional
banking arrangements below.
6 Trade and other payables due to entities under common control amounting to US$1,013 thousand as of 31 December 2010 related to concentrate purchased from Vostock Ruda (31 December
2009: US$ il) and to compressed air and US$416 thousand (31 December 2009: US$ 368 thousand) to oxygen purchased from Kislorod. Trade and other payables due to other related parties
amounting to US$1,291 thousand as of 31 December 2010 related to purchased material from Ferrolit (31 December 2009: US$989 thousand).
Transactional banking arrangements
The Group has transactional banking arrangements with Bank Finance & Credit (Bank F&C) in Ukraine which is under common control of the
majority shareholder of Ferrexpo plc. Finance income and finance costs are disclosed in the table above.
The Group entered into a multi-currency revolving loan facility agreement in April 2007 with Bank F&C which expired on 16 April 2010 and has
been extended to 16 April 2013 upon the same terms and conditions except for two changes. The maximum facility limit has been increased
from UAH50,500 thousand to UAH80,000 thousand (US$10,048 thousand at the exchange rate as of 31 December 2010) and the interest
rates increased for UAH advances from 16% to 18% per annum. The total value of pledges for this loan facility is US$13,300 thousand.
Other related party transaction
In August 2009, the Group paid Swiss Withholding Tax of US$984 thousand on behalf of Kostyantin Zhevago on costs incurred for the Initial
Public Offering completed in June 2007. This was settled in accordance with terms and conditions entered into at the time of the Initial Public
Offering of the Company.
Ferrexpo plc
Annual Report and Accounts 2010
105
Note 36: Employee benefits expenses
Employee benefits expenses for the year ended 31 December 2010 consisted of the following:
US$000
Wages and salaries
Social security costs
Post-employment benefits
Other employee costs
Share-based payments
Total employee benefits expenses
Average number of employees
US$000
Production
Marketing and distribution
Administration
Other
Total average number of employees
Compensation for key management was as follows:
US$000
Wages and salaries
Social security costs
Other employee costs
Total compensation for key management
Year ended
31.12.10
Year ended
31.12.09
53,774
17,037
2,172
2,186
923
39,905
11,520
2,653
7,248
3,850
76,092
65,176
Year ended
31.12.10
Year ended
31.12.09
6,897
174
1,119
724
8,914
6,319
169
958
907
8,353
Year ended
31.12.10
Year ended
31.12.09
4,927
277
361
5,565
4,540
646
287
5,472
Share-based payments, calculated under the Black-Scholes option pricing model, amounting to US$1,409 thousand (2009: US$560
thousand) are included in wages and salaries. Under this model, the expected future costs of the award grants made to employees is spread
over the period of vesting.
The balances above include compensation for Non-executive and Executive Directors as well as for other key management personnel. Refer
to the Remuneration Report for details of compensation relating to Non-executive and Executive Directors.
Note 37: Commitments and contingencies
Operating lease commitments – Group as lessee
Future minimum rentals payable under non-cancellable operating leases as at 31 December 2010 are as follows:
US$000
Less than one year
Between one and five years
More than five years
Total minimum rentals payable
As at
31.12.10
2,128
5,587
45,813
As at
31.12.09
849
2,374
16,479
53,528
19,702
During the year ended 31 December 2010 US$1,076 thousand was recognised as an expense in the income statement in respect of
operating leases (2009: US$1,665 thousand).
The Group leases land and buildings under operating leases. The leases on land typically run for 49 years, with a lease period of 5 to 10 years
on buildings.
106
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 37: Commitments and contingencies continued
Operating lease commitments – Group as lessor
The Group does not have any commitments from lease agreements acting as lessor.
Finance lease commitments
Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows:
US$000
Less than one year
Between one and five years
More than five years
Total minimum lease payments
Less: amounts representing finance charges
Present value of minimum lease payments
US$000
Less than one year
Between one and five years
More than five years
Total minimum lease payments
Less: amounts representing finance charges
Present value of minimum lease payments
Other
US$000
Capital commitments on purchase of property, plant and equipment
As at 31.12.10
Minimum
payments
5,389
20,142
8,245
33,776
(9,618)
Present
value of
payments
(note 30)
2,832
13,162
8,164
24,158
–
24,158
24,158
As at 31.12.09
Minimum
payments
1,264
9,023
8,188
Present
value of
payments
(note 30)
1,264
6,049
2,906
18,475
(8,256)
10,219
–
10,219
10,219
As at
31.12.10
As at
31.12.09
70,618
41,404
Legal
In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any,
arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of
the Group.
Tax and other regulatory compliance
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 enterprises in Ukraine.
Ferrexpo plc
Annual Report and Accounts 2010
107
Note 38: Financial instruments
The accounting classification of each category of financial instruments, and their carrying amounts, are set out below:
As at 31.12.10
US$000
Financial assets
Cash and cash equivalents
Available-for-sale investments
Trade and other receivables
Other financial assets
Total financial assets
Financial liabilities
Trade and other payables
Accrued liabilities and deferred income
Interest bearing loans and borrowings
Other financial liabilities
Total financial liabilities
US$000
Financial assets
Cash and cash equivalents
Available-for-sale investments
Trade and other receivables
Other financial assets
Total financial assets
Financial liabilities
Trade and other payables
Accrued liabilities and deferred income
Interest bearing loans and borrowings
Other financial liabilities
Total financial liabilities
Available- At fair value
Financial
liabilities
through measured at
amortised
profit or
cost
loss
Total at
31.12.10
Notes
Loans and
receivables
for-sale
financial
assets
28
21
25
31
34
30
319,470
–
111,890
1,164
432,524
–
3,356
–
–
3,356
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
319,470
3,356
111,890
1,164
435,880
88,089
23,393
423,853
–
88,089
23,393
423,853
–
535,335
535,335
As at 31.12.09
Available-
for-sale
financial
assets
At fair value
Financial
liabilities
through measured at
amortised
profit or
cost
loss
Notes
Loans and
receivables
28
21
25
31
34
30
11,991
38,117
3,719
53,827
–
3,543
–
–
3,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total at
31.12.09
11,991
3,543
38,117
3,719
57,370
–
–
–
–
–
24,656
12,146
269,646
3,161
24,656
12,146
269,646
3,161
309,609
309,609
Financial risk management
Overview
The Group has exposure to the following risks from its use of financial instruments:
>
>
>
credit risk
liquidity risk
market risk – including currency and commodity 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.
108
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 38: Financial instruments continued
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 and the CFO.
The Group operates a centralised financial risk management structure under the management of the Executive Committee, accountable to
the Board. The Executive Committee delegates certain responsibilities to the 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 controls the management
of treasury risks within each of the business units in accordance with a Board approved Treasury Policy.
Financial instrument risk exposure and management
Natural hedges that can be identified and their 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 under the approved Treasury Policy –
and are designed to have the 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 other hedging instruments, in this or
prior periods.
Credit risk
Trade and other receivables
The Group through its trading operations enters into binding contracts which contain 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 reducing risks within acceptable parameters.
In order to react to the significant weakness in iron ore demand during the financial year 2009, certain sales arrangements with customers
have been changed from long-term to spot.
Trade finance is used to balance risk and payment. 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 as, or better than, those which other organisations with similar credit worthiness
would achieve, and compared with other 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 crystallises when a party to an agreement defaults. Where letters of credit are used to minimise this risk, 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. During the year the Group reduced its exposure to Ukraine trade receivables risk by increasing the level of production exported.
Group treasury monitors the concentration of all outstanding risks associated with any entity or country, and reports to the Group CFO on a
timely basis.
Investment securities
The Group limits its cash 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 by S&P or Moody’s at a level to long-term A (S&P) or short-term
A2 (S&P) or better.
Ferrexpo plc
Annual Report and Accounts 2010
109
Note 38: Financial instruments continued
Recognising that the principal activities of the Group are predominantly in Ukraine, special consideration is given to investments with Ukrainian
counterparties. Exceptions may be made under the following conditions:
>
>
the counterparty is resident in Ukraine; and
the counterparty is included in the Top 15 financial institutions in Ukraine based on the Group’s assessment of the creditworthiness of the
financial institution.
Cash and deposits are held with the Group’s transactional bank in Ukraine, which is a related party financial institution. This bank is registered
with the National Bank of Ukraine for receiving and disbursing payments under Group intercompany loans, and is an approved Ukrainian
counterparty. The Group is therefore exposed to Ukraine country risk.
Guarantees
The Group’s policy is to provide financial guarantees only to wholly-owned subsidiaries. At 31 December 2010 Ferrexpo AG and Ferrexpo
Finance plc were jointly and severally liable under a US$350 million loan agreement having an outstanding balance of US$350,000 thousand
(31 December 2009: US$207,723 thousand).
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 cash equivalents
Trade and other receivables
Other financial assets
Total maximum exposure to credit risk
As at
31.12.10
319,470
111,890
1,164
As at
31.12.09
11,991
38,117
3,719
432,524
53,827
The total receivables balance relating to the Group’s top three customers was US$73,749 thousand (2009: US$24,999 thousand) making up
65.9% of the total amounts receivable (2009: 68.5%).
Impairment profile
The Group’s exposure to credit risk relating to trade and other receivables is disclosed in note 25.
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 is to ensure, as
far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without
incurring unacceptable losses or risking damage to the Group’s reputation by holding surplus cash or undrawn credit facilities.
The Group prepares detailed rolling cash flow 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.
110
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 38: Financial instruments continued
The following are the contractual maturities of financial liabilities by interest type:
US$000
Interest bearing
Syndicated loans – secured
Other banks – secured
Obligation under finance lease
Interest accrued
Future interest payable
Non interest bearing
Trade and other payables
Accrued liabilities and deferred income
Other financial liabilities
Total financial liabilities
US$000
Interest bearing
Syndicated loans – secured
Other banks – secured
Obligation under finance lease
Interest accrued
Future interest payable
Non interest bearing
Trade and other payables
Accrued liabilities and deferred income
Other financial liabilities
Total financial liabilities
As at 31.12.10
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
Total
–
19,313
2,832
418
29,812
88,089
23,393
–
142,288
10,750
2,999
–
24,305
199,651
27,275
18,327
–
13,703
341,939
57,338
24,158
418
67,820
–
–
–
–
–
–
88,089
23,393
–
163,857
180,342
258,956
603,155
As at 31.12.09
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
Total
207,727
31,170
1,264
730
9,923
24,656
12,146
3,161
–
6,044
1,419
–
3,827
–
5,500
15,792
–
2,674
207,727
42,714
18,475
730
16,424
–
–
–
–
–
–
24,656
12,146
3,161
290,777
11,290
23,966
326,033
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 the Group. Operating currencies for the Group are primarily the Ukrainian hryvnia, 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 local Ukrainian production
mainly in hryvnia. During the year the value of the hryvnia moved from being pegged to a managed float.
Further devaluation of the Ukrainian hryvnia will reduce the operating costs of the production unit in US dollars terms and the value of hryvnia
payables recorded in the statement of financial position at the year end in US dollars. As the majority of sales and receivables are
denominated in US dollars, a devaluation in the local currency will result in operating exchange gains recorded in the income statement.
With a devaluation of the local currency, US dollar denominated loans held by the Ukrainian subsidiary will result in non-operating exchange
losses to the extent these are not matched by US dollar denominated assets. Fixed assets are similarly held in local currency amounts and a
devaluation in the currency will result in reduced net asset vales which are recorded in reserves.
The National Bank of Ukraine (NBU) manages and determines the official exchange rates. An inter-bank market for exchange of currencies
exists in Ukraine and is monitored by the NBU. The Group, through its financial institutions, exchanges currencies at bank offered
market rates.
Ferrexpo plc
Annual Report and Accounts 2010
111
Note 38: Financial instruments continued
Trade receivables are predominately in US dollars and are not hedged. Trade payables denominated in a US dollars are also not hedged on
the market, but are matched against US dollar currency receipts.This includes the interest expense which is principally payable in US dollars.
Trade receivables and trade payables in other currencies are not hedged as a forward market for the currency is generally not available.
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.
The Group’s exposure to foreign currency risk was as follows based on notional amounts:
US$000
Financial assets
Financial liabilities
Syndicated bank loans – secured
Other banks – secured
Obligation under finance lease
Interest accrued
Total borrowings
Trade and other payables
Accrued liabilities and deferred income
Other financial liabilities
Total financial liabilities
Net financial assets/(liabilities)
US$000
Financial assets
Financial liabilities
Other banks – secured
Obligation under finance lease
Interest accrued
Total borrowings
Trade and other payables
Other financial liabilities
Total financial liabilities
As at 31.12.10
Ukraine
hryvnia
US
dollar
Euro
Swiss
franc
Other
currencies
Total
–
111,589
38,315
375
357
150,636
–
–
–
–
–
–
–
–
–
–
–
(16,735)
(24,088)
(75)
(40,898)
(6,910)
–
–
(47,808)
–
–
–
–
–
(501)
–
–
(501)
63,781
37,814
As at 31.12.09
–
–
–
–
–
(242)
–
–
(242)
133
–
–
–
–
–
–
(16,735)
(24,088)
(75)
(40,898)
(67)
(81)
(68)
(7,720)
(81)
(68)
(216)
(48,767)
141
101,869
Ukraine
hryvnia
249
US
dollar
816
(26,840)
(18,475)
(188)
(45,503)
(2,246)
(17)
–
–
–
–
–
–
–
Euro
2
(124)
–
(5)
(129)
(811)
(5)
Swiss
franc
76
Other
currencies
Total
44
1,187
–
–
–
–
–
–
–
–
(763)
(419)
(139)
(106)
(26,964)
(18,475)
(193)
(45,632)
(3,959)
(547)
(47,766)
(945)
(1,182)
(245)
(50,138)
Net financial assets/(liabilities)
249
(46,950)
(943)
(1,106)
(201)
(48,951)
Interest rate risk
The Group predominantly borrows funds that are at floating interest rates and is exposed to interest rate movements. 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.
112
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 38: Financial instruments continued
Profile
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:
US$000
Financial assets
Cash and cash equivalents
Available-for-sale investments
Trade receivables
Other financial assets
Total financial assets
Weighted av. interest rate (%)
Financial liabilities
Trade and other payables
Accrued liabilities and deferred income
Interest bearing loans and borrowings
Other financial liabilities
Total financial liabilities
Weighted av. interest rate (%)
US$000
Financial assets
Cash and cash equivalents
Available-for-sale investments
Trade receivables
Other financial assets
Total financial assets
Weighted av. interest rate (%)
Financial liabilities
Trade and other payables
Accrued liabilities and deferred income
Interest bearing loans and borrowings
Other financial liabilities
Total financial liabilities
Weighted av. interest rate (%)
As at 31.12.10
Floating
interest
Other
Fixed non-interest
bearing
interest
Total
161,912
–
–
–
156,507
–
–
1,000
1,051
3,356
111,890
164
319,470
3,356
111,890
1,164
161,912
157,507
116,461
435,880
0.1%
1.7%
–
–
403,832
–
–
–
19,603
–
88,089
23,393
418
–
88,089
23,393
423,853
-
403,832
19,603
111,900
535,335
5.7%
–
As at 31.12.09
Floating
interest
Fixed
interest
Other
non-interest
bearing
10,227
–
–
2,550
1,465
–
–
–
299
3,543
38,117
1,169
Total
11,991
3,543
38,117
3,719
12,777
1,465
43,128
57,370
7.7%
251,036
–
18,610
–
24,656
12,146
–
3,161
24,656
12,146
269,646
3,161
251,036
18,610
39,963
309,609
4.1%
–
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$1,000 thousand of the floating rate loan to associate which matures between two to five
years as at 31 December 2010 (2009: US$2,000 thousand).
Ferrexpo plc
Annual Report and Accounts 2010
113
Note 38: Financial instruments continued
Commodity risk
The Group is exposed to longer-term movements in the price of iron ore, but does not have a commodity risk exposure to its financial assets
and liabilities once the sale has been made. 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 tradable
exchange in the product to ascertain its market value.
Sensitivity analysis
A 20% strengthening of the US dollar against the following currencies at 31 December would have increased/(decreased) income statement
and equity by the amounts shown below. This assumes that all other variables, in particular interest rates, remain constant.
US$000
UAH
EUR
CHF
Total
Year ended
31.12.10
Income
statement/
Equity
Year ended
31.12.09
Income
statement/
Equity
12,756
(7,563)
(27)
(9,440)
189
221
5,166
(9,030)
A 20% 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 or loss, and the Group does not hold
any derivatives (eg 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 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.
US$000
Net finance charge
Year ended
31.12.10
Year ended
31.12.09
(2,885)
(2,080)
A decrease in 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 are the carrying amounts and fair values of the Group’s financial instruments that are carried in the consolidated statement of
financial position:
US$000
Financial assets
Available-for-sale financial assets
Cash and cash equivalents
Total financial assets
Financial liabilities
Interest bearing loans and borrowings
Total financial liabilities
Carrying amount
|
Fair value
As at
31.12.10
As at
31.12.09
As at
31.12.10
As at
31.12.09
3,356
319,470
3,543
11,991
3,356
319,470
3,543
11,991
322,826
15,534
322,826
15,534
423,853
269,646
423,853
276,419
423,853
269,646
423,853
276,419
114
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 38: Financial instruments continued
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.
Fair value measurements recognised in the statement of financial position
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into
Levels 1 to 3 based on the degree to which the fair value is observable.
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
US$000
Financial assets
Available-for-sale financial assets
Total available-for-sale financial assets
US$000
Financial assets
Available-for-sale financial assets
Total available-for-sale financial assets
There were no transfers between Level 1 and 2 in the period.
Reconciliation of Level 3 fair value measurements of financial assets
US$000
Opening balance
Total gains or losses:
– in profit or loss
– in other comprehensive income
Purchases
Issues
Settlements
Transfer out of level 3
Closing balance
As at 31.12.10
Level 1
Level 2
Level 3
Total
3,356
3,356
–
–
–
–
3,356
3,356
As at 31.12.09
Level 1
Level 2
Level 3
Total
1,449
1,449
–
–
2,104
2,104
3,553
3,553
As at
31.12.2010
Available-
for-sale
financial
assets
Unquoted
equities
As at
31.12.2009
Available-
for-sale
financial
assets
Unquoted
equities
2,104
4,000
(1,896)
(2,104)
– –
– –
– –
– –
– –
–
2,104
Ferrexpo plc
Annual Report and Accounts 2010
115
Note 38: Financial instruments continued
Capital management
The Board’s policy is to maintain a strong capital base. 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 non-controlling interests, and the level of
dividends to Ordinary Shareholders. Please refer to the Statement of Changes in Equity for details of the capital position of the Group.
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. Access to securing borrowings in the context of the events affecting the global financial
credit markets during the year has affected the elasticity at which the Board can maintain this balance. The Board continues to support
maintaining a sound capital base balanced against these market constraints.
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.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements other than a bank covenant
requirement to maintain consolidated equity in respect of the Ferrexpo AG group of US$300,000 thousand including non-controlling interests.
Compliance is ensured by balancing dividend payments against the earnings of the Ferrexpo AG group.
For more information about the Group’s interest bearing loans and borrowings, see note 30.
Note 39: Share-based payments
Listing bonus share award
Share awards were granted in 2007 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 values 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 2010 is US$55 thousand (2009: US$427 thousand), all of which
arose from equity-settled share-based payment transactions.
Beginning of the year
Awards granted during the year
Vested during the year
Forfeited during the year
Outstanding at 31 December
Year ended
31.12.10
WAFV ($)
Year ended
31.12.09
WAFV ($)
Year ended
31.12.10
No. (’000)
Year ended
31.12.09
No. (’000)
3.63
–
3.63
–
–
3.63
–
3.63
3.63
3.63
91
–
(91)
–
–
442
–
(349)
(2)
91
Long-term incentive plan (LTIP)
The following share awards were granted under the LTIP and the Interim LTIP in the previous financial years. The LTIP runs for three years
whereas the period for the Interim LTIP is two years.
No. (’000)
Year ended 31.12.10
Year ended 31.12.09
Year ended 31.12.08
2010 LTIP
2009 LTIP
2008 LTIP
Interim LTIP
Total
330
–
–
–
320
–
–
–
695
–
–
415
330
320
1,110
The LTIP and Interim LTIP are subject to a performance condition based on the Total Shareholder Return (‘TSR’) compared to a comparator
group, measured over the vesting period, as described in the Director’s Remuneration Report.
116
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 39: Share-based payments continued
The following expenses have been recognised in 2010 and 2009 in respect of the LTIP and the Interim LTIP:
US$000
Year ended 31.12.10
Year ended 31.12.09
2010 LTIP
2009 LTIP
2008 LTIP
Interim LTIP
Total
178
–
188
80
557
1,836
–
1,480
923
3,396
The awards of the Interim LTIP were forfeited in 2009 as they did not satisfy the market related performance conditions as of 31 December 2009.
The fair value of these awards was assessed at their grant date using a simulation or ‘Monte Carlo’ model consistent with the mathematics
underlying the standard Black-Scholes options pricing model, extended to allow for the performance conditions. Each simulation of the model
projects the Company’s and comparator’s share prices (with reinvested dividends) over the vesting period, allowing for the volatilities and
correlations between the shares as estimated from historical data. From this projection the proportion of awards vesting, and the value to
employees, is calculated. 100,000 simulations were run to calculate the fair values. The fair value is set as the average value over all the
simulations.
LTIP
Beginning of the year
Awards granted during the year
Forfeited during the year
Lapsed during the year
Vested during the year
Outstanding at 31 December
Interim LTIP
Beginning of the year
Awards granted during the year
Forfeited during the year
Vested during the year
Outstanding at 31 December
Note 40: Operating profit by function
US$000
Revenue
Cost of sales
Gross profit
Selling and distribution expenses
General and administrative expenses
Other income
Other expenses
Operating foreign exchange gain
Operating profit
Share of profit of associates
Year ended
31.12.10
WAFV ($)
Year ended
31.12.09
WAFV ($)
Year ended
31.12.10
No. (’000)
Year ended
31.12.09
No. (’000)
4.11
3.28
3.47
–
–
3.92
–
–
–
–
–
5.52
1.94
5.52
5.52
–
4.11
5.22
–
5.22
–
–
810
330
(235)
–
–
905
–
–
–
–
–
695
320
(180)
(25)
–
810
–
415
–
–
415
Before
adjusting
items
Notes
Adjusted
items
Year ended
31.12.10
Before
adjusting
items
Adjusted
items
Year ended
31.12.09
6 1,294,900
(481,857)
7
813,043
(212,006)
(49,175)
4,515
(5,938)
(1,078)
8
9
10
11
12
– 1,294,900
(481,857)
–
648,667
(341,067)
–
813,043
307,600
–
–
–
(11,291)
–
(212,006)
(49,175)
4,515
(17,229)
(1,078)
(162,266)
(43,161)
4,102
(3,418)
2,534
549,361
(11,291) 538,070
105,391
14
4,155
–
4,155
1,304
–
–
–
–
–
–
(2,468)
–
–
–
648,667
(341,067)
307,600
(162,266)
(43,161)
4,102
(5,886)
2,534
102,923
1,304
Total profit from operations and associates
553,516
(11,291) 542,225
106,695
(2,468) 104,227
Ferrexpo plc
Annual Report and Accounts 2010
117
Note 40: Operating profit by function continued
Summary of adjusted items:
US$000
Operating adjusting items
Under recovery of VAT receivable
Write-offs and impairment losses
Gain on bargain purchase
Initial public offering costs
(Losses)/gains on disposal of property, plant and equipment
Total operating adjusting items
Notes
Year ended
31.12.10
Year ended
31.12.09
27
13
15
39
(10,936)
(1,618)
2,623
(55)
(1,305)
–
(2,757)
503
(427)
213
(11,291)
(2,468)
Note 41: Business combination
Subsidiaries acquired
On 31 December 2010, the Group acquired Helogistics Holding GmbH and its subsidiaries (‘Helogistics’) in order to develop the Group’s
distribution and logistics capabilities. The acquisition agreements were signed on 14 December 2010 and the completion of the acquisition
was subject to the approval from the Austrian merger control authorities which was obtained on 10 January 2011. The Group however
obtained effective control on the 14 December 2010 and Helogistics has been consolidated as at the 31 December 2010 as no material
transactions or events occurred between 14 December 2010 and 31 December 2010 that would have a material impact on the amounts
recognised in the income statement in that period.
The controlled entities acquired as part of this business combination are identified below:
Subsidiaries
Helogistics Holding GmbH (Group)
EDDSG GmbH
DDSG Tankschiffahrt GmbH
Helogistics Transport GmbH
Mahart Duna Cargo Kft.
Pancar Kft.
Country of
incorporation
Austria
Austria
Austria
Austria
Hungary
Hungary
Principal activity
Holding company
Logistic company
Logistic company
Logistic company
Logistic company
Logistic company
Proportion
of shares
acquired in %
100.0
100.0
100.0
100.0
100.0
100.0
Consideration transferred
No consideration has been transferred in cash for this acquisition to previous shareholders of the Helogistics. Transaction costs of US$1,624
thousand have been incurred and expensed by the Group. These costs are included in general and administrative expenses.
In relation with the acquisition of Helogistics Holding GmbH, the Group acquired bank debts amounting to US$95,472 thousand for a
consideration transferred in cash to the lending banks of US$37,768 thousand. The amount was held in an escrow account at 31 December
2010 as the financial closing of the transaction was on 19 January 2011. The debts acquired have been fair valued for the purpose of the
acquisition accounting.
There is no contingent consideration to be paid by the Group to the previous shareholders of Helogistics.
118
Ferrexpo plc
Annual Report and Accounts 2010
Notes to the Consolidated Financial Information continued
Note 41: Business combination continued
Assets acquired and liabilities assumed at the date of acquisition
The provisional fair value of the identifiable assets and liabilities assumed of Helogistics as at the date of acquisition were:
US$000
Non-current assets
Property, plant and equipment
Financial assets
Intangible assets
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Prepayments and other current assets
Available-for-sale financial assets
Cash and cash equivalents
Assets classified as held for sale
Total assets acquired
Non-current liabilities
Defined benefit pension liability
Deferred tax liabilities
Current liabilities
Interest bearing loans and borrowings
Trade and other payables
Income taxes payable
Accrued liabilities and deferred income
Total liabilities assumed
Fair value of identifiable net assets acquired
Helogistics
Holding
GmbH
65,348
4
1,637
5,258
2,252
3,096
4,179
7
582
3,149
85,512
(819)
(1,875)
(38,726)
(14,596)
(81)
(15,911)
(72,008)
13,504
The fair value of intangible assets consists of licenses amounting to US$397 thousand and capitalised software of US$2,140 thousand. The
license were capitalised as acquired intangible assets in the course of the accounting for the business combination. The Group acquired trade
and other receivables amounting to US$3,096 thousand. This amount is net of an allowance for doubtful receivables of US$564 thousand.
The outstanding balances with the five largest customers representing 65.3% of the total balance as of 31 December 2010 were fully paid in
March 2011.
The initial accounting for the acquisition of Helogistics has been provisionally determined at the end of the reporting period. At the date of
finalisation of these financial statements, the fair values of the vessels acquired and the certain liabilities assumed had not been finalised and
they have therefore been provisionally determined based on the directors’ best estimate of the likely values. The actual fair values may also
impact the recognised fair values of the other assets acquired as part of the business combination.
Non-controlling interests from business combination
The Group acquired 100% of Helogistics Holding GmbH which wholly owned its subsidiaries listed above. The business combination did not
result in the recognition of any non-controlling interests to be measured at fair value.
Bargain purchase arising on acquisition
The acquisition of Helogistics resulted in a bargain purchase of US$2,623 thousand recognised in profit or loss as of 31 December 2010.
US$000
Consideration paid in cash
Value of pre-existing loan balances
Less: fair value of identifiable net assets acquired
Bargain purchase on acquisition
Helogistics
Holding
GmbH
–
10,881
(13,504)
2,623
Ferrexpo plc
Annual Report and Accounts 2010
119
Note 41: Business combination continued
Loans amounting to US$10,881 thousand were provided by the Group to Helogistics prior to the acquisition. These loan balances were
considered to be settled for the purpose of the business combination. The amount of US$10,881 thousand reflects the fair value of the loans
granted. As a result of overcapacity in its market, Helogistics sustained continual losses allowing Ferrexpo to acquire Helogistics at a
consideration below the estimated fair value of the assets acquired and liabilities assumed, resulting in the recognition of a gain on bargain
purchase amounting to US$2,623 thousand. Further information is provided on page 23 in the Operational Review of the Annual Report.
No tax impact is expected on the gain on bargain purchase arising on this transaction.
Net cash outflow on acquisition
US$000
Consideration paid in cash
Cash and cash equivalent balances acquired1
Transaction costs of the acquisition2
Net cash outflow on acquisition (net of cash acquired)
1
2
Included in cash flow from investing activities.
Included in cash flow from operating activities.
Helogistics
Holding
GmbH
–
582
(1,624)
(1,042)
Impact of acquisition on the result of the Group
Had this business combination been affected at 1 January 2010, the revenue of the Group would have been US$52,200 thousand higher, and
the profit for the year would have been US$13,300 thousand lower. The Directors of the Group consider these ‘pro-forma’ numbers to
represent an approximate measure of the performance of the combined group on an annualised basis and to provide a reference point for
comparison in future periods.
Note 42: Events after the reporting period
No material adjusting or non-adjusting events have occurred subsequent to the year end other than the proposed dividend disclosed in note
18 and the completion of the acquisition of Helogistics Holding GmbH and its subsidiaries described in note 41.
120
Ferrexpo plc
Annual Report and Accounts 2010
Parent Company Balance Sheet
US$000
Fixed assets
Non-current investments
Subsidiary undertakings
Total fixed assets
Current assets
Debtors – amounts falling due:
Amounts due from subsidiaries
Deferred tax assets
Prepayments and other current assets
Other taxes recoverable and prepaid
Cash at bank and in hand
Total current assets
Creditors – amounts falling due within one year
Trade and other creditors
Accruals and deferred income
Income taxes payable
Other taxes payable
Total creditors
Net assets
Represented by
Capital and reserves
Share capital
Share premium
Treasury share reserve
Employee benefit trust reserve
Retained earnings
Total capital and reserves
All liabilities held by the Company are current in nature.
The financial statements were approved by the Board of Directors on 22 March 2011.
Kostyantin Zhevago
Chief Executive Officer
Christopher Mawe
Chief Financial Officer
Notes
As at
31.12.10
As at
31.12.09
2
147,496
134,732
147,496
134,732
134,441
1,156
1,165
3
20
181,026
1,596
1,121
10
25
136,785
183,778
512
900
16 –
–
357
450
3,233
1,428
4,040
282,853
314,470
121,628
185,112
(77,260)
(10,172)
63,545
121,628
185,112
(77,260)
(11,593)
96,583
282,853
314,470
3
5
6
7
4
4
4
4
4
4
Ferrexpo plc
Annual Report and Accounts 2010
121
Parent Company Notes to the Financial Statements
Note 1: Parent company accounting policies
Basis of preparation
The parent company financial statements of Ferrexpo plc are presented as required by the Companies Act 2006 and were approved for issue
on 22 March 2011. The financial statements are prepared under the historical cost convention and are prepared in accordance with applicable
UK accounting standards. No profit and loss account is presented by the Company as permitted by Section 408 of the Companies Act 2006.
The Company is exempt from the disclosure requirements of FRS 29 Financial Instruments, under its section 2D (a) as the entity is included in
publicly available consolidated financial statements, which include disclosures that comply with FRS 29/IFRS 7.
Disclosures and narratives have not included 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.
Investments
Equity investments in subsidiaries are carried at cost less any provision for impairments.
Deferred income tax
Deferred income tax is recognised in respect of all timing differences that have originated but not reversed at the reporting 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 following exceptions:
>
provision is made for deferred tax that would arise on remittance of the retained earnings of overseas subsidiaries, associates and joint
ventures only to the extent that, at the reporting date, dividends have been accrued as receivable; and
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 reporting 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 reporting 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 instruments
Derivative financial instruments
The Company 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.
All regular way purchases and sales of financial assets are recognised on the trade date ie 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 Company has not designated any financial asset as financial assets at fair value through profit or loss.
Other
Other non-derivative financial instruments are measured at amortised cost using the effective interest method less any impairment losses.
122
Ferrexpo plc
Annual Report and Accounts 2010
Parent Company Notes to the Financial Statements
continued
Note 1: Parent company accounting policies continued
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 or 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 reporting date whether a financial asset or a group of financial assets is impaired. Investments in subsidiaries
undertakings are held at cost. The Company assesses investments for impairment whenever events or changes in circumstances indicate
that the carrying amount of an investment may not be recoverable. If any such indication of impairment exists, the Company makes an
estimate of its recoverable amount (valuation). Where the carrying amount of an investment exceeds its recoverable amount, the investment is
considered impaired and is written down to its recoverable amount.
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 (ie 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 grant date and is 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, except for market conditions. No expense is recognised
for awards that do not ultimately vest.
At each reporting 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 reporting date is recognised in the income statement, with a
corresponding entry in equity.
All costs related to the share-based payments of the Group are recorded in Ferrexpo plc. Note 42 provides further information on the valuation
related to the share-based payments and the costs recorded.
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.
Ferrexpo plc
Annual Report and Accounts 2010
123
Note 2: Investments
US$000
Non-current investments
As at
31.12.10
As at
31.12.09
147,496
134,732
The balance above relates to the Company’s investment in Ferrexpo AG which is a 100% owned subsidiary based on Switzerland. During the
financial year 2010, the Company purchased 3,178,877 shares of Ferrexpo AG which have been previously held in treasury by the subsidiary.
Note 3: Deferred tax assets
Deferred tax assets at 31 December 2010 relate to the following:
US$000
Deferred tax assets:
Tax loss recognised
Timing difference on IPO costs
Total deferred tax assets
Note 4: Capital and reserves
US$000
At 1 January 2009
Profit for the period
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
As at
31.12.10
As at
31.12.09
430
726
1,156
370
1,226
1,596
Issued capital
121,628
–
–
–
–
Share
premium
185,112
–
–
–
–
Treasury
share
reserve
(77,260)
–
–
–
–
Employee
benefit
trust
reserve
Retained
earnings
(15,443) 134,508
1,625
1,625
(39,550)
–
–
–
–
3,850
Total equity
348,545
1,625
1,625
(39,550)
3,850
At 31 December 2009
121,628
185,112
(77,260)
(11,593)
96,583
314,470
Profit for the period
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,421
5,544
5,544
(38,582)
–
5,544
5,544
(38,582)
1,421
At 31 December 2010
121,628
185,112
(77,260)
(10,172)
63,545
282,873
Note 5: Trade and other creditors
Trade and other creditors at 31 December 2010 relate to the following:
US$000
Trade and other creditors:
Falling due within one year
Total trade and other creditors
Note 6: Accrued liabilities and deferred income
Accrued liabilities and deferred income at 31 December 2010 relate to the following:
US$000
Accrued liabilities and deferred income:
Falling due within one year
Total accrued liabilities and deferred income
As at
31.12.10
As at
31.12.09
512
512
357
357
As at
31.12.10
As at
31.12.09
900
900
450
450
124
Ferrexpo plc
Annual Report and Accounts 2010
Parent Company Notes to the Financial Statements
continued
Note 7: Other taxes payable
Other taxes payable at 31 December 2010 comprises the following taxes:
US$000
Other taxes payable:
Withholding tax on dividend
Other taxes
Total other taxes payable
As at
31.12.10
As at
31.12.09
–
–
–
3,225
8
3,233
Note 8: Related party disclosures
There are no related party transactions and balances to be disclosed. All transactions and balances are with subsidiaries, which are
wholly owned.
Note 9: Auditor remuneration
The audit fee in respect of the parent company was US$16 thousand (2009: US$16 thousand).
Note 10: Events after the reporting period
No material adjusting or non-adjusting events have occurred subsequent to the year end other than the proposed dividend disclosed in note
18 to the consolidated financial statements and the refinancing of the Group described below.
Ferrexpo plc
Annual Report and Accounts 2010
125
Glossary
Act
AGM
The Companies Act 2006
The Annual General Meeting of the Company to be held on Thursday 26 May 2011
Articles
Articles of Association of the Company
Audit Committee
The Audit Committee of the Company’s Board
Belanovo or Belanovskoye An iron ore deposit situated immediately to the north of Yeristovo
Benchmark Price
International seaborne traded iron ore benchmark price agreed between the major iron ore producers and
specific West European or British steel producers for a given year
BIP
Board
bt
Cape size
Business Improvement Programme, a programme of projects to increase production output and efficiency at
FPM
The Board of Directors of the Company
Billion tonnes
Cape size vessels are typically above 150,000 tonnes deadweight. Ships in this class include oil tankers,
supertankers and bulk carriers transporting coal, ore, and other commodity raw materials
Capital Employed
The aggregate of equity attributable to shareholders, non-controlling interests and borrowings
CFR
C1 Costs
CIF
CIS
Delivery including cost and freight
Cash costs per tonne of pellets, ex-works, excluding administrative and distribution costs
Delivery including cost, insurance and freight
The Commonwealth of Independent States
Combined Code
The Combined Code on Corporate Governance published by the Financial Reporting Council in June 2008
Company
Ferrexpo plc, a public company incorporated in England and Wales with limited liability
CPI
CSR
Consumer Price Index
Corporate Safety and Social Responsibility
CSR Committee
The Corporate Safety and Social Responsibility Committee of the Board of the Company
DAF
DFS
Delivery at frontier
Detailed Feasibility Study
Directors
The Directors of the Company
Dragline excavators
Heavy excavators used to excavate material. A dragline consists of a large bucket which is suspended from
a boom
EBITDA
EBT
EPS
The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation
and amortisation (included in cost of sales, administrative expenses and selling and distribution costs) and
non-recurring cash items included in other income and other expenses plus the net of gains and losses from
disposal of investments and property, plant and equipment
Employee Benefit Trust
Earnings per share
Executive Committee
The Executive Committee of management appointed by the Company’s Board
126
Ferrexpo plc
Annual Report and Accounts 2010
Glossary continued
Executive Directors
The Executive Directors of the Company
Fe
Iron
Ferrexpo
Ferrexpo plc
Ferrexpo AG Group
Ferrexpo AG and its subsidiaries including FPM
Fevamotinico S.a.r.l.
A company incorporated with limited liability in Luxembourg
FOB
FPM
FRMC
FTSE 250
FYM
GPL
Group
Delivered free on board
Ferrexpo Poltava Mining, also known as Ferrexpo Poltava GOK Corporation or PGOK, a company
incorporated under the laws of Ukraine
Financial Risk Management Committee, a sub-committee of the Executive Committee
Financial Times Stock Exchange top 250 companies
Ferrexpo Yeristovskoye Mining, also known as YGOK, a company incorporated under the laws of Ukraine to
administer the three major growth projects
Gorishne, Plavninskoye and Lavrikovskoye Mine, the mine operated by FPM
The Company and its subsidiaries
Growth Markets
Those markets that offer to add new and significant tonnage expansion potential
Helogistics
Helogistics Holding GmbH and its subsidiaries, an inland waterway transport group operating on the Danube/
Rhine corridor
HSE
IAS
IASB
IFRS
IPO
Health, safety and environment
International Accounting Standards
International Accounting Standards Board
International Financial Reporting Standards, as adopted by the EU
Initial public offering
Iron ore concentrate
Product of the flotation process with enriched iron content
Iron ore sinter fines
Fine ground iron ore
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
JORC
K22
KPI
kt
LIBOR
LLC
LTIFR
Australasian Joint Ore Reserves Committee – the internationally accepted code for ore classification
GPL ore has been classified as either K22 or K23 quality, of which K22 ore is of higher quality (richer)
Key Performance Indicator
Thousand tonnes
The London Inter Bank Offered Rate
Limited Liability Company
Lost-Time Injury Frequency Rate
Ferrexpo plc
Annual Report and Accounts 2010
127
LTIP
m3
Long-Term Incentive Plan
Cubic metre
Majority Shareholder
Fevamotinico S.a.r.l., The Minco Trust and Kostyantin Zhevago (together)
mm
mt
mtpa
Millimetre
Million tonnes
Million tonnes per annum
Natural Markets
Relatively new markets in regions where the Group believes it has competitive advantage which is yet to
be exploited
Nominations Committee
The Nominations Committee of the Company’s Board
Non-executive Directors Non-executive directors of the Company
NOPAT
Net operating profit after tax
OHSAS 18001
International safety standard ‘Occupational Health & Safety Management System Specification’
Ordinary Shares
Ordinary Shares of 10 pence each in the Company
Ore
Panamax
A mineral or mineral aggregate containing precious or useful minerals in such quantities, grade and chemical
combination as to make extraction economic
Modern Panamax ships typically carry a weight of between 65,000 to 75,000 tonnes of iron ore and can
transit both Panama and Suez canals
PPI
Ukrainian 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
Rail car
Railway wagon used for the transport of iron ore concentrate or pellets
Relationship Agreement
The relationship agreement entered into among Fevamotinico S.a.r.l., Kostyantin Zhevago, The Minco Trust
and the Company
Remuneration Committee The Remuneration Committee of the Company’s Board
Reserves
$/t
Sinter
Spot price
Sterling/£
STIP
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
US dollars per tonne
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
The current price of a metal for immediate delivery
Pound sterling, the currency of the United Kingdom
Short-Term Incentive Plan
128
Ferrexpo plc
Annual Report and Accounts 2010
Glossary continued
Tailings
Tolling
Ton
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
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
A US short ton, equal to 0.9072 metric tonnes
tonne or t
Metric tonne
Treasury Shares
A company’s own issued shares that it has purchased but not cancelled
TSF
Tailings storage facility
Traditional Markets
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
TSR
Total shareholder return. The total return earned on a share over a period of time, measured as the dividend
per share plus capital gain, divided by initial share price
Ukraine
The Republic of the Ukraine
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 and
non-operating foreign exchange gains and losses
UAH
Ukr SEPRO
Ukrainian hryvnia, the currency of the Republic of the Ukraine
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
USS
VAT
Value-in-use
United States Steel Corporation
Value Added Tax
The implied value of a material to an end user to use one material relative to other options, eg 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
Yeristovo or Yeristovskoye The mine being developed by FYM
Ferrexpo plc
Annual Report and Accounts 2010
Ferrexpo plc
Annual Report and Accounts 2010
Shareholder Information
Ferrexpo plc is a Swiss-headquartered resources
company with assets in Ukraine and is principally
involved in the production of iron ore pellets which
are used in the manufacture of steel.
How have we performed this year?
> p.01 – Group highlights
Where are our operations?
> p.04 – Our resource base
What is our investment proposition?
> p.08 – Our strategy explained
How have we performed against our strategy?
> p.18 – Key Performance Indicators
How are we going to continue our growth?
> p.06 – Chairman and Chief Executive’s Statement
Registered Office
2–4 King Street
London
SW1Y 6QL
Web: www.ferrexpo.com
Advisors
Share Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
UK
Tel: 0871 384 2030
Overseas +44 121 415 7047
Web: www.equiniti.com
Financial
JPMorgan Cazenove Ltd
20 Moorgate
London EC2R 6DA
Corporate brokers
JP Morgan Cazenove Ltd
20 Moorgate
London EC2R 6DA
Deutsche Bank AG
1 Great Winchester Street
London EC2N 2DB
Legal
Allen & Overy LLP
One Bishops Square
London E1 6AD
Auditors
Ernst & Young LLP
1 More London Place
London SE1 2AF
Ferrexpo plc
Registered Office:
2-4 King Street,
London
SW1Y 6QL
Ferrexpo plc
Annual Report and Accounts
2010
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Producing
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for over 30 years
www.ferrexpo.com