Producing iron ore
pellets for 35 years
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Ferrexpo plc
Annual Report & Accounts 2012
Ferrexpo’s vision is to
be a sustainable iron
ore producer through
the commodity cycle.
This has resulted in a reputation
for reliable production while
maintaining prudent financial
management.
For up-to-date information
please visit www.ferrexpo.com
OvervieW
01 Highlights 2012
Ferrexpo at a Glance
– 02 Assets
– 04 Distribution and Markets
– 06 Investment
08 Business Model
10 Chairman’s and Chief Executive
Officer’s Statement
– 16 Strategic Priorities
– 20 Risks
BuSineSS revieW
24 Operational Review
34 Financial Review
GOvernance
38 Corporate Responsibility
48 Board of Directors and
Executive Committee
50 Corporate Governance Report
56 Remuneration Report
67 Directors’ Report
71 Statement of Directors’
Responsibilities
FinanciaL STaTemenTS
72 Independent Auditors’ Report
to the Members of Ferrexpo plc
73 Consolidated Income Statement
74 Consolidated Statement
of Comprehensive Income
75 Consolidated Statement
of Financial Position
76 Consolidated Statement
of Cash Flows
77 Consolidated Statement
of Changes in Equity
78 Notes to the Consolidated
Financial Statements
130 Parent Company Balance Sheet
131 Notes to the Parent Company
Financial Statements
135 Glossary
IBC Shareholder Information
Highlights
A Snapshot of 2012
6.6
US cents per share
special dividend as recognition of
the progress made since IPO and
in particular of the opening of the
Yeristovo mine
Ferrexpo increased production from own ore during
2012, and maintained a level of profitability which
reflected lower market prices and industry cost
inflation, and a continued competitive position on
the global cost curve for iron ore.
Sales and Marketing
– Average benchmark China CFR 62% Fe fines price 23% lower at
US$128 per tonne (2011: US$168 per tonne)
– Sales volumes 9.7 million tonnes of pellets (2011: 9.8 million tonnes
–
of pellets)
Lower prices partially mitigated through reduced freight rates to
seaborne market
Operations
9.3 million tonnes of pellet production from FPM (2011: 9.1 million tonnes)
–
–
First ore at FYM, 0.1 million tonnes of pellet production (2011: nil)
– C1 cash cost1 of US$59.6 per tonne (2011: US$50.7 per tonne)
– C1 cash cost reflected a stable exchange rate between Ukrainian Hryvnia
and US Dollar as well as higher energy prices and local inflation
Growth Projects
– Growth projects progressed as planned
–
First ore achieved at FYM in July 2012, commercial production expected
in 2013
– Significant capital investment of US$429 million (2011: US$380 million)
Performance
US$ millions unless otherwise stated
Pellets produced from own ore (thousand tonnes)
Total pellet production (thousand tonnes)
Sales volumes (thousand tonnes)
EBITDA2
Profit before tax
Year ended
31.12.12
Year ended
31.12.11
9,409
9,690
9,675
402
262
9,063
9,811
9,876
801
691
Diluted EPS (US cents per share)
36.57
96.97
Capital investment
Net debt
Cash and cash equivalents
429
423
597
380
80
890
%
4%
(1%)
(2%)
(50%)
(62%)
(62%)
13%
(33%)
1 The C1 cash cost of production per tonne is defined as the cash costs of production of iron pellets from own 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.
2 EBITDA – the Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and
amortisation and non-recurring exceptional items included in other income and other expenses, and the net of gains and losses
from disposal of investments, property, plant and equipment.
01
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Ferrexpo at a Glance
Scalable Assets
Long-life
Resource
Ferrexpo’s ore body is a single 50 kilometre-long strike
divided into 10 adjacent deposits. The southern five
mines have JORC classified of 6.8bt and the northern
five 13.2bt FSU Soviet Classified.
6.8bt JORC
Classified
13.2bt FSU
Soviet Classified
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Yeristovskoye
First ore at Yeristovo
reached in 2H 2012,
commercial production
expected in 2H 2013.
Once in full production,
mine to deliver 28mtpa
of ore.
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Production
Development
Licence Maintenance
Gdantsev Succession
■ quartzite, schist, fillite
■ schist units
Saksagan Succession
■■■■ BIF units
Basement
■ amphilobite
■ granite, migmatite
FYM pit as of May 2011
Poltava
The FPM open pit mine is over 350
metres deep and seven kilometres
long. In 2012 it mined 29,761 thousand
tonnes of ore.
FPM pit as of June 2011
02
Ferrexpo plcAnnual Report & Accounts 2012
High Quality
Processing
Ferrexpo produces two types of pellets,
62% Fe and 65% Fe.
Ore from mine
Primary crushing
Medium fine
crushing
Dry magnetic
separation
Rock
Ore
Open cut, hard rock iron
ore mining, using
truck and shovel.
Average Fe content
of 30%.
The ore is crushed and screened to allow it to be upgraded
through separation by two crushing plants. Input particle size:
0–1,200mm; output particle size: 0–20mm.
Dry magnetic separation
separates waste material
from the iron resulting
in output particles
of 0–20mm with a
Fe content of 40%.
The waste rock
is sold on for use
as thickeners
and gravel.
Grinding
Wet magnetic
separation
Flotation tanks
The ore is ground to produce fine particles of 0–0.44mm in size.
The fine ore particles are
collected to produce 63%
Fe concentrate, half of
which goes to the
pelletiser to produce 62%
Fe iron ore pellets.
Approximately 50% of the
concentrate is upgraded to
67% Fe content, used to
create 65% Fe iron ore
pellets, with unwanted
waste material removed to
the tailings storage area.
Pelletising
Transportation
Customers
Four kiln grate units
which heat and form
the materials into
pellets of around
16mm. Temperature
of pelletising kiln:
1,250ºC.
Ferrexpo transports its finished products by rail to border dispatch
points. From the border points, the means of transportation
include rail, barges and capesize vessels.
03
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Ferrexpo at a Glance
Distribution and Markets
Sophisticated
Logistics
Ferrexpo transports its finished products by rail to border
dispatch points, predominantly using its own rail cars.
From the border points, means of transportation include
barges and rail to customers in Eastern and Central
Europe and capesize vessels for seaborne cargo.
Mostiska
Lvov
Kiev
Uzhhorod
Chop
Bateevo
UKRAINE
Poltava
Ferrexpo
Zotlotnishino
Znamenka
Port Yuzhny
(for seaborne cargo)
Port Reni
Port Izmail
Port Constanta
Railway Station
Ports Barges
Ports Marine
Ferrexpo owns just
under 2,000 rail cars
which transports a high
proportion of its pellets to
border dispatch points.
In 2012, 17 capesize ships
were loaded, allowing the
Group to benefit from lower
freight rates as compared
to panamax vessels.
In 2012, Ferrexpo
shipped approximately
1.4mt of pellets to
customers in Europe via
its 143 strong bargefleet.
04
Ferrexpo plcAnnual Report & Accounts 2012 Close Proximity
to End Markets
Ferrexpo sells its product to the key steel producing
regions in the world.
35
sailing days
to China
End Markets
Traditional
Growth
Natural
Developing the Customer Base Since 2008
Market Breakdown
• Entered new markets in Japan and Germany
• Captured significant market share of pellet demand
from China’s leading steel mill
Reducing Freight Costs
• Panamaxes to Far East being phased out
• 17 capes loaded in 2012; more than 30 expected
to be loaded in 2013
• Iron Destiny transshipment vessel to reduce top-off
costs and reduce time taken to load
cape vessel (increasing port efficiency)
2008
2012
Traditional
Growth
Natural
Traditional Markets: These markets are located
within Central and Eastern Europe and include steel
plants that were designed to use our pellets.
Growth Markets: Ferrexpo has the potential to deliver new
and significant sales volumes to these markets in Asia.
Natural Markets: These markets include Turkey, the Middle
East and Western Europe and are located where we have
a competitive advantage over more distant producers.
05
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Ferrexpo at a Glance
A Sustainable Producer Through the Cycle
Significant Investment
Ferrexpo has reinvested its profits
to modernise and develop FPM’s
mine and production facilities and
to develop the FYM deposit as well
as its logistics capabilities. These
investments should yield operating
efficiencies and increased output
while greater logistics infrastructure
provide a more competitive level
of service to customers.
US$429M
capital investment in 2012
Capital investment US$
2012
2011
2010
167M
2009
86M
2008
276M
2007
104M
429M
380M
17capes loaded
in 2012
Ferrexpo transshipment vessel, Iron Destiny,
arrived in port in December 2012
06
Ferrexpo plcAnnual Report & Accounts 2012 Output and Grade to Steadily Increase
Production growth
2012
2013
2014
2015
2016
2017
s
t
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P
9.5mtpa
11.0mtpa
12.0mtpa
12.0mtpa
Capacity Upgrade
Quality Upgrade
65.0%
63.3%
63.5%
63.5%
E
F
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20mtpa
65-67%
12mtpa of 65%
pellets, 8-10mtpa
of 67% pellet
equivalent
1st
ore at Yeristovo
in 2012
A Caterpillar excavator
at work in the FYM pit
07
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Business Model
A sustainable high quality iron ore
producer through the cycle
Iron Ore Producer Value Chain
Development
g
Mark etin
Develo
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Adding value
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Processi n g
Ferrexpo Key Strengths
Large Brownfield Resource
Ferrexpo’s significant resource base is
situated along a single ore body, which allows
for efficient expansion through brownfield
developments. The FPM mine has consistent
geology and allows for a long-life production
profile. The development of the FYM mine fully
utilises known and existing technology and
infrastructure, as well as the Group’s skill base.
As of 1 January 2013, Ferrexpo had estimated
resources of approximately 6.8 billion tonnes
classified according to the JORC Code and
a further 13.2 billion tonnes of resources
estimated under the FSU Classification.
08
Ferrexpo plcAnnual Report & Accounts 2012
Mining
Processing
Logistics
Marketing
Low Cost Pellet Producer
High Quality Output
Integrated Logistics
Customer Relationships
On a cost of production basis,
Ferrexpo is a competitive cost
producer of iron ore concentrate
with relatively low pelletising costs
on global basis. The cornerstone
of the cost reduction strategy is
to maximise production outputs
and continually implement
efficiency enhancements
through the Business
Improvement Programme.
Ferrexpo produces iron ore
pellets, which are a premium
input used in the steel industry.
Ferrexpo’s product improves
blast furnace productivity in the
steel production process due to
its form, substance and low level
of impurities. Approximately half
of the Group’s products contain
65% iron content, which the
market considers to be premium
content, and thus commands a
premium to the benchmark price.
An integrated and well-invested
logistics system is an essential
and a key competitive advantage
for a bulk commodity producer.
Ferrexpo transports its finished
products by rail to border
dispatch points, predominantly
using its own rail cars. From
the border points, means of
transportation include barges
and rail to customers in Eastern
and Central Europe and capesize
vessels, through its 49% owned
port, for seaborne cargo.
Ferrexpo remains committed
to long-term framework
agreements with customers that
are focused on producing high
value added steel products. It
has supplied many of its existing
customers for a number of
decades. The Group is focused
on supplying a geographically
diversified customer base and
allocates a proportion of sales
to potential new customers
through trial spot cargoes.
09
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement
“In acknowledgement of the progress made since
the IPO, as well as the significant milestone of
reaching first ore at FYM, the Directors are pleased
to announce a special dividend of 6.6 US cents
per share. As in previous years, the Directors
are recommending an unchanged final ordinary
dividend of 3.3 US cents per share.”
10
Ferrexpo plcAnnual Report & Accounts 2012 Introduction
In the last five years, since its IPO,
Ferrexpo has made significant progress
in achieving its strategic objectives.
In the face of general cost inflation prevalent in
the mining industry, the Group has maintained
its position as a competitive cost producer
of pellets and in 2012 it lowered its seaborne
freight costs delivering more product via
capesize vessels both enhancing margins
and allowing Ferrexpo to provide a better
service to first class steel mills around the
world with its high quality iron ore product.
The Group has continued to develop its
asset base through the modernisation of
the existing mine and processing facilities
at Ferrexpo Poltava Mining (‘FPM’), and in
2012 by opening its second mine, Ferrexpo
Yeristovo Mining (‘FYM’), the first new iron
ore mine in the CIS for many years. Once
mining operations at FYM have ramped up,
Ferrexpo will have two mines in full operation
providing associated cost benefits through
higher output and remains on track to increase
production in 2013 and to reach its target of
12 million tonnes of pellet production in 2014.
As a result of the above factors, Ferrexpo
has reduced its operational and financial risk
and enhanced its reputation as a premium
supplier of pellets with excellent quality and
service. In the financial markets, Ferrexpo
is increasingly recognised for its sound
management and good governance.
Results
Group revenue declined by 20% to US$1.4
billion for the 12 months ended 31 December
2012 (2011: US$1.8 billion) due to lower
market prices for iron ore. In 2012, the average
benchmark price for 62% Fe iron ore fines
to China CFR fell by 24% to US$128 per
tonne compared to an average of US$168
per tonne in 2011. Group sales volumes
were in line with 2011 at 9.7 million tonnes.
The Group’s average C1 cash cost1 of
production increased by 18% to US$60 per
tonne, compared to the average C1 cash
cost in 2011 of US$51 per tonne. This was
due to increased electricity tariffs and gas
prices as well as local inflation while the
Ukrainian Hryvnia remained stable against
the US Dollar. Since October 2008 when
C1 costs reached US$51, overall cost
inflation has amounted to 4% per year.
1 The C1 cash cost of production per tonne is defined as the
cash costs of production of iron pellets from own ore to the
mine gate 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.
Ferrexpo maintained satisfactory levels of
profitability reflecting lower market prices
and industry cost inflation while retaining
its competitive position on the global
cost curve for iron ore. EBITDA for the
period was US$402 million (2011: US$801
million). Group profit after tax declined to
US$216 million (2011: US$575 million).
Net cash flows from operating activities were
US$119 million for the period (2011: US$503
million) reflecting higher working capital
requirements following a US$130 million
increase in VAT receivables outstanding in
Ukraine during the year. The gross Ukrainian
VAT receivable balance as at 31 December
2012 was US$302 million, a US$20 million
discount has been recorded to reflect the
time value of money for VAT due to the
expectation that a portion of VAT will be
recovered after more than one year.
During the year the Group spent US$429
million (2011: US$380 million) on capital
investment in its existing and new mines
as well as on logistics infrastructure, which
was the highest level of annual capital
investment at Ferrexpo on record.
At the period end, Ferrexpo had net debt
of US$423 million (2011: US$80 million).
Dividend
Ordinary Dividend
As is consistent with the Group’s dividend
policy since listing, of paying a modest
sustainable dividend commensurate with
the growth profile of the business through
the economic cycle, the Board of Directors
recommend a final dividend in respect of
profits generated for the Group in 2012 of
3.3 US cents per Ordinary Share (2011 final
dividend: 3.3 US cents per Ordinary Share) for
payment on 31 May 2013 to shareholders on
the register at the close of business on 3 May
2013. The dividend will be paid in UK Pounds
Sterling with an election to receive US Dollars.
Special Dividend
The Group has invested significantly over
the past five years and has maintained its
dividend since IPO at 6.6 US cents per
share split equally between interim and final
payments. The Group is continuing to invest
in its operations and the Directors believe it is
appropriate at the current time to maintain the
ordinary dividend at its current level until further
milestones are achieved. In recognition of the
opening of the Yeristovo mine which lowers
the operational risk profile of the business and
given Ferrexpo’s strong balance sheet the
Directors are pleased to announce a special
11
Left to right:
Kostyantin Zhevago,
Chief Executive Officer,
Michael Abrahams,
CBE DL, Chairman
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
Demand for iron ore pellets has been steadily
increasing due to declining availability of high
quality lump iron ore.
dividend of 6.6 US cents per share, amounting
to approximately US$39 million, for payment
on 28 March 2013 to shareholders on the
register at the close of business on 22 March
2013. This dividend will be paid in UK Pounds
Sterling with an election to receive US Dollars.
Market Environment
In 2012, according to the World Steel
Association, global crude steel production
grew 1% to 1.6 billion tonnes while the
average capacity utilisation of steel mills
declined to 79% from 81% in 2011. China,
the principal driver of the iron ore market in
recent years, increased its steel production
by 3% to 717 million tonnes and accounted
for 46% of global steel production.
CRU estimates that in 2012 the global
consumption of iron ore increased 1% while
production was marginally below 2011 levels.
The industry move to a generally accepted
benchmark pricing mechanism based on
spot prices ensured that the market remained
largely in balance, although iron ore pricing
was volatile, moving from US$140 per tonne
at the beginning of 2012 to a three year low
of US$87 per tonne before finishing the
year around the US$145 per tonne level.
Production of iron ore remains highly
concentrated with the top four producers
accounting for over 70% of seaborne
iron ore production in 2012. Historically,
there have been challenges in developing
greenfield iron ore projects including access
to affordable financing, a lack of equipment,
skills shortages, prohibitive logistics costs
and local permitting and geopolitical
restrictions. Bank of America Merrill Lynch
estimates that as much as 260 million tonnes
of iron ore capacity was either delayed
or cancelled during 2012 as the above
challenges impacted project economics.
With regards to iron ore pellets, demand has
been steadily increasing due to declining
availability of high quality lump iron ore
and growing environmental pressure
on sinter plant emissions. CRU estimates that
demand for pellets will show a compound
annual growth rate of 5% from 2012 to 2017
compared to total iron ore consumption of
4% per annum for the same period. CRU
expects the premium for pellets over sinter
fines to remain at around US$30 per tonne
for this period although this could fluctuate
according to the level of steel demand.
Marketing and Logistics
Ferrexpo’s marketing strategy is to supply
the world’s leading steel producers, who
are focused on producing high quality
steel for premium applications.
Ferrexpo aims to supply a geographically
diversified customer portfolio under long-
term framework agreements. Indeed it
has been servicing some of its customers
for decades securing reliable off-take
volumes. The Group enjoys a balanced
sales portfolio with approximately half of
sales derived from Central and Eastern
Europe while the remainder originates
from Western Europe, Turkey and Asia.
A critically important logistics focus of the
Company is to secure reliable and competitive
shipping to customers in Asia compared
to the major pellet producers from Brazil.
Ukraine’s central location allows Ferrexpo
to ship at increasingly competitive rates
to the major iron ore pellet markets. The
Group has a 49% stake in the TIS-Ruda port
terminal at Yuzhny on the Black Sea with a
capacity of over 5 million tonnes per annum.
In 2012, the Group invested in upgrading its
loading and shipping capabilities to allow
for the routine use of capesize vessels.
As a result, Ferrexpo loaded 17 capesize
vessels compared to nine in 2011 and it
intends to further increase this method of
shipment in 2013 by loading over 30 capesize
vessels. In December 2012, Ferrexpo’s
transshipment vessel, Iron Destiny, was put
in operation which should allow the Group
to further reduce international freight costs.
An integrated and well-invested logistics
system is an essential and a key competitive
advantage for a bulk commodity producer.
In addition to the Group’s port facilities, as
at 31 December 2012 Ferrexpo owned just
under 2,000 rail cars enabling it to transport
a high proportion of its pellets to border points
with its own fleet, reducing its reliance on
state rail cars and lowering transportation
costs. Ferrexpo also has in place a large
barging fleet operating on the Danube and
Rhine rivers further securing reliable access
to customers in Central and Eastern Europe.
Resource Base
Ferrexpo holds the licences to the largest iron
ore resource base in Europe. This resource
base is situated along a single ore body
containing 10 adjacent deposits, which allows
the Group to efficiently expand production
through brownfield developments. The
deposits exploited by the subsidiary FPM have
consistent geology and a long-life production
profile. The opening and development of
the Yeristovskoye deposit in 2012 through
the subsidiary FYM fully utilises known
and existing technology and infrastructure,
as well as the Group’s current skills.
As of 1 January 2013, Ferrexpo had
estimated proved and probable reserves of
1.5 billion tonnes classified according to the
JORC Code. These reserves are included
in estimated resources of approximately
6.8 billion tonnes classified according to
the JORC Code. Ferrexpo has further
estimated resources of over 13.2 billion
tonnes classified under the methodology
used in the Former Soviet Union.
Production
In 2012, FPM produced 9,409 thousand
tonnes of pellets from own ore, a 4% increase
compared to 9,063 thousand tonnes of
pellets produced in 2011. This includes
108 thousand tonnes of pellets mined from
FYM ore. The production of pellets from
purchased third party concentrate was lower
due to reduced availability of concentrate
12
Ferrexpo plcAnnual Report & Accounts 2012 on the local market at prices able to generate
positive margins, as such total production
declined by 1% to 9,690 thousand tonnes
compared with 9,811 thousand tonnes in
2011. The average pellet iron content from
own ore was 63.3% in 2012 in line with 2011.
Importantly, FPM continued throughout the
year with the modernisation programme of its
existing mining and processing facilities whilst
maintaining consistent and reliable production.
The current level of production from own
ore represents full mining capacity of
approximately 30 million tonnes per year
(30% average iron content). Once processed
into iron ore pellets with an average content
of 63.3%, this translates into 9,301 thousand
tonnes of pellets. The Group intends to
increase its annualised pellet production
from own ore to 12.0 million tonnes in
2014. To accomplish this, it will continue
to develop the FYM mine, where first ore
was reached in the second half of 2012.
Health and Safety
In accordance with the Group’s policy of
continuously improving safety standards,
Ferrexpo is pleased to report that there have
been no fatalities at its mines in well over two
years and that the lost-time injury frequency
rate (‘LTIFR’) at FPM continued to fall to 0.74
per million man hours worked (2011: 0.82).
FYM, the Group’s new operating mine,
experienced no lost-time injuries during the
year which was a major accomplishment.
Overall, the Group’s total LTIFR in 2012
was 0.66 compared to 0.77 in 2011.
The management of Ferrexpo fosters and
continually develops a culture of safety in
the organisation, linking safety performance
to remuneration. The Group has regular
safety audits by DuPont and is determined
to continue to follow international best
practice as well as to set the standard for
mining companies operating in the CIS.
Costs
FPM is a cost competitive producer on the
global iron ore concentrate cost curve on both
a FOB and CFR China basis. Furthermore, its
cost of converting its iron ore concentrate into
pellet form positions it as a profitable producer
on the global pelletising market through the
commodities cycle. Crucially, this combination
of low cost concentrate production and pellet
conversion has enabled it to sustain positive
operating cash flows every quarter since 2006.
For the year ended 31 December 2012, the
C1 cash cost of production of pellets from
own ore was US$60 per tonne compared
to US$51 per tonne in 2011. In line with the
industry, the increase in costs was driven
by higher energy prices and local inflation.
Just over half of C1 cash costs are
denominated in Ukrainian Hryvnia. The
Hryvnia has remained largely stable since
2009 at UAH8 to the US Dollar. Prior to
the devaluation of the Hryvnia at the end
of 2008, when it depreciated from UAH5
to UAH8 to the US Dollar, production
costs peaked at US$51 per tonne. In
this context, since 2008 production
costs have increased by a compound
annual growth rate of 4% per annum.
Ferrexpo offsets cost increases by increasing
output and producing at maximum capacity
to ensure full absorption of the fixed cost
base. Improved energy efficiencies are also
achieved through the Business Improvement
Programme (‘BIP’) which aims to reduce
the C1 cost of production by 1% to 2% per
annum on a constant output basis. The
BIP programme has resulted in an overall
reduction in the C1 cost of US$7 per tonne
or US$64 million since its inception in 2006.
Looking forward, it is anticipated that the
13
Health and Safety Highlights
• No fatalities in two years
• Regular safety audits
• LTIFR continuing to fall
Caterpillar 793D truck at FYM
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
Ferrexpo has maintained
strict financial discipline
over many years.
mining and processing of FYM ore will have
a positive impact on the Group’s overall
production cost through lower mining costs
and the addition of higher grade ore.
Capital Investments
Ferrexpo aims to finance capital investment
out of operating cash flows and, excluding
the increase in the Group’s VAT receivable,
has broadly done so in 2012 and the
five year period since 2007. As such, the
pace of investment inevitably depends
on the market price for iron ore. Group
policy is to ensure that the balance sheet
does not become over leveraged and
that Ferrexpo has a sustainable funding
position despite iron ore price fluctuations.
The Group is part way through a US$650
million investment programme to increase the
quality and quantity of its pellet output. The
successful implementation of this programme
will enable Ferrexpo to increase output at
FPM by approximately one third to 12 million
tonnes of pellet per annum in 2014 (from
current production levels of 9.4 million tonnes
of pellet per annum) and to further increase the
quality of the Group’s pellet output to 65% iron
content (currently average pellet iron content
is 63.3%) in 2015. The increase to 12mtpa of
pellet output is expected to be initially achieved
CSR Highlights
• Significant investor in local community initiatives
• 23% of the local working population are employed by the Group
• Unemployment in the town of Komsomolsk is significantly below
the national average
IT lesson at school in Komsomolsk
utilising crude ore from FYM. These projects
are progressing on time and to budget.
The next phase of investment concerns the
construction of a 10mtpa concentrator at FYM
to process the remaining crude ore that it can
mine annually (total annual mining capacity is
expected to be 28 million tonnes). In October
2012, the Board of Directors approved
US$30 million to begin this development in
2013 which, subject to market conditions,
is targeted to begin concentrate production
in 2016 and to ramp up to full production
by the end of 2017. Thus, following further
capital expenditure, Ferrexpo expects to
produce approximately 12 million tonnes
of pellets per annum with 65% iron content
and 8 to 10 million tonnes of concentrate
per annum with up to 67% iron content,
doubling output from 2012 production levels.
The Group will continue to evaluate, and
if appropriate, invest in NPV accretive
opportunities, both within the Company
and externally, that de-risk and diversify
its operations.
Financial Management
Ferrexpo has maintained strict financial
discipline over many years. Key aspects of
the Group’s approach include funding capital
expenditures out of operating cash flows
and where appropriate debt, maintaining
robust liquidity and retaining competitive
credit metrics and cost of financing.
Ferrexpo’s financial position reflects this
strategy, as evidenced by the strong balance
sheet, low gearing and EBITDA to debt ratios
and competitive cost of financing. Net gearing1
was 21% as of 31 December 2012 (compared
to 5% as of 31 December 2011) and net debt
to EBITDA was 1.05x as of 31 December 2012
(compared to 0.1x as of 31 December 2011).
The Group’s average cost of debt in 2012
was 5.24% a 1% improvement compared
to 2011 at 6.23%. As of 31 December
2012, the Group had net debt of US$423
million which included cash of US$597
million. In 2013, Ferrexpo has minimal debt
repayments of approximately US$19 million.
14
1 Net gearing is calculated as net financial indebtedness over
net financial indebtedness plus shareholder’s equity.
Ferrexpo plcAnnual Report & Accounts 2012 Ferrexpo will continue with its strategy of developing its
significant resource base, improving the quality of its
pellets, and further advancing its logistics infrastructure
to enhance its service to first class steel customers
around the world with its premium iron ore product.
VAT
Ukraine is a young democracy which
has been subject to various changes in
government over the past 20 years. As is
common with developing economies there
is a risk that the country may develop in a
manner that is adverse to general business
practice. These operating risks are commonly
faced by all mining companies in emerging
markets, and the Board believes Ferrexpo
has the expertise to manage them.
As of 31 December 2012, Ferrexpo was
owed US$302 million of VAT by the Ukrainian
government, the majority of which is
significantly overdue. This amount has been
discounted by US$20 million to US$282
million in order to reflect the cost of financing
those VAT balances that are expected to be
recovered more than one year after the period
in which they arose. As part of the procedure
adopted in Ukraine, it is common for VAT
claims to be challenged by the government in
the court system. A significant portion of the
VAT outstanding is currently being challenged
in this way, although the Directors believe that
the full amounts will eventually be recovered.
The late repayment of VAT is, in the view
of the Directors, a result of the Ukrainian
government’s current weak fiscal position.
The Directors believe that there is a risk that
continued fiscal weakness could further
preclude the prompt repayment of VAT for
some time. This would lead to higher levels
of working capital and increase the risk of
a financial loss when repayment occurs
which would depend on the eventual type
of repayment and the prevailing exchange
rate if repayment was made in local currency.
Ferrexpo continues to have a constructive
dialogue with the Ukrainian authorities
regarding the repayment of overdue VAT.
CSR
In 1960 the town of Komsomolsk was
established adjacent to the Poltava mine
to support the mining and processing
operations. Ferrexpo remains the largest
employer in the town, which has a population
of approximately 55,000 people, of which
approximately 23% of the working population
are employed by the Group. Ferrexpo has
been a significant investor in local community
initiatives from the outset, investing funds
in the social infrastructure of Komsomolsk
and the surrounding area. These funds
have been spent on medical facilities,
social services, education, religion, culture
and sporting activities, as well as on the
maintenance of certain of the city’s social and
cultural structures. In 2012, Ferrexpo spent
approximately UAH166 million (US$21 million)
(2011: UAH102 million or US$12 million)
on community projects. Due to Ferrexpo’s
presence as a major local employer and
its contributions to community initiatives,
unemployment in Komsomolsk is
significantly below the national average,
and the average salary is significantly
above the national average.
Corporate Governance
The Board remains dedicated to maintaining
the highest standards of corporate
governance in the conduct of its business
throughout the Group, as well as instilling a
culture of commitment and accountability in all
employees. Ferrexpo has fully complied, since
its 2007 listing, with the Combined Code on
Corporate Governance, and since 2011 with
the UK Corporate Governance Code of 2010.
The Board is comprised of eight members:
a Non-executive Chairman, four independent
Non-executive Directors, one Non-executive
Director and two Executive Directors. The
Board believes that this is an appropriate
size and structure to manage the
Group successfully.
People
2012 has been a notable year in the history
of Ferrexpo. Without the dedication and
commitment of all Ferrexpo employees
this would not have been possible. The
Board would very much like to thank
the management and staff for their
continued hard work which directly
contributes to the progress achieved.
Strategy and Outlook
Ferrexpo will continue with its strategy of
developing its significant resource base,
improving the quality of its products, and
further advancing its logistics infrastructure
to enhance its service to first class steel
customers around the world with its
premium iron ore pellets. It will do so in a cost
competitive manner to ensure it can deliver its
product reliably through the commodity cycle.
The Group is well placed to increase its
production from 9.4 million tonnes of pellets,
from own ore, with an average iron content of
63.3%, to its stated goal of 12 million tonnes of
pellets per annum in 2014. The Group is also
on track to increase the average iron content
of its pellets to 65% in 2015. As Ferrexpo’s
total output of crude ore ramps up following
the opening of the FYM pit, it will be in a
position to build further processing facilities
and double production output. This will be
undertaken in accordance with the Directors’
approach to prudent debt management
and adequate levels of liquidity consistent
with the cyclical nature of the business.
Overall, pricing for the iron ore market remains
difficult to predict while the economic outlook
for Ukraine is uncertain. In this environment,
Ferrexpo’s proven management team will
continue to implement its strategy, and the
Directors believe that the Group will make
further progress during the current year.
15
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
Strategic Priorities
Delivering the Group’s vision to
be a sustainable iron ore producer
through the commodity cycle.
16
To develop the Group’s
significant resource base
FYM open pit as
of 31 May 2012
Ferrexpo’s significant resource base (the largest in Europe) is situated
along a single ore body, which enables efficient expansion through
brownfield development.
What’s been achieved in 2012
• First ore at FYM, the first new iron ore mine in the CIS for many years
• Mine life expansion at FPM
• Land acquisition and feasibility studies underway at FBM
Objectives for 2013
• Ramp up of FYM ore to commercial production
• Continuation of mine life extension at FPM
• Development of feasibility study at FBM
Key performance indicators
Crude ore mined (million tonnes)
2012
2011
2010
2009
2008
2007
FPM FYM
29.8 1.1
30.9
29.6
28.9
28.5
27.8
28.9
Ferrexpo plcAnnual Report & Accounts 2012 To improve the quality
of the Group’s pellets
Maintain a competitive
cost of production
Ferrexpo sells high
quality iron ore
pellets to premium
customers.
Ferrexpo is well
positioned on the
global cost curve
sustaining profitability
during downturns.
Ferrexpo is on track to increase the average quality of its pellets from
63.3% iron content to 65% iron content in 2015. Currently, 65% iron
content pellets account for approximately half of output.
Ferrexpo believes it is a competitive cost producer of iron ore
concentrate with relatively low pelletising costs on a FOB & CFR basis,
allowing it to be among the most competitive iron ore pellet producers
globally. This has allowed Ferrexpo to maintain positive operating cash
flows each quarter since 2006.
What’s been achieved in 2012
What’s been achieved in 2012
• Modernisation of key grinding and WMS sections dedicated to the
• Since October 2008 when C1 costs reached US$51, overall cost
higher grade concentrate circuit
• Construction of flotation capacity to yield higher grade pellets
• Upgrade of the balling machines and installed larger capacity
vacuum filters
Installation of a new annular cooling ring
•
inflation has amounted to 4% per year
• The BIP has reduced the C1 cash cost by US$6.9 per tonne
since 2005
Objectives for 2013
Objectives for 2013
• Complete construction of first of two new flotation sections,
including five vertimills
Installation of new concentrator mixers
•
• Evaluation of new gas burners for pellet kilns
• Offset cost inflation through higher production volumes
• Maintain the current level of the C1 cash cost at constant currency
Key performance indicators
Capital Investment (US$ millions)
Key performance indicators
Maintain competitive cost position (US$/tonne)
2012
2011
2010
2009 0.0
2008
0.0
0.0
2007
3.2
2.8
35
150
120
90
60
30
0
Ferrexpo
CIF China 62% Fe equivalent units concentrate cash cost
Source: Bank of America Merrill Lynch, January 2013
1.4 bnt
17
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
To expand the Group’s
logistics capabilities
To open and develop
new markets and customers
A critical focus is to
secure reliable and
competitive shipping
to customers in
Europe and Asia
compared to major
pellet producers
from Brazil.
Ferrexpo’s location
in Ukraine allows
it to supply a
geographically
diverse customer
base.
A key aspect of long-term sustainable competitive costs with consistent
production and product delivery is an integrated and well-invested
logistics system. In this context, Ferrexpo owns almost 2,000 rail cars,
over 140 barges and has a 48.6% ownership in a port terminal on the
Black Sea.
Ferrexpo supplies some of the world’s leading steel producers, which
are focused on producing high quality steel for premium applications.
The Group allocates a portion of sales to potential new customers
through trial spot cargoes, and have conducted such trials with several
significant producers in Asia and Germany ahead of the planned
production growth from FYM.
What’s been achieved in 2012
What’s been achieved in 2012
• Significant reduction in seaborne freight costs which increased
the Group’s net sales price
• Arrival of Ferrexpo’s own transhipment vessel
• Further acquisition of rail cars
• A new long-term contract with a customer in Europe
• Captured significant market share with China’s leading steel mill
• Trial cargoes to premium steel producers in Asia
Objectives for 2013
Objectives for 2013
• Transshipment efficiency gains
• Loading of over 30 capesize vessels
•
Increased production volume to be shipped to seaborne markets
• To convert previous trial cargoes into long-term contracts
Key performance indicators
Seaborne freight cost (US$/tonne)
Key performance indicators
New Markets (% of volume sold)
2H 2010
1H 2011
2H 2011
1H 2012
2H 2012
1H 2013
1H 2010
50
40
30
20
10
0
2012
2011
2010
2009
2008
2007
51
47
47
34
22
19
Sourced from C3 Baltic Index
Ferrexpo, Yuzhny-Qindao C3 Tubarao-Qindao
% of sales volumes to growth and natural market segments
18
Ferrexpo plcAnnual Report & Accounts 2012 To maintain adequate liquidity
and low balance sheet gearing
To be a responsible
corporate citizen
As at 31 December
2012 Ferrexpo
had cash of
US$597 million.
In 2012 Ferrexpo
refurbished the
local swimming
in Komsomolsk.
Ferrexpo’s financial focus is on employing strict financial discipline to
ensure financial stability through the economic cycle.
Ferrexpo’s commitment to corporate social responsibility derives from a
strong belief that the Group’s licence to operate will be underpinned by
the Group’s CSR performance.
What’s been achieved in 2012
What’s been achieved in 2012
• Further diversified sources of funding with an increase in Export
• No work related fatalities during 2012 or 2011, and the lost time
Credit Agency lending, lowering the Group average cost of funding
and lengthening debt maturities
injury frequency rate continued to improve, reaching the lowest point
in the Group’s history
• Total emission levels (NO2, SO2, CO2 and dust) declined vs. 2011
and were within regulated limits
• FPM & FYM continued to foster relationships with local communities
e.g. supply of new equipment to schools, construction of new
apartments for employees, supply of medical equipment to local
and regional hospitals, provision of medicines to pensioners
Objectives for 2013
Objectives for 2013
• Continue to review the international debt capital markets as a
potential source of financing subject to market conditions
• Continue to manage the debt profile of the Company through
lower cost funding and longer dated maturities
• Maintain the trend towards lower emissions (per tonne of
pellets produced) while continuing to develop the mine and
increase production
• Continue to support the community through various initiatives
aimed at helping children through to pensioners
Key performance indicators
Net debt to EBITDA
2012
2011
2010
2009
2008
2007
0.1
0.2
0.4
0.4
1.1
1.9
Key performance indicators
Fatalities
2012
2011
0
0
2010
2009 0
2008
2007
1
1
3
19
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
Risks
The list of the principal risks and uncertainties facing
the Group’s business that follows below is based on the
Board’s current understanding. Due to the very nature
of risk it cannot be expected to be completely exhaustive.
New risks may emerge and the severity or probability
associated with known risks may change over time.
Risks Relating to the Group’s Operations
Mitigation
–
–
Ferrexpo has a competitive cost base which has enabled it to
produce at full capacity and remain profitable throughout the
commodities cycle.
The Group has an established, broad customer base and logistics
infrastructure which can service regional and seaborne markets.
This provides flexibility should a particular region experience a
decline in demand.
Mitigation
– Safety, environmental and operational performance is regularly
and rigorously reviewed throughout the organisation including
the COO, the Executive Committee and the Board.
Through its capital investment programme Ferrexpo is
modernising its mining and production facilities which is improving
safety, environmental and operational performance.
– All accidents are fully investigated and lessons are drawn
–
and implemented.
– Appropriate safety training is regularly provided to employees.
– Employee remuneration is linked to safety performance.
Associated
strategic priority1
Associated
strategic priority1
Iron Ore Prices and Market
Possible impact
Fluctuations in iron ore prices as well as in demand may negatively
impact the financial result of the Group.
Mining Risks and Hazards
Possible impact
Mining risks and hazards may result in material mine or plant
shutdowns or periods of reduced production. Such events could
damage the Group’s operating results and reputation.
20
Ferrexpo plcAnnual Report & Accounts 2012 Associated
strategic priority1
Mitigation
–
The factors affecting the Group’s future cost structure are
closely managed.
– Cost reduction initiatives are planned and reported to the Board.
– Since inception of BIP in 2006, it has reduced the C1 cash cost by
–
–
–
US$6.90 per tonne of pellets.
The Group has purchased its own rail wagons to reduce reliance
on state-owned rail cars.
The Group sourced alternative gas supplies in January 2009 when
there were gas price disputes between Russia and Ukraine.
Ferrexpo actively looks to invest in areas to reduce reliance on
state monopolies.
Mitigation
–
The Group continues to invest in its logistics capabilities in order to
ensure available capacity, better service its customers, lower costs
and to reduce reliance on third party providers. Beside
considerable investment in the rail car fleet over recent years,
Ferrexpo owns 143 barges operating on the Danube/Rhine River
corridor. It also owns a 48.6% in the port of TIS-Ruda which
guarantees the Group independent access to the seaborne
markets avoiding reliance on the state port.
Associated
strategic priority1
Mitigation
–
The financial strength of all of the Group’s counterparties is subject
to regular and thorough review. The results of these reviews are
used to determine appropriate levels of exposures consistent with
benefits obtained in order to mitigate the potential risk of financial
loss. The Group has not experienced any financial losses from
transactions with its counterparties.
The Group regularly reviews its supplier base in order to avoid
excessive dependence on any supplier, actively encouraging a
diversity of supply where possible.
–
Associated
strategic priority1
Mitigation
–
The Group complies with commitments under its various licences
in order to ensure that the conditions contained within the licences
are fulfilled or, if appropriate, waivers are obtained.
Associated
strategic priority1
Reliance on State Monopolies
Possible impact
The Group purchases certain goods and services from state-owned
enterprises, and changes in the related tariffs affect the Group’s cost
base. Availability of services can also be limited, which could affect the
Group’s ability to produce and deliver pellets. Examples include railway
tariffs and availability of rail wagons, supply of gas and electricity and
associated tariffs, and mining royalties.
Logistics
Possible impact
The Group’s logistics capability is dependent on services provided by
third parties and state-owned organisations, mainly in relation to rail
and port services. Logistical bottlenecks may affect the Group’s ability
to distribute its products on time, impacting customer relationships.
Counterparty Risk
Possible impact
The Group operates in Ukraine which has a weak country credit
profile as defined by international credit rating agencies. Financial
instability of the Group’s counterparties, including its major customers,
suppliers, Ukrainian Government and local financial institutions and
banks could lead to lower sales volumes, delays in projects and
interruption of production or financial loss and adversely affect its
future financial results.
Licences
Possible impact
See also ‘Risk relating to the Group’s strategy – Government
approvals of expansion’.
Mining and land allotment licences are critical to the Group’s
operations, and there can be no guarantee that they will be
renewed or that additional licences will be obtained. This could
adversely affect the Group’s operations and its ability to develop
in the future.
Risks Relating to Finance
Exchange Rate Risk
Possible impact
The Group receives the majority of its income in US Dollars while a
large proportion of its costs are denominated in Ukrainian Hryvnia.
An appreciation of the Ukrainian Hryvnia against the US Dollar could
have a negative impact on the profitability of the Group.
Mitigation
– Historical weakness of the Ukrainian Hryvnia in times of low
commodity prices has provided a natural hedge during downturns
in the commodity cycle. All of the Group’s revenues and
associated debt are denominated in US Dollars.
Associated
strategic priority1
1 Please see pages 16 and 19 for the KPI associated with the Strategic Priorities.
21
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Chairman’s and Chief Executive Officer’s Statement continued
Risks Relating to Finance continued
Interest Rate Risk
Possible impact
A portion of the Group’s finance facility is linked to US Dollar LIBOR
rates. An increase in interest rates will have a negative impact on the
Group’s financial costs, thus affecting profitability.
Mitigation
–
The Group has optimised its debt structure, maintaining low
balance sheet gearing. As a result, its interest costs are a low
proportion of its profitability.
Associated
strategic priority1
Financing Risk
Possible impact
The Group’s development projects may be funded using debt secured
with financial guarantees. There is a risk that cancellation of contracts
as a result of force majeure events and/or lower iron ore pellet prices
would limit the amount of funding available to the Group, and could
prompt lenders of existing finance facilities to require Ferrexpo to
assign additional contracts to meet agreed ratios.
Mitigation
–
The Group’s financing risk has been mitigated by the issue of a
US$500 million Eurobond and a US$420 million bank facility.
The average debt maturity at 31 December 2012 was three years.
The Group has minimal debt repayments of US$19 million in 2013.
–
–
Associated
strategic priority1
Risks Relating to the Group’s Strategy
Mitigation
–
The Group has established strict procedures to control, monitor
and manage this expenditure which is regularly reviewed by the
Investment and Executive Committee and the Board.
Associated
strategic priority1
Mitigation
–
–
Ferrexpo maintains an open and proactive relationship with various
governmental authorities and is fully aware of the importance of
compliance with local legislation and standards.
The Group monitors and reviews its commitments under its
various mining licences in order to ensure that the conditions
contained within the licences are fulfilled or the appropriate waivers
obtained. Ferrexpo maintains strict compliance with the Ukrainian
mining code and execution of work in accordance with the project
design through active engagement of Ukrainian and international
legal advisers.
Associated
strategic priority1
Expansion Capital Investment
Possible impact
The Group’s growth depends on its ability to upgrade existing facilities
and develop its iron ore resource base. For any major capital project
there is a risk of insufficient controls, cost overruns, shortage of
required skills, and unexpected technical problems affecting the time
taken to complete the project and the return on the capital invested.
Government Approvals of Expansion
Possible impact
The Group does not yet have all the governmental approvals required
to develop future deposits. Although all approvals that have been
applied for have been granted, there is no guarantee that others will be
granted in the future.
22
Ferrexpo plcAnnual Report & Accounts 2012 Risks Relating to Operations in Ukraine
Political
Possible impact
Ukraine is a young democracy which has been subject to various
changes in government over the past 20 years. As is common with
developing economies there is a risk that the country may develop in a
manner that is adverse to general business practice. This could include
a weak judicial system that is susceptible to outside influence.
Mitigation
– Management proactively engages with local, regional and central
government. Ferrexpo protects its local and international interests
by ensuring it operates to the very highest international standards
and actively defends its rights.
Associated
strategic priority1
The Group faces an ongoing legal claim over a shareholding in
Ferrexpo Poltava Mining. The case has been running for more than six
years in Ukraine, and the Directors believe it still has some way to go.
The Board continues to receive legal advice that the case against
Ferrexpo has little legal merit under Ukrainian law for legal, technical
and practical reasons.
Ukrainian Producer Price Inflation (‘PPI’)
Possible impact
As the Group’s operations are in Ukraine it is exposed to cost inflation.
Ukraine has experienced high levels of inflation over a number of years.
The inflationary environment increases local costs if not mitigated by
a devaluation of the Ukrainian currency and operational efficiency
improvements.
Mitigation
–
The Group’s BIP has achieved continuing efficiency improvements
and cost reductions over many years. Since inception of BIP in
2006, the cash cost of production has reduced by US$6.90 per
tonne of pellets. The Group also has a consistent track record
of producing at full capacity to achieve maximum overhead
absorption and is set to expand production output in 2013.
Associated
strategic priority1
Ukrainian VAT Receivable (See Note 26 in the Accounts)
Mitigation
–
The Group maintains an open dialogue with the Government and
operates to best international standards, ensuring the validity of
the VAT repayments.
Associated
strategic priority1
Possible impact
As the bulk of the Group’s output is exported, it does not collect
substantial amounts of VAT on sales (which could otherwise be offset
against VAT incurred on purchases of goods and services for
operating and investment activities). The Ukrainian government refunds
the outstanding balance of VAT, although not always on a timely basis.
The late repayment of VAT results in increased working capital, which
must be funded from operating cash flows and debt. Ukrainian VAT
balances are exposed to a risk of devaluation of the UAH. The country
of Ukraine as the debtor of the VAT balances has a rating of B (S&P).
As of 31 December 2012, Ferrexpo was owed US$302 million of VAT
by the Ukrainian government, the majority of which is significantly
overdue. This amount has been discounted by US$20 million to
US$282 million in order to reflect the cost of financing those VAT
balances that are expected to be recovered more than one year after
the period in which they arose. As part of the procedure adopted in
Ukraine, it is common for VAT claims to be challenged by the
government in the court system. A significant portion of the VAT
outstanding is currently being challenged in this way, although the
Directors believe that the full amounts will eventually be recovered.
Ukrainian Taxes (See Note 36 in the Accounts)
Possible impact
The Group is exposed to changes in local tax laws especially in
Ukraine. Ukrainian tax laws are complex and subject to varying
interpretations, and inconsistent enforcement by local, regional and
national authorities. Tax authorities can challenge the Group’s
interpretation and treatment of these laws resulting in increased
tax liabilities owed by the Group.
Mitigation
–
The Group takes regular advice on tax matters from Ukraine tax
experts and complies with all known requirements. The Group
maintains a transparent and open relationship with local, regional
and national tax authorities.
Associated
strategic priority1
1 Please see pages 16 and 19 for the KPI associated with the Strategic Priorities.
23
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Operational Review
Reserves and Resources
Ferrexpo’s resource base consists of a magnetite
ore of average 30% iron content, which is
particularly well suited for pelletising. The ore
body is a single 50 kilometre-long strike divided
into 10 adjacent deposits.
The Group is currently exploiting the
first two deposits through the subsidiary
Ferrexpo Poltava Mining (‘FPM’). In July
2012, Ferrexpo reached first ore at the
third deposit with its subsidiary Ferrexpo
Yeristovo Mining (‘FYM’), and first commercial
production of ore from this mine is expected
in 2013. The Group is investing in the
development of the fourth deposit through
Ferrexpo Belanovo Mining (‘FBM’).
In total, as of 1 January 2013, Ferrexpo
had estimated resources of approximately
6.8 billion tonnes classified according to the
Australasian Joint Ore Reserves Committee
(‘JORC’) code, and further estimated
resources of over 13.2 billion tonnes
classified according to the former Soviet Union
method of classification (FSU classification).
Based on a combination of the JORC and
FSU classified resources, management
believes the Group holds the licences to
the largest iron ore deposit in Europe1.
The tables below set out our estimates
of iron ore reserves and measured,
indicated and inferred mineral resources
as at 1 January 2013. The reserves and
resources estimates are presented in
accordance with the JORC Code.
Five further deposits are estimated to
contain resources of over 13.2 billion tonnes
according to the FSU (‘Former Soviet
Table 1: JORC Reserve Statements as at 1 January 2013
Deposit
Gorishne-Plavninskoye1
Lavrikovskoye1
Yeristovskoye2
Total
1 Excluding European Russia west of the Ural mountains.
Proved
(million tonnes)
207
39
–
246
Fe grade
(total)
26
32
–
–
Reserves
Fe
(magnetite)
17
22
–
–
Probable
(million tonnes)
496
97
631
1,224
Fe grade
(total)
30
32
34
–
Fe
(magnetite)
22
24
26
–
1 The reserves estimates for the GPL deposits are those estimated in the report by RHDHV (Former Turgis UK Consulting (Pty) Ltd.) dated 29 May 2009 less the volume of ore mined from GPL deposits
in 2009, 2010, 2011 and 2012.
2 The reserves estimates for the Yeristovskoye deposits are based on a report by SRK Consulting (UK) Ltd. (SRK) dated 15 June 2007 less the volume of ore mined from the Yeristovskoye deposit
in 2012.
JORC Resource Statements as at 1 January 2013
Deposit
Gorishne-Plavninskoye1
Lavrikovskoye1
Yeristovskoye2
Belanovskoye2
Galeschinskoye2
Total
Measured
(million tonnes)
285
100
267
336
–
988
Fe grade
(total)
31
28
34
31
–
–
Fe
(magnetite)
21
20
27
24
–
–
Indicated
(million tonnes)
1,044
692
560
1,149
268
3,713
Resources
Fe grade
(total)
31
31
32
31
55
–
Fe
(magnetite)
23
23
26
23
–
–
Inferred
(million tonnes)
1,275
174
364
217
58
2,088
Fe grade
(total)
31
29
30
30
55
–
Fe
(magnetite)
23
20
23
21
–
–
1 The resource estimates for the GPL deposits were calculated based on a review conducted by SRK in March 2008 less the volume of ore mined from GPL deposits in 2008 (27.8 million tonnes),
2009 (28.6 million tonnes), 2010 (28.9 million tonnes), 2011 (29.6 million tonnes) and 2012 (29.8 million tonnes).
2 The resource estimates are based on a report by SRK Consulting (UK) Ltd. (‘SRK’) dated 15 June 2007 less the volume of ore mined from the Yeristovskoye deposit in 2012
(1.14 million tonnes).
24
Ferrexpo plcAnnual Report & Accounts 2012 Union’) classification code. Ferrexpo is
currently working together with international
consultants to convert these resources to
the universally accepted JORC standards.
These deposits are collectively known
as the ‘Northern Deposits’ and are
classified under the names Manuilovskoye,
Vasilievskoye, Kharchenkovskoye,
Zarudenskoye and Brovarkovskoye.
and Galeschinskoye deposits. The Group is
currently extending the exploration licences for
the remaining Northern Deposits. In general,
a development licence is granted for a period
of 20 years and an exploration licence is
granted for 10 years. Renewal is deemed
automatic, subject to adherence of stipulated
requirements in terms of development of
the deposit and community obligations.
Ferrexpo mines and develops its reserves
under the well-established laws and codes
governing mining in Ukraine. The State Service
for Geology and Use of Natural Resources of
Ukraine has granted Ferrexpo development
licences for the Gorishne-Plavninskoye,
Lavrikovskoye, Yeristovskoye, Belanovskoye
Production
In 2012, Ferrexpo was the largest exporter of
pellets in the CIS and one of the top 10 pellet
producers in the global seaborne iron ore
market. Production continued at full capacity
and a record quantity of iron units were
produced and shipped in the form of pellets.
FPM Highlights
• Increase in production from own ore of 2.6%
• On track to increase volume to 12mtpa in 2014
• On track to increase average pellet quality to 65% Fe in 2015
FPM pit as at July 2011
Review of Operations Ferrexpo Poltava
Mining (‘FPM’)
FPM consists of a mine, concentrating and
pellet processing facilities that exploit the
Gorishne-Plavninskoye and Lavrikovskoye
(‘GPL’) deposits. As of 1 January 2013, the
GPL deposits had iron ore resources of 3.6
billion tonnes, of which approximately 839
million tonnes were proved and probable
reserves with an average iron content of 30%
under the JORC Code. The mine is adjacent
to rail and port facilities on the Dnieper River
and is six kilometres long and over 350
metres deep. FPM operates a traditional
shovel and truck open pit mining operation
extracting approximately 30mtpa of crude
ore. This mine has operated successfully
for over 40 years without any significant
disruptions or delays in production.
At FPM’s production facilities, the crude ore
is ground and crushed to remove rock and
concentrated, thereafter, it is formed into balls
and fired to produce iron ore pellets which
have a current average iron content of 63.3%.
FPM’s production facilities have technical
capacity to produce 12mtpa of pellets.
Output, however, is currently limited to 10mtpa
due to the amount of crude ore available
from the FPM pit and certain bottlenecks in
concentrating and pelletising, which are being
upgraded and modernised as part of the
sustaining capital expenditure programme.
For the year ended 31 December 2012, FPM
increased the amount of iron ore mined to
29,761 thousand tonnes compared to 29,637
thousand tonnes in 2011. 9,301 thousand
tonnes of pellets from own ore were produced,
of which 4,118 thousand tonnes had circa 65%
iron content and 5,183 thousand tonnes had
circa 62% iron content. FPM also produced
108 thousand tonnes of pellets from FYM
ore and 281 thousand tonnes of pellets
from purchased third party concentrate.
FPM plans to mine up to 30 million tonnes
of ore per year from the pit equating to an
estimated mine life in excess of 25 years.
25
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Our Growth Projects – FPM
25 years
mine life
30 million tonnes
of crude ore mined per annum
26
Ferrexpo plcAnnual Report & Accounts 2012 Increasing the Quantity
and Quality of the
Group’s Pellets
“FPM is on track to increase
production output from own ore
by c. 30% to 12mtpa in 2014 and
to increase the average quality of
its pellets from 63.3% Fe to 65.0%
Fe in 2015.”
Viktor Lotous
Chief Operating Officer of Ferrexpo Poltava Mining
“These projects are brownfield in nature as while FPM
increases its future production capabilities it must do so without
affecting current production levels and most importantly
without compromising safety. FPM places great emphasis
on continual improvements in work place safety. The graph
below demonstrates the improvements it has made.”
Work related accidents at FPM (number of people)
80
1984
2012
70
60
50
40
30
20
10
0
27
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Operational Review continued
Table 2: Production Statistics
(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
Pellets produced from FYM ore
Total Group production from own ore
Higher grade
Average Fe content %
Lower grade
Average Fe content %
Pellets produced from purchased concentrate
and ore
Higher grade
Average Fe content %
Lower grade
Average Fe content %
Total pellet production
Pellet sales volume
Gravel output
Stripping volume
BIP Highlights
2012
29,761
30.66
29,803
11,830
62.24
6,834
4,571
67
325
65
373
9,301
108
9,409
4,118
64.85
5,291
62.14
281
56
65
225
62
9,690
9,675
2,822
27,916
2011
29,637
30.23
29,535
11,487
62.60
7,241
4,685
67
864
66
–
9,063
–
9,063
4,256
64.95
4,807
62.2
748
543
65
205
62
9,811
9,876
2,855
28,214
Change
+/-
124
0.03
268
343
(0.36)
(407)
(114)
–
(539)
(1)
373
237
–
346
(138)
(0.1)
484
(0.06)
(467)
(487)
–
20
–
(121)
(201)
(33)
(298)
%
0.4
0.1
0.9
3.0
(0.6)
(5.6)
(2.4)
–
(62.4)
(1.6)
–
2.6
–
3.8
(3.3)
(0.2)
10.1
(0.1)
(62.4)
(89.7)
(0.0)
9.8
–
(1.2)
(2.0)
(1.2)
(1.1)
• In 2012, FPM implemented 36 projects as part of BIP
saving US$64.2 million
• Since inception of BIP in 2006, the C1 cash cost of
production has reduced by US$6.9 per tonne
Bucket wheel excavator at FPM stockpile
Health and Safety
There were no fatalities at FPM in 2012 and
2011, and lost-time injuries reduced from 11
in 2011 to 10 in 2012, reducing the LTIFR to
0.74 per million man hours worked which is
the lowest rate in FPM’s history (2011: 0.82
per million man hours worked). This reduced
the three-year moving average to a LTIFR of
0.96 compared to the prior three year average
of 1.12 per million man hours worked.
The management of Ferrexpo strongly
encourages a culture of safety in the
organisation linking safety performance to
remuneration. The Group has regular internal
safety audits and external audits by DuPont
and is committed to following international
best practice and to set the standard for
mining companies operating in the CIS.
Business Improvement Programme
(‘BIP’)
In 2012, FPM completed and implemented
36 projects as part of the BIP. This reduced
the C1 cash cost of production by US$64.2
million or 1.8%, in line with its goal of 1%
to 2% cost savings per annum. Of these
projects, 17 related to mining activities,
six projects were focused on improving
productivity in the processing facilities and
13 projects focused on reducing downtime
in the service departments. Overall 14
projects were aimed at reducing electricity
consumption. Table 3 shows the actual
resource savings achieved in 2012.
Table 3: Resource Savings Under BIP
Resource
Power (million kWh)
Steam (Gcal)
Grinding media (tonnes)
Diesel fuel (tonnes)
Lining (tonnes)
Savings
31.7
1,920.0
741.0
79.2
11.7
It is an essential part of the Group’s strategy to
reduce costs in order to remain a competitive
pellet producer. This has been achieved
through ongoing efficiency improvements
and cost reductions over many years. Table 4
illustrates the effect of these projects. Since
inception of the BIP programme in 2006,
FPM has achieved savings of US$6.9 per
tonne in the C1 cash cost of production.
28
Ferrexpo plcAnnual Report & Accounts 2012 Table 4: Improvement in Consumption Norms
Norms – examples
Electricity (kWh/t)
Gas (m3/t)
Grinding bodies (kg/t)
Labour productivity (thousand tonnes/person)
Examples of the BIP in 2012:
Decrease in Consumption of Steel
Grinding Media in Concentration Plant
Cost: no capital cost required.
Total savings since the project inception in
2011 are 1,998 tonnes of steel grinding media
and reduced electricity costs of UAH18 million.
Description of Project:
A programme was designed to monitor
electrical consumption of the motors on the
ball mills in the concentration plant. Ball mills
contain steel grinding media which are used
to grind the iron ore into an optimum size for
further processing. By studying the pattern
of power consumption, FPM assessed when
grinding media were being over or under
loaded. As a result, FPM could optimise the
process for consistent loading of grinding
media and reduce overall power consumption.
Benefits:
1. More efficient energy management.
2. Reduction of required grinding media.
3. Consistent particle size achieved.
Reduction of Power Consumption at the
Tailings Plant
Cost: UAH13 million.
Total savings since the project inception in
2010 are 33 million kWh of power and reduced
electricity costs of UAH21 million per annum.
Description of Project:
Tailings, fine particles of waste which are
a by-product of pellet production, are
stored in a tailings dam. FPM redesigned
the piping from the dam to the processing
plant to allow water to flow by gravity back
to the processing area thereby eliminating
the use of large electrical pumps.
Benefits:
1. Lower electricity consumption.
2. Reduction in wear and tear of
water pumps.
3. Recycling water.
Mine Dewatering System
Cost: UAH0.5 million.
In 2012, 1.7 million kWh of power was saved
and electricity costs were reduced by
UAH1.2 million.
2012
173.1
17.0
5.6
1.5
2005
205.5
22.0
6.4
0.7
Ch %
(15.8)
(23.1)
(12.8)
108.8
Description of Project:
The project commenced in 2011 with the
design and approval by FPM’s technical
committee. In December 2011, the pit
dewatering scheme at the Lavrikovskoye
deposit (at the northern end of the pit) was
changed from a double stage dewatering
system to a single stage system. This allowed
FPM to eliminate a transitional pumping station
located near ground level of the pit by installing
higher capacity pumps at -90 metres in the pit.
Expected Project Outcomes:
1. Electricity cost reduction.
2. Maintenance cost reduction.
3. Improved efficiency.
The BIP is embedded in the Company’s
culture with targeted outcomes linked
to operational managers’ performance
evaluations. The Group believes the
programme is essential to ensure continued
improvement in the cost reduction of
its mining and processing activities.
Sustaining Capital Investment at FPM
During the period, the Group allocated
US$108.4 million for the modernisation
and debottlenecking of FPM’s production
facilities (2011: US$121.0 million).
Included in sustaining capital investments
are projects to upgrade FPM’s beneficiating
and pelletising facilities to allow processing
capability of 35 million tonnes of crude ore
per annum by the end of 2013. This will
ensure FPM can process ore from the FPM
pit and, additionally, the first ore from the
FYM pit, increasing the Group’s pellet output
capacity to 12 million tonnes per year. Activities
during the period, focused on the redesign
and refurbishment of the grinding sections.
These were completed and commissioned
through the year, while maintaining day to
day operations and production levels. Future
activities will involve the modernisation of
additional grinding sections of the existing
beneficiation plant, as well as the replacement
of vacuum filters, and mixers in the pelletising
plant to achieve a higher quality of iron ore
concentrate to feed the balling machines.
Sustaining capital investment also provides
for the modernisation of existing assets and
systems to increase operating efficiencies
benefiting the cash cost of production.
Development Capital Investment at FPM
FPM is undertaking a number of
development and improvement projects
that will increase its volume of output, as
well as the average quality of its pellets and
drive down the overall cost of production
through increased operating efficiency.
Quality Upgrade Programme
In November 2010, the Board of Directors
approved a US$212 million investment
programme to increase the average
quality of FPM’s pellet output from 63.3%
iron content to 65% iron content.
In order to improve the quality of the
pellet product, the overall iron content of
the concentrate requires upgrading. The
primary method to achieve this is through
vertimill fine grinding technology and
flotation. This will allow for the production
of concentrate with an average 67% iron
content (compared to the current average
iron content of 65%) and will ensure all
pellets contain 65% iron content. Below is a
summary of the key stages in the project.
• Construction of a new flotation unit
consisting of vertimills and flotation tanks
to allow for further processing of the
lower grade ore mined in FPM’s pit
• Modernisation of the existing flotation
unit that currently processes the
higher grade ore from the FPM pit,
including installation of vertimills
• Construction of an additional flotation
unit to process tailings from the above
flotation sections to liberate further iron ore
• Expansion and upgrade of the tailings
facilities to accommodate the increased
volumes that will be processed as
production of pellets from own ore is
increased from 9.4mtpa to 12mtpa
• Construction of a new filter plant at the
pelletising plant which will accommodate
the filtering of the higher grade concentrate
Since 2011, FPM has spent US$38.3 million
primarily on engineering design works and
processing equipment such as vertimills.
FPM expects to spend US$67.8 million out
of the remaining US$173.7 million in 2013.
FPM expects to be able to deliver pellets with
an average grade of 65% iron content in 2015.
29
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Our Growth Projects – FYM
50 million m3
of overburden removed at FYM as of
31 December 2012
30
Ferrexpo plcAnnual Report & Accounts 2012 28 million tonnes
of crude ore available to mine per annum following ramp up
First Ore at FYM –
a Milestone in the
Group’s History
“FYM is the first new mine in
the CIS since Ukraine gained
its independence. Ferrexpo is
developing the mine to world class
levels, aiming to set the standard
for mining in the region.”
Nikolay Goroshko
General Director of Ferrexpo Yeristovo Mining
“In 2012, FYM reached first ore in July and developed much
of the required infrastructure which will be commissioned
in 2013. As such, not only will it ramp up ore production to
approximately 9 million tonnes in 2013 but it will commission
the tyre wash centre, the welding bay, the handling facility,
the service, administration and repair centres, the canteen,
the portable water facilities as well as the field offices. In
conjunction, FYM will finalise the detailed design for a
10mtpa concentrating facility to be in operation, subject
to Board approval and market conditions, by 2016/17.”
FYM mine and infrastructure as of October 2012
31
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Operational Review continued
Brian Maynard
Group Chief Operating Officer
Mine Life Extension Programme
Capital expenditure of US$168 million over
a period of eight years was approved in
November 2010 to extend the estimated
life of the existing FPM mine by 12 years
to 2038. The project will involve removal
of 45.2 million m3 of overburden. As of
31 December 2012, 24.8 million m3 of
overburden had been removed.
For the year ended 31 December 2012,
US$48.6 million was spent on mining
equipment and stripping works, compared
to US$45.7 million in 2011. The successful
implementation of this project should result
in the ore output from the existing mine
peaking at 35mpta in 2014 compared to the
current output of approximately 30mpta.
Review of Operations Ferrexpo Yeristovo
Mining (‘FYM’)
Developing the Yeristovskoye Deposit
Ferrexpo has a licence to mine the
Yeristovskoye iron ore deposit at FYM, which
is located approximately two kilometres
north of the FPM mine. The FYM deposit
has estimated resources of 1,191 million
tonnes under the JORC Code, of which
approximately 631 million tonnes were
proved and probable reserves with an
average iron content of 34%. Assuming an
iron ore production rate of 28mtpa (broadly
similar to FPM’s current production), it
has the capacity to add approximately
23 years to the Group’s production profile.
32
First ore at the Yeristovskoye deposit was
reached in the second half of 2012. Ferrexpo
spent US$146.3 million and US$128.9 million,
respectively, for the year ended 31 December
2012 and 2011. This expenditure was primarily
on mining equipment, stripping works and
pit infrastructure. In total, US$383 million has
been spent since 2008 to develop the mine.
The FYM mine is managed and operated
independently from the existing FPM mine,
although its proximity to the FPM mine
will facilitate the sharing of certain facilities
and resources, particularly during the early
stages of operation. The ore initially extracted
from the FYM mine will be processed at
FPM’s processing complex. Together with
existing output from the FPM mine, the
Group expects to increase its annualised
pellet production from 9.4mtpa of own ore
in 2012 to 12mtpa of pellets from own ore
in 2014. In 2012, 0.1 million tonnes of pellets
were produced from FYM ore. Meaningful
commercial production of pellets using FYM
ore is expected in the second half of 2013
once FYM has mined through the initial
layer of weathered ore. This will contribute
to increased production volumes in 2013
and position the Group to reach its 12mpta
target in 2014 as production ramps up.
Ferrexpo Belanovo Mining (‘FBM’)
The Belanovskoye deposit has total JORC
resources of 1,702 million tonnes. Drilling
works and site preparation activities are under
way and during the period the Group spent
US$32.9 million (2011: US$8.0 million). Topsoil
is being removed and donated to the district
council. The Belanovo activities are focused
on development of a feasibility study, licence
maintenance and the acquisition of land. Pre
stripping work will start following full financial
appraisal and the grant of appropriate permits.
Galeschino Mining
Ferrexpo Galeschino Mining (‘FGM’)
and the Northern Deposits
The Group holds a mining licence for
the Galeschinskoye deposit, located
immediately north of the FBM mine.
Galeschinskoye has estimated total JORC
classified resources 326 million tonnes.
FYM is developing additional processing
and pelletising facilities for the remaining
available crude ore mined at the FYM pit.
These processing facilities will be new and
stand alone and are expected to increase
combined output of both the FPM and
FYM mines to around 20mtpa of pellets or
concentrate equivalent per annum. This
project will add an additional concentrating
complex with 10 million tonnes of capacity.
In October 2012, the Board of Directors
approved US$30 million to begin the detailed
engineering work for this development in 2013,
which, subject to market conditions, will be
considered for final approval in the second
half of 2013 and targeted to begin concentrate
production in the second half of 2016 with
full production targeted by the end of 2017.
Health and Safety
Since its inception in 2008, FYM has had
an excellent safety record. There were no
fatalities or lost time injuries in 2012 or 2011.
The Group is in the process of extending the
exploration licences for the five remaining
Northern deposits, namely Vasilievskoye,
Kharchenkovskoye, Manuilovskoye,
Brovarskoye and Zarudenskoye, located to the
north of Galeschinskoye. An initial assessment
of these deposits has been undertaken and
total in situ reserves of 13.2 billion tonnes
classified according to the FSU Classification
have been delineated. These deposits are
situated adjacent to the Group’s existing
logistics infrastructure and Ferrexpo believes
the development will be relatively low risk.
Marketing
Sales and Logistics
Ferrexpo exports 99.9% of its production to
markets outside of Ukraine and receives all
of its revenues in US Dollars. The marketing
strategy is centred on securing sales for a
large percentage of production with long-
term contracts. Customers are targeted who
produce high value added steel products
Ferrexpo plcAnnual Report & Accounts 2012 This is designed to maximise revenue stability
and security through the economic cycle.
For the year ended 31 December 2012,
sales to long-term customers accounted
for approximately 75% of our sales
volumes from own ore, in line with 2011.
In advance of the planned FYM mine
expansion, Ferrexpo currently allocates around
10% of sales to potential new customers to
be supplied through trial spot cargoes. As
a result of this, the Group recently secured
long-term contracts with key customers
in both Western Europe and Asia.
Ferrexpo services the key steel producing
regions in the world through three market
segments:
• Traditional markets: these lie within
Central and Eastern Europe and include
steel plants that were initially designed
to use Ferrexpo pellets. Ferrexpo has
well-established logistics routes and
infrastructure to service these steel mills
by both river barge and rail. The Group’s
products represent an attractive alternative
to Brazilian and Canadian suppliers due
to the closer proximity allowing for a
continuous small-parcel delivery chain.
Key traditional customers are based in
Austria, the Czech Republic, and Slovakia.
• Natural markets: these markets include
Turkey, the Middle East and Western
Europe and are located where the Group
has a similar logistics cost advantage
compared to more distant producers.
Ferrexpo currently has a relatively low
market share in these markets which
offer sales growth opportunities.
• Growth markets: these markets are in Asia
and have the potential to deliver new and
significant sales volumes to the Group.
Within this region Ferrexpo is focused
not only on China and India but also on
building relationships with the premium
steel producers in South Korea, Taiwan
and Japan. Ferrexpo concentrates on
reducing its freight costs to this region by
delivering via capesize vessels enabling it to
remain competitive on a landed cost basis.
The following table shows the % of Group
sales volume by market segment.
Table 5: Sales Volume by Market Segment
Market
Traditional
Growth
Natural
2012
2011
49%
42%
9%
53%
40%
7%
Ferrexpo intends to maintain and consolidate
its leadership in Traditional markets while
looking to maximise opportunities for sales
growth in its Natural and Growth markets.
In Natural and Growth markets, the Group
has been steadily reducing the cost of freight.
Ferrexpo’s 48.6% owned port terminal at
Yuzhny on the Black Sea has guaranteed
capacity of 5mtpa. This port berth was initially
designed for vessels of carrying capacity
of up to 100,000 tonnes, and historically
vessels were loaded in the range of 70,000
to 85,000 tonnes. Ferrexpo has developed
a cost effective capability to load standard
capesize vessels, typically around 172,000
tonnes, by use of a transshipment vessel.
In 2012, Ferrexpo loaded 17 capesize
vessels compared to nine in 2011 and it
plans to load over 30 capesize vessels
in 2013. As of December 2012, Ferrexpo
operates its own transshipment vessel
which will further reduce loading costs.
Overall, the lower freight costs achieved in
2012 were as a result of reduced capesize
rates in the market generally, the greater
use of capesize vessels for shipping
and the more efficient transshipment
and loading of vessels. This resulted in
a higher net sales price for the Group.
Logistics Capital Investment
In 2012, Ferrexpo invested US$43.5 million in
the development of its logistics infrastructure
(2011: US$57.8 million). This included
US$14.4 million for its transshipment vessel,
Iron Destiny, as well as US$29.1 million
for rail wagons. As of 31 December 2012,
the Group owned 1,933 rail cars which
allow it to transport a high proportion of its
pellets to Ukrainian border points reducing
its reliance on state rail cars and lowering
transportation costs. In February 2013,
the Group ordered a further 267 rail cars
which will take the inventory of rail cars to
2,200 units. As part of sustaining capital,
the Group invested US$5.0 million (2011:
US$6.4 million) in its barging operations.
Jason Keys
Chief Marketing Officer
Pricing
Pellets are a high quality iron ore product
which can be directly charged into the blast
furnace and provide steelmakers with a higher
level of productivity. As a result, iron ore pellets
are generally priced at a premium compared
to iron ore fines or lump. Ferrexpo’s pellets
are relatively low in alumina and phosphorus,
which is particularly important to flat steel
manufacturers. Pellets can generally be
shipped consistently in cold climates as
the lower moisture content makes them
easier to handle and less prone to freezing.
Currently in the global iron ore market, there
are a number of pricing methodologies being
applied by industry participants depending
on geography and customer. With regards to
the major suppliers, the index based pricing
mechanism is now well established in long-
term contracts whilst it is common for these
companies to regularly place shipments to
the increasingly liquid spot market. In 2012,
61% of Ferrexpo’s sales contracts were priced
on a quarterly basis while 14% were priced
on a monthly basis and 26% were on a spot
basis. This compares to 76% on a quarterly
basis and 24% on a spot basis in 2011.
The Group will follow international pricing
trends increasing the proportion of
contracts priced on a formula or index
basis. Ferrexpo will continue utilising a
‘value in use’ methodology. Ferrexpo
believes that its geographic proximity to key
steel customers represents an attractive
alternative to the major seaborne suppliers
due to the lower costs of transporting pellets
over a shorter distance from Ukraine.
33
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Financial Review
Table 6: Summary 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)
Year ended 31.12.12
Year ended 31.12.11
1,424,030
1,788,012
401,549
28.2%
262,005
46,425
215,580
36.6
3.3
800,946
44.8%
690,900
115,964
574,936
97.0
3.3
Change
(20.4%)
(49.9%)
(62.1%)
(62.5%)
–
34
Chris Mawe,
Chief Financial Officer
Ferrexpo plcAnnual Report & Accounts 2012 Revenue
Group revenue declined by 20.4% to
US$1.4 billion for the 12 months ended
31 December 2012 (2011: US$1.8 billion)
due to lower market prices for iron ore. In
2012, the average benchmark price for
62% Fe iron ore fines to China CFR fell by
23.8% to US$128 per tonne compared to
an average of US$168 per tonne in 2011.
The average realised price achieved by the
Group for its pellets declined 21.7% in line
with the market, decreasing revenues by
US$326.9 million. 38.8% of sales were on
a CFR or similar basis adding US$113.5
million to revenue (2011: US$119.6 million).
Group sales volumes for the period
were 9,675 thousand tonnes compared
to 2011 at 9,875 thousand tonnes.
Reliance on the Company’s two largest
customers, in Central and Eastern
Europe, was reduced to 36.2% of pellet
sales from 43.1% of sales in 2011.
Other revenue, not related to pellet sales,
amounted to US$94.0 million (2011: US$88.1
million). This included revenue from third
party services, such as freight services and
bunker fuel sales, at the Group’s barging
operations as well as sales from gravel.
Cost of Sales
Total cost of sales for the year ended
31 December 2012 increased 6.9% to
US$694.6 million (2011: US$649.5 million).
Cost of sales consists of the C1 cash
cost of sales and other costs including
depreciation. These are reviewed below:
C1 Cash Cost
The C1 cash cost of production per tonne is
defined as the cash costs of production of
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.
The Group’s average C1 cash cost of
production increased by 17.6% to US$59.6 per
tonne, compared to the average C1 cash cost
in 2011 of US$50.7 per tonne. This was due
to increased electricity tariffs and gas prices
as well as local inflation while the Ukrainian
Hryvnia remained stable against the US Dollar.
Just over half of C1 cash costs are
denominated in Ukrainian Hryvnia. The
Hryvnia has remained largely stable since
2009 at UAH8 to the US Dollar. Prior to the
60% devaluation of the Hryvnia at the end of
2008, production costs peaked at US$51.0
per tonne in October 2008. In this context,
since then production costs have increased by
a compound annual growth rate of 4.0% per
annum reflecting local inflation and increases
in gas and electricity tariffs offset by savings
from volume increases and efficiency gains.
Of the US$8.9 per tonne increase in the
C1 cash cost in 2012 compared to 2011,
commodity related price inflation accounted
for 46.0% of the increase. In 2012, gas and
electricity prices rose by 24.1% and 18.7%
respectively while the cost of diesel fuel was
6.9% higher, reflecting higher global oil prices
during the year and increased domestic
fuel taxes. In total, these factors added
US$4.3 per tonne to the C1 cash cost.
Personnel, repair and maintenance and other
material costs increased the C1 cash cost
by US$4.5 per tonne. These expenses are
principally denominated in local currency.
The Group produced at full capacity
throughout the period which helped to absorb
the cost increases. In addition, the Business
Improvement Programme (‘BIP’) reduced the
C1 cash cost by 1.8%, generating savings
of US$0.8 per tonne. Since the inception
of the BIP in 2006, cumulative productivity
gains have achieved savings of approximately
US$6.9 per tonne of pellets produced, or
US$64.2 million to the 31 December 2012.
Table 7: C1 Cash Costs
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
Cost of Sales outside C1 Relating
to Pellet Production
These costs amounted to US$133.5 million
for the period (2011: US$190.0 million).
Depreciation and amortisation increased
by 37.2% to US$39.3 million, reflecting the
Group’s capital investment programmes
to modernise and upgrade the existing
mine and production facilities.
The remainder of non-C1 cost of sales
related to the purchase of concentrate for
reprocessing into pellets. The Group has
nominal pelletising capacity of 12 million
tonnes of pellet production per year. FPM
is currently able to mine ore sufficient
to produce just over 9.0 million tonnes
of pellets. To utilise its spare pelletising
capacity efficiently, third party concentrate is
purchased, when available at economic prices,
on the local market. During the year, 281.0
thousand tonnes of third party concentrate
was acquired (2011: 747.3 thousand tonnes)
which generated a positive contribution. As
FYM ore comes on line in 2013 the Group
will replace third party concentrate.
Gross Margin
The Group’s gross margin was 51.2% for
the period compared to 63.7% in 2011.
This reflected lower market prices for
iron ore and industry cost inflation.
Year ended 31.12.12
Year ended 31.12.11
US$000
140,227
77,424
55,223
41,716
15,970
56,478
100,386
64,280
9,444
561,148
59.6
US$000
% of total
25.0% 118,148
59,821
13.8%
47,064
9.8%
40,921
7.4%
13,151
2.8%
38,662
10.1%
78,191
17.9%
55,810
11.5%
7,746
1.7%
459,514
50.7
% of total
25.7%
13.0%
10.2%
8.9%
2.9%
8.4%
17.0%
12.1%
1.8%
35
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Table 8: Selling and Distribution Expenses
(US$ million unless otherwise stated)
International freight for pellets
Railway transportation
Port charges
Other pellet transportation costs
Costs of logistics business
Gravel delivery costs
Advertising
Depreciation
Other
Total selling and distribution expenses
Total sales volume (thousand tonne)
Cost per tonne of pellets sold (including international freight) (US$)
DAP/FOB distribution costs per tonne of pellets sold (US$)
Year ended
31.12.12
113.5
93.4
32.0
18.6
27.5
0.5
9.6
9.8
7.0
311.9
9,675
32.2
14.5
Year ended
31.12.11
119.6
89.2
37.7
13.5
36.7
1.8
6.9
8.2
4.4
318.0
9,876
32.2
14.0
General and Administrative Expenses
General and administrative expenses were
US$56.3 million (2011: US$52.0 million).
The increase was related to new marketing
offices in Singapore and Japan as well as
personnel costs reflecting local inflation.
Finance Income and Expense
Finance income was US$2.6 million (2011:
US$2.5 million). Interest from cash held
was US$2.5 million in line with 2011. The
average cash balance during the year was
US$743.4 million (2011: US$604.8 million).
Other Income and Expense
Other income was US$11.3 million in
2012 (2011: US$6.9 million). The increase
reflected higher operating income from the
lease of premises to third parties at FPM.
Other expenses increased to US$30.2 million
(2011: US$17.1 million). This reflected increased
spending on support for the local communities
in the Poltava region, where FPM is based
and is a key part of the Group’s strategy.
EBITDA
The Group calculates EBITDA as profit from
continuing operations before tax and finance
plus depreciation and amortisation and
non-recurring exceptional items included
in other income and other expenses, and
the net of gains and losses from disposal of
investments, property, plant and equipment.
Ferrexpo maintained satisfactory levels of
profitability reflecting a 23.8% fall in market
prices and industry wide double digit
cost inflation. EBITDA for the period was
US$401.5 million (2011: US$800.9 million).
Finance expense increased to US$88.1 million
(2011: US$68.2 million) which included a
full year of interest payment on the Group’s
US$500 million Eurobond totalling US$39.5
million (2011: US$28.8 million). Due to financial
instability in the global banking sector,
particularly in Western Europe, Ferrexpo
drew in full its US$420 million revolving bank
facility in October 2011 which remained
outstanding in 2012. Interest on this facility
is 225 basis points above LIBOR which was
significantly below the previous bank facility.
The average cost of Group debt for the period
was 5.24%, almost a percentage point lower
than the average of 6.23% in 2011 reflecting
a full year of the lower cost bank facility.
Foreign Exchange Gains and Losses
Operating Foreign Exchange Gains
and Losses
Ferrexpo prepares and reports 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.
Financial Review continued
Selling and Distribution Expenses
Selling and distribution expenses were
US$311.9 million for the year compared
to US$318.1 million in 2011.
Selling and distribution costs to the Ukrainian
border increased by US$2.4 million to
US$140.4 million in the period (2011: US$138.0
million), equating to US$14.5 per tonne (2011:
US$14.0 per tonne). These costs primarily
include railway freight to the southern ports
at Yuzhny and Izmail and to the western
Ukrainian border as well as port charges.
Rail tariffs increased on average by
approximately 12.2% in 2012 compared
to 2011 reflecting a full year impact of tariff
increases in 2011. This was partially offset by
a discount for volumes transported by the
Group’s own rail cars. Ferrexpo owns 1,933 rail
cars and received discounts from 9% to 15%
for using its own cars, depending on direction.
International freight costs amounted to
US$113.5 million (2011: US$119.6 million).
These costs, which are also reflected as
part of revenue on associated CFR1 sales,
relate to the shipping of pellets by ocean
vessel to customers in Asia (on a CIF 2 or CFR
basis), and by barge to customers in Serbia
(on a DAP 3 basis). The Group shipped 3.8
million tonnes of pellets by sea to customers
in Growth and Natural markets on a CFR
or equivalent basis principally through the
loading of 17 capesize vessels. Utilisation of
capesize vessels allowed Ferrexpo to reduce
seaborne freight costs by approximately
US$21 million in 2012 compared to 2011.
Depreciation amounted to US$9.8
million (2011: US$8.2 million) and
related to amortisation of the Group’s
river vessels as well as to rail cars.
1 CFR is defined as delivery including cost and freight.
2 CIF is defined as delivery including cost, insurance
and freight.
3 DAP is defined as delivered at place.
36
Ferrexpo plcAnnual Report & Accounts 2012 During the period, the Ukrainian Hryvnia
remained stable against the US Dollar
at an average rate of UAH7.9905 (2011:
UAH7.9579). As a result, there was no
significant operating foreign exchange
movements, with a gain of US$0.7 million
recorded (2011: loss of US$1.4 million).
Non-operating Foreign Exchange Gains
and Losses
Non-operating foreign exchange gains or
losses result from the retranslation of financial
liabilities, loans and other similar items.
The Group recorded a non-operating
foreign exchange gain for the period of
US$6.6 million (2011: loss of US$1.9 million).
This related to income received from the
conversion of US Dollars for settlement of
liabilities denominated in Ukrainian Hryvnia
at an exchange rate higher than the one
applicable upon initial recognition.
Income Tax Expense
Ferrexpo pays tax in various jurisdictions.
The effective income tax rate was 17.8%
for the year ended 31 December 2012
compared to 16.8% for 2011. This rate is
influenced by the Group’s mix of profits
primarily between Switzerland, Ukraine
and Dubai, as well as the amount of non-
deductible expenses for tax purposes.
Cash Flows
Net cash flow from operating activities
was US$118.6 million for the period
compared to US$502.7 million in 2011.
Working capital increased by US$128.2 million
primarily reflecting higher VAT receivables
(2011: working capital increase was US$111.4
million). As a result of high capital expenditure
during the year on which the Group pays
20% VAT, and a delay in respect of VAT
repayments from the Ukrainian government,
VAT receivables increased by US$129.9 million
during the period to US$301.5 million. A
US$20.0 million discount has been recorded
to reflect the time value of money for VAT
given the expectation that a portion of VAT
will be recovered after more than one year.
Total capital investment for the year was
US$429.3 million, a 13.5% increase
compared to US$380.4 million in 2011.
Sustaining and modernisation capital
investment was US$113.5 million for the Group
(2011: US$128.0 million) of which US$108.4
million was invested at FPM (2011: US$121.3
million). The remaining US$5.1 million was
largely invested in the barging operations.
In November 2010, the Board approved
US$646.9 million for development projects
at FPM and FYM. In 2012, the Group spent
US$230.0 million in this regard (2011:
development capex US$177.9 million).
US$83.7 million was spent at FPM, while
US$146.3 million was invested at FYM.
US$41.8 million was spent on the FBM
and Northern deposits during the period
(2011: US$12.0 million). The spend
was primarily related to FBM for topsoil
removal and site preparation activities.
Total development expenditure on logistics
was US$43.5 million (2011: US$57.8 million).
Of this US$29.1 million related to the
acquisition of rail cars and US$14.4 million
was for the Group’s transshipment vessel.
The Group’s closing cash balance was
US$596.6 million (2011: US$890.1 million).
This reflected lower levels of profitability due
to a subdued market environment in 2012 as
well as record levels of capital investment.
Ferrexpo’s gross debt had an average
maturity of 3.0 years at 31 December 2012.
The Group has minimal debt repayments of
US$19.2 million in 2013. Net debt to EBITDA
as of 31 December 2012 was 1.05 times.
Table 9: Summary of Group Liquidity
and Debt
US$ million
Cash and equivalents
Gross debt
Net debt
Total equity
Undrawn facilities
Total liquidity
As of
31.12.12
596.6
1,019.9
(423.4)
1,569.9
–
As of
31.12.11
890.1
970.3
(80.2)
1,393.1
50.0
(facilities plus cash)
596.6
940.1
Christopher Mawe
Chief Financial Officer
37
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Corporate Responsibility
Chairman’s Statement
Ferrexpo’s Board is fully committed to the
Group’s corporate social responsibility
(‘CSR’) initiatives, which aim to achieve a
high international standard of performance.
The Board focuses its attention on three
key areas:
Safety: with the assistance of external
consultants, Ferrexpo is embedding an
improved safety culture throughout the
organisation. This is reflected in the steady fall
in the accident rate and in the accompanying
distress and disruption.
Environment: continuous efforts are made to
manage and reduce dust, gas and effluent
emissions, by introducing new equipment and
procedures. Ferrexpo is keenly aware of its
duty to manage its resources carefully and
with the proper regard for the natural and
social environment.
Community: Ferrexpo benefits enormously
from having a thriving, well-educated and
well-motivated local community which aids
the recruitment and retention of staff. To this
end it pursues a wide range of initiatives,
from dealing sensitively with its immediate
neighbours, to sponsorship of the football
teams that enjoy overwhelming support
among employees and the local community.
In all of this the Board aims to foster high
standards of behaviour among employees,
reinforced by appropriate codes of conduct.
Michael Abrahams
Chairman
2012 Highlights
Safety
– There were no work related fatalities during 2012, and the lost
time frequency rate continued to improve, reaching its lowest
point in the Company’s history. This reflects constant efforts
to increase safety standards and reduce injuries.
– No incidents requiring evacuation of staff or members of the
local community.
Environment
– Total emissions levels (NO2, SO2, CO2, and dust) declined
versus 2011, and were within regulated limits.
– Further regulatory permits were obtained for exploration,
production, and processing activities.
Community Initiatives (see also panel on page 47)
– Project management and monetary support for Regional and
District Planning Councils.
– Continuing sponsorship of the Ukrainian Premier League
football club FC Vorskla which has a large following among the
staff and local community, and also the local club FC Gornyak.
– Supply of new equipment for local schools.
– Construction of new apartment units.
– Supply of medical equipment to local and regional hospitals.
– More than 500 employees added to FYM in preparation for
2013 commercial production.
– Successful resettlement of eight households from the Yemtsy
village, in order to support the FYM business.
– Medical sponsorship for pensioners and others who are not
able to acquire all necessary medicines and supplies.
2013 Challenges
Environment
– Maintain the trend towards lower emissions (per tonne of
pellets produced), while continuing to develop the site and
increase production.
– Minimising dust levels from the expansion of the FYM open pit
and associated infrastructure.
Skills Availability
– Ferrexpo is examining many business and community
processes (including peer group compensation analysis,
accommodation/housing, and sports/entertainment facilities),
in order to attract and retain the skills required to support the
modernisation and growth of the site.
38
Ferrexpo plcAnnual Report & Accounts 2012 CSR Strategy
Set out below are the short-, medium- and long-term CSR goals for the Group.
Health and
Safety
Short-term (2012-2014)
Reduce/eliminate recurring
injuries through improvement in
safe workplace behaviour
Medium-term (2012-2016)
Implement effective systems
to ensure compliance with
company safety standards
Long-term (2012-2021)
Implement hazardous operations
analysis and risk assessment
processes to drive best practice
Employees
Increase availability of improved
living accommodation
Increase employee
development programmes
Integrate recruitment and
retention systems
Environment Keep controlled emissions (dust, gas
and effluent) below permitted limits
and reduce further where possible
Adapt production techniques
so as to minimise use of inputs
and minimise waste
Increase productive output
while reducing the impact on
the environment through new
processes and technology
Improve workplace conditions
through the implementation of
modern equipment and processes
Community Contribute to the development
of the education and skills of the
local population, and support
the modernisation of local
community infrastructure and
services, in order to develop and
maintain the local labour pool
Conduct successful negotiations with
local communities in order to facilitate
land acquisition for mining infrastructure
Align the growth of operations with
land acquisition and city planning
processes for rural and urban living
Work jointly with local communities
to create new infrastructure, social
programmes, and leisure activities
About this Report
The Board and its CSR Committee (described
below) are committed to continuing the drive
to improve health and safety, environmental
and social performance and reporting. As part
of this programme the decision was taken
in 2011 to adopt a more coherent structure
for reporting which can be built on as the
Company’s monitoring procedures grow.
This report covers the reporting period
1 January – 31 December 2012, and reporting
is on an annual basis. However, if there are
any significant CSR issues or developments
during the year, these are reported in the
half-yearly report. The last annual CSR review
was in the Company’s 2011 Annual Report.
Report Content
The scope of this report covers all areas
of Ferrexpo’s activities and those of its
operating subsidiaries.
The content of this report has been
defined by consideration of:
• Company principles and policies
• Consideration of the Company’s strategy
and how this may be affected by
sustainable development risks facing
the Company
• Feedback from and interests of
stakeholder groups
• Key CSR topics identified by senior
management engaged with the
CSR process
• Review against peer group companies
• Legislation and regulation that affects
the Company.
The topics covered are those that have been
assessed to be most material to the Company,
including those highlighted in the Risks and
Opportunities section on pages 41 to 42. We
will take account of stakeholders’ views in
order to refine and build on our CSR reporting.
Report Audience
The report is aimed principally at existing
and prospective shareholders and
investment analysts. Other users may
include local and national government,
employees, communities affected by
the Company’s operations, contractors,
suppliers, customers and the media.
External Assurance
This report has been self-reviewed, which is
considered to be appropriate at this stage
in the development of our CSR reporting.
Organisational Profile
Information on the Group and its activities
may be found in the Business Review on
pages 10 to 37 and employee numbers
are detailed in note 35 to the Financial
Statements. For information on the scale of
organisation (revenues, assets, capitalisation,
etc): please see notes 6, 18 to 21, and 28
to the Financial Statements.
Governance
The general governance structure of
the Group is explained in the Corporate
Governance Report on page 50.
39
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Corporate Responsibility continued
CSR Governance
The Corporate Safety and Social
Responsibility Committee
The Group has a Corporate Safety and
Social Responsibility Committee (the ‘CSR
Committee’) which is a sub-committee of
the main Board and includes two Board
members and two senior executives. It
monitors the implementation of CSR policies.
The CSR Committee is chaired by Brian
Maynard (Group Chief Operating Officer). The
other members of the CSR Committee are
Michael Abrahams (Chairman of the Board),
Kostyantin Zhevago (Chief Executive Officer)
and Viktor Lotous (FPM Chief Operating
Officer). To assist them in the exercise of their
duties, the CSR Committee will, from time to
time, engage specialist technical advisers.
During the year the matters considered
by the CSR Committee and the
Board included the following:
• Monitoring the review of targets and
metrics to be set in relation to the CSR
Performance Indicators; this work will
continue in 2013.
• Reviewing the work being done to
implement the greenhouse gas emissions
reporting regulations in the UK.
• Overall review of safety in mining and
processing operations, including analysis of
industrial injuries and sickness, workplace
conditions, and labour safety audits.
• A review of CSR related risks.
Business Conduct
A concern for high standards of business
conduct informs the Group’s approach to its
activities. Awareness of the Group Policy on
Bribery and Corruption was reinforced with
all managers and commercial employees
during the year with training provided when
required, in order to ensure best practice
and compliance with the UK Bribery Act.
It is the responsibility of the Chief Financial
Officer to monitor the Group’s anti-bribery
policies and report to the Committee of
Independent Directors on their effectiveness.
The Committee of Independent Directors
oversees the operation of business ethics and
anti-bribery policies and makes any necessary
recommendations for improvement.
Structure
Commitment to CSR is demonstrated through:
• Group policies
• Board and management focus
• Asset level management systems
• Performance management at all levels
The Board considers that Ferrexpo has
continued to make good progress in 2012.
The Group’s values (see the Chairman’s
Statement at the beginning of this CSR
review) are reflected in a Group-wide Code of
Corporate Responsibility and Business Ethics.
CSR at First-DDSG Logistics Holding GmbH
(formerly Helogistics Holding GmbH)
See section on First-DDSG Logistics on
page 47.
All Employees
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.
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 by far 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 is responsible for health
protection, industrial safety, 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 FYM open pit was commissioned in 2012
and will begin commercial production in 2013.
A department has been created to deal with
health, safety, and environment matters.
1,091
number of staff at FYM
The number of staff at FYM grew steadily
during 2012, to 1,091. CSR matters form
an increasing part of FYM’s regular
reporting procedures.
Adherence to External Charters
Safety
Management continues to take into account
best practice both in Ukraine and abroad.
In 2012, there was further action on the
recommendations of the DuPont audit of 2011.
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 accreditation is renewed
every five years, most recently in January
2013, and audits are carried out annually.
Environment
FPM and FYM are currently in compliance with
all applicable standards under environmental
laws in Ukraine, which 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. 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. The system was last audited in May
2011, and the accreditation was confirmed
by external auditors. At FYM, which is at an
earlier stage of development, preparations
have been made for ISO 14001 certification.
40
Ferrexpo plcAnnual Report & Accounts 2012
Stakeholder Engagement
Stakeholders
Stakeholders are those groups or
individuals who are significantly affected
by Ferrexpo’s activities or those whose
actions may affect the ability of the Group
to implement its strategies and objectives.
The stakeholder groups that the Group
engages with are described below.
Shareholders and the Investment Community
Directors and senior executives have frequent
discussions with institutional investors and
major shareholders on a range of issues
including performance, strategy and
governance. The Head of Investor Relations
manages programmes and communications,
particularly at the time of the full and half-year
results announcements when presentations
are given to analysts, brokers and major
shareholders. The Annual General Meeting
is an important event in the calendar, giving
all shareholders the opportunity to engage
directly with Directors and management.
Customers and Suppliers
Ferrexpo has had successful business
relationships with several of its customers for
over 20 years. Marketing plays an important
role in developing new relationships in order
to diversify the customer base in anticipation
of the planned increase in production.
How Ferrexpo Engages
with its Stakeholders
Employees (and Trade Unions)
Successful communication with employees
is crucial in helping Ferrexpo to achieve
its objectives. Communication starts at
a personal level when employees begin
their employment through an induction
programme, and continues throughout their
time with Ferrexpo. It takes a variety of forms
according to the circumstances – from face-
to-face discussion to formal group training
programmes, from job-specific training to
programmes for ensuring compliance with
legal or regulatory requirements (such as
that undertaken in 2011 in implementing
anti-bribery procedures across the Group).
Communication is of course two-way,
and employees are encouraged to give
feedback either through their managers
or occasional employee surveys.
Local Communities
Ferrexpo has a positive impact on local
communities through being a major employer.
As a mining company, it also recognises the
sensitivities that surround the occasional
necessary displacement of small communities
by its operations, and those operations’ impact
on the physical landscape. It works hard to
maintain dialogue with local communities,
and has a dedicated department through
which communications are channelled.
Local Training Institutions
Ferrexpo works towards establishing a closer
relationship with the local training institutions,
with a view to developing accelerated training
programmes that improve the flow and
quality of new recruits to its operations.
Government (National and Local)
Engagement with local and national
government is open and proactive.
Communication often revolves around project
implementation and land acquisition, as
well as routine submission of information as
required by the authorities. Recent activities
included sponsored development of future
town planning in the Kremenchuk district.
Risks and Opportunities
The main CSR-related business risks are:
• Mining risks and hazards
• Licences
• Governmental approvals for expansion-
related projects
• Relocation of communities
Mining Risks and Hazards
The Group’s mining operations are subject
to risks and hazards including industrial
accidents, equipment failure, unusual
or unexpected geological conditions,
environmental hazards, extreme weather
conditions (especially in winter) and other
natural phenomena. Many of these risks
are outside management’s control.
Shareholders and Investment
Community
– Annual Report and Accounts
– Website
– Analyst and investor meetings
and conferences
– Annual General Meeting
– Written communication and email
– Presentations
– Site visits
Customers and Suppliers
– Written communication and email
– Face to face
– Annual Report and Accounts
– Networking at conferences
Employees and Trade Unions
– Face to face regular meetings
with employees and unions
– Information boards around the site
– Training
– Written communication and email
– Surveys
– Special programmes (e.g. anti-
bribery procedure training)
Local Communities
– Sponsorship (finance and know-how)
– Funding of community projects
– Local TV
– Local press articles and interviews
– Site visits
Government (National and Local)
– Written communication and email
– Face to face
– Site visits
– Audits and inspections
– Annual Report and Accounts
41
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Corporate Responsibility continued
Mitigation: The Group is dedicated to a
zero-harm objective, and the mitigation of
mining risk is one of its primary operational
goals. All safety initiatives and processes
are regularly reviewed by management and
adjusted to changing circumstances, with
the support of third-party service providers
(i.e. DuPont) as required. Appropriate safety
training and refresher training is given to all
relevant employees, and their remuneration
is partly linked to safety performance. The
modernisation of plant and equipment has
also allowed safer working practices and
improved environmental performance.
Accidents are fully investigated and
remedies proposed and implemented.
However, given the nature of mining
operations there can be no guarantee that
accidents and fatalities will not occur.
There were no fatalities in 2012, and
the accident rate for the year has
fallen compared with 2011.
Throughout the Group’s 40-year history
of operation it has not experienced
any significant shutdowns.
Licences
All licences for FPM’s and FYM’s operations
have been renewed upon expiry. The risk of
licences being revoked is low, but requires
timely and close monitoring in order to prepare
for all externally controlled situations.
Mitigation: The Group continues to monitor
and review its commitments under its
various licences in order to ensure that the
conditions contained within the licences
are fulfilled or the appropriate waivers
obtained. There is careful assessment of the
situation regarding transfers of licences.
Government Approvals of Expansion
The process of obtaining governmental
approvals is time-consuming. The Yeristovo
mine is being developed according to plan,
and the extension of the current mining
licence was approved. The Group does
not yet hold all governmental approvals
required to conduct all of its future expansion
projects that are under study, although
none of the approvals applied for to date
has been refused by the authorities.
The risk is kept under careful review.
Mitigation: The Group continues to maintain
an open and proactive relationship with
various governmental authorities and is
aware of the importance of compliance with
local legislation and standards. The Group
maintains strict compliance with the National
Resources Code of Ukraine and execution
of work in accordance with the project
design, through the active engagement of
Ukrainian and international legal advisers.
Relocation of Communities (this is a subsidiary
risk, and for that reason is not included in the
Principal Risks on pages 20 to 23)
Certain small rural settlements will have to be
relocated in order to allow us to proceed with
some of our mine expansion projects. Potential
solutions have been explored, and progress
has been made during the recent months.
Mitigation: The resolution of the issue is
supported by strong activity at the local level
including timely meetings and dialogue with
community representatives, in order to reach
consensus on the benefits of relocation in
terms of improved accommodation and utilities
and better access to transport infrastructure
and social services. Communities are paid a
fair price for their land and compensation for
disruption. As it is included in the approved
funding of the Capital Project, the topic is
under constant review, including weekly
meetings at site, and when necessary at
monthly Executive Committee meetings.
(See also ‘Community Initiatives’ under
‘Highlights’ on page 38.)
Ferrexpo’s Approach
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 reflect this.
• Within the 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.
Goals
Ferrexpo’s goal is to develop a culture in
which safe production is recognised as
cost-effective, and which leads to improved
workplace conditions and behaviour. The
objective (originally set in 2009) of achieving
the best mining safety record in Ukraine is
supported by targets including a reduction
of 5% in the lost-time injury frequency rate.
42
Ferrexpo plcAnnual Report & Accounts 2012 4,655
employees trained in safety
at FPM training centre 2012
For 2012 management set itself the task
of further reinforcing 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).
Performance
Monitoring the effectiveness of health
and safety policies includes the review
of health and safety performance, as
measured by key KPIs as shown below:
Lost Time Injury
Frequency Rate
(LTIFR – see note)
Fatal accidents
Total accidents
Lost days
2012
2011
2010
0.66
0
10
338
0.77
0
11
469
1.46
1
20
916
Notes
LTIFR – Number of work-related lost time injuries per million man
hours (not including contractors).
The prevention of injuries to employees is the
highest priority of the Board and management,
who follow the principle that all accidents are
avoidable. There were no work-related fatalities
within the Group during 2012, and the accident
rate in Ferrexpo’s operations has fallen.
In line with policy, 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 created 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.
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 in the case of fatalities).
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.
Organisational Responsibility
In accordance with the legal requirements
of the jurisdictions within which Ferrexpo
operates, it has developed health and safety
policies appropriate to its operations and types
of activity. Compliance with these policies
is monitored via a three-tiered system: daily
control is conducted by operating personnel,
engineers and technicians; production
managers carry out weekly inspections; senior
management conducts periodic inspections
in conjunction with government personnel.
There is a centralised Directorate for Industrial
Labour Safety and Environmental Protection
taking the place of the previous more localised
structure; in this Directorate the remuneration
of safety engineers is no longer directly linked
to operational output (thereby contributing
to the maintenance of health and safety
standards). Procedural manuals on labour
safety and environmental protection at the
operational level continue to be implemented.
Training
Staff are trained in Health and Safety matters
as part of their general technical training.
In 2012, safety training at the FPM Training
Centre was provided to 4,655 employees
at all levels of the Group (see ‘Training and
Development’ under ‘Employees’ on page 44).
43
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 6,937
employees benefited from
various forms of in-house
and external training
investment has been made in facilities for
health and safety training. Training takes
the form of basic and specialised training,
retraining and refresher training courses,
both internal and external. In 2012, 107
employees were sponsored by Ferrexpo
at institutes of higher education. Total
educational spending for employees in higher
educational establishments was UAH631
thousand (US$79 thousand). In 2012, a total
of 6,937 employees received various forms
of in-house and external training, at a cost
of UAH6.5 million (US$813 thousand).
Corporate Responsibility continued
Employees
Policy
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.
Goals
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 employees by involving an
increasing number of staff in its employee
development programmes and by providing
competitive compensation packages.
Ferrexpo also aims to combine employees’
local knowledge with modern technology so
as to enhance the capacity and utilisation
of its physical plant and equipment.
Ferrexpo also intends to implement more
up-to-date Human Resources systems.
Performance
In 2012, 66 staff were able to join the employee
housing programme, which enables selected
employees to take out loans for the purchase
of accommodation in Komsomolsk, at a highly
subsidised rate of interest and without the
normal requirement in Ukraine of a substantial
down payment. This plays an important part in
Ferrexpo’s strategy for retaining key employees.
Further information on employee numbers
is set out in note 35 to the Accounts.
Organisational Responsibility – Trade
Unions and Industrial Relations
The Group does not have individual contracts
with its employees in Ukraine other than with
its senior managers. Every year a Collective
Labour Agreement is signed which states, inter
alia, that individual salaries will be increased
at least in line with inflation. Management
believes, having conducted market research,
that wages paid by the Group are higher than
average wages in Ukraine. There has been
no major industrial action or labour dispute
at FPM since its privatisation in 1995.
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,
44
Ferrexpo plcAnnual Report & Accounts 2012 UAH91M
invested on implementation of
environmental protection measures
Environment
Policy
• Operating practices and growth plans
will be implemented in a manner
consistent with the principles underlying
long-term sustainable resource
development; Ferrexpo will always bear
in mind the long-term environmental
consequences of its actions.
• All operating assets are required to
develop and implement environmental
management systems, in line with
Group policy.
• All new capital projects will include
environmental risk assessments
(according to IFC (International Finance
Corporation) Environmental and
Social Performance Standards) and
mitigation plans.
Goals
• Maximise recovery of iron from ore, tailings,
and concentrate so as to ensure the best
use of Ferrexpo’s natural resource.
• Minimise use of production consumables
such as water, electricity, natural gas,
diesel fuel, and explosives in order to
reduce demand for externally sourced
natural resources.
• Use timely investment to sustain existing
operations, and develop new projects so
as to allow mineral resource to be
converted into new iron ore reserves.
• Utilise stripping materials (topsoil, sand,
clay, rock) to support the creation of new
plant and transport infrastructure.
• Eliminate workplace waste through
improved management systems, and utilise
plant facilities to re-use scrap materials.
• Monitor processes and employee
behaviour in order to minimise waste and
by-product contaminants and improve the
condition of plant and equipment.
• Monitor dust and gas emissions and waste
effluents in order to keep them below the
permitted limits and reduce them further
wherever possible.
• Work with engineers and National Design
Institutes to ensure that modernisation and
production growth plans include designs
and documentation that reduce their overall
impact on the environment.
• Monitor new technologies that could assist
in the reprocessing of iron ore tailings.
Performance
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
Total emissions
2012
6,332
2011
5,803
2010
6,294
3,293
2,226
813
3,296
9,628
2,475
2,345
887
3,968
9,771
2,922
2,336
937
3,575
9,869
River Dnieper
In 2012, FPM spent UAH91 million on the
implementation of environmental protection
measures; this increase was due mainly
to work on the tailings storage area.
Additionally, UAH69 million was spent on
environmental monitoring and maintenance
activities. Charges payable under emissions
regulations declined slightly from UAH32
million in 2011 to UAH31 million in 2012
due to lower waste disposal charges.
Ongoing environmental management
activities in 2012 included the building of
reservoirs for water conservation (using
mining overburden to build dams), further
development of the closed water cycle
for production activities, environmental
equipment upgrades and landscaping work.
Organisational Responsibility
Ferrexpo has a dedicated Environmental
Department the primary responsibility of which
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.
45
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Corporate Responsibility continued
Ferrexpo is a major sponsor of FC Vorskla, a football
club based in the Poltava Region which plays in
the Ukraine Premier League. As well as providing
important advertising opportunities for Ferrexpo,
this sponsorship of a club that is enthusiastically
supported by many people in the local community is
a key part of Ferrexpo’s social responsibility strategy
Communities
Policy
• Ferrexpo’s presence should benefit
those communities around its
operations; operations will benefit
if local communities are thriving.
• Ferrexpo strives to be recognised
as an attractive local employer and
a concerned corporate citizen.
• Ferrexpo will assist in the development of
the micro-economic environment within
the communities in which it operates, so
as to ensure that their dependence on
Ferrexpo for their livelihood is reduced.
• Ferrexpo aims to enhance and
have a positive relationship with the
communities around it; to hold an open
dialogue with those communities; and to
ensure that its involvement with them is
cost effective and relevant to their needs.
46
Community Context
The Poltava region, in which Ferrexpo’s
mining operations are situated, is an area of
predominantly flat agricultural land close to
the River Dnieper, one of the largest European
river systems and an important transport
artery for Ukraine, Belarus and Russia. Iron
ore mining in the area dates from the 19th
century, although the major expansion of
mining activity occurred in the early 20th
century. The town of Komsomolsk was
established adjacent to the mine to support
the mining operation and ancillary industries
(transport, power etc). Ferrexpo is still by
far the largest employer in the town, which
has a population of around 55,000 people,
with approximately 23% of the working
population of Komsomolsk being employed
by the mine in one capacity or another.
Goals
• Make operational leadership accessible to
the various local citizen groups and
organisations, so as to allow Ferrexpo to
assess and prioritise their concerns about
its various initiatives.
• Provide expertise and voluntary services in
order to sustain and/or improve community
infrastructure, supplying financial
assistance where appropriate.
• Participate in the development of modern
cultural and social programmes and
activities in the local area.
• Work consistently with local town and
village councils in order to understand their
expectations of Ferrexpo, so that Ferrexpo
can within reason provide value added
solutions or alternatives.
• Give preference to suitably qualified local
residents when hiring to fill vacancies.
Performance
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. These funds have been spent on
medical facilities, social services, education,
religion, culture and sporting activities, as
well as on the maintenance of certain of
the city’s social and cultural structures.
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
Ferrexpo plcAnnual Report & Accounts 2012 sustainability of the local economy. To
encourage this process, FPM has offered
financial and other support to employees
who provide these in-house services so
as to encourage them to transform internal
departments into stand-alone businesses.
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 its operations. As a rapidly expanding
company, FYM has been able to provide
significant employment opportunities for local
people and aims to have good relationships
with the communities near its operations.
First-DDSG Logistics Holding GmbH
(formerly Helogistics Holding GmbH)
The Group acquired the river transport
company Helogistics Holding GmbH (now
renamed First-DDSG Logistics Holding
GmbH ‘First-DDSG’) at the end of 2010.
Because of the different nature of its
activities its CSR is reported on separately
from that of the Group’s mining operations.
Ferrexpo’s strategy is to integrate First-
DDSG fully into Ferrexpo’s CSR culture.
(a) Health and Safety
The accident rate at First-DDSG during 2012
was determined by six lost time accidents,
equating to a LTIFR of 8.11 accidents per
million man hours, and a total of 70 lost days,
with no fatalities. Accidents were mainly due
to injuries causes by handling equipment
during frequent barging and mooring
operations. Accidents are reported to and
discussed at monthly meetings with the
senior management of the Group, and steps
are taken to minimise their reoccurrence.
(b) Employees
First-DDSG provides training for staff so that
they can develop the knowledge, skills and
values necessary for the performance of
their roles.
(c) Environmental
First-DDSG complies with the applicable
environmental regulations of the countries
along the Danube in which it operates (for
example, regarding the prevention of fuel
leakages and the grounding of barges).
(d) Community
As a transport company operating over a
wide area rather than concentrated in one
place, First-DDSG does not at present
consider it appropriate to incur significant
expenditure on community initiatives.
Community initiatives achieved in 2012
During 2012, FPM and FYM continued to
pursue the policy of fostering relationships
with the communities around the perimeter
of the mining and processing sites, including
Komsomolsk, Dmitrovka, and Pryshyb.
Work in Komsomolsk, the town where FPM
and FYM are based, and where much of
the workforce lives, has concentrated on
initiatives designed to increase its attractions
as a place in which to live, and thus create
favourable conditions for the development of
the pool of labour on which Ferrexpo relies:
– Upgrades to the local and employer
bus transport vehicles
– More than 300 workers hired
from the local communities
– Donation of modern equipment
to school classrooms
– Purchase of advanced
equipment for local hospitals
– Continuation of the ‘My First Job’
programme, and placement for 92
graduates of the local technical schools
– Renovations and repairs to schools
and sports facilities, and hostel
accommodation for families.
Refurbishment of schools to aid with
insulation and upgrade of equipment
47
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Board of Directors and Executive Committee
1
3
5
7
Executive Committee
3
5
2
1
7
4
6
48
2
4
6
8
1. Michael Abrahams, CBE DL (75)
Non-executive Chairman
Michael Abrahams joined the Board
on 14 June 2007. He is chairman of the
Prudential Staff Pension Scheme. 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. He was chairman
of the London Clinic until March 2012.
2. Kostyantin Zhevago (39)
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.
From 2002 until 2012 he was 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’). Between 1993 and
1996, he was financial director of F&C Group
of companies. He is a non-executive director
of New World Resources plc, a subsidiary
of BXR Group Limited. He graduated from
the Kyiv State Economic University in 1996,
specialising in international economics.
3. Christopher Mawe, FCA (51)
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. Before joining Ferrexpo
he was finance director of UK Coal plc.
4. Oliver Baring (68)
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
Ferrexpo plcAnnual Report & Accounts 2012 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 (51)
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. He is the non-
executive Chairman of Firestone Diamonds
plc and serves on a number of other 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
is a Chartered Accountant (South Africa).
6. Wolfram Kuoni (46)
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 (60)
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 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. He 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 (58)
Non-executive Director
Mike Salamon joined the Board on 27 March
2009. He is a non-executive director of Central
Rand Gold, Gem Diamonds and Minera
las Cenizas. He was executive chairman of
New World Resources plc, a subsidiary of
BXR Group Limited and managing director
of AMCI Capital, a private equity fund from
2007 until 2012. 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 he 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.
Executive Committee
1. Kostyantin Zhevago
Chief Executive Officer
(See profile under Board of Directors)
2. Christopher Mawe, FCA
Chief Financial Officer
(See profile under Board of Directors)
3. Nikolay Goroshko (53)
General Director, FYM
Nikolay Goroshko joined FPM in 1984. He was
Chief Financial Officer of FPM until April 2007
and Chief Commercial Officer in charge of the
Group’s Growth Projects in December 2007.
He became the Chief Financial Officer of FYM
upon its formation in July 2008, and from 1
November 2012 the General Director of FYM.
He is a graduate of the Kyiv Institute of National
Economics, specialising in Industrial Planning.
4. Jason Keys (41)
Chief Marketing Officer
Jason Keys joined Ferrexpo in July 2011.
He held sales and marketing posts at Rio
Tinto Coal and Iron Ore and at BHP Billiton
Coal for 12 years, and then led BHP Billiton’s
Iron Ore commercial marketing team for
five years before joining Ferrexpo. He holds
a Bachelor of Commerce degree from
the University of Western Australia and is
a Certified Professional Accountant.
5. Nikolay Kladiev (40)
Chief Financial Officer, FPM
Nikolay Kladiev joined the Ferrexpo Group
in June 2005 and FPM in October 2007.
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.
6. Viktor Lotous (48)
Head of Managing Board and Chief Operating
Officer, FPM
Viktor Lotous joined FPM in 1986. He became
chief engineer in 1997, and Head of Managing
Board and Chief Operating Officer in April
2007. He is a graduate of Kryvyi Rih Mining
and Ore Institute, and of the Kyiv State
Economic University, specialising in Finance.
7. Brian Maynard (53)
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.
49
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Corporate Governance Report
Introduction
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. 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. As a company with a
premium listing on the London Stock Exchange, the Company is
subject to the 2010 UK Corporate Governance Code (the ‘2010 Code’).
The 2010 Code is available from the Financial Reporting Council’s
website, www.frc.org.uk.
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
(In Accordance with Listing Rule 9.8.6R)
During the year to 31 December 2012 the Company complied with
all relevant provisions of the 2010 Code.
The 2010 Code establishes principles of good governance in five areas:
Leadership, Effectiveness, Accountability, Remuneration, and Relations
with Shareholders. This report explains how these principles were
applied, with the exception of those relating to Directors’ remuneration
which are included in the Remuneration Report on pages 56 to 66.
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.
Leadership and Effectiveness
The Board
The Board is composed of a Non-executive Chairman: Michael
Abrahams; two Executive Directors: Kostyantin Zhevago, Chief
Executive Officer (‘CEO’), and Christopher Mawe, Chief Financial Officer
(‘CFO’); 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.
Biographical details of the Directors at the date of this report are set
out on pages 48 and 49, and details of their membership of Board
committees are set out on pages 52 and 53. A summary of the roles
of the Chairman, the CEO 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 (such as approving the Group strategy and
budget, annual and long-term capital expenditure plans, and contracts
for more than a certain monetary amount). 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 2010 Code. It is the responsibility of
the CEO 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 six times during the reporting period. Attendance by
Directors at Board meetings and Board committee meetings is shown
on pages 52 and 53. All Board meetings are held in Switzerland.
Chairman, 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 48 and 49. There has been no increase
in those commitments during the reporting period.
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 48
and 49.
50
Ferrexpo plcAnnual Report & Accounts 2012 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
dominate or unduly influence 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 2010 Code.
In the opinion of the Board, all the 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 Mike Salamon who until September 2012 represented 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
B.1.1. of the 2010 Code.
Lucio Genovese and Wolfram Kuoni are 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 page 66). 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 B.1.1 of the 2010 Code. The Board
believes this still to be the case.
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, The Minco Trust 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., The Minco Trust
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., The Minco Trust 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’) (which is composed of certain
members of the Executive Committee and other members of senior
management) and the Committee of Independent Directors (‘CID’). Any
changes to the schedules are noted at the beginning of the next Board
meeting. The CID has delegated authority to carefully consider and (if
deemed appropriate in the circumstances) approve on behalf of the
Board transactions where there is a risk of a conflict of interests. This
procedure operates effectively, and the Group undertakes to follow
emerging best practice in this area.
The Board has established the CID to consider and, if appropriate,
approve related party transactions and transactions where there is
a risk of a conflict of interest 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. This Committee also
oversees anti-bribery compliance matters on behalf of the Board.
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 is set out in the Directors’ Report
on page 67.
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.
51
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 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 in 2012 by the Chairmen of these
bodies. This is done by the Chairman of the relevant body interviewing
his colleagues whilst referring to a questionnaire covering matters
including the balance and diversity of the body’s membership, the
body’s and its individual members’ effectiveness and performance (in
terms of contribution to good governance), and the administration and
conduct of the body’s business, 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, and no particular areas were identified as needing
improvement. The mixture of skills and experience on the Board and
the committees was felt to be appropriate.
The Board’s intention is to hold an externally-facilitated assessment
once every three years, in line with the 2010 Code. The first of these
is now in progress and will be reported on in the 2013 Annual Report.
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.
Board
Six Board meetings were held during the year.
Board members
M Abrahams
K Zhevago
C Mawe
O Baring
L Genovese
W Kuoni
I Mitiukov
M Salamon
Non-executive Chairman
Chief Executive Officer
Chief Financial Officer
Senior Independent Non-executive
Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Non-executive Director
Audit Committee
Four Audit Committee meetings were held during the year.
Committee members
W Kuoni
O Baring1
L Genovese
I Mitiukov
Chairman
1 Appointed to the Committee in August 2012
Attendance
record
6/6
6/6
6/6
6/6
6/6
6/6
6/6
5/6
Attendance
record
4/4
1/1
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 the significant financial reporting issues and
judgements that they contain. The Audit Committee is also responsible
for reviewing internal controls and risk management systems, whistle-
blowing procedures and internal audit processes, and oversees the
relationship with the external auditors.
Remuneration Committee
Five Remuneration Committee meetings were held during the year.
The Board periodically reviews the membership of its committees
to ensure that committee membership is refreshed.
In view of the lapse of five years since the IPO it was decided in 2012
to adjust the composition of some of the committees. This was done
in August 2012, when Oliver Baring was appointed as an additional
member of the Audit Committee and Wolfram Kuoni replaced
Michael Abrahams as a member of the Remuneration Committee.
Chairman
Committee members
L Genovese
M Abrahams1
W Kuoni2
I Mitiukov
O Baring
The Group provides the committees with sufficient resources to
undertake their duties, including access to the Company Secretary.
1 Resigned from the Committee in August 2012
2 Appointed to the Committee in August 2012
Attendance
record
5/5
4/4
1/1
5/5
5/5
Tables 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.
The Remuneration Committee meets at least twice a year, as required
by its terms of reference, 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 page 56.
52
Ferrexpo plcAnnual Report & Accounts 2012
Nominations Committee
One Nominations Committee meeting was held during the year.
CID
Five CID meetings were held during the year.
Chairman
Committee members
O Baring
M Abrahams
W Kuoni
I Mitiukov
K Zhevago
Attendance
record
1/1
1/1
1/1
1/1
1/1
Committee members
O Baring
M Abrahams
L Genovese
W Kuoni
I Mitiukov
Chairman
Attendance
record
5/5
5/5
5/5
5/5
5/5
Nominations Committee Report
The Nominations Committee meets at least once a year, as required
by its terms of reference. 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 (including of gender) on the Board.
No vacancies arose during 2012; however, when seeking to recruit
new Board members in future the Committee will have regard to the
recommendations of the Davies Report. In accordance with the need
for the non-executive membership of the Board to be ‘refreshed’ from
time to time, the Committee will during 2013 start the search for new
directors, with a view to making new appointments and retiring current
directors from 2014 onwards.
Ferrexpo operates equal-opportunities policies with the aim of
encouraging the employment of women wherever this is reasonable
and practicable, so that over time women will increase as a proportion
of the work force and of the pool from which senior appointments are
made. The Committee will consider the Board’s diversity policy in 2013.
CSR Committee
One CSR Committee meeting was held during the year.
Committee members
B Maynard
M Abrahams
V Lotous
K Zhevago
Chairman
Attendance
record
1/1
1/1
1/1
1/1
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 page 40.
The 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
transactions where there is a risk of a conflict of interest of any member
of the Board under the relevant section of the Companies Act 2006.
The Committee’s terms of reference also cover the oversight of
anti-bribery procedure implementation.
The Executive Committee
The Executive Committee is a key decision making body of the Group.
Its members are detailed on page 49. It is responsible for managing
and taking all material decisions relating to the Group apart from those
that are reserved for the entire Board. 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
responsibility for the execution of Board-approved strategies for the
Group, for ensuring that appropriate levels of authority are delegated to
senior management, for the review of organisational structures and for
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 pages 71 and 72.
Audit Committee Report
The 2010 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. The
Audit Committee complies with these requirements, and 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 52.
53
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Corporate Governance Report continued
During the reporting period the Audit Committee met four times, and its
activities included:
• Reviewing 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.
• Reviewing with Ernst & Young LLP the scope of the audit work
proposed for 2012 and audit fees.
• Reviewing the risk matrix at each meeting, and discussing with the
Head of Internal Audit the internal audit plan and the findings of the
internal audit reviews conducted during the year.
• Reviewing the Group’s internal controls and risk management
systems.
• Reviewing the Group’s whistle-blowing arrangements.
• Reviewing the effectiveness of the external auditors, the quality of
their auditing work, their independence and the non-audit services
they provided, and considering whether to recommend their
reappointment.
A statement on the Board’s position regarding the Group as a going
concern is contained in the Directors’ Report on page 70.
Internal Control and Risk Management
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 2012 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.
Full details of the Group’s policy on risk and uncertainties are set out in
note 37 to the financial statements on pages 120 to 128. See also the
Risks section of the Financial Review on pages 20 to 23.
The Board has, through the Executive Committee and the Audit
Committee, reviewed the effectiveness of the Group’s system of
internal controls.
54
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 and by the
Board.
• Clearly defined organisational and reporting structure and limits of
authority for transaction and investment decisions, including any
with related parties, applied to subsidiary companies including FPM
and FYM, the key Ukrainian subsidiaries, and the Helogistics Group.
• 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.
• An Investment Committee (an executive sub-committee) meets
once or twice a month to approve capital expenditures within limits
delegated by the Executive Committee and the Board.
• The Financial Risk Management Committee (‘FRMC’) (an executive
sub-committee) reviews financial information and management
accounts, and meets monthly.
• 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.
•
• 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.
• A framework of transaction and entity level controls to prevent and
detect material error and loss.
• Anti-fraud measures through an independent department operating
in the Group’s key operating subsidiary FPM.
• A whistle-blowing policy is in place under which staff may in
confidence, via an independent, secure website, raise concerns
about financial or other impropriety.
Treasury
Details of the Group treasury policy are referred to in the Chairman’s
and Chief Executive Officer’s Statement on page 14, the Risks section
of the Financial Review section on pages 20 to 23 and in the notes to
the financial statements on pages 120 to 128.
Investment Proposals
A budgetary process and authorisation levels regulate capital
expenditure. For expenditure beyond specified levels, detailed written
proposals are submitted to the Investment and Executive Committees
and then if necessary to the Board for approval.
Ferrexpo plcAnnual Report & Accounts 2012 Internal Audit
A Group-wide internal audit function has been established, and
operated during 2012 using an experienced internal auditor based in
Ukraine but independent of operational management, who reported
directly to the CFO and the Audit Committee.
An internal audit programme for 2012–14, approved by the Audit
Committee, 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 effectiveness of the audit process and the overall performance,
independence and objectivity of the auditors are 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. The Committee reviewed these
arrangements during the year and believes that they are still
appropriate.
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 94.
Recommendation on Reappointment of Auditors
The Committee considered whether Ernst & Young (who have held
office as auditors since 2007) should be proposed for reappointment
by the shareholders at the 2013 Annual General Meeting, or whether
the audit should be put out to tender as a matter of policy. Taking into
account their general satisfaction with the auditors and the recent
rotation of audit partners, the Committee agreed to recommend to the
Board that Ernst & Young should be proposed for reappointment for
another year.
Implementation of Requirements of UK Bribery Act 2010
At the time of the introduction of the Bribery Act in July 2011, and
following a thorough risk assessment and the establishment of due
diligence procedures for business counterparties, all employees were
informed (and given instruction where necessary) about the policies
and procedures introduced in order to ensure compliance with the Act
(which took the form of the Group Policy on Bribery and Corruption).
The Board delegated responsibility for implementing the Policy and
monitoring its effectiveness to an anti-bribery compliance officer
(currently the CFO), who reports to the CID at its meetings and makes
any recommendations arising from the meetings to the full Board.
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 CEO, the CFO,
and the Head of Investor Relations meet major shareholders to discuss
performance, strategy and governance, and the Non-executive
Directors are available for discussions with shareholders if required.
J.P. Morgan 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 CEO, 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 12 March 2013.
55
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Part A: Policy Section
Remuneration Committee
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 Corporate Governance
Code and are available for inspection on the Company’s website at
www.ferrexpo.com.
Key Principles of the 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;
•
• 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
link a high proportion of remuneration to performance;
• 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.
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
relations bodies.
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 UK Corporate Governance Code. Part A
of the report, which is not subject to audit, sets out the Company’s
remuneration policy. Part B provides details of remuneration and share
incentives of the Directors for the year ended 31 December 2012. As
required by Schedule 8 of the Companies Act, only subsections entitled
Pensions, 2010 LTIP award vesting, 2012 LTIP awards granted and
Emoluments table of Directors of Part B have been subject to audit.
This Report will be subject to an advisory shareholder vote at the
Company’s 2013 Annual General Meeting.
Summary Statement
A Statement to Shareholders from the Chairman of the
Remuneration Committee
On behalf of the Board, I am pleased to introduce the Directors’
Remuneration Report for the year ended 31 December 2012. As is
made clear elsewhere in the Annual Report, in 2012 Ferrexpo
performed again in line with its strategic objectives, keeping costs under
control and maintaining production and sales volumes and expanding
productive potential with the opening of a second mine. This was
against a background of cost inflation and volatile iron ore prices.
The Remuneration Committee believes that this performance is fairly
reflected in executive remuneration outcomes for the year, as set
out in this report.
It is the policy of the Board to align executive and shareholder interests
by linking a high proportion of remuneration to performance, basing
rewards on a balanced portfolio of performance measures, and
assessing them against the relevant market so as to ensure that they
attract, motivate and retain talented executives. The Chief Executive
Officer’s incentive is derived entirely from his shareholding in the
Company, and his salary is paid at a flat rate of US$240,000 per year
which is donated to charity. The Board considers this large
shareholding in the business to be a significant factor in aligning the
performance of the CEO with other shareholders’ interests, and is
satisfied that this structure is appropriate. The remuneration of the
Executive Directors is disclosed in local currency and allows year-on-
year comparison, uninfluenced by exchange rate fluctuations on
notional translation into US Dollars.
Whilst the new regulations governing the reporting and shareholder
approval of executive remuneration do not come into force until
Ferrexpo’s 2013 financial year, we have incorporated a number of
changes this year to help make our Remuneration Report clearer and
easier to understand. In summary, this report is divided into two distinct
sections; the first (A) outlines Ferrexpo’s forward-looking remuneration
policy, setting out components of pay, how they are linked to the
business strategy, and incentive opportunities for the Executive
Directors. The second (B) reviews how the policy was implemented in
2012 and includes a table showing a single figure of total remuneration
for Executive Directors.
Lucio Genovese
Chairman of the Remuneration Committee
56
Ferrexpo plcAnnual Report & Accounts 2012 Summary of Ferrexpo’s Remuneration Policy for Executive Directors
This section of our report summarises the key components of remuneration for Executive Directors.
Purpose and link to strategy
Fixed pay
Base salary
To attract and retain
talent by ensuring base
salaries are competitive
in the market in which the
individual is employed
Pension
To provide retirement
benefits
Benefits
Designed to be competitive
in the market in which the
individual is employed
Variable pay
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
Operation
Opportunity
Performance metrics
Changes for 2013
Base salary increases are
applied in line with the
outcome of the review
Business and individual
performance are
considerations in
setting base salary
No changes to the
policy for 2013
Latest salary increases
were effective 1 January
2013 and are set out in the
Report on Remuneration
in 2012 on page 61
Pension plan entitles
members to a fixed
pension depending on a
conversion percentage
ratio fixed by the Swiss
government, with the
employer liable to
make up any deficit
Benefits values
vary by role and are
reviewed periodically
Not performance related
None
Not performance related
None
For the CFO, maximum
(‘stretch’) STIP opportunity
of 150% of salary;
target STIP opportunity
of 100% of salary
KPIs selected, and their
respective weightings,
vary each year depending
on strategic priorities
No change to the policy
except for minor changes
in weighting of measures
as set out on page 62
Measures used for
the STIP are set out
in the Report on 2012
Remuneration on page 62
Base salaries are reviewed
annually, with reference
to the individual’s
role, experience and
performance; business
performance; salary levels
for equivalent posts at
relevant comparators;
cost of living and inflation;
and the range of salary
increases applying
across the Group
Executive Directors are
members of the Ferrexpo
AG pension plan which
is a mandatory insurance
scheme under Swiss
law, provided for all
employees of Ferrexpo AG
Benefits include life
insurance, annual
leave, and medical
insurance. Where
appropriate, allowances
for accommodation,
relocation, and tax
advice may be offered
KPIs are set at the start of
the year and are weighted
to reflect the contribution
of each executive
At the end of the year,
the Remuneration
Committee determines
the extent to which these
have been achieved.
The Remuneration
Committee has the ability
to exercise discretion to
adjust for factors outside
management control
The CEO does
not participate
57
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Remuneration Report continued
Purpose and link to strategy
LTIP
Aims to motivate
participants to deliver
appropriate longer-term
returns to shareholders
by encouraging them to
see themselves not just as
managers but as part-
owners of the business
Operation
Opportunity
Performance metrics
Changes for 2013
None expected
The Remuneration
Committee has the ability
to grant performance
shares or market value
options under the LTIP.
To date, the Remuneration
Committee has only
awarded performance
shares to executives
For the CFO, the LTIP
provides for annual awards
of performance shares and
options up to an aggregate
limit of 200% of salary in
normal circumstances. This
limit may be exceeded in
exceptional circumstances,
e.g. recruitment
Actual awards are made
on the basis of a similar
number of shares to
participants at comparable
levels in the organisation
The award levels and
performance conditions
on which vesting depends
are reviewed from time
to time to ensure they
remain appropriate
Dividends accrue on
performance shares over
the vesting period, and are
paid on shares that vest
The CEO does not
participate
The vesting of awards
is usually subject to:
• continued employment
• the Company’s
performance over a
three-year performance
period
The performance
measures applied to LTIP
awards are reviewed from
time to time to ensure they
remain appropriate and
aligned with shareholder
interests. Measures
used for the 2012 LTIP
award, and expected
for the 2013 LTIP award,
are set out in the Report
on 2012 Remuneration
on pages 62 to 64
Share Ownership Guidelines
With effect from the grant of 2010 LTIP awards (vesting in 2013), Executive Directors and members of the Executive Committee are encouraged, in
line with the growing practice among FTSE 250 companies, 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 level is achieved.
Pay-for-Performance: Scenario Analysis
The CEO does not participate in any incentive plan, for reasons stated in the introduction to this report. Under all scenarios, therefore, his
remuneration, which is donated to charity, remains as set out in Section B of this report. For the remaining executive director, the graph below
provides estimates of the potential future reward opportunity and the potential split between the different elements of remuneration under three
different performance scenarios; ‘Below threshold’, ‘Target’ and ‘Stretch’.
CFO
Stretch 29%
2%
8% 44%
17%
Target
41%
3%
10% 41%
5%
Below
threshold
75%
6%
19%
Salary
Pension
Benefits
STIP
LTIP
CHF ‘000s
0
500
1,000
1,500
2,000
2,500
58
Ferrexpo plcAnnual Report & Accounts 2012
In illustrating potential reward opportunities the following assumptions have been made:
Scenario
Stretch
Target
Below threshold
STIP
Maximum STIP (150%
of salary)
On target STIP (100%
of salary)
LTIP
Performance warrants
full vesting1
Performance warrants
threshold vesting (20%)1
No STIP payable Threshold not achieved
(nil)
Fixed pay
Latest known base
salary, pension, benefits
1 Excludes increase in value arising from share price growth.
Potential reward opportunities illustrated above are based on the policy which will apply in 2013, applied to the base salary in force at 1 January
2013. For the STIP, the amounts illustrated for the CFO are those potentially receivable in respect of performance for 2013. For the LTIP awards, the
award opportunity for the CFO is assumed to remain the same number of shares as in 2012 (i.e. 120,000 shares for the CFO) and the face value is
estimated using the average share price over Q4 2012 of 215 pence). It should be noted that the LTIP awards do not normally vest until the end of
three years following the beginning of the year in which they were granted.
Employee Context
In making remuneration decisions, the Remuneration Committee also considers the pay and employment conditions elsewhere in the Group. Prior
to the annual pay review, the Remuneration Committee receives a report from the CEO setting out changes to broader employee pay. This forms
part of the basis for determining Executive Director remuneration.
Remuneration of Senior Executives Below the Board
The policy and practice with regard to the remuneration of senior executives below the Board is consistent with that for the Executive Directors,
except that they may participate in local, discretionary plans.
Senior executives participate in the LTIP with the same performance measures applied as for Executive Directors. In exceptional circumstances,
such as recruitment, long-term incentive awards may be granted without performance conditions to participants below the Board.
Details of Executive Directors’ Service Contracts
The Executive Directors are employed under contracts of employment with Ferrexpo AG, a Group company. 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 principal terms of the Executive Directors’ service contracts (which have no fixed term) are as follows: Mr Zhevago’s
service contract with the Company is terminable on not less than six months’ notice to be given by the Company or by the executive. Mr Mawe’s
service contract with the Company is terminable on not less than 12 months’ notice to be given by the Company or not less than six months’
notice to be given by the executive.
Executive Director
K Zhevago
C Mawe
Position
CEO
CFO
Notice period
Date of contract
1 November 2008
From
employer
6 months
7 January 2008 12 months
From
employee
6 months
6 months
Exit Payments Policy
The policy on termination payments is to pay no more than what may be stipulated in an individual’s service contract.
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 such a payment (which in practice it will do if the speed and
certainty afforded by this provision are thought to be in the best interests of shareholders), the Executive Director will be entitled under his contract
to receive all components of his remuneration, allowances and expenses for the extent of the notice period including (only in the case of Mr Mawe)
the STIP, which reflects the practice in the Company at the time when Mr Mawe was appointed.
It is the Remuneration Committee’s policy to review contractual arrangements prior to new appointments in the light of developments in
best practice.
Unvested LTIP awards held by leavers normally lapse. However, if the individual is considered a ‘good’ leaver (e.g. for reasons of death, ill-health,
injury or disability; his employing company ceasing to be a member of the Group; the business (or part of the business) in which he is employed
being transferred to a transferee which is not a member of the Group; or any other reason which the Remuneration Committee in its absolute
discretion permits), any outstanding LTIP awards will be pro-rated for time and performance. The Remuneration Committee retains discretion to
alter these provisions (as permitted by the relevant Plan Rules) on a case-by-case basis following a review of circumstances, in order to ensure
fairness to both shareholders and participants.
59
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Remuneration Report continued
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 Kostyantin Zhevago. Any such directorships must be formally notified to the Board. Details of
external directorships of quoted companies held by Executive Directors, along with fees retained, are as follows:
Executive Director
K Zhevago
C Mawe
1 The fee is donated to various charities
Company
Role(s) held
New World Resources plc Non-executive Director
–
–
Fees
retained
Nil1
–
Relative Importance of Spending on Pay
The graph below shows Ferrexpo’s profit after tax, dividend, and total employee pay expenditure (this includes pension, variable pay, and social
security) for the financial year ends 31 December 2011 and 31 December 2012, and the percentage change.
Dividend, US$m#
600
Total employee pay expenditure, US$m
600
Profit after tax, US$m
600
575
400
200
0
-63%
215
400
200
0
400
200
0
+32%
111
2012
84
2011
39
2011
+0%
39
2012
2011
(% change from 2011 to 2012)
2012
# Excluding special dividends
Considerations of Shareholder Views
The following table shows the results of the advisory vote on the 2011 Remuneration Report at the 24 May 2012 AGM. It is the Remuneration
Committee’s policy to consult with major shareholders prior to any major changes to its executive remuneration structure.
For
99.44%
Against
0.45%
Votes withheld (which are not votes in law and are therefore not counted in the calculation of votes cast for or against a resolution) were equal
to 0.11% of the votes cast on this resolution.
Part B: Remuneration in 2012
The following section provides details of how the remuneration policy was implemented during the year.
Remuneration Committee Membership in 2012
The Remuneration Committee is composed of five independent Non-executive Directors. Lucio Genovese is the Chairman of the Committee, and
its other members are Michael Abrahams, Oliver Baring, Wolfram Kuoni and Ihor Mitiukov. The Remuneration Committee met five times during the
year. Attendance at meetings by individual members is detailed in the Corporate Governance Report on page 52. A summary of the topics
discussed at each meeting in 2012 is detailed below:
• Review of remuneration of Executive Directors and members of the Executive Committee
• LTIP performance and the Company’s performance compared to its peers
• General market considerations surrounding executive remuneration packages and structure
• Performance evaluation of the Committee
The CEO 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 the committee. No Director is present when his own remuneration is being discussed.
60
Ferrexpo plcAnnual Report & Accounts 2012
Advisers
The Remuneration Committee retains Kepler Associates 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 fees paid to Kepler Associates in respect of work carried out in 2012 totalled GBP31,000.
The CEO provides guidance to the Remuneration Committee on remuneration packages of senior executives employed by the Group (but not
in respect of his own remuneration).
Single Total Figure of Remuneration
The table below sets out in a single figure for each currency of payment the total remuneration received by each Executive Director for the year
ending 31 December 2012 and the prior year. (See also table on page 62 below, showing how STIP targets were met in the year.)
All figures shown in currency of payment
1 Salary
2 Benefits
3 Pension
4 STIP
5 LTIP
6 Dividends
Total
K Zhevago (CEO)
C Mawe (CFO)
2012
US$240,000
US$49,000
CHF2,000
–
–
–
US$289,000
plus CHF2,000
2011
US$240,000
US$100,000
CHF2,000
–
–
–
US$340,000
plus CHF2,000
2012
CHF632,000
CHF168,000
CHF48,000
CHF650,000
£229,000
£6,000
CHF1,498,000
plus £235,000
2011
CHF626,000
CHF168,000
CHF48,000
CHF820,000
£269,000
£7,000
CHF1,662,000
plus £276,000
The figures have been calculated as follows:
1 Base salary: amount earned for the year
2 Benefits: the taxable value of benefits received in the year (accommodation allowance)
3 Pension: increase in transfer value over the year, less Director’s contribution. Other formulas (such as 20 times the increase in the value
of accrued benefit over the year) are not considered appropriate since this is not a classic Defined Benefit scheme (see ‘Pensions’ below),
and for expatriate staff the pension is repaid as a lump sum on leaving the country
4 STIP: this is the total bonus earned on performance during the year
5 LTIP: the market value of shares that vested on performance to 31 December of the relevant year (2012: 91% vested on performance,
2011: 100% vested on performance) and share price on 31 December 2012 of 251.2 pence and 31 December 2011 of 268.8 pence
6 Dividends: the total value of dividends earned during the vesting period on LTIP shares vesting on 31 December, paid in cash
Base Salary
Base salaries are reviewed annually, with reference to the individual’s role, experience and performance; business performance; salary levels at
relevant comparators; and the range of salary increases applying across the Group. During the year the Committee considered pay levels against
international mining comparators and other FTSE-listed companies of similar size. Following this review the Committee decided to increase Mr
Mawe’s salary by 1% from CHF626,160 to CHF632,424 with effect from 1 January 2012. Mr Zhevago’s salary, which he donates to Ukrainian
charities, remained unchanged at US$240,000. A further change has been made for 2013, as set out below.
Executive Director
K Zhevago
C Mawe
Base salary at:
Position
CEO
CFO
1 January 2013
US$240,000
CHF638,748
1 January 2012
US$240,000
CHF632,424
Increase
–
1%
The increase to the CFO’s base salary for 2013 of 1% is in line with the average increase across the Group (outside the relatively high-inflation
environment of Ukraine) of 1%. The CEO’s salary remained unchanged.
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, to which the
Company contributes an average of 6% of their annual base salaries. Pension benefits earned by the Directors in the year ended 31 December
2012 were:
Accrued
benefit at
31 December
2012
56
648
Accrued
benefit at
31 December
2011
41
495
Increase in
period (net of
indexation)
4
56
Transfer value
of net increase
in accrual over
period
11
97
Age
39
51
Forex effect
0
0
Transfer value
of accrued
pension at
31 December
2012
24
348
Transfer value
of accrued
pension at
31 December
2011
18
275
Director’s
contributions in
2012
4
25
Increase in
transfer value
less Directors’
contributions
2
48
CHF000
K Zhevago
C Mawe
Forex effect
0
0
61
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Remuneration Report continued
Benefits
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$49,480 in 2012,
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 CHF167,790
of accommodation allowance per annum.
STIP
The STIP applies to the members of the Executive Committee, excluding Mr Zhevago. The STIP is a discretionary annual bonus scheme. For 2012,
the maximum STIP opportunity for members of the Executive Committee ranged up to 150% of salary.
Key performance indicators (‘KPIs’) for 2012 were set at the start of the year for each member of the Executive Committee and were weighted
to reflect the contribution of each executive to the achievement of that KPI. KPIs during the year related to financial performance (EBITDA and
NOPAT), operational performance (pre-stripping, production and sales volumes), safety (behavioural safety initiatives and improvements in lost-time
accident statistics), and personal and project performance. Financial KPIs were adjusted, as in previous years, to take account of market and raw
material cost price developments, as appropriate, to the extent that these were not under the direct control of management. Adjustments were at
the full discretion of the Committee. The level of achievement against each of KPIs for FY2012 as determined by the Committee in the case of the
relevant Executive Director is set out in the table below:
EBITDA
NOPAT
Production
Sales volume
KPI
Financial
Operational
CSR
Development Projects,
Personal and
governance
Total
Weighting
for CFO
22.5%
22.5%
FY2012
assessment
Just below stretch
Just below target
Just below target
Between threshold and target
10% Just below target
Projects (weighting 10%) – below target
Personal and governance (weighting 35%) –
45%
between target and stretch
100%
Max
bonus as
% of salary
33.75%
33.75%
15%
67.5%
Actual
bonus as
% of salary
23%
4%
16%
2%
8%
7.3%
42.5%
150%
102.8%
No payment is made under the STIP if performance is below threshold. For the CFO, threshold performance earns a bonus of 50% of salary,
target performance 100% of salary and stretch performance 150% of salary.
The Company’s overall performance in 2012 was assessed as being slightly above target. Taking account of this, and individual performance, the
Committee made an award to the CFO under the STIP of CHF649,935, equivalent to 102.8% of salary in respect of 2012.
The outcome of the KPIs for other members of the Executive Committee under the STIP, as determined by the Remuneration Committee, ranged
between 59.9% and 91.1% of salary depending on the achievement of the relevant KPIs, which were weighted towards the responsibilities and
targets of the executive concerned.
The STIP framework for 2013 is in line with the principles of the 2012 framework. CSR, projects and personal KPIs continue to be set as in previous
years. Weightings for the CFO in 2013 are shown in the table below:
KPI
Financial (EBITDA, NOPAT)
Operational (Production, Sales volume)
CSR
Personal, Projects, Governance
Total
Weighting
for CFO
22.5%
20%
10%
47.5%
100%
LTIP
The LTIP framework was approved by shareholders at the 2008 AGM. The LTIP provides for annual awards of performance shares and options up
to an aggregate limit of 200% of salary in normal circumstances. Total outstanding awards granted under the Plan from its inception in 2008 until
the end of 2012 are equivalent to 0.20% of issued share capital. Actual awards are made on the basis of a similar number of shares to participants
at comparable levels in the organisation. The award granted to the CFO in 2012 did not exceed 100% of salary. As mentioned earlier, the CEO
does not participate. Awards are in the form of performance shares which vest according to the extent to which Ferrexpo’s three-year TSR
matches or outperforms that of a comparator index.
62
Ferrexpo plcAnnual Report & Accounts 2012 Relative TSR is the primary long-term incentive measure as the Remuneration Committee continues to believe this is the most objective external
measure of the Company’s success over the longer term. The Remuneration Committee reviewed the constituents of the comparator index and
their weightings prior to the grant of 2012 LTIP awards and dropped Brockman Resources which was acquired by Wah Nam International
Holdings in July 2012. The constituents of the index for the last three cycles are summarised in the table below:
Focused iron ore miners
Atlas Iron
Brockman
China Vanadium
Cliffs
Fortescue Metals
Gindalbie Metals
Kumba Iron Ore
MMX Mineracao
Mount Gibson
Northern Iron
Global diversified miners
Anglo American
BHP Billiton
Rio Tinto
Vale
Xstrata
Single commodity/emerging market miners
African Rainbow Minerals
Alcoa
Alumina
Aluminium 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
Weighting
40%
2010
2011
2012
50%
10%
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
TSR is calculated on a common currency basis to ensure that comparisons with international comparators listed overseas are fair. As described in
previous reports, the TSR share-price averaging period was extended from three to six months for LTIP awards granted in 2011 onwards to help
improve the comparison of the management long-term incentive in relation to potential short-term movements in Ferrexpo’s share price or the
share price of comparator companies.
The Committee has discretion to review the comparator index if any of the constituent companies is affected by corporate events such as mergers
and acquisitions.
The Committee also reviews the constituents and their weightings prior to the start of each LTIP cycle in order to ensure that they remain
appropriate. In the event that the pending acquisition of Xstrata by Glencore completes, the Remuneration Committee intends to replace Xstrata
with the combined entity.
63
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 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 Committee must be satisfied that the recorded TSR is a fair reflection of Ferrexpo’s underlying business
performance. The vesting parameters are illustrated below:
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 Committee will retain discretion to vary this treatment if it deems it to be in shareholders’ interests
to do so.
2010 LTIP Award Vesting
The performance period for the 2010 LTIP awards ended on 31 December 2012. Ferrexpo’s TSR performance relative to the weighted index
was measured by Kepler Associates. From 1 January 2010 to 31 December 2012, Ferrexpo’s TSR performance was 25.4% and Index TSR was
2.1%. This outperformance of 7.1% p.a. of Index TSR resulted in 91% of 2010 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 has therefore determined, in accordance with the rules of the plan that 91% of the
2010 LTIP awards vested.
2012 LTIP Awards Granted
In April 2012 Chris Mawe was granted an award of shares under the LTIP over 120,000 LTIP shares. The three year performance period over
which TSR performance will be measured began on 1 January 2012 and will end on 31 December 2014. The constituents and weightings
of the comparator index are discussed on page 63.
C Mawe
Total
At 1
January
2012
100,000
100,0001
120,000
Granted
(2012
award)
120,000
Exercised
100,000
Lapsed
0
Total at 31
December
2012
0
100,000
120,000
120,000
340,000
Price on
date of
award
(pence)
Date from
which
exercisable Expiry date
143 01.01.2012 14.09.2019
275 01.01.2013 17.06.2020
341 01.01.2014 07.08.2021
275 01.01.2015 22.04.2022
1 This award has vested 91% under the TSR performance condition described above. At the date of vesting (31 December 2012) the market price of a share was 251.2 pence.
Exit Payments Made in Year
No Executive Directors left during the year.
64
Ferrexpo plcAnnual Report & Accounts 2012 Non-executive Directors (Including the Chairman)
Neither the Chairman nor any of the Non-executive Directors has a service contract with the Company; however, each has entered into a letter of
appointment with the Company. The Non-executive Directors are each appointed for an initial period of three years, and their appointments may
then be renewed on a three-yearly basis, subject to re-election when appropriate by the Company in general meeting; in 2011 the Company
adopted the practice of annual re-election of all Directors. Unless otherwise determined, neither the Company nor the Director concerned may
give less than three months’ notice of termination of the appointment.
The Non-executive Directors’ fees are reviewed each year in light of the time commitment and level of involvement that Non-executive Directors
are required to devote to the activities of the Board and its committees, market practice, and surveys by Kepler Associates. The current fees are:
Role
Chairman fee
Non-executive Director base fee
Committee chairman fee
Fee
US$500,000
US$150,000
US$40,000
The Chairman’s fee and the Non-executive Directors’ fees were last increased in 2011.
The dates of the Chairman’s and Non-executive Directors’ appointments who served during the reporting period are as follows:
Non-executive Director
M Abrahams
O Baring
L Genovese
W Kuoni
I Mitiukov
M Salamon
Position
Chairman
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Date of appointment
14 June 2007
1 December 2007
14 June 2007
14 June 2007
14 June 2007
27 March 2009
Date of re-election
Annual re-election
Annual re-election
Annual re-election
Annual re-election
Annual re-election
Annual re-election
Total Shareholdings of Directors
Executive Directors and members of the Executive Committee are 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 level is achieved.
As at 12 March 2013, the Executive Directors’ shareholdings are as follows:
K Zhevago
C Mawe
Shareholding
requirement
(% salary)
100%
100%
Shares held
Owned
outright
300,198,313
142,202
Subject to
performance1
–
340,000
Subject to
deferral
–
–
Current
shareholding2
(% salary)
–
83%
Guideline
met?
Yes
No
1 Performance awards are nil-cost options.
2 Based only on shares owned outright at 31 December 2012 and share price of 251.2 pence.
Total interests of the Directors in office as at 31 December 2012
K Zhevago1
C Mawe
M Abrahams
O Baring
L Genovese
W Kuoni
I Mitiukov
M Salamon
At 31 December 2012
300,198,313
142,202
170,992
20,130
169,568
28,854
31,952
100,000
At 31 December 2011
300,198,313
67,439
168,690
20,130
169,180
28,466
31,522
100,000
1 Kostyantin Zhevago is interested in these shares as a beneficiary of the Minco Trust, which is the ultimate shareholder of Fevamotinico Sarl, 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 12 March 2013, being a date not more
than one month prior to the date of notice of AGM.
65
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Remuneration Report continued
Emoluments Table of Directors
Currency of
payment
Salary
or fees
000
Pension
000
Benefits
000
Bonus
000
Total
2012
US$000
Total
2012
CHF000
Total
2011
US$000
Total
2011
CHF000
US$
US$
CHF
US$
US$
US$
US$
US$
500
240
632
190
230
265
150
150
1,725
632
–
2#
48
–
–
–
–
–
2
48
–
495
1685
–
–
–
–
–
49
168
–
–
650
–
–
–
–
–
–
650
500
291
–
190
230
265
150
150
1,776
–
–
–
1,498
–
–
–
–
–
–
1,498
450
3486
–
165
205
240
135
135
1,678
–
–
–
1,6987
–
–
–
–
–
–
1,698
Chairman
M Abrahams
Executive Directors
K Zhevago
C Mawe
Non-executive Directors
O Baring1
L Genovese2,4
W Kuoni3,4
I Mitiukov
M Salamon
Total US$
Total CHF
# Exchange rate CHF1: US$1.067
1 Oliver Baring receives a fee of US$150,000 p.a. as a Non-executive Director and an additional fee of US$40,000 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$150,000 p.a. as a Non-executive Director and additional fees of US$40,000 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$150,000 p.a. as a Non-executive Director and additional fees of US$40,000 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 34.
5 Relates to accommodation allowance.
6 Total for 2011 includes pension related benefits of US$8,000.
7 Total for 2011 includes pension related benefits of CHF48,000.
Comparison of Company Performance and Executive Director Pay
The graph below shows the value, at 31 December 2012, of £100 invested in Ferrexpo’s shares on 31 December 2007 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
2012 LTIP Index
FTSE 250 Index
250
200
150
100
50
0
31 Dec 07
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 11
31 Dec 12
Other transactions involving Directors are set out in note 34 (related parties) to the Financial Statements.
This Report was approved by the Board on 12 March 2013.
Signed on behalf of the Board.
Lucio Genovese
Chairman of the Remuneration Committee
66
Ferrexpo plcAnnual Report & Accounts 2012
Directors’ Report
The Directors present their report to shareholders for the financial year
ending 31 December 2012.
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
10 to 19
• The Operational Review on pages 24 to 33
• The Financial Review on pages 34 to 37
• The Risks section on pages 20 to 23
• The Corporate Social Responsibility Review on pages 38 to 47
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 50 to 55 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 73.
The Directors recommend a final dividend of 3.3 US cents per Ordinary
Share. Subject to shareholders approving this recommendation at the
AGM, the dividend will be paid in UK Pounds Sterling on 31 May 2013
to shareholders on the register at the close of business on 3 May 2013.
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).
In recognition of the opening of the Yeristovo mine the Directors
have also announced a special dividend of 6.6 US cents per share,
amounting to US$40 million, for payment on 28 March 2013 to
shareholders on the register at the close of business on 22 March 2013.
The dividend will similarly be paid in UK Pounds Sterling with an election
to receive US Dollars.
Directors
The Directors of the Company who served during the year were:
• Michael Abrahams
• Oliver Baring
• Lucio Genovese
• Wolfram Kuoni
• Chris Mawe
•
Ihor Mitiukov
• Mike Salamon
• Kostyantin Zhevago
In compliance with the 2010 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 48 and 49. Details of the
remuneration of the Directors, their interests in shares of the Company
and their service contracts are contained in the Remuneration Report
on pages 56 to 66.
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
The Company has a single class of Ordinary Shares of 10 pence 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 Institutional Investor Guidelines.
Details of the issued share capital of the Company are shown in note 28
of the financial statements.
67
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 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.
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 24 May 2012. This authority will expire at the conclusion of
the Company’s 2013 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 AGM enclosed with this report.
The Company did not make use of the authority mentioned above
during 2012.
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.
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 Act.
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 Employee Benefit Trust (‘EBT’)
The trustees of the Company’s 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.
68
Ferrexpo plcAnnual Report & Accounts 2012 Substantial shareholdings
As at 31 December 2012, the Company had been advised in accordance with the Disclosure and Transparency Rules, of the following notifiable
interests in its voting rights. There were no changes in these interests between 31 December 2012 and the date of this report.
Name of shareholder
Fevamotinico S.a.r.l.1
Wigmore Street Investments No. 3 Ltd2
Ordinary Shares
300,198,313
147,156,035
Number of voting
rights
300,198,313
147,156,035
% of the
Company’s
total voting
rights at date of
notification
51.00%
24.99%
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 147,156,035 shares through its nominee Lynchwood Nominees Ltd.
Free Float
On 14 December 2011 the FTSE Group announced that the FTSE Policy Group had approved a change to the Ground Rules of the FTSE UK
Index Series, increasing to 25% the minimum free float (as calculated by FTSE) for a company to be eligible for inclusion. The FTSE Group also
indicated that Ferrexpo does not currently satisfy this requirement as it calculates that Ferrexpo’s free float is approximately 24%. Companies not
currently satisfying this requirement have been given a time frame of 24 months from 1 January 2012 to reach this free float level if they are to
continue to be included in the UK Index Series. Ferrexpo is considering with its advisers the options available to it.
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:
LTIP
The rules of the Company’s LTIP 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$420 million revolving pre-export finance facility with ING Bank N.V., Uni Credit Bank AG, Société Générale and other banks entered
into in September 2011, if Kostyantin Zhevago ceases to own directly or indirectly at least 30% of the issued and allotted share capital of the
Company, or any person (other than Kostyantin Zhevago) becomes the beneficial owner of the shares in the Company carrying more than 50%
of the voting rights normally exercisable at a general meeting, then the lenders are not obliged to fund a drawdown.
Corporate Bond Due 2016
Under the conditions of the Notes issued in April 2011, if Kostyantin Zhevago ceases to own directly or indirectly at least 30% of the issued and
allotted share capital of the Company, or any person (other that Kostyantin Zhevago) becomes the beneficial owner of shares in the Company
carrying more than 50% of the voting rights normally exercisable at a general meeting, then any Noteholder will have the right to require the
repurchase of its Notes at a purchase price in cash equal to 101% of the principal amount plus accrued and unpaid interest.
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 Corporate Governance Report (page 51). 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 41 to the financial statements on page 129.
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 International Financial Reporting Standards (‘IFRS’). It is not practicable to estimate the market value of land and mineral reserves
and resources at each balance sheet date.
69
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 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 71.
Amendments to Articles of Association
The Articles may be amended by special resolution in accordance with
the Act.
AGM
The AGM of the Company will be held at 11.00am on Thursday 23 May
2013 at The Dorchester, Park Lane, London W1K 1QA . A separate
letter from the Chairman summarising the business of the meeting and
the Notice convening the AGM will be 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 2013 AGM.
This report was approved by the Board on 12 March 2013.
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
Directors’ Report continued
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 37 to the Notes to
the Consolidated Financial Statements on pages 120 to 128.
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 2012 for the Company
was 25 days (2011: 24 days).
Charitable and Political Donations
The Group made no political donations during the year. Group
donations to charities worldwide were nil (2011: nil), with UK charities
receiving nil (2011: nil). (For community support donations, please see
note 11 to the Consolidated Financial Statements.)
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 37 of the Notes to the Consolidated Financial
Information on pages 120 to 128. Further references to risk are made
in the Risks section on pages 20 to 23 and in the Internal Control
section of the Corporate Governance Report on pages 54 to 55
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 20 to 23 and 34 to 37. The financial position of the
Company, its cash flows, liquidity position and borrowing facilities are
described in the Financial Review on pages 34 to 37. In addition,
note 37 of the Notes to the Consolidated Financial Statements on
pages 120 to 128 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 as well as currency risk and interest rate risk.
The Directors are of the opinion that the Company will continue to
operate and, as such, the accounts have been prepared using the
Going Concern principle.
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 50 to 55
(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.
70
Ferrexpo plcAnnual Report & Accounts 2012 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;
• 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;
• state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained
in the financial statements; and
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.
• prepare the financial statements on the going concern basis
For and on behalf of the Board
unless it is inappropriate to presume that the Company will continue
in business.
Michael Abrahams
Chairman
Christopher Mawe
Chief Financial Officer
71
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Ferrexpo plc
Annual Report & Accounts 2012
Independent Auditor’s Report to the
Members of Ferrexpo plc
• 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.
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; and
• 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 returns; or
• Certain disclosures of Directors’ remuneration specified by law are
not made; or
• We have not received all the information and explanations we require
for our audit.
Under the Listing Rules we are required to review:
• The Directors’ Statement, set out on page 70, in relation to going
concern;
• The part of the Corporate Governance Statement relating to the
Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
• Certain elements of the report to shareholders by the Board on
Directors’ remuneration.
Ernst & Young LLP
Ken Williamson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
12 March 2013
1. The maintenance and integrity of the Ferrexpo plc web site is the responsibility of the directors;
the work carried out by the auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes that may have occurred to
the financial statements since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
We have audited the financial statements of Ferrexpo plc for the year
ended 31 December 2012 which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income,
the Consolidated Statement of Financial Position, the Consolidated
Statement of Cash Flows, Consolidated Statement of Changes in
Equity, the Parent Company Balance Sheet and the related notes 1 to
41 for the Group financial statements and notes 1 to 9 for the Parent
Company financial statements. The financial reporting framework that
has been applied in the preparation of the Group financial statements 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.
Respective responsibilities of Directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set
out on page 71, 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. In addition, we read all the
financial and non-financial information in the Annual Report and
Accounts to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material
misstatements or inconsistencies, we consider the implications
for our report.
Opinion on financial statements
In our opinion:
• The 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
2012 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
Accounting Practice; and
72
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 gains/(losses)
Operating profit from continuing operations before adjusted items
Write-offs and impairment losses
Share of profit from associates
Losses on disposal of property, plant and equipment
Profit before tax and finance from continuing operations
Finance income
Finance expense
Non-operating foreign exchange gains/(losses)
Profit before tax
Income tax expense
Profit for the year from continuing operations
Profit attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
Profit for the year from continuing operations
Earnings per share:
Basic (US cents)
Diluted (US cents)
Notes
9
7
8
Year ended
31.12.12
Year ended
31.12.11
6 1,424,030 1,788,012
(649,544)
(694,576)
729,454 1,138,468
(317,951)
(311,964)
(51,969)
(56,329)
6,943
11,347
(17,091)
(30,161)
(1,360)
653
757,040
343,000
(478)
(836)
2,012
2,772
(46)
(4,067)
758,528
340,869
2,511
2,598
(68,205)
(88,091)
(1,934)
6,629
690,900
262,005
(115,964)
(46,425)
574,936
215,580
10
11
12
13
14
15
15
12
16
214,340
1,240
215,580
567,822
7,114
574,936
17
17
36.63
36.57
97.09
96.97
73
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Consolidated Statement of Comprehensive Income
US$000
Profit for the year
Exchange differences on translating foreign operations
Income tax effect
Exchange differences arising on hedging of foreign operations
Income tax effect
Net losses on available-for-sale investments
Income tax effect
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
Total comprehensive income for the year
Year ended
31.12.12
215,580
(573)
–
(201)
32
(326)
62
(1,006)
214,574
Year ended
31.12.11
574,936
(3,024)
–
(894)
153
(1,868)
437
(5,196)
569,740
213,272
1,302
214,574
562,883
6,857
569,740
74
Ferrexpo plcAnnual Report & Accounts 2012 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
Inventories
Other non-current assets
Other taxes recoverable and prepaid
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
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
Notes
As at
31.12.12
As at
31.12.11
19/40
20
21
26
14
22
23
18 1,342,039
112,171
16,995
534
12,362
41,810
97,895
29,130
924,690
103,240
19,186
1,290
–
93,358
–
23,426
1,652,936 1,165,190
117,046
128,905
22,720
384
172,951
890,154
1,101,331 1,332,160
1,845
1,101,432 1,334,005
2,754,368 2,499,195
139,635
116,553
36,468
24,869
187,246
596,560
101
21,130
121,628
185,112
(348,063)
121,628
185,112
(348,603)
1,590,192 1,414,512
1,548,869 1,372,649
20,480
1,569,999 1,393,129
951,430
13,329
3,015
2,232
970,006
18,948
42,648
29,713
36,674
8,077
136,060
1,184,369 1,106,066
2,754,368 2,499,195
993,139
23,504
2,368
2,581
1,021,592
26,846
62,609
51,285
13,672
8,365
162,777
23
24
25
26
26
27
28
28
28
29
31
32
22
29
30
33
26
26
The financial statements were approved by the Board of Directors on 12 March 2013.
Kostyantin Zhevago
Chief Executive Officer
Christopher Mawe
Chief Financial Officer
75
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 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
Interest income
Share of profit from associates
Movement in allowance for doubtful receivables
Loss on disposal of property, plant and equipment
Write-offs and impairment losses
Site restoration provision
Employee benefits
Share-based payments
Operating foreign exchange gains/(losses)
Non-operating foreign exchange (gains)/losses
Operating cash flow before working capital changes
Changes in working capital:
Decrease/(increase) in trade and other receivables
Increase in inventories
Increase/(decrease) in trade and other accounts payable
Increase in VAT recoverable and other taxes prepaid
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
Dividends from associates
Cash payment for acquisition made in 2010
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 plc
Dividends paid to non-controlling shareholders
Net cash flows from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Currency translation differences
Cash and cash equivalents at the end of the year
76
Notes
Year ended
31.12.12
Year ended
31.12.11
262,005
690,900
54,169
81,271
(2,598)
(2,772)
721
4,067
836
(650)
16,381
1,608
(653)
(6,629)
407,756
(3,226)
(33,638)
40,603
(131,903)
279,592
(55,610)
(99,771)
(5,641)
118,570
(419,357)
569
(9,911)
2,652
–
6,710
–
–
(419,337)
63,955
(13,186)
(4,672)
(38,775)
(254)
7,068
(293,699)
890,154
105
596,560
41,003
62,321
(2,511)
(2,012)
(2,406)
46
478
269
1,069
891
1,360
1,934
793,342
(17,391)
(12,220)
(9,788)
(72,051)
681,892
(43,266)
(132,176)
(3,741)
502,709
(378,302)
–
(2,092)
2,067
1,000
2,207
(38,045)
(390)
(413,555)
952,269
(410,027)
(21,021)
(38,663)
(880)
481,678
570,832
319,471
(149)
890,154
15
15
14
11
13
32
31
38
12
12
26
26
18
19
21
40
40
27
Ferrexpo plcAnnual Report & Accounts 2012 Consolidated Statement of Changes in Equity
Attributable to equity shareholders of Ferrexpo plc
US$000
At 1 January 2011
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 38)
Effect from acquisition
of subsidiary
At 31 December 2011
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 38)
Effect from acquisition
of subsidiary
At 31 December 2012
Issued
capital
(Note 28)
121,628
–
Share
premium
(Note 28)
185,112
–
Uniting of
interest
reserve
(Note 28)
31,780
–
Treasury
share reserve
(Note 28)
(77,260)
–
Employee
benefit trust
reserve
(Notes 28
and 38)
(10,172)
–
Net
unrealised
gains reserve
(Note 28)
2,515
–
Translation
reserve
(Note 28)
Retained
earnings
(291,283) 885,353
567,822
–
Total
capital and
reserves
847,673
567,822
Non-
controlling
interests
(Note 1)
13,801
7,114
Total
equity
861,474
574,936
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
121,628
–
–
185,112
–
–
31,780
–
–
(77,260)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
756
–
(9,416)
–
–
–
–
1,608
–
121,628
–
185,112
–
31,780
–
(77,260)
–
(7,808)
(1,431)
(3,508)
–
(4,939)
(257)
(5,196)
(1,431)
(3,508) 567,822
562,883
6,857
569,740
–
–
–
1,084
–
–
–
(38,663)
(38,663)
(322)
(38,985)
–
756
–
756
–
–
–
(294,791) 1,414,512 1,372,649
214,340
214,340
–
144
144
20,480 1,393,129
215,580
1,240
(264)
(804)
–
(1,068)
62
(1,006)
(264)
(804) 214,340
213,272
1,302
214,574
–
–
–
820
–
–
(38,660)
(38,660)
(331)
(38,991)
–
1,608
–
1,608
–
–
(295,595) 1,590,192 1,548,869
–
(321)
(321)
21,130 1,569,999
77
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements
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 sales
and marketing activities in Switzerland, Dubai and Kiev. The Group also owns a logistics 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 (‘GPL’) and Yeristovo deposits.
The majority shareholder of the Group is Fevamotinico S.a.r.l. (‘Fevamotinico’), a company ultimately owned by The Minco Trust, of which
Kostyantin Zhevago, the Group’s Chief Executive Officer, is a beneficiary. At the time this report was published, Fevamotinico held 51.0%
(31 December 2011: 51.0%) of Ferrexpo plc’s issued share capital. The Group’s operations are largely conducted through Ferrexpo plc’s principal
subsidiary, OJSC Ferrexpo Poltava Mining 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
OJSC Ferrexpo Poltava Mining1
Ferrexpo AG2
DP Ferrotrans2
United Energy Company LLC3
Ferrexpo Finance plc1
Ferrexpo Services Limited1
Ferrexpo Hong Kong Limited1
LLC Ferrexpo Yeristovo GOK4
LLC Ferrexpo Belanovo GOK4
Nova Logistics Limited3
Ferrexpo Middle East FZE6
Ferrexpo Singapore PTE Limited6
First-DDSG Logistics Holding GmbH5
EDDSG GmbH5
DDSG Tankschiffahrt GmbH5
Helogistics Transport GmbH5
DDSG Mahart Kft. (formerly Mahart Duna Cargo Kft.)5
Pancar Kft.5
Ferrexpo Port Services GmbH7
Helogistics Asset Leasing Kft.7
Ferrexpo Shipping International Limited8
Iron Destiny Limited8
Transcanal SRL9
Universal Service Group Ltd10
Country of incorporation
Ukraine
Switzerland
Ukraine
Ukraine
England
Ukraine
China
Ukraine
Ukraine
Ukraine
U.A.E.
Singapore
Austria
Austria
Austria
Austria
Hungary
Hungary
Austria
Hungary
Marshall Islands
Marshall Islands
Romania
Ukraine
Principal activity
Iron ore mining
Sale of iron ore pellets
Trade, transportation services
Holding company
Finance
Management services & procurement
Marketing services
Iron ore mining
Iron ore mining
Service company (dormant)
Sale of iron ore pellets
Marketing services
Holding company
Barging company
Barging company
Barging company
Barging company
Barging company
Port services
Asset holding company
Holding company
Shipping company
Port services
Asset holding company
31.12.12
%
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
100.0
100.0
100.0
100.0
100.0
100.0
77.6
100.0
31.12.11
%
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
100.0
100.0
100.0
100.0
100.0
100.0
77.6
–
1 The Group’s interest in these entities is held through Ferrexpo AG.
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 OJSC Ferrexpo Poltava Mining.
4 The Group’s interest in this entity is held through both Ferrexpo AG and Ferrexpo Service Limited.
5 The Group’s interest in these entities are held through Ferrexpo AG. First-DDSG Logistics Holding GmbH (formerly Helogistics Holding GmbH) and its subsidiaries were acquired in December 2010.
6 Both subsidiaries were incorporated in March 2011. The Group’s interest in Ferrexpo Middle East FZE is held by Ferrexpo AG whereas Ferrexpo Singapore PTE Limited is a subsidiary of Ferrexpo
Middle East FZE.
7 The subsidiaries were incorporated in April 2011 and December 2011. The Group’s interest is held through Helogistics Holding GmbH.
8 The subsidiaries were incorporated on 14 July 2011.
9 The company was acquired on 1 October 2011 and the Group’s interest is held through Helogistics Holding GmbH.
10 The company was incorporated in December 2012 and the Group’s interest is held through Ferrexpo Services Limited.
The Group also holds an interest of 48.6% (2011: 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.
78
Ferrexpo plcAnnual Report & Accounts 2012 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 2012.
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
thousands of US Dollars and all values are rounded to the nearest thousand except where otherwise indicated.
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 2011, except for those changes detailed in note 3.
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 the Group obtains effective control. Similarly, subsidiaries
disposed of are deconsolidated from the date on which the Group ceases to hold effective control. A change in the ownership interest of a
subsidiary without a loss of control is accounted for as an equity transaction.
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
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 of the impairment testing are disclosed in
note 19.
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 with those applied by the Group.
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 presentational currency and OJSC Ferrexpo Poltava Mining (the principal subsidiary)
has determined that its functional currency is the Ukrainian Hryvnia.
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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 presentational currency as at the
reporting date, the assets and liabilities of this entity are translated into the presentational 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 (Cost Insurance and Freight);
• CFR (Cost and Freight);
• DAP (Delivery At Place); 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 border 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 spare 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, 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 resulting directly from
the Group’s operating activities. Non-operating gains and losses are predominately those associated with the sale of assets (including monetary
assets), the translation of interest bearing loans and borrowings denominated in currencies different to the respective functional currencies and
transactional gains and losses from the conversion of cash balances in currencies different to the local functional currencies at exchange rates
different to those at the initial recognition date.
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.
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Finance expenses comprise the interest expense on borrowings and other financial liabilities. Finance expenses also comprise the effect of the
estimated discount of overdue VAT balances expected to be received after more than 12 months following the period end.
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 on 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 note 26 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.
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.
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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 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.
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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.
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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. In the case
of general borrowings used to fund the acquisition or construction costs of qualifying assets, the borrowing costs to be capitalised are calculated
based on a weighted average interest rate applicable to the relevant general borrowings of the Group during a specific period.
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.
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.
Upon recognition, items of property, plant and equipment are divided into components, which represent items with a significant value that have
different useful lives. 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:
• Vehicles:
• Fixtures and fittings:
20–50 years
30–40 years
3–15 years
7–15 years
2.5–10 years
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds
and the carrying amount of the item) is included in the income statement in the year the item is derecognised.
Assets in the course of construction are initially recognised in a separate category 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.
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Exploration and evaluation assets
Costs incurred in relation to the exploration and evaluation of potential iron ore deposits are capitalised and classified as tangible or intangible asset
depending on the nature of the expenditures. Costs associated with exploratory drilling, researching and analysing of exploration data and costs of
pre-feasibility studies are included in tangible assets whereas those associated with the acquisition of licences are included in intangible assets.
Capitalised exploration and evaluation expenditures are carried forward as an asset as long as these costs are expected to be recouped in full
through successful development and exploration in a future period.
Exploration and evaluation assets included in intangible and tangible assets are measured at cost and neither amortised nor depreciated, but
monitored for indications of impairment. To the extent that the capitalised expenditures are not expected to be recouped the excess is fully
provided for in the financial year in which this is determined.
Upon reaching the development stage, exploration and evaluation assets are transferred to asset under construction.
Intangible assets
Goodwill
The policies applied for the initial recognition and subsequent measurement of goodwill are described under Goodwill and other intangible assets
and Business combination on page 97 and page 125 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 accumulated
amortisation and accumulated impairment losses. 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 19 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.
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Cash and cash equivalents
Cash and cash equivalents include cash at bank and on hand as well as short-term deposits with original maturity of 90 days or less.
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.
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
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 defines the underlying assumptions required by actuaries to calculate the liability of the
retirement obligation at each reporting date.
Gains and losses resulting from the development of the defined benefit obligations and market values of plan assets 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. 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 pension liability is the aggregate of the net funded status (present value of the defined benefit obligation less plan assets) and
actuarial gains and losses and past service costs not yet recognised.
Numerous amendments made to IAS 19 Employee benefits will become effective as of 1 January 2013. The most fundamental change of the
numerous amendments made to IAS 19 is the removal of the so-called ‘corridor-approach’ requiring to recognise all actuarial gains and losses
from the remeasurement of the defined benefit obligation and the market values of the plan assets in other comprehensive income in the current
period. See note 3 for further details in relation to the amendments of the standard. Details to the pension schemes within the Group are provided
in note 31.
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 are
considered 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.
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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.
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 accounting policies and methods of computation adopted in the preparation of these consolidated financial statements are consistent
with those of the previous year, except for the adoption of new and amended IFRS and IFRIC interpretations effective as of 1 January 2012.
None of the new and amended standards or interpretations affected the reported results and financial positions. The adoption of the standards
or interpretations is described below:
IFRS 1 First-time adoption of IFRS – severe hyperinflation and removal of fixed dates for first time adopters
The amendments were issued in December 2010 and became effective for annual periods beginning on or after 1 July 2011. The amendments
to IFRS 1 provide guidance for entities emerging from severe hyperinflation and replace the date of prospective application of the derecognition
of financial assets and liabilities of 1 January 2004 with the date of transition to IFRS. Both amendments did not have an impact on the financial
position or performance of the Group.
IFRS 7 Financial instruments: disclosures – transfer of financial assets
The amendment to IFRS became effective for financial years beginning on or after 1 July 2011. The amendment requires the disclosure of
information that enables the users of the financial statements to understand the relationship between transferred financial assets that are not
derecognised in their entirety and the associated liabilities as well as, in the case of fully derecognised financial assets in which the entity retains
continuing involvement, information to evaluate the nature of, and associated risks with continuing involvement in the derecognised financial assets.
The application of this amendment did not have impact on the financial statements of the Group.
IAS 12 Income taxes – recovery of underlying assets
The amendment to the standard was issued in December 2010 and became effective for financial years beginning on or after 1 January 2012.
The amendment provides an exception to the general principle of measuring deferred taxes for investment properties measured at fair value and
introduces a rebuttable presumption that the carrying amount of such assets will be recovered entirely through sale. The adoption of this amended
standard did not have an impact on the financial position or performance of the Group.
New standards and interpretations not yet adopted
The Group has elected not to early adopt the following revised and amended standards:
IFRS 1 First-time adoption of IFRS – government loans
The amendment requires first-time adopters to apply the requirements of IAS 20 Accounting for government grants and disclosure of government
assistance prospectively to government loans existing at the date of transition to IFRS. This amendment is effective for annual periods beginning
on or after 1 January 2013 and will have no impact on the Group’s financial position and performance.
IFRS 7 Financial instruments: disclosures – offsetting financial assets and financial liabilities
The amendment requires disclosure of information about rights of offset and related arrangements (e.g. collateral posting requirements) for financial
instruments under an enforceable master netting agreement or similar agreement. The amendments are effective for annual periods beginning
on or after 1 January 2013 with retrospective disclosure for all comparative periods and will have no impact on the Group’s financial position
and performance.
87
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 3: New accounting policies continued
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 2015. 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. In subsequent phases, hedge accounting and impairment of financial
assets will be addressed by the IASB.
IFRS 10 Consolidated financial statements
The new standard provides additional guidance to assist in the determination of which entities are controlled and are required to be consolidated.
This standard replaces the portion of IAS 27 Consolidated and separate financial statements that addresses the accounting for consolidated
financial statements. The IASB implementation date is for periods beginning on or after 1 January 2013 whereas the standard becomes
mandatory in the EU only for annual periods beginning on or after 1 January 2014. The Group does not intend to take advantage of the possibility
of an early adoption. The impact on the accounting for the Group’s associated company TIS Ruda will be assessed.
IFRS 11 Joint arrangements
The new standard replaces IAS 31 Interests in joint ventures and SIC 13 Jointly-controlled entities – non-monetary contributions by venturers. The
IASB implementation date is for periods beginning on or after 1 January 2013 whereas the standard becomes mandatory in the EU only for annual
periods beginning on or after 1 January 2014. The standard defines contractually agreed sharing of control of an arrangement and the accounting
for joint operations and joint ventures. The Group does not intend to take advantage of the possibility of an early adoption and will review its
arrangements in place in order to evaluate the potential impact.
IFRS 12 Disclosure of involvement with other entities
The new standard covers the disclosures that were previously required in consolidated financial statements under IAS 27 Consolidated and
separate financial statements as well as those included in IAS 31 Interests in joint ventures and IAS 28 Investments in associates. The IASB
implementation date is for periods beginning on or after 1 January 2013 whereas the standard becomes mandatory in the EU only for annual
periods beginning on or after 1 January 2014. The Group does not intend to take advantage of the possibility of an early adoption, but expects
that a number of additional disclosures will be required under the new standard.
IFRS 13 Fair value measurement
The new standard becomes effective for annual periods beginning on or after 1 January 2013 and provides guidance on how to measure fair value
under IFRS and when fair value is required or permitted. The Group does not intend to take advantage of the possibility of an early adoption and is
currently assessing the impact of the new standard on its financial position and performance.
IAS 1 Financial statement presentation – presentation of items of other comprehensive income
The amended standard was issued in June 2011 and becomes effective for financial years beginning on or after 1 July 2012. The amendment
requires to group items in other comprehensive income based on whether they will be potentially reclassifiable to profit or loss at a future point of
time or whether they will never be reclassified. The amendment affects presentation only and will have no impact on the Group’s financial position
or performance.
IAS 19 Employee benefits
The most fundamental change of the numerous amendments made to IAS 19 is the removal of the so-called ‘corridor-approach’ requiring to
recognise all actuarial gains and losses from the remeasurement of the defined benefit obligation and the fair values of the plan assets in other
comprehensive income in the current period. This amendment will affect the Group’s financial position and performance as well as the
presentation of the defined benefit obligation. The Group does not intend to take advantage of the possibility of an early adoption of the numerous
amendments made to IAS 19 that becomes effective for annual periods beginning on or after 1 January 2013. The removal of the ‘corridor-
approach’ under the amendments to IAS 19 will result in the recognition of unrecognised actuarial losses and past service costs through other
comprehensive income. If the Group would have applied the amended standard for the financial year 2012, the shareholders equity would have
been lower by US$51,815 thousand and US$26,885 thousand as of 1 January 2012 and as at 31 December 2012 respectively. As a result, the
current year benefit expenses for the financial year 2012 would have been lower by US$3,764 thousand. The amendment of the IAS 19 standard
will be retrospectively applied in the financial year 2013. Details of the pension schemes of the Group are provided in note 31.
IAS 32 Financial instruments: presentation – offsetting financial assets and financial liabilities
The amendments clarify existing application issues relating to the offset of financial assets and financial liabilities requirements. The amendments
are not effective until annual periods beginning on or after 1 January 2014 with retrospective application. No material effects on the Group’s
financial position and performance are expected from this amendment.
88
Ferrexpo plcAnnual Report & Accounts 2012 Note 3: New accounting policies continued
IFRIC 20 Stripping costs in the production phase of a surface mine
The new interpretation covers the accounting for the necessary removal of mine waste materials in order to gain access to the mineral ore deposit
during the production phase of a mine. The interpretation provides guidance on the accounting and separation of the costs of stripping activities
resulting in the production of inventory in the current period or improved access to further mineral ore deposits that will be mined in future periods.
The new interpretation applies to annual periods beginning on or after 1 January 2013. The Group does not intend to take advantage of the
possibility of an early adoption and no material effects on the financial position or performance of the Group are expected.
Improvements to IFRSs (issued May 2012)
The IASB has issued amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate
transitional provisions for each standard. The adoption of the following amendment will result in changes to accounting policies, but will not have
any impact on the financial position or performance of the Group.
IAS 16 Property, plant and equipment
The improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not
inventory. As a result of this improvement, major spare parts and servicing equipment will have to be reclassified from inventory to property, plant
and equipment in the first half of the financial year 2013. The impact of implementing the amendment on the Group’s inventory is being assessed.
The amendment affects presentation only and will have no impact on the Group’s financial position or performance.
Other amendments resulting from improvements to the following standards and interpretations will not have an impact on the accounting policies,
financial position or performance of the Group:
•
•
•
•
IFRS 1 First-time adoption of IFRS
IAS 1 Presentation of financial statements
IAS 32 Financial instruments: presentation
IAS 34 Interim financial reporting
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$1,342,039 thousand as of 31 December 2012 (2011:
US$924,690 thousand). See also note 18 for further information.
Pre-production stripping costs
Overburden and other mine waste materials have to be removed prior to the production of the mine in order to gain 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 2012, the carrying amount of capitalised pre-production stripping
costs included in assets under constructions amounted to US$36,794 thousand (2011: US$151,393 thousand). See also note 18 for further
information.
Impairment testing of goodwill and intangible assets
As outlined in note 19 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$98,413 thousand as of 31 December 2012 (2011: US$98,453 thousand). Related disclosures
are also made in note 19.
89
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 4: Use of estimates continued
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 37.
Taxes recoverable
Within the Ukraine, the Group has limited domestic sales and exports the majority of its products so that VAT paid on purchases of goods and
capital equipment cannot be fully offset from VAT on domestic sales and the Group relies on refunds to be made by the Ukrainian government tax
authority. Since the financial year 2010, refunds have not been made on time by the Ukrainian government tax authority and the gross recoverable
balance increased to US$301,535 thousand as of 31 December 2012 (2011: US$171,654 thousand). Despite the fact that the vast majority of this
balance is due for immediate repayment, there is a risk that a large portion will be recovered only after more than 12 months from the period end.
An estimated discount of US$20,000 thousand has been recorded as of 31 December 2012 (2011: nil) to reflect the time value of money based
on management’s best estimate of the anticipated timing of refunds. The exact timing is subject to uncertainties and outside of management’s
control. A change of estimate of timing may affect the balance of the recorded discount in future periods. Additional disclosures are made
in note 26.
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
2012, the carrying amount of defined benefit pension liability was US$23,504 thousand (2011: US$13,329 thousand). Detailed disclosure is made
in note 31.
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 2012, the carrying amount of the provision for site restoration amounted to US$2,368 thousand (2011: US$3,015
thousand). See also note 32 for further information.
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 2012, the
Group’s consolidated financial statements showed deferred tax assets of US$29,130 thousand (2011: US$23,426 thousand) and deferred tax
liabilities of US$2,581 thousand (2011: US$2,232 thousand). See also note 22 for further information.
90
Ferrexpo plcAnnual Report & Accounts 2012 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. While the revenue generated by the Group is analysed, there are no separate measures of profit reported to the Group’s Chief Operating
Decision-Maker (‘CODM’). 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 management monitors the operating result of the Group based on a number of measures including EBITDA, ‘C1’ costs and the net
financial indebtedness.
EBITDA
The Group presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating
performance. The Group’s full definition of EBITDA is disclosed in the Glossary on page 136.
US$000
Profit before tax and finance
Write-offs and impairment losses
Losses on disposal of property, plant and equipment
Share-based payments
Depreciation and amortisation
EBITDA
Notes
13
38
Year ended
31.12.12
340,869
836
4,067
1,608
54,169
401,549
Year ended
31.12.11
758,528
478
46
891
41,003
800,946
‘C1’ costs
‘C1’ costs represents 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.
US$000
Cost of sales – pellet production
Depreciation and amortisation
Purchased concentrate and other items for resale
Processing costs for purchased concentrate
Production cost of gravel
Inventory movements
Pension service costs
Other
C1 cost
Own ore produced (tonnes)
C1 cash cost per tonne (US$)
Year ended
31.12.12
642,654
(39,290)
(29,254)
(3,293)
(612)
9,029
(7,560)
(10,526)
561,148
Year ended
31.12.11
600,790
(28,639)
(102,908)
(7,873)
(572)
481
5,334
(7,099)
459,514
9,408,662 9,063,398
50.7
59.6
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
27
29
29
Year ended
31.12.12
596,560
(26,846)
(993,139)
(423,425)
Year ended
31.12.11
890,154
(18,948)
(951,430)
(80,224)
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.
91
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 6: Revenue
Revenue for the year ended 31 December 2012 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 logistics and bunker business
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
China
Austria
Slovakia
Czech Republic
Turkey
Germany
Japan
India
Serbia
Russia
Romania
Hungary
Total exports
Year ended
31.12.12
Year ended
31.12.11
331
1,329,728 1,699,154
742
1,330,059 1,699,896
73,276
4,092
10,748
1,424,030 1,788,012
81,845
3,202
8,924
Year ended
31.12.12
529,664
339,725
141,765
112,623
73,180
40,486
33,389
23,068
19,723
8,875
5,167
2,063
Year ended
31.12.11
569,924
453,586
121,041
119,793
83,722
28,898
88,875
47,119
158,687
–
–
27,509
1,329,728 1,699,154
During the year ended 31 December 2012 sales made to three customers accounted for approximately 44.7% of the revenues from export sales
of ore pellets (2011: 50.2%).
Sales made to two customers individually amounted to more than 10% of total sales. These are disclosed below:
Year ended
31.12.12
339,725
141,765
Year ended
31.12.11
453,586
279,728
US$000
Customer A
Customer B
92
Ferrexpo plcAnnual Report & Accounts 2012
Note 7: Cost of sales
Cost of sales for the year ended 31 December 2012 consisted of the following:
US$000
Materials
Purchased concentrate and other items for resale
Electricity
Personnel costs
Spare parts and consumables
Depreciation and amortisation
Gas
Fuel
Repairs and maintenance
Royalties and levies
Cost of sales from logistics business
Bunker fuel
Inventory movements
Other
Total cost of sales
US$000
Cost of sales – pellet production
Cost of sales – logistics and bunker business
Total cost of sales
Note 8: Selling and distribution expenses
Selling and distribution expenses for the year ended 31 December 2012 consisted of the following:
US$000
International freight for pellets
Railway transportation
Port charges
Other pellet transportation costs
Costs of logistics business
Gravel delivery costs
Advertising
Depreciation
Other
Total selling and distribution expenses
Year ended
31.12.12
89,296
29,254
141,939
72,939
26,563
39,290
79,082
56,038
78,022
12,375
22,342
29,580
(9,028)
26,884
694,576
Year ended
31.12.12
642,654
51,922
694,576
Year ended
31.12.12
113,538
93,442
31,891
18,611
27,495
516
9,643
9,805
7,023
311,964
Year ended
31.12.11
75,246
102,908
121,364
51,677
20,968
28,639
63,485
47,343
63,801
10,437
23,363
25,391
(481)
15,403
649,544
Year ended
31.12.11
600,790
48,754
649,544
Year ended
31.12.11
119,572
89,185
37,724
13,453
36,671
1,783
6,911
8,231
4,421
317,951
93
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Notes to the Consolidated Financial Statements continued
Note 9: General and administrative expenses
General and administrative expenses for the year ended 31 December 2012 consisted of the following:
US$000
Personnel costs
Buildings and maintenance
Taxes other than income tax and other charges
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
31.12.12
30,569
2,597
1,465
4,699
4,636
1,144
2,033
1,542
1,589
473
2,296
3,286
56,329
Year ended
31.12.11
26,912
2,182
1,480
7,799
3,968
1,149
1,553
1,365
1,445
510
1,859
1,747
51,969
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 entities
Total audit services
Non-audit services
Tax advisory
Assurance related services
Other services
Total non-audit services
Total auditor remuneration
Note 10: Other income
Other income for the year ended 31 December 2012 consisted of the following:
US$000
Sale of surplus maintenance spares
Lease income
Other income
Total other income
Year ended
31.12.12
Year ended
31.12.11
823
766
1,589
23
203
247
473
2,062
741
704
1,445
139
117
254
510
1,955
Year ended
31.12.12
1,276
3,050
7,021
11,347
Year ended
31.12.11
2,334
1,597
3,012
6,943
94
Ferrexpo plcAnnual Report & Accounts 2012 Note 11: Other expenses
Other expenses for the year ended 31 December 2012 consisted of the following:
US$000
Community support donations
Movements in allowance for doubtful receivables and prepayments made
Research
Other personnel costs
Other
Total other expenses
Note 12: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December 2012 consisted of the following:
US$000
Operating foreign exchange gains/(losses)
Revaluation of trade receivables
Revaluation of trade payables
Revaluation of cash and cash equivalents
Other
Total operating foreign exchange gains/(losses)
Non-operating foreign exchange gains/(losses)
Revaluation of interest-bearing loans
Revaluation and conversion of cash and cash equivalents
Other
Total non-operating foreign exchange gains/(losses)
Year ended
31.12.12
20,810
721
680
2,339
5,611
30,161
Year ended
31.12.11
12,393
(2,406)
362
1,962
4,780
17,091
Year ended
31.12.12
Year ended
31.12.11
7
23
339
284
653
1,986
5,046
(403)
6,629
252
(1,612)
–
–
(1,360)
(102)
605
(2,437)
(1,934)
The non-operating foreign exchange gains in 2012 relates to income received from the conversion of US Dollars for the settlement of liabilities
denominated in Ukrainian Hyrvnia at an exchange rate higher than the one applicable upon initial recognition.
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 2012 consisted of the following:
US$000
Write-off of inventories
Write-off of property, plant and equipment
Impairment of available-for-sale financial assets
Total write-offs and impairment losses
Notes
20
Year ended
31.12.12
215
191
430
836
Year ended
31.12.11
105
175
198
478
95
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 14: Investments in associates
As at 31 December 2012 investments in associates comprised:
TIS Ruda
Principal activity
Country of
incorporation
Ownership
%
As at
31.12.12
US$000
As at
31.12.11
US$000
Port development
Ukraine
48.6
16,995
19,186
For the year ended 31 December 2012 the summarised financial information for the associate was as follows:
US$000
TIS Ruda
Total assets
Total liabilities
Revenue
Net profit
As at
31.12.12
20,500
As at
31.12.11
25,993
As at
31.12.12
2,498
As at
31.12.11
4,936
Year ended
31.12.12
22,401
Year ended
31.12.11
22,205
Year ended
31.12.12
5,555
Year ended
31.12.11
4,032
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$2,772 thousand in TIS Ruda (2011: US$2,012 thousand). TIS Ruda paid
a dividend amounting to US$4,963 thousand for the financial year 2012 (2011: US$2,207 thousand) to the Group.
TIS Ruda operates a port on the Black Sea which the Group uses as part of its distribution channel.
Note 15: Finance income and expense
Finance income and expenses for the year ended 31 December 2012 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
Year ended
31.12.12
Year ended
31.12.11
2,454
144
2,598
(53,241)
(6,821)
(6,880)
(21,149)
(88,091)
(85,493)
2,505
6
2,511
(46,376)
(5,765)
(14,885)
(1,179)
(68,205)
(65,694)
Bank charges include arrangement fees charged in relation to the Group’s major bank debt facility.
Other finance costs includes the recorded discount of US$20,000 thousand (2011: nil) to reflect the time value of money on the outstanding VAT
receivable balances in Ukraine that are expected to be recovered after more than one year of the period end. Further information is provided in
note 26.
96
Ferrexpo plcAnnual Report & Accounts 2012
Note 16: Income tax expense
The income tax expense for the year ended 31 December 2012 consisted of the following:
US$000
Current income tax
Current income tax charge
Amounts related to 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
31.12.12
Year ended
31.12.11
48,797
2,929
51,726
125,689
150
125,839
(12,763)
7,462
(5,301)
46,425
(10,788)
913
(9,875)
115,964
Other comprehensive income contained taxes on the following items charged or credited to it for the year ended 31 December 2012:
US$000
Exchange differences arising on hedging of foreign operations
Net losses on available-for-sale investments
Total income taxes charged to other comprehensive income
A breakdown of the deferred tax balances is contained in note 22.
Year ended
31.12.12
(32)
(62)
(94)
Year ended
31.12.11
(153)
(437)
(590)
The effective income tax rate differs from the corporate income tax rates. The weighted average statutory rate was 9.3% for 2012 (2011: 15.3%).
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 17.8% (2011:
16.8%).
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 2012 is as follows:
US$000
Profit before tax
Notional tax computed at the weighted average statutory tax rate of 9.3% (2011: 15.3%)
Derecognition of deferred tax asset
Effect from changes in local tax rates
Effect from utilisation of non-recognised deferred tax assets
Effect from capitalised tax loss carry forwards
Expenses not deductible for tax purposes
Tax exempted income
Non-recognition of deferred taxes on current year losses
Tax related to prior years
Other
Total income tax expense
Year ended
31.12.12
262,005
24,422
(98)
7,462
(318)
–
8,818
(422)
3,684
2,929
(52)
46,425
Year ended
31.12.11
690,900
105,531
(30)
722
(781)
(63)
9,186
(912)
2,284
150
(123)
115,964
97
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 17: 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)
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
31.12.12
Year ended
31.12.11
36.63
36.57
97.09
96.97
36.49
36.43
97.47
97.35
Year ended
31.12.12
Year ended
31.12.11
585,060
973
586,033
584,811
730
585,541
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 28).
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 are considered 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
Losses on disposal of property, plant and equipment
Non-operating foreign exchange (gains)/losses
Tax on adjusted items
Underlying earnings
Notes
13
12
Year ended
31.12.12
214,340
836
4,067
(6,629)
879
213,493
Year ended
31.12.11
567,822
478
46
1,934
(282)
569,998
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.
98
Ferrexpo plcAnnual Report & Accounts 2012 Note 17: Earnings per share and dividends paid and proposed continued
Dividends paid and proposed
US$000
Dividends proposed
Final dividend for 2012: 3.3 US cents per Ordinary Share
Special dividend for 2012: 6.6 US cents per Ordinary Share
Total dividends proposed
Dividends paid during the period
Interim dividend for 2012: 3.3 US cents per Ordinary Share
Final dividend for 2011: 3.3 US cents per Ordinary Share
Total dividends paid
US$000
Dividends proposed
Final dividend for 2011: 3.3 US cents per Ordinary Share
Total dividends proposed
Dividends paid during the period
Interim dividend for 2011: 3.3 US cents per Ordinary Share
Final dividend for 2010: 3.3 US cents per Ordinary Share
Total dividends paid
Year ended
31.12.12
19,309
38,618
57,927
19,312
19,340
38,652
Year ended
31.12.11
19,301
19,301
19,301
19,362
38,663
99
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 18: Property, plant and equipment
As at 31 December 2012 property, plant and equipment comprised:
Exploration and
evaluation
–
–
–
–
–
–
–
3,078
–
–
–
3,078
–
–
–
–
–
–
–
–
–
–
–
–
–
US$000
Cost:
At 1 January 2011
Additions
Acquisition of subsidiaries
Transfers
Disposals
Translation differences
At 31 December 2011
Additions
Transfers
Disposals
Translation differences
At 31 December 2012
Depreciation:
At 1 January 2011
Depreciation charge
Disposals
Transfers
Impairment
Translation differences
At 31 December 2011
Depreciation charge
Disposals
Transfers
Impairment
Translation differences
At 31 December 2012
Net book value at:
31 December 2011
31 December 2012
Land
3,134
3,329
–
1,408
–
(11)
7,860
–
1,754
73
9,687
–
3
(3)
–
–
–
–
–
–
–
–
–
–
Mining
assets
19,668
65
–
682
–
(69)
20,346
326,015
(914)
(9)
345,438
1,137
373
–
–
–
(4)
1,506
5,479
–
–
–
(1)
6,984
Buildings
Vessels
Plant &
equipment
Vehicles
Fixtures
and fittings
Assets under
construction
Total
151,444
18
10
27,215
(611)
(538)
177,538
54,256
(3,329)
(67)
228,398
29,937
8,575
(344)
293
186
(112)
38,535
10,008
(1,310)
4
16
(18)
47,235
61,863
227
164
9,579
(686)
(1,535)
69,612
21,696
19,009
(1,291)
1,587
110,613
–
4,240
–
–
–
–
4,240
4,566
–
–
–
97
8,903
221,684
64
4
57,000
(1,911)
(783)
276,058
39
74,290
(3,334)
(106)
346,947
94,653
21,442
(1,729)
(168)
(334)
113,864
28,367
(2,868)
2
–
(44)
139,321
170,487
584
58
69,494
(1,813)
(600)
238,210
979
140,231
(4,698)
(95)
374,627
34,260
16,035
(1,650)
(21)
–
(120)
48,504
24,052
(3,981)
(3)
–
(20)
68,552
3,746
164
3
1,468
(44)
(12)
5,325
175
1,509
(78)
2
6,933
1,844
975
(39)
(104)
–
(5)
2,671
1,430
(73)
(3)
–
1
4,026
176,983
330,215
–
(166,846)
(731)
(530)
809,009
334,666
239
–
(5,796)
(4,078)
339,091 1,134,040
496,728
470,761
–
(617,064)
(14,903)
(1,259)
1,301
(84)
191,445 1,617,166
41
–
–
–
(11)
–
30
–
–
–
76
–
106
161,872
51,643
(3,765)
–
175
(575)
209,350
73,902
(8,232)
–
92
15
275,127
–
3,078
7,860
9,687
18,840
338,454
139,003
181,163
65,372
101,710
162,194
207,626
189,706
306,075
2,654
2,907
924,690
339,061
191,339 1,342,039
Assets under construction consist of ongoing capital projects amounting to US$154,545 thousand (2011: US$187,668 thousand) and capitalised
pre-production stripping costs of US$36,794 thousand (2011: US$151,393 thousand). Once production commences, stripping costs are
transferred to mining assets. The accounting policy for mine stripping costs is outlined in note 2.
Property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$1,508 thousand (2011: nil). The capitalised
borrowing costs on general borrowings were determined based on the capitalisation rate of 5.8% (2011: nil), which is the average effective interest
rate on general borrowings during the period. The Group has no specific borrowings in relation to qualifying assets during either reporting period.
The carrying value of equipment held under finance leases and hire purchase contracts at 31 December 2012 was US$18,549 thousand (2011:
US$7,792 thousand). During the financial years 2012 and 2011, the Group entered into sale and lease-back transactions for rail cars and mining
equipment, which were considered to be finance leases. No gain or loss was realised on the sale of the assets subject to these finance leases.
Leased assets and assets under hire purchase contracts are pledged as security for the related finance leases and hire purchase liabilities.
US$220,053 thousand of property, plant and equipment have been pledged as security for liabilities (2011: US$128,624 thousand).
The gross value of fully depreciated property, plant and equipment that is still in use is US$45,994 thousand (2011: US$39,781 thousand).
100
Ferrexpo plcAnnual Report & Accounts 2012 Note 19: Goodwill and other intangible assets
As at 31 December 2012 goodwill and other intangible assets comprised:
US$000
Cost:
At 1 January 2011
Additions
Acquisition of subsidiaries
Disposals
Translation differences
At 31 December 2011
Additions
Disposals
Translation differences
At 31 December 2012
Accumulated amortisation and impairment:
At 1 January 2011
Amortisation charge
Disposals
Translation differences
At 31 December 2011
Amortisation charge
Disposals
Translation differences
At 31 December 2012
Net book value at:
31 December 2011
31 December 2012
Goodwill
Exploration and
evaluation
Other intangible
assets
Total
98,747
–
56
–
(350)
98,453
–
–
(40)
98,413
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,607
–
–
3,607
–
–
–
–
–
–
–
–
–
4,527
2,205
–
(37)
(41)
6,654
6,304
(53)
51
12,956
957
931
(19)
(2)
1,867
980
(53)
11
2,805
103,274
2,205
56
(37)
(391)
105,107
9,911
(53)
11
114,976
957
931
(19)
(2)
1,867
980
(53)
11
2,805
98,453
98,413
–
3,607
4,787
10,151
103,240
112,171
The goodwill acquired through business combinations in previous periods has been allocated for impairment purposes to one cash-generating
unit, as the Group only has 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.
Goodwill from business combinations are not amortised, but reviewed for impairment 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 2012 based on a value-in-use calculation using cash flow projections over the remaining
estimated life of the Gorishne-Plavniskoye and Lavrikovskoye mine (‘GPL’), which is expected to expire in 2038 according to the current approved
mine plan. The estimated production volumes are based on this mine plan and do not take into account the effects of expected future mine life
extension programmes. The cash flow projection is based on the financial budget covering the next four years and approved by senior
management. The production capacity remains at a fixed level until full capacity is reached and therefore no perpetual growth rate is applied
for the cash flow projections beyond the budgeted four years.
The major component of other intangible assets comprises mining licences and purchased software.
101
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 19: Goodwill and other intangible assets continued
Key assumptions
The principal key assumptions are:
Estimates/assumptions
Future production:
Commodity prices:
Cost of raw materials and other production/distribution costs:
Exchange rates:
Discount rates:
Basis
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 longer-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. The assumptions for iron ore prices ranged from US$85 per tonne to US$128 per tonne of Fe 62%
fines CFR North China (2011: US$84 per tonne to US$153 per tonne).
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% (2011: 10%)
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 20: Available-for-sale financial assets
As at 31 December 2012 available-for-sale financial assets comprised:
Ownership
Carrying value
As at
31.12.12
As at
31.12.11
As at
31.12.12
As at
31.12.11
1.10%
1.10%
9.95%
9.00%
9.00%
1.10%
1.10%
9.95%
9.00%
9.00%
534
–
–
–
–
534
860
430
–
–
–
1,290
US$000
Non-current
Investments available-for-sale – equity instruments:
OJSC Stahanov
Vostok Ruda LLC
LLC Atol
CJSC AMA
CJSC Amtek
Total non-current
All investments relate to companies incorporated in Ukraine.
102
Ferrexpo plcAnnual Report & Accounts 2012 Note 20: Available-for-sale financial assets continued
Impairment testing
Ferrexpo Petroleum
The unquoted equity investments 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, were fully impaired during previous financial years based on a discounted cash flow projection. 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.
There are no indications at 31 December 2012 that require a reversal of any impairment losses booked in previous periods.
OJSC Stahanov
The value of OJSC Stahanov decreased due to a lower quoted market price for its shares on the Ukrainian stock exchange (‘PFTS’) as of
31 December 2012. The decrease of the fair value in the amount of US$326 thousand (2011: decrease of US$1,868 thousand) has been
recorded against the net unrealised gains reserve.
Vostok Ruda LLC
The investment in Vostok Ruda LLC was fully impaired during the current financial year and there are no indications at 31 December 2012 that
could require a reversal of the previously booked impairment losses.
Further details regarding available-for-sale investments can be found in note 13 (write-offs and impairment losses) as well as note 34 (related
party transactions).
Note 21: Other non-current assets
As at 31 December 2012 other non-current assets comprised:
US$000
Prepayments for property, plant and equipment
Other non-current assets
Total other non-current assets
As at
31.12.12
35,711
6,099
41,810
As at
31.12.11
86,331
7,027
93,358
103
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 22: Deferred income tax
Deferred income tax assets and liabilities at 31 December 2012 relate to the following:
US$000
Trade and other receivables
Inventories
Accrued income and prepaid expenses
Property, plant and equipment
Intangible assets
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 and prepaid expenses
Property, plant and equipment
Intangible assets
Other non-current assets
Other financial assets
Employee benefit trust
Trade and other payables
Lease obligations
Defined benefit pension liability
Total deferred tax liabilities
Thereof netted against deferred tax assets
Total deferred tax liabilities as per the statement of financial position
Net deferred tax assets/net change
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
Foreign currency exchange rate adjustment
Closing balance
Consolidated statement
of financial position
Consolidated income statement
As at
31.12.12
496
229
12
23,091
53
33
1,060
56
1
1,585
3,767
353
9
1
30,746
(1,616)
29,130
(759)
(267)
(159)
(1,678)
–
(615)
(185)
–
(521)
(1)
(12)
(4,197)
1,616
(2,581)
26,549
As at
31.12.11
73
306
–
17,194
–
227
2,022
19
1
1,485
2,256
458
10
1
24,052
(626)
23,426
(1,127)
–
(218)
(944)
–
–
(256)
(305)
–
(8)
–
(2,858)
626
(2,232)
21,194
Year ended
31.12.12
423
(77)
12
5,880
59
(194)
(962)
(20)
1
100
1,512
(104)
(1)
–
6,629
370
(267)
59
(726)
–
(615)
71
305
(520)
7
(12)
(1,328)
Year ended
31.12.11
(4,019)
306
(293)
7,443
–
(499)
(206)
18
(29)
(511)
(400)
49
(70)
(7)
1,782
43
3,962
2,896
1,524
111
48
(256)
(259)
27
(3)
–
8,093
5,301
9,875
Year ended
31.12.12
21,194
5,301
56
(2)
26,549
Year ended
31.12.11
11,063
9,875
590
(334)
21,194
As at 31 December 2012, the Group had deductible temporary differences on available tax loss carry forwards in the amount of US$80,582
thousand (2011: US$82,453 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 during the financial year 2010. Tax loss carry forwards in both tax jurisdictions do
not expire. Temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised amount to
US$660,683 thousand (2011: US$582,370 thousand).
104
Ferrexpo plcAnnual Report & Accounts 2012 Note 23: Inventories
As at 31 December 2012 inventories comprised:
US$000
Raw materials and consumables
Finished ore pellets
Work in progress
Other
Provision for slow-moving and obsolete inventory items
Total inventories – current
Raw materials and consumables
Total inventories – non-current
As at
31.12.12
98,439
28,142
5,178
7,876
–
139,635
12,362
12,362
As at
31.12.11
78,111
24,022
11,280
4,063
(430)
117,046
–
–
Inventory is held at the lower of cost or net recoverable amount. Inventories classified as non-current comprises ore stockpiles that are not planned
to be processed within one year.
Note 24: Trade and other receivables
At 31 December 2012 trade and other receivables comprised:
US$000
Trade receivables
Other receivables
Allowance for doubtful receivables
Total trade and other receivables
As at
31.12.12
116,135
1,967
(1,549)
116,553
As at
31.12.11
126,715
3,674
(1,484)
128,905
Trade receivables at 31 December 2012 includes US$826 thousand (2011: US$3,249 thousand) owed by related parties. The detailed related party
disclosures are made in note 34.
The movement in the provision for doubtful receivables during the period under review was:
US$000
Opening balance
Recognition
Reversal
Foreign currency translation
Closing balance
Year ended
31.12.12
1,484
1,080
(1,015)
–
1,549
Year ended
31.12.11
3,881
329
(2,735)
9
1,484
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 31.12.12
US$000
Trade receivables
Other receivables
As at 31.12.11
US$000
Trade receivables
Other receivables
Receivables
past due and
impaired
1,465
84
Receivables
neither past
due nor
impaired
88,792
891
Receivables past due but not impaired
Less than
45 days
21,978
20
45 to 90
days
1,008
531
Over 90
days
2,892
441
Gross amount
116,135
1,967
Gross
amount
126,715
3,674
Receivables
past due and
impaired
1,218
266
Receivables
neither past
due nor
impaired
111,285
2,250
Receivables past due but not impaired
Less than
45 days
11,268
36
45 to 90
days
1,337
27
Over 90
days
1,607
1,095
The Group’s exposures to credit and currency risks are disclosed in note 37.
105
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 25: Prepayments and other current assets
As at 31 December 2012 prepayments and other current assets comprised:
US$000
Prepayments to suppliers:
Electricity and gas
Materials and spare parts
Services
Other prepayments
Accrued income
Other
Total prepayments and other current assets
As at
31.12.12
As at
31.12.11
4,094
3,289
4,588
67
22,176
2,254
36,468
5,972
4,833
2,594
59
7,660
1,602
22,720
Prepayments at 31 December 2012 include US$1,482 thousand (2011: US$693 thousand) made to related parties. The detailed related party
disclosures are made in note 34.
Note 26: Taxes payable, recoverable and prepaid
The income tax receivable/(payable) balance as of 31 December 2012 is shown below:
US$000
Opening balance
Income statement charge
Tax paid
Foreign exchange adjustment
Closing balance
Split by:
US$000
Income tax receivable balance
Income tax payable balance
Income tax receivable/(payable) at the year end
As at 31 December 2012 taxes recoverable and prepaid comprised:
US$000
VAT receivable
Other taxes prepaid
Total taxes recoverable and prepaid – current
VAT receivable
Total taxes recoverable and prepaid – non-current
As at
31.12.12
(36,290)
(51,727)
99,771
(557)
11,197
As at
31.12.11
(41,776)
(125,839)
132,176
(851)
(36,290)
As at
31.12.12
24,869
(13,672)
11,197
As at
31.12.11
384
(36,674)
(36,290)
As at
31.12.12
186,900
346
187,246
97,895
97,895
As at
31.12.11
172,434
517
172,951
–
–
VAT receivable is as a result of VAT paid on domestic Ukrainian purchases of goods, capital equipment and services and on the import of goods,
capital equipment and services into Ukraine to the extent that this cannot be offset on VAT paid on domestic sales. Ferrexpo currently has limited
domestic sales and exports the majority of its products. As a result, VAT has to be recovered from the Government tax authority and Ferrexpo is
reliant on the normal functioning of this system. During the financial year 2012, FPM received VAT refunds in respect of 2011 and 2012 amounting
to US$70,644 thousand and paid Ukrainian VAT amounting to US$221,973 thousand, including US$81,043 thousand in respect of capital
expenditure. As a result, the gross recoverable balance increased by US$129,881 thousand to US$301,535 thousand (UAH2,410 million).
Management expects this amount to be fully recovered in local currency. However, the exact timing of recovery and method of settlement is
subject to uncertainties, along with the prevailing exchange rate to the US Dollar at the time of repayment. In the past, VAT has been recovered in
cash and by the issuance of domestic local currency bonds. An alternative method of settlement could be to offset amounts recoverable against
current and future corporate profit tax. A financial loss could result, for example from the issuance of bonds which trade at a discount at the time
of issue; continued late repayment as a result of Government fiscal constraints diminishing the present value of the receivable, or the conversion
to US Dollar of local currency received at a different exchange rate to that recorded at the time of payment.
106
Ferrexpo plcAnnual Report & Accounts 2012 Note 26: Taxes payable, recoverable and prepaid continued
Management has considered these uncertainties including potential continued International Monetary Fund support for the Ukrainian national
budget, domestic economic and budgetary constraints, and current discussions with fiscal authorities in making an estimate of the timing of
recovery of the VAT due. Management concluded that a large portion of the VAT is likely to be repaid considerably beyond the settlement terms
which will result in additional funding costs for the Group. As a result, an estimated discount of US$20,000 thousand has been recorded to reflect
this uncertainty and its effect is included in finance expense. The discount was calculated on the basis that VAT refunds will continue to be limited
to an amount which is double monthly corporation tax payments, which has been our recent experience. Based on current management
estimates, US$186,900 thousand of VAT is expected to be recovered within one year of the period end, with the remainder, amounting to
US$97,895 thousand, net of the associated discount to reflect the time value of money, recoverable after more than one year of the period end.
Further information on the Ukrainian VAT situation is provided in the risk section on page 23.
As at 31 December 2012 other taxes payable comprised:
US$000
Withholding tax
Environmental tax
Source tax
VAT payable
Other taxes
Total taxes payable
Note 27: Cash and cash equivalents
As at 31 December 2012 cash and cash equivalents comprised:
US$000
Cash at bank and on hand
Short-term deposits
Marketable securities
Total cash and cash equivalents
As at
31.12.12
540
496
10
1,697
5,622
8,365
As at
31.12.11
530
2,373
42
–
5,132
8,077
Year ended
31.12.12
304,994
291,566
–
596,560
Year ended
31.12.11
799,361
90,787
6
890,154
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 37.
Note 28: Share capital and reserves
Balance at 31 December 2012 and 2011
US$000
121,628
Number of
shares
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 2012 was 613,967,956 Ordinary Shares (2011: 613,967,956) at a par value of £0.10 paid
for in cash, resulting in share capital of US$121,628 thousand (2011: US$121,628 thousand) per the statement of financial position.
The closing balance as of 31 December 2012 and 2011 includes 25,343,814 shares which are held in treasury and 3,504,523 shares held in the
employee benefit trust reserve (2011: 3,744,658 shares).
107
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 28: Share capital and reserves continued
As at 31 December 2012 other reserves attributable to equity shareholders of Ferrexpo plc comprised:
US$000
At 1 January 2011
Foreign currency translation differences
Loss on available-for-sale investments
Tax effect
Total comprehensive income for the period
Share-based payments
At 31 December 2011
Foreign currency translation differences
Loss on available-for-sale investments
Tax effect
Total comprehensive income for the period
Share-based payments
At 31 December 2012
Uniting of
interest reserve
31,780
–
–
–
–
–
31,780
–
–
–
–
–
31,780
Treasury
share
reserve
(77,260)
–
–
–
–
–
(77,260)
–
–
–
–
–
(77,260)
Employee
benefit trust
reserve
(10,172)
–
–
–
–
756
(9,416)
–
–
–
–
1,608
(7,808)
Net
unrealised
gains
reserve
2,515
–
(1,868)
437
(1,431)
–
1,084
–
(326)
62
(264)
–
820
Translation
reserve
(291,283)
(3,661)
–
153
(3,508)
–
(294,791)
(836)
–
32
(804)
–
(295,595)
Total
other
reserves
(344,420)
(3,661)
(1,868)
590
(4,939)
756
(348,603)
(836)
(326)
94
(1,068)
1,608
(348,063)
Uniting of interest reserve
The uniting of interest reserve represents the difference between the initial investment by Ferrexpo AG in OJSC Ferrexpo Poltava Mining 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.
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 for senior management incentive schemes.
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. Ukrainian Hryvnia) functional currency
operations within the Group into US Dollars.
Share premium
Share premium represents the premium paid by subscribers for the share capital issues, net of costs directly attributable to the share issue.
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).
108
Ferrexpo plcAnnual Report & Accounts 2012 Note 29: 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 37.
US$000
Current
Other bank loans – secured
Obligations under finance leases
Interest accrued
Total current interest-bearing loans and borrowings
Non-current
Eurobond issued
Syndicated bank loans – secured
Other bank loans – secured
Obligations under finance leases
Total non-current interest-bearing loans and borrowings
Total interest-bearing loans and borrowings
Notes
As at
31.12.12
As at
31.12.11
37
37
37
37
37
37
37
13,321
3,729
9,796
26,846
8,231
1,384
9,333
18,948
491,438
420,000
62,232
19,469
993,139
1,019,985
489,257
420,000
37,955
4,218
951,430
970,378
As at 31 December 2012 the Group has a syndicated US$420 million revolving pre-export finance facility in place and a US$500 million Eurobond.
The revolving pre-export finance facility was drawn in full on 7 October 2011. This finance facility is available for 60 months including a commitment
amortisation over the final 24 months. The maturity is 31 August 2016.
As at 31 December 2012 the major bank debt facility was guaranteed and secured as follows:
• Ferrexpo AG and Ferrexpo Middle East FZE assigned the rights to revenue from certain sales contracts;
• OJSC Ferrexpo Poltava Mining assigned all of its rights of certain export contracts for the pellets sales to Ferrexpo AG and Ferrexpo Middle
East FZE; and
• the Group pledged bank accounts of Ferrexpo AG and Ferrexpo Middle East FZE into which all proceeds from the sale of certain iron ore pellet
contracts are received.
The unsecured US$500 million Eurobond was issued on 7 April 2011 and is due for repayment on 7 April 2016. The bond has a 7.875% coupon
and interest is payable on a semi-annual basis.
As at 31 December 2012, the Group has no other committed credit lines (2011: US$50,000 thousand).
Note 30: Trade and other payables
As at 31 December 2012 trade and other payables comprised:
US$000
Materials and services
Payables for equipment
Dividends payable
Other
Total current trade and other payables
As at
31.12.12
50,736
9,889
87
1,897
62,609
As at
31.12.11
31,033
4,401
56
7,158
42,648
Trade and other payables at 31 December 2012 includes US$1,816 thousand (2011: US$3,215 thousand) due to related parties (see note 34).
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 37.
109
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 31: Defined benefit pension liability
Ukrainian defined benefit plan
The Group makes defined contributions to the Ukrainian State Pension scheme at statutory rates based on gross salary payments for the
employees of OJSC Ferrexpo Poltava Mining and LLC Ferrexpo Yeristovo GOK. Such expenses are charged to the income statement in the period
the related salaries are earned. The Group has also 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. Costs relating to this plan are accrued using the projected unit credit
method in respect of those employees entitled to such payments.
Additionally, 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.
All pension schemes in Ukraine are unfunded. The defined benefit pension liabilities are calculated by an independent actuary applying accepted
actuarial techniques.
At 31 December 2012, this defined benefit plan covered 5,030 current employees (2011: 4,850 people). There are 1,135 former employees
currently in receipt of pensions (2011: 1,165 people). During the financial year 2011, the local pension legislation changed and the pension schemes
maintained by the Group in Ukraine were amended accordingly. The eligibility conditions for the pension benefits (retirement age) are more
restrictive than before and the calculation of the insured salary changed. The latter resulted in a reduction of benefits for the employees and
consequently the defined benefit pension obligation at the end of the prior financial year ended on 31 December 2011.
Swiss defined benefit plan
The employees of the Group’s Swiss operation are covered under a collective 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 regulation 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 2012, this defined benefit plan covered 20 people (2011: 28 people).
Austrian defined benefit plan
The Group has an unfunded retirement benefit obligation covering the Austrian employees of Helogistics. All payments under the scheme are
made by the employer as a lump sum in cases of retirement, occupational disability and death in service or redundancy. The amount payable
is dependent 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.
At 31 December 2012, three current employees (2011: four employees) are covered by this plan. During the financial year 2011, a considerable
number of employees covered by this plan were either made redundant or transferred to another subsidiary of the Group, so that the eligible
amounts were paid out to these participants of the plan and the defined benefit pension obligation consequently decreased as of the end of the
prior financial year ended on 31 December 2011. These events qualified as a curtailment under IAS 19, and the resulting effects were calculated
and included in the benefit expense of the prior year.
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)
110
Year ended 31.12.12
Year ended 31.12.11
Swiss
scheme
1.90%
1.25%
3.00%
0.00%
86.0
82.9
Austrian
Ukrainian
scheme
scheme
3.50% 11.90%
4.70%
2.50%
5.28%
2.50%
0.00%
0.00%
74.5
n/a
63.5
n/a
Swiss
scheme
2.40%
1.00%
3.00%
0.00%
86.0
82.9
Austrian
scheme
5.00%
2.50%
2.50%
0.00%
n/a
n/a
Ukrainian
scheme
11.00%
7.00%
10.50%
0.00%
74.5
63.5
Ferrexpo plcAnnual Report & Accounts 2012 Note 31: Defined benefit pension liability continued
Changes in the net present value of the defined benefit obligation are as follows:
US$000
Opening defined benefit obligation
Current service cost
Employee contribution
Interest cost
Contribution by plan participants
Benefits paid
Actuarial losses/(gains)
Losses/(gains) on curtailment
Past service cost
Termination benefits
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
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
Termination benefits
Losses/(gains) on curtailment
Current year benefit expense
Net movement on defined benefit
pension liability:
Opening balance
Benefits expense
Benefits paid
Employer contribution
Foreign exchange translation adjustment
Closing balance
Year ended 31.12.12
Year ended 31.12.11
Swiss
scheme
3,693
499
135
83
–
(529)
230
–
–
–
133
4,244
2,173
66
564
135
–
(529)
(13)
77
2,473
1,771
(1,343)
–
428
499
83
81
(66)
–
–
–
597
380
597
–
(564)
15
428
Austrian
scheme
172
9
–
7
–
(1,115)
14
–
–
1,022
–
109
–
–
–
–
–
–
–
–
–
109
(83)
–
Ukrainian
scheme
63,452
4,353
–
6,731
–
(4,526)
(21,480)
–
–
–
(21)
48,509
–
–
–
–
–
–
–
–
–
48,509
(30,473)
5,014
Total
67,317
4,861
135
6,821
–
(6,170)
(21,236)
–
–
1,022
112
52,862
2,173
66
564
135
–
(529)
(13)
77
2,473
50,389
(31,899)
5,014
26
23,050
23,504
9
7
(60)
–
–
1,022
–
978
169
978
(1,115)
–
(6)
26
4,353
6,731
4,558
–
(836)
–
–
14,806
12,780
14,806
(4,526)
–
(10)
23,050
4,861
6,821
4,579
(66)
(836)
1,022
–
16,381
13,329
16,381
(5,641)
(564)
(1)
23,504
Swiss
scheme
2,634
376
144
68
288
(203)
467
–
–
–
(81)
3,693
1,579
69
450
144
288
(203)
(109)
(45)
2,173
1,520
(1,140)
–
380
376
68
46
(69)
–
–
–
421
408
421
–
(450)
1
380
Austrian
scheme
819
51
–
40
–
(1,347)
31
277
–
271
30
172
–
–
–
–
–
–
–
–
–
172
(3)
–
Ukrainian
scheme
53,302
3,381
–
5,657
–
(3,746)
28,796
(3,760)
(19,962)
–
(216)
63,452
–
–
–
–
–
–
–
–
–
63,452
(56,525)
5,853
Total
56,755
3,808
144
5,765
288
(5,296)
29,294
(3,483)
(19,962)
271
(267)
67,317
1,579
69
450
144
288
(203)
(109)
(45)
2,173
65,144
(57,668)
5,853
169
12,780
13,329
51
40
(1)
–
–
271
306
667
819
667
(1,347)
–
30
169
3,381
5,657
3,587
–
(11,528)
–
(1,116)
(19)
16,592
(19)
(3,746)
–
(47)
12,780
3,808
5,765
3,632
(69)
(11,528)
271
(810)
1,069
17,819
1,069
(5,093)
(450)
(16)
13,329
Contributions to the defined benefit plans in 2013 are expected to be US$4,700 thousand for the schemes in Ukraine and US$550 thousand and
US$45 thousand for those in Switzerland and Austria respectively.
111
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 31: 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
31.12.12
%
24.4
42.6
10.5
22.5
100.0
As at
31.12.12
603
1,053
260
557
2,473
As at
31.12.11
%
22.0
43.4
10.4
24.2
100.0
As at
31.12.11
478
943
226
526
2,173
The overall expected rate of return on assets is determined based on the market value weighted expected return applicable to the underlying
asset category.
Year ended
31.12.12
Swiss
scheme
Year ended
31.12.11
Swiss
scheme
Expected rate of return on plan assets:
Equities
Bonds
Properties
Other
Total
Actual rate of return on plan assets:
Equities
Bonds
Properties
Other
Total
8.47%
2.55%
4.86%
4.26%
4.44%
14.79%
5.62%
13.15%
3.90%
8.09%
The actual return on the plan assets for the Swiss scheme was US$53 thousand (2011: loss of US$40 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
Swiss
scheme
(+0.25%)
(25)
(204)
Swiss
scheme
(+0.25%)
(27)
(171)
Increase
Austrian
scheme
(+0.25%)
–
(3)
Increase
Austrian
scheme
(+0.25%)
–
(6)
Year ended 31.12.12
Ukrainian
scheme
(+1.00%)
(258)
(3,668)
Swiss
scheme
(-0.25%)
28
220
Year ended 31.12.11
Ukrainian
scheme
(+1.00%)
(504)
(6,250)
Swiss
scheme
(-0.25%)
27
182
Decrease
Austrian
scheme
(-0.25%)
–
3
Decrease
Austrian
scheme
(-0.25%)
–
4
4.31%
2.50%
2.35%
4.92%
3.06%
(7.90%)
3.24%
1.90%
(2.24%)
(0.74%)
Ukrainian
scheme
(-1.00%)
284
4,216
Ukrainian
scheme
(-1.00%)
566
(7,415)
112
Ferrexpo plcAnnual Report & Accounts 2012 Note 31: Defined benefit pension liability continued
The history of unrecognised actuarial losses is as follows for the current and previous four periods:
Opening balance
Change of assumptions on plan liabilities
Experience adjustments on plan liabilities
Experience adjustments on plan assets
Recognised losses
Impact on curtailment
Foreign exchange translation adjustment
Closing balance
Year ended
31.12.12
(57,668)
21,653
(421)
(13)
4,579
–
(29)
(31,899)
Year ended
31.12.11
(34,630)
(11,116)
(18,178)
(109)
3,632
2,576
157
(57,668)
Year ended
31.12.10
(7,140)
(13,600)
(14,299)
(194)
564
–
39
(34,630)
Year ended
31.12.09
(6,294)
918
(2,249)
(230)
476
–
239
(7,140)
Year ended
31.12.08
(3,292)
10,551
(16,770)
(84)
62
–
3,239
(6,294)
Note 32: Provision for site restoration
The costs of restoration of the different deposits in the Group’s open pit mines are based on amounts determined by an independent and credited
institute taking into account the codes of practice and laws applicable in Ukraine. The useful lives of the different pits and mines are determined by
the same institute based on expected annual stripping and production volumes having taken into account the expected timing and effect of future
mine-life extension programmes. It is expected that the restoration works of the GPL mine will start after the years 2020, 2038 and 2055
depending on the different areas within the mine. The first restoration work of the Yeristovo mine is expected to start after 2035.
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 in the relevant areas within the mine. The present value of the provision has been calculated using a nominal pre-tax
discount rate of 11.7% (2011: 8.47%) and the costs are expected to be incurred once the restoration works begin in the different areas of the mines.
Uncertainties in estimating the provision include potential changes in regulatory requirements, decommissioning and reclamation alternatives and
the discount and inflation rates to be used in the calculations.
US$000
Opening balance
Unwind of the discount
Arising during the year
Translation adjustments
Closing balance
Note 33: Accrued liabilities and deferred income
As at 31 December 2012 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
31.12.12
3,015
289
(935)
(1)
2,368
As at
31.12.11
2,746
216
65
(12)
3,015
As at
31.12.12
6,249
19,726
23,938
1,372
51,285
As at
31.12.11
8,830
20,836
47
–
29,713
Note 34: Related party disclosure
During the periods presented the Group entered into arm’s length transactions with entities under the common control of the majority owner of the
Group, Kostyantin Zhevago, with associated companies 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 the control of Kostyantin Zhevago. Associated companies refers to TIS Ruda LLC, in which the
Group holds an interest of 48.6%. This is the only associated company of the Group. Other related parties are principally those entities controlled
by Anatoly Trefilov and Olexander Moroz. Anatoly Trefilov is a member of the supervisory board of OJSC Ferrexpo Poltava Mining from which
Olexander Moroz resigned as of 14 May 2010. All transactions taking place up to 31 May 2011, being within one year of his resignation from the
supervisory board, are considered to be transactions with a related party and thus included in the disclosures made for the comparative period.
113
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 34: Related party disclosure continued
Related party transactions entered into by the Group during the periods presented are summarised in the following tables:
Revenue, expenses, finance income and expenses
US$000
Other salesa
Total related party transactions within revenue
Materialsb
Purchased concentrate and other items for resalec
Spare parts and consumablesd
Fuele
Gase
Total related party transactions within cost of sales
Selling and distribution expensesf
General and administration expensesg
Total related party transactions within expenses
Finance incomeh
Finance expensesh
Net related party finance income/(expenses)
Entities under common control
Year ended 31.12.12
Year ended 31.12.11
Entities
under
common
control
1,198
1,198
5,984
21,948
7,859
1,373
9,646
46,810
9,377
1,644
57,831
917
(733)
184
Associated
companies
–
–
–
–
–
–
–
–
20,493
–
20,493
–
–
–
Other
related
parties
88
88
24
–
–
–
–
24
8,367
72
8,463
–
–
–
Entities
under
common
control
6,718
6,718
4,638
24,891
4,726
7,980
15,455
57,690
6,536
1,231
65,457
899
(411)
488
Associated
companies
–
–
–
–
–
–
–
–
16,674
–
16,674
9
–
9
Other
related
parties
1,783
1,783
8,475
–
256
–
–
8,731
13,470
15
22,216
–
–
–
The Group entered into various related party transactions with entities under common control. A description of the most material transactions, all of which were carried out on an arm’s length basis in the
normal course of business for the members of the Group (see note 1), is given below:
a Sales of power, steam and water and other materials to Kislorod PCC for US$480 thousand (2011: US$2,128 thousand). Revenue of US$507 thousand was received from Vorskla Steel Ltd. for the sale
of sand (2011: US$548 thousand). Other sales as of 31 December 2011 comprised tolling fees of US$2,622 thousand paid by Vostok Ruda Ltd. to OJSC Ferrexpo Poltava Mining for the production of
pellets. No pellets were produced under the tolling scheme during the financial year 2012.
b Purchases of compressed air and oxygen from Kislorod PCC for US$4,933 thousand (2011: US$4,033 thousand).
c Purchases of concentrate and other items for resale from Vostok Ruda Ltd. amounting to US$21,948 thousand (2011: US$12,728 thousand).
c No purchases of merchant concentrate from Vostok Ruda Ltd. were made as of 31 December 2012 (2011: US$7,458 thousand). During the financial year 2011, Vostok Ruda Ltd. earned
US$10 thousand on the purchase and resale of concentrate. The fee covered costs incurred in procuring and delivering third party merchant concentrate supplied. No fee was earned during
the financial year 2012.
c Handling commissions to SIA Wellmark Latvia amounting to US$35 thousand during the financial year 2011 for the purchase of goods. No handling commissions were paid during the financial
year 2012.
d Purchases of spare parts from AutoKraZ Holding Co. in the amount of US$5,255 thousand (2011: US$1,456 thousand);
d Purchases of spare parts from CJSC Kiev Shipbuilding and Ship Repair Plant (‘KSRSSZ’) in the amount of US$805 thousand (2011: US$228 thousand);
d Purchases of spare parts from OJSC Berdichev Machine-Building Plant Progress of US$595 thousand (2011: US$1,017 thousand);
d Purchases of spare parts from Valsa GTV of US$736 thousand (2011: US$541 thousand); and
d Purchase of spare parts from Komsomolsk Cogeneration Company LLC in the amount of US$736 thousand as of 31 December 2011. No procurement from Komsomolsk Cogeneration
Company LLC were made during the financial year 2012.
e Purchases of fuel for US$1,373 thousand (2011: US$7,980 thousand) from OJSC Ukrzakordongeologia. Procurement of gas US$9,646 thousand (2011: US$15,455 thousand) from
OJSC Ukrzakordongeologia.
f
Purchases from FC Vorskla for advertisement, marketing and general public relations services during the financial year 2012 of US$9,301 thousand (2011: US$6,536 thousand).
g
Insurance premiums of US$686 thousand (2011: US$644 thousand) paid to ASK Omega for workmen’s insurance and other insurances.
g Fees of US$448 thousand (2011: US$355 thousand) paid to Bank Finance & Credit (Bank F&C) for bank services.
h Transactional banking services are provided to certain subsidiaries of the Group by Bank F&C. Finance income and expenses relate to these transactional banking services. Further information
is provided under transactional banking arrangements on page 116.
114
Ferrexpo plcAnnual Report & Accounts 2012 Note 34: Related party disclosure continued
Associated companies
The Group entered into related party transactions with its Associated Company TIS Ruda LLC, which were carried out on an arm’s length basis in the normal course of business for the members of the
Group (see note 1). These are described below:
f
Purchases of logistics services in the amount of US$21,438 thousand (2011: US$16,674 thousand) relating to port operations, including port charges, handling costs, agent commissions and
storage costs.
Other related parties
The Group entered into various transactions with related parties other than those under the control of the majority owner of the Group. Descriptions of the material transactions are below:
a Sales of scrap metal to Ferrolit amounting to US$1,201 thousand and other sales of US$509 thousand during the financial year 2011. Ferrolit is no longer a related party to the Group due to the
resignation of Olexander Moroz as a supervisory board member of OJSC Ferrexpo Poltava Mining in May 2010.
b Purchases of cast iron grinding bodies from Ferrolit for US$8,475 thousand during the financial year 2011. As noted above, Ferrolit is no longer a related party to the Group.
f
Purchases of logistics management services from Slavutich Ruda Ltd relating to customs clearance services and the coordination of rail transit. Total billings amounted to US$8,367 thousand
(2011: US$13,470 thousand). Slavutich Ruda Ltd. earned commission income of US$906 thousand on these services (2011: US$809 thousand).
g Purchases of legal services from Kuoni Attorneys at Law Ltd. amounting to US$72 thousand as of 31 December 2012 (2011: US$12 thousand). All services were provided on an arm’s length basis.
Purchases of property, plant and equipment
US$000
Purchases with independent fair and reasonable confirmation
Purchases with shareholder approval
Other purchases
Total purchase of property, plant and equipment i
Year ended 31.12.12
Year ended 31.12.11
Entities
under
common
control
2,659
55,026
1,044
58,729
Associated
companies
–
–
–
–
Other
related
parties
–
–
–
–
Entities
under
common
control
14,655
13,167
–
27,822
Associated
companies
–
–
–
–
Other
related
parties
–
–
–
–
i During the financial year 2012, the Group entered into the following transactions with related parties that were not of a revenue nature, but were in the normal course of business. As such, these
transactions were, in so far as they exceeded the relevant aggregated threshold tests on a rolling annual basis, subject to an independent fair and reasonable confirmation that the terms are fair and
reasonable in accordance with the requirements of the UK Listing Rules. Effective 1 October 2012, the UK Listing Rules have been amended to require only independent fair and reasonable
confirmation for transactions that are not in the ordinary course of business, irrespective of the nature of the transaction.
• During the period from October to December 2012, The Group entered in various transactions with related parties totalling to US$653 thousand. These transactions were in the ordinary course
of business and on an arm’s length basis and did not require independent fair and reasonable confirmation.
In September 2012, the Group procured metal works from OJSC Berdichev Machine-Building Plant Progress in the amount of US$1,019 thousand in connection with the construction of the
flotation equipment.
In July and August 2012, the Group entered in various smaller transactions with related parties totalling US$391 thousand. No independent fair and reasonable confirmation was required as these
transactions did not exceed the relevant aggregated threshold at the point of time of the transactions.
In July 2012, the Group procured design documentation services in the amount of US$194 thousand from OJSC DIOS in relation to replacement of mixers at the pellet plant complex and the
construction of a dust aspiration system. Deslimer equipment in the amount of US$668 thousand was procured from CJSC Kiev Shipbuilding and Ship Repair Plant (‘KSRSSZ’) and OJSC
Berdichev Machine-Building Plant Progress for a beneficiation plant.
In March 2012, project management services in the amount of US$140 thousand were procured from Vorskla Steel Ltd. in connection with the construction of service facilities and technical
design documentation amounting to US$618 thousand from OJSC DIOS related to the update of the beneficiation plant.
In February 2012, the Group procured design documentation from OJSC DIOS in the amount of US$21 thousand in relation to the construction of roads and loading facilities.
•
•
•
•
•
The Group obtained on 24 May 2012 shareholder approval for an option to purchase up to 500 rail cars from PJSC Stakhanov Railcar Company between the date of the approval and 31 December
2014. In February 2013, the Group exercised the right under this option to order 267 rail cars.
During the financial year 2011, the Group entered into the following transactions with related parties that required independent fair and reasonable confirmation in accordance with the requirements
of the UK Listing Rules.
•
•
•
•
•
•
•
In December 2011, the Group purchased two dust filters from OJSC Berdichev Machine-Building Plant Progress for the pellet production plant amounting to US$438 thousand.
In November 2011, the Group entered into another agreement with OJSC DIOS for the procurement of engineering design services in the amount of US$739 thousand.
In September 2011, the Group purchased 12 dumper rail cars from PJSC Stakhanov Railcar Company in the amount of US$1,756 thousand.
In August 2011, design services in relation to the conversion of a vessel were provided by Zaliv Ship Design LLC in the amount of US$483 thousand.
In June 2011, project management services in the amount of US$105 thousand were procured from Vorskla Steel Ltd. in connection with the construction of service facilities.
In May 2011, the Group entered into an agreement for the purchase of equipment for the crushing and beneficiation plants from CJSC Kiev Shipbuilding and Ship Repair Plant (‘KSRSSZ’)
in the amount of US$493 thousand. Orders were also placed for three press-filters for US$8,991 thousand from OJSC Berdichev Machine-Building Plant Progress.
In April 2011, the Group entered into an agreement for engineering services to be provided by OJSC DIOS in the amount of US$1,650 thousand for the upgrade of the crushing and
concentrating equipment.
The purchase of 400 rail cars from PJSC Stakhanov Railcar Company, with an option to purchase an additional 600 rail cars, was approved by the general meeting of the shareholders on 15 March
2011. 712 rail cars were ordered under the authority of this shareholder approval during the financial year 2011 and 288 rail cars in 2012, bringing the total ordered to 1,000 units. As of 31 December
2012, all rail cars ordered under this authority had been delivered, which brought the total fleet of rail cars to 1,933 units, not including 200 dumper rail cars previously used in the mine and related area
and recently brought into service. Purchased rail cars under this authority amounting to US$55,026 thousand were put into operation during the financial year 2012 (2011: US$13,167 thousand).
115
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Notes to the Consolidated Financial Statements continued
Note 34: Related party disclosure continued
Balances with related parties
The outstanding balances, as a result of transactions with related parties, for the periods presented are shown in the table below:
US$000
Investments available-for-salej
Prepayments for property, plant and equipmentk
Total non-current assets
Trade and other receivablesl
Prepayments and other current assetsm
Cash and cash equivalentsn
Total current assets
Trade and other payableso
Current liabilities
Entities under common control
Year ended 31.12.12
Year ended 31.12.11
Entities
under
common
control
530
625
1,155
823
162
141,424
142,409
1,694
1,694
Associated
companies
–
–
–
–
1,302
–
1,302
–
–
Other
related
parties
–
–
–
3
18
–
21
122
122
Entities
under
common
control
1,286
29,080
30,366
1,262
414
94,933
96,609
2,151
2,151
Associated
companies
–
–
–
1,981
–
–
1,981
549
549
Other
related
parties
–
–
–
6
279
–
285
515
515
j
The balance of the investments available-for sale comprised shareholdings in PJSC Stakhanov Railcar Company (1.10%) and Vostok Ruda Ltd. (1.10%). The ultimate beneficial owner of these
companies is Kostyantin Zhevago. PJSC Stakhanov Railcar Company is further listed on the Ukrainian stock exchange. The changes of the values in the table above are related to fair value
adjustments recorded during the respective reporting periods. The shareholdings for all investments remained unchanged during the periods disclosed above. During the financial year 2012,
the investment in Vostok Ruda Ltd. was subject to an impairment of US$430 thousand (2011: US$198 thousand).
k As of 31 December 2012, prepayments of US$153 thousand were made to DIOS (2011: US$302 thousand) for engineering design services and US$289 thousand to OJSC Berdichev Machine-
Building Plant Progress (2011: nil) and US$142 thousand to CJSC Kiev Shipbuilding and Ship Repair Plant (‘KSRSSZ’) (2011: nil) for equipment for the crushing and beneficiation plants. Prepayments
outstanding of US$28,705 thousand in respect of key components for rail cars purchased from OJSC Stahanov Rail Cars Plant as of 31 December 2011. No prepayments were made to OJSC
Stahanov Rail Cars Plant as of 31 December 2012.
l
As of 31 December 2012, trade and other receivables included outstanding amounts due from Vorskla Steel Ltd. of US$277 thousand (2011: US$828 thousand) in relation to other sales and
US$461 thousand (2011: US$349 thousand) from Kislorod PCC for the sale of power, steam and water.
m Prepayments and other current assets relate mainly to prepayments of US$91 thousand (2011: US$75 thousand) to ASK Omega for insurance premiums and US$38 thousand to CJSC Kiev
Shipbuilding and Ship Repair Plant (‘KSRSSZ’) (2011: nil) and US$11 thousand to OJSC Berdichev Machine-Building Plant Progress (2011: US$194 thousand) for spare parts. Prepayments are
in the normal course of business as requested by any third party supplier in Ukraine.
n As of 31 December 2012, cash and cash equivalents with Bank F&C were US$141,424 thousand (2011: US$94,933 thousand). Further information is provided under transactional banking
arrangements below.
o Trade and other payables amounting to US$599 thousand for compressed air and oxygen purchased from Kislorod PCC (2011: US$535 thousand) and US$126 thousand in relation to the purchase
of concentrate from Vostok Ruda Ltd. (2011: US$1,276 thousand) and US$642 thousand for the procurement of fuel and gas from OJSC Ukrzakordongeologia (2011: nil).
Associated companies
l
The prior year balance of other receivables consist a declared dividend due from TIS Ruda LLC in the amount of US$1,749 thousand and US$232 thousand in relation to the provision of rail cars
to TIS Ruda LLC for the storage of cargo at the port). No such receivable balances exist as of 31 December 2012.
m Prepayments and other current assets relate to prepayments of US$1,302 thousand (2011: nil) made to TIS Ruda LLC for transhipment services. Prepayments are in the normal course of business
as requested by any third party supplier in Ukraine.
Other related parties
m Prepayments and other current assets relate to advance payments of US$18 thousand to Slavutich Ruda Ltd. for distribution services (2011: US$279 thousand). Prepayments are in the normal course
of business and are common for the provision of supplies in Ukraine.
o Trade and other payables amounting to US$99 thousand as of 31 December 2012 are in respect of distribution services provided by Slavutich Ruda Ltd. (2011: US$515 thousand).
Transactional banking arrangements
The Group has transactional banking arrangements with Bank Finance & Credit (Bank F&C) in Ukraine which is under common control of the
majority shareholder of Ferrexpo plc. Finance income and expenses are disclosed in the table on page 114.
The Group has an uncommitted multicurrency revolving loan facility agreement with Bank F&C which will expire on the 16 April 2013. The
maximum limit of this facility, the terms of which was the subject of a fair value opinion at its renewal and extension in April 2010, amounts to
UAH 80 million (2012: US$ 10,008 thousand; 2011: US$10,013 thousand). The loan facility has remained undrawn for the entire period of time
since renewal in April 2010.
116
Ferrexpo plcAnnual Report & Accounts 2012 Note 34: Related party disclosure continued
As is required under Ukrainian legislation, assets are pledged or become the subject of a mortgage under the terms of the facility agreements.
The security for short-term agreements with Bank F&C to issue letters of credit and bank guarantees for the supply of goods and services shares
the same pledge of assets given in respect of the loan facility. The average cost of issuing letters of credit and guarantees in 2012 amounts to
0.83% of the value of the financial instruments issued. The total value of pledges and mortgages under the terms of the loan agreement and letters
of credit and guarantee agreements is US$26,180 thousand (2011: US$10,595 thousand).
US$000
Loan facilities
Amount drawn
Letter of credit facility outstanding
Bank guarantee facility outstanding
Year ended
31.12.12
10,008
–
7,179
1,081
Year ended
31.12.11
10,013
–
322
2,240
Bank F&C provides mortgages and loans to employees of the Group for the acquisition, construction and renovation of apartments in Ukraine.
This is part of a social loyalty programme started by the Group in December 2011 allowing certain employees of the Group to borrow at preferential
interest rates. OJSC Ferrexpo Poltava Mining and LLC Ferrexpo Yeristovo GOK act as guarantors for the bank’s loans to the employees of the Group
and have deposited US$2,085 thousand at Bank F&C as security (2011: US$1,500 thousand). The interest rate margin earned by Bank F&C covers
the costs of administrating the mortgages and loans. Detailed information on the social loyalty programme is provided in the Corporate Social
Responsibility Review section of this Annual Report and Accounts.
Note 35: Employee benefits expenses
Employee benefits expenses for the year ended 31 December 2012 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 was as follows:
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
Share-based payments amounting to US$984 thousand (2011: US$1,379 thousand) are included in wages and salaries.
Year ended
31.12.12
76,057
25,449
8,276
2,927
1,608
114,317
Year ended
31.12.11
63,302
21,832
(5,319)
2,810
891
83,516
Year ended
31.12.12
7,189
171
1,244
954
9,558
Year ended
31.12.11
6,829
170
1,156
966
9,121
Year ended
31.12.12
6,299
604
260
7,163
Year ended
31.12.11
6,229
611
352
7,192
117
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 35: Employee benefits expenses continued
The balances above include compensation for Non-executive and Executive Directors as well as for other key management personnel. The details
of compensation relating to Non-executive and Executive Directors are disclosed in the table below:
US$000
Salary and fees
Bonus
Benefits
Pension
Gains made on exercise of nil cost share options under the LTIP
Total compensation to Non-executive and Executive Directors
Note 36: Commitments, contingencies and legal disputes
Operating lease commitments – Group as lessee
Future minimum rentals payable under non-cancellable operating leases as at 31 December 2012 are as follows:
US$000
Less than one year
Between one and five years
More than five years
Total minimum rentals payable
Year-ended
31.12.12
2,399
694
228
53
362
3,736
Year-ended
31.12.11
2,276
925
289
57
422
3,969
As at
31.12.12
3,078
8,249
71,475
82,802
As at
31.12.11
2,582
6,135
52,644
61,361
During the year ended 31 December 2012, US$3,063 thousand was recognised as an expense in the income statement in respect of operating
leases (2011: US$2,037 thousand).
The Group leases land and buildings under operating leases. The leases on land typically run for 48 years and with a lease period of 5 to 10 years
on buildings.
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
118
As at 31.12.12
Minimum
payments
5,421
17,616
5,940
28,977
(5,779)
23,198
Present value
of payments
3,729
13,865
5,604
23,198
–
23,198
As at 31.12.11
Minimum
payments
1,924
4,906
–
6,830
(1,228)
5,602
Present value
of payments
1,384
4,218
–
5,602
–
5,602
As at
31.12.12
162,665
As at
31.12.11
137,029
Ferrexpo plcAnnual Report & Accounts 2012 Note 36: Commitments, contingencies and legal disputes continued
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.
The Group is currently involved in a share dispute which commenced in 2005 and which was disclosed and as relevant updated in the Group’s
2007 Annual Report and Accounts and subsequent IPO and Eurobond prospectuses, interim as well as annual reports as appropriate since then.
A former shareholder in OJSC Ferrexpo Poltava Mining (‘FPM’) brought proceedings in the Ukrainian courts against certain nominee companies
that were previously ultimately controlled by Kostyantin Zhevago, among other parties, seeking to invalidate the shares sale and purchase
agreement pursuant to which a 40% stake in FPM (which was subsequently diluted to less than 14% following further share issues by FPM) was
sold to those nominee companies. On 11 January 2010, a judgement rejecting the claims of the former shareholder that had previously been
made by the Commercial Court of Poltava Region was upheld on appeal by the Kyiv Inter Region Appellate Commercial Court. Following the
appeal proceedings, the former shareholder filed a cassation complaint with the High Commercial Court of Ukraine requesting that it reverse the
judgements of the lower courts. The High Commercial Court of Ukraine granted the cassation complaint of the former shareholder on 21 April
2010 and invalidated the respective shares sale and purchase agreement without ruling on any consequences of such invalidity.
On 6 October 2011, the claimants filed a new claim in Ukraine alleging that as a result of invalidity of the shares sale and purchase agreement with
respect to a 40% stake in FPM their rights were infringed by the decisions on the capital increases taken at the general shareholders meeting of
FPM which took place on 20 November 2002 and all further decisions of the general shareholders meetings of FPM relating to subsequent
changes to FPM’s charter capital. Accordingly, the claimants asked the court to invalidate the decisions taken at the general shareholders meeting
of FPM which took place on 20 November 2002, restore their status as shareholders of FPM as of 20 November 2002 having a 40% stake in FPM,
cancel all share issues of FPM that took place after 20 November 2002 and register shares in their names.
On 22 November 2011, Ferrexpo AG filed a claim against the claimants at the High Court of Justice in London seeking a confirmation of ownership
in FPM shares. The claim was launched in order to take an active step outside Ukraine to resolve this long-running dispute. By a judgement dated
3 April 2012, the proceedings in the UK were stayed while the case continued in Ukraine.
On 20 August 2012, the Commercial Court of Poltava Region, which was considering the case as a court in the first instance, upon motion of the
claimants ruled that the case be transferred to the Kyiv City Commercial Court, which has exclusive jurisdiction over the case, given that one of the
defendants in the case, the National Commission on Securities and Stock Market of Ukraine, has the status of a central executive authority. FPM
challenged the transfer of the case to the Kyiv City Commercial Court; however, both the Kharkiv Appellate Commercial Court and the High
Commercial Court of Ukraine upheld the ruling of the Commercial Court of Poltava Region dated 20 August 2012.
The case is currently being heard before the Kyiv City Commercial Court by a panel of three judges and at the latest hearing on 28 February 2013
the decision was made to postpone the consideration of the case till 21 March 2013 in order to prepare for further consideration of the case and
for the decision on the various motions submitted by the defendants.
After having taken Ukrainian legal advice, the management of the Group believes the claim has little legal merit primarily since neither the final
decision by the High Commercial Court of Ukraine nor any subsequent claims entitles claimants to direct enforcement rights to the shares of FPM.
In addition, the restitution of the status quo ante of the shareholding position as sought by claimants does not have a basis under Ukrainian law
for various legal, technical and practical reasons. It follows that no provision was recorded for this dispute as of 31 December 2012. At the same
time, in light of the risks surrounding the operation and independence of Ukrainian courts, including the risks associated with the Ukrainian
legal system in general, the claimants may ultimately prevail in this dispute and the Group’s ownership of the relevant interest in FPM may be
successfully challenged in the future, which could have a material adverse effect on Ferrexpo’s business, results of operations, financial
condition and prospects.
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.
We are disputing several tax claims by domestic tax authorities following inspections for the fiscal years 2011 and 2012 and continue to dispute in
the court system amounts resulting from audits in relation to 2009 and 2010. Corporate profit tax claims are, among other things, claims related to
the deductibility of expenses for tax purposes, adjustments in respect of prices charged on the export of products and payments of additional
environmental and other taxes and duties. The aggregate amount claimed by the Ukrainian tax authorities relating to these matters, together with
applicable fines and penalties, is approximately US$16,900 thousand. As we believe the tax authorities claims are unlikely to be enforced no
provision has been made for these claims, although there is no guarantee the tax authorities’ challenges will not succeed.
119
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 36: Commitments, contingencies and legal disputes continued
Recoverable VAT amounting to US$103,208 thousand outstanding at 31 December 2012 is in the process of being considered by the Ukrainian
court system in several different cases. As the VAT is fully recoverable under the relevant Ukrainian legislation, the Group expects to ultimately
receive positive court decisions for these ongoing court proceedings. Consequently, the VAT is recorded at its full amount in the financial
statements, net of an estimated discount to reflect the time value of money as disclosed in note 26.
Note 37: Financial instruments
The accounting classification of each category of financial instruments, and their carrying amounts, are set out below:
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
Interest-bearing loans and borrowings
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
Interest-bearing loans and borrowings
Total financial liabilities
Notes
Loans and
receivables
Available-for-
sale financial
assets
27
20
24
30
33
29
596,560
–
116,553
860
713,973
–
–
–
–
–
534
–
–
534
–
–
–
–
Notes
Loans and
receivables
Available-for-
sale financial
assets
27
20
24
30
33
29
890,154
–
128,905
1,656
1,020,715
–
–
–
–
–
1,290
–
–
1,290
–
–
–
–
As at 31.12.12
At fair value
through
profit or
loss
Financial
liabilities
measured at
amortised
cost
–
–
–
–
–
–
–
–
–
–
Total
596,560
534
116,553
860
714,507
62,609
25,976
62,609
–
–
25,976
– 1,019,985 1,019,985
– 1,108,570 1,108,570
As at 31.12.11
At fair value
through
profit or
loss
Financial
liabilities
measured at
amortised
cost
Total
–
–
–
–
–
–
890,154
–
1,290
–
128,905
1,656
–
– 1,022,005
42,648
29,666
970,378
42,648
–
29,666
–
–
970,378
– 1,042,692 1,042,692
Financial risk management
Overview
The Group has exposure to the following risks from its use of financial instruments:
• credit risk
•
• market risk – including currency and commodity risk
liquidity 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.
120
Ferrexpo plcAnnual Report & Accounts 2012 Note 37: 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.
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.
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. A ratings approach is used to determine maximum exposure to each counterparty.
Cash not required within three months for production, distribution and capital expenditures is invested with counterparties rated by S&P or
Moody’s at a level of long-term BBB (S&P) or short-term A3 (S&P) or better.
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.
121
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 37: Financial instruments continued
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 in this respect as well as in relation to certain of its other activities.
Guarantees
The Group’s policy is to provide financial guarantees under limited circumstances only for the benefit of wholly-owned or substantially wholly-
owned subsidiaries. At 31 December 2012 Ferrexpo AG and Ferrexpo Finance plc were jointly and severally liable under a US$420 million loan
agreement having an outstanding balance of US$420 million (2011: US$420 million).
Ferrexpo plc, Ferrexpo AG and Ferrexpo Middle East FZE are guarantors to the US$500 million Eurobond (‘Notes’) issued by Ferrexpo Finance plc,
which is due for repayment on 7 April 2016. Additionally the Notes benefit from a surety agreement provided by OJSC Ferrexpo Poltava Mining.
Ferrexpo AG acts as a guarantor for several finance facilities provided to Ukrainian subsidiaries amounting to US$150,600 thousand
(2011: US$47,900 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
31.12.12
596,560
116,553
860
As at
31.12.11
890,154
128,905
1,656
713,973 1,020,715
The total receivables balance relating to the Group’s top three customers was US$37,383 thousand (2011: US$53,244 thousand) making up
32.2% of the total amounts receivable (2011: 57.1%).
Impairment profile
The Group’s exposure to credit risk relating to trade and other receivables is disclosed in note 24.
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 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.
The following are the contractual maturities of financial liabilities by interest type:
US$000
Interest-bearing
Eurobond issued
Syndicated loans – secured
Other banks – secured
Obligation under finance lease
Interest accrued
Future interest payable
Non-interest-bearing
Trade and other payables
Accrued liabilities
Total financial liabilities
122
As at 31.12.12
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
More than
5 years
Total
–
–
13,321
3,729
9,796
53,323
–
70,000
13,300
3,870
–
52,560
62,609
25,926
168,704
–
50
139,780
491,438
350,000
37,864
15,600
–
71,559
–
–
966,461
–
–
11,068
–
–
607
491,438
420,000
75,553
23,199
9,796
178,049
–
–
62,609
25,976
11,675 1,286,620
Ferrexpo plcAnnual Report & Accounts 2012 Note 37: Financial instruments continued
US$000
Interest-bearing
Eurobond issued
Syndicated loans – secured
Other banks – secured
Obligation under finance lease
Interest accrued
Future interest payable
Non-interest-bearing
Trade and other payables
Accrued liabilities
Total financial liabilities
As at 31.12.11
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
More than
5 years
Total
–
–
8,231
1,384
9,333
51,768
–
–
8,240
1,412
–
51,511
489,257
420,000
29,716
2,806
–
118,818
42,648
28,663
142,027
–
1,003
–
–
62,166 1,060,597
–
–
–
–
–
–
489,257
420,000
46,186
5,602
9,333
222,097
–
42,648
29,666
– 1,264,790
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. Functional 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. The value of the Hryvnia is managed by the National Bank of Ukraine (‘NBU’).
The Group has gross recoverable VAT balances of US$301,535 thousand (UAH2,410 million) to be recovered from the Ukraine Government tax
authority and is reliant on the normal functioning of this system. The exact timing of recovery is subject to uncertainties, along with the prevailing
exchange rate to the US Dollar at the time of repayment. A devaluation of the Ukrainian Hryvnia will negatively effect the expected cash flows from
the refunds in US Dollars.
A 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 values which are recorded in reserves.
The 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 financial institutions, exchanges currencies at bank offered market rates.
Trade receivables are predominately in US Dollars and are not hedged. Trade payables denominated in 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 Ukrainian Hryvnia 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.
123
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Consolidated Financial Statements continued
Note 37: Financial instruments continued
The Group’s exposure to foreign currency risk was as follows based on notional amounts:
Ukrainian
Hryvnia
4
US
Dollar
112,515
–
–
–
–
–
–
–
4
Ukrainian
Hryvnia
7
–
–
–
–
–
–
–
7
(39,066)
(2,364)
(425)
(41,855)
(4,219)
–
(46,074)
66,441
US
Dollar
73,830
(16,930)
(5,577)
(43)
(22,550)
(2,298)
–
(24,848)
48,982
As at 31.12.12
Euro
612
(467)
–
(2)
(469)
(1,754)
–
(2,223)
(1,611)
As at 31.12.11
Euro
19,392
–
–
(4)
(4)
(618)
–
(622)
18,770
Swiss
Franc
835
Other
currencies
1,036
Total
115,002
–
–
–
–
(384)
(14)
(398)
437
Swiss
Franc
487
–
–
–
–
(346)
–
(346)
141
–
–
–
–
(489)
(348)
(837)
199
Other
currencies
1,027
(2)
–
–
(2)
(1,445)
(42)
(1,489)
(462)
(39,533)
(2,364)
(427)
(42,324)
(6,846)
(362)
(49,532)
65,470
Total
94,743
(16,932)
(5,577)
(47)
(22,556)
(4,707)
(42)
(27,305)
67,438
US$000
Financial assets
Financial liabilities
Other banks – secured
Obligation under finance lease
Interest accrued
Total borrowings
Trade and other payables
Accrued 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
Accrued liabilities
Total financial liabilities
Net financial assets/(liabilities)
124
Ferrexpo plcAnnual Report & Accounts 2012 Note 37: Financial instruments continued
Interest rate risk
The Group predominantly borrows bank 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.
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 average interest rate (%)
Financial liabilities
Trade and other payables
Accrued liabilities
Interest-bearing loans and borrowings
Total financial liabilities
Weighted average interest rate (%)
US$000
Financial assets
Cash and cash equivalents
Available-for-sale investments
Trade receivables
Other financial assets
Total financial assets
Weighted average interest rate (%)
Financial liabilities
Trade and other payables
Accrued liabilities
Interest-bearing loans and borrowings
Total financial liabilities
Weighted average interest rate (%)
As at 31.12.12
Fixed
interest
Other
non-interest-
bearing
Floating
interest
305,475
–
–
–
305,475
0.0%
–
–
462,464
462,464
3.0%
280,097
–
–
860
280,957
0.8%
–
–
557,521
557,521
7.6%
Total
596,560
534
116,553
860
714,507
10,988
534
116,553
–
128,075
62,609
25,976
62,609
25,976
– 1,019,985
88,585 1,108,570
As at 31.12.11
Floating
interest
Fixed
interest
Other
non-interest-
bearing
Total
635,785
–
–
–
635,785
0.4%
–
–
471,475
471,475
2.6%
193,099
–
–
1,656
194,755
0.7%
–
–
498,903
498,903
7.9%
61,270
1,290
128,905
–
890,154
1,290
128,905
1,656
191,465 1,022,005
42,648
29,666
–
42,648
29,666
970,378
72,314 1,042,692
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.
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.
125
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Notes to the Consolidated Financial Statements continued
Note 37: Financial instruments continued
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
Ukrainian Hryvnia
Euro
Swiss Franc
Total
Year ended
31.12.12
Income
statement/
Equity
11,074
(269)
73
10,878
Year ended
31.12.11
Income
statement/
Equity
8,164
3,128
23
11,315
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 (e.g. interest rate swaps). Therefore a change in interest rates at the reporting date would not affect profit or loss.
Cash flow sensitivity for fixed and variable rate instruments
An increase of 100 basis points (‘bp’) in interest rates would have increased/(decreased) equity and profit or loss by the amounts shown below.
This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
US$000
Net finance charge
Year ended
31.12.12
1,619
Year ended
31.12.11
974
A decrease of 100 bp would increase equity and profit by US$2,215 thousand for the year ended 31 December 2012 (2011: US$1,682 thousand).
This is 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
Cash and cash equivalents
Trade and other receivables
Available-for-sale financial assets
Other financial assets
Total financial assets
Financial liabilities
Trade and other payables
Accrued liabilities
Interest-bearing loans and borrowings
Total financial liabilities
Carrying amount
Fair value
As at
31.12.12
As at
31.12.11
As at
31.12.12
As at
31.12.11
596,560
116,553
534
860
890,154
128,905
1,290
1,656
714,507 1,022,005
596,560
116,553
534
860
890,154
128,905
1,290
1,656
714,507 1,022,005
42,648
29,666
42,648
62,609
62,609
29,666
25,976
25,976
986,913
970,378 1,026,084
1,019,985
1,108,570 1,042,692 1,114,669 1,059,227
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.
126
Ferrexpo plcAnnual Report & Accounts 2012
Note 37: Financial instruments continued
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 (i.e. as prices) or indirectly (i.e. 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
Transfer out of level 3
Closing balance
As at 31.12.12
Level 1
Level 2
Level 3
Total
534
534
–
–
–
–
534
534
As at 31.12.11
Level 1
Level 2
Level 3
Total
860
860
–
–
430
430
1,290
1,290
As at 31.12.12
Available-
for-sale
financial
assets
430
As at 31.12.11
Available-
for-sale
financial
assets
628
(430)
–
–
–
(198)
–
–
430
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. The Board continues to support maintaining a sound capital base balanced against these
market constraints.
127
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012
Notes to the Consolidated Financial Statements continued
Note 37: Financial instruments continued
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 is subject to externally imposed capital requirements other than a bank covenant requirement
to maintain consolidated equity of the Group of US$500,000 thousand including non-controlling interests and excluding the translation reserve.
Compliance is ensured by balancing dividend payments against the earnings of the Group.
For more information about the Group’s interest-bearing loans and borrowings, see note 29.
Note 38: Share-based payments
Long-term incentive plan (‘LTIP’)
The following share awards were granted under the LTIP in the previous financial years, the LTIP vesting period is three years.
No. (’000)
Year ended 31.12.12
Year ended 31.12.11
Year ended 31.12.10
2012 LTIP
485
–
–
2011 LTIP
–
415
–
2010 LTIP
–
–
330
Total
485
415
330
The LTIP is 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.
The following expenses have been recognised in 2012 and 2011 in respect of the LTIP:
US$000
Year ended 31.12.12
Year ended 31.12.11
2012 LTIP
693
–
2011 LTIP
592
592
2010 LTIP
323
319
2009 LTIP
–
198
2008 LTIP
–
(353)
Total
1,608
756
The fair value of these awards was assessed at their grant date using a simulation or ‘Monte Carlo’ model consistent with the mathematics
underlying the standard Black-Scholes options pricing model, extended to allow for the performance conditions. Each simulation of the model
projects the Company’s and comparator’s share prices (with reinvested dividends) over the vesting period, allowing for the volatilities and
correlations between the shares as estimated from historical data. From this projection the proportion of awards vesting, and the value to
employees, is calculated. 100,000 simulations were run to calculate the fair values. The fair value is set as the average value over all the simulations.
Year ended
31.12.12
WAFV ($)
Year ended
31.12.11
WAFV ($)
Year ended
31.12.12
No. (’000)
Year ended
31.12.11
No. (’000)
3.38
2.32
–
–
1.94
3.23
3.92
4.28
5.52
2.61
5.52
3.38
905
485
–
–
(240)
1,150
905
415
(64)
(10)
(341)
905
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
128
Ferrexpo plcAnnual Report & Accounts 2012 Note 39: 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
Total profit from operations and associates
Summary of adjusted items:
US$000
Operating adjusting items
Write-offs and impairment losses
Losses on disposal of property, plant and equipment
Total operating adjusting items
Notes
8
7
Before
adjusting
items
6 1,424,030
(694,576)
729,454
(311,964)
(56,329)
11,347
(30,161)
653
343,000
2,772
345,772
9
10
11
12
14
Adjusted
items
Year ended
31.12.12
Before
adjusting
items
– 1,424,030 1,788,012
(649,544)
–
(694,576)
729,454 1,138,468
–
(317,951)
(311,964)
–
(51,969)
(56,329)
–
6,943
11,347
(17,091)
(35,064)
(1,360)
653
757,040
338,097
2,012
2,772
759,052
340,869
(4,903)
–
(4,903)
–
(4,903)
Adjusted
items
Year ended
31.12.11
– 1,788,012
(649,544)
–
– 1,138,468
(317,951)
–
(51,969)
–
6,943
–
(17,614)
(523)
(1,360)
–
756,517
(523)
2,012
–
758,529
(523)
Notes
Year ended
31.12.12
Year ended
31.12.11
13
(836)
(4,067)
(4,903)
(478)
(45)
(523)
Note 40: Business combination
Prior year business combination
On 1 October 2011, the Group acquired 77.6% of Transcanal S.R.L. (‘Transcanal’). The consideration of US$557 thousand has been transferred in
cash to the previous shareholder of the 77.6% stake. The fair value of assets acquired amounted to US$803 thousand and liabilities assumed to
US$158 thousand. Based on the definitely determined initial accounting for the acquisition of Transcanal, the acquisition resulted in a goodwill of
US$56 thousand.
Had this business combination been effected at 1 January 2011, the revenue of the Group would have been US$588 thousand higher, and the
profit for the year would have been US$75 thousand higher.
Note 41: 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 17.
129
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Parent Company Balance Sheet
US$000
Fixed assets
Non-current investments
Subsidiary undertakings
Total fixed assets
Current assets
Debtors – amounts falling due within one year:
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
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 12 March 2013.
Kostyantin Zhevago
Chief Executive Officer
Christopher Mawe
Chief Financial Officer
Notes
As at
31.12.12
As at
31.12.11
2
3
5
6
4
4
4
4
4
4
147,496
147,496
147,496
147,496
792,180
-
2,055
2
700
794,937
332
1,013
1,112
2,457
939,976
590,520
227
1,651
–
459
592,857
442
503
1,308
2,253
738,100
121,628
185,112
(77,260)
(7,808)
718,304
939,976
121,628
185,112
(77,260)
(9,416)
518,036
738,100
130
Ferrexpo plcAnnual Report & Accounts 2012 Notes to the Parent Company 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
12 March 2013. 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 has taken advantage of the exemption granted by FRS 1 Cash flow statements (revised), whereby it is not required to publish its own
cash flow statement.
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 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 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.
131
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Parent Company 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 (i.e. the effective interest rate computed at initial
recognition). The carrying amount of the asset is reduced, with the amount of the loss recognised in administration costs. If, in a subsequent
period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was
recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the profit and
loss account, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.
Derecognition of financial assets and liabilities
A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. Where an existing
financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the
difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss.
Share-based payments
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value at the 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 39 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.
132
Ferrexpo plcAnnual Report & Accounts 2012 Note 2: Investments
US$000
Non-current investments
As at
31.12.12
147,496
As at
31.12.11
147,496
The balance above relates to the Company’s investment in Ferrexpo AG which is a 100% owned subsidiary based on Switzerland.
Note 3: Deferred tax assets
Deferred tax assets at 31 December 2012 relate to the following:
US$000
Deferred tax assets:
Timing difference on IPO costs
Total deferred tax assets
Note 4: Capital and reserves
US$000
At 1 January 2011
Profit for the period
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
At 31 December 2011
Profit for the period
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
At 31 December 2012
As at
31.12.12
As at
31.12.11
–
–
227
227
Issued
capital Share premium
185,112
–
–
–
–
185,112
–
–
–
–
185,112
121,628
–
–
–
–
121,628
–
–
–
–
121,628
Treasury
share reserve
(77,260)
–
–
–
–
(77,260)
–
–
–
–
(77,260)
Employee
benefit trust
reserve
(10,172)
–
–
–
756
(9,416)
–
–
–
1,608
(7,808)
Retained
earnings
63,545
493,154
493,154
(38,663)
–
518,036
238,928
238,928
(38,660)
–
718,304
Total
equity
282,853
493,154
493,154
(38,663)
756
738,100
238,928
238,928
(38,660)
1,608
939,976
Note 5: Trade and other creditors
Trade and other creditors at 31 December 2012 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 2012 relate to the following:
US$000
Accrued liabilities and deferred income:
Falling due within one year
Total accrued liabilities and deferred income
As at
31.12.12
As at
31.12.11
332
332
442
442
As at
31.12.12
As at
31.12.11
1,013
1,013
503
503
133
overviewbusiness reviewgovernancefinancial statementsFerrexpo plcAnnual Report & Accounts 2012 Notes to the Parent Company Financial Statements continued
Note 7: 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 8: Auditor remuneration
The audit fee in respect of the parent company was US$16 thousand (2011: US$16 thousand).
Note 9: 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 17
to the consolidated financial statements.
134
Ferrexpo plcAnnual Report & Accounts 2012 overview
Business review
governance
financial statements
Glossary
2010 Code
The UK Corporate Governance Code published in 2010
Act
AGM
Articles
The Companies Act 2006
The Annual General Meeting of the Company
Articles of Association of the Company
Audit Committee
The Audit Committee of the Company’s Board
Belanovo or Belanovskoye An iron ore deposit located immediately to the north of Yeristovo
Benchmark Price
International seaborne traded iron ore pricing mechanism understood to be offered to the market by major iron
ore producers under long-term contracts
Beneficiation Process
A number of processes whereby the mineral is extracted from the crude ore (see page 3)
BIP
Board
bt
Capesize
Business Improvement Programme, a programme of projects to increase production output and efficiency
at FPM
The Board of Directors of the Company
Billion tonnes
Capesize 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. Standard capesize
vessels are able to transit through Suez Canal
Capital Employed
The aggregate of equity attributable to shareholders, non-controlling interests and borrowings
CFR
C1 Costs
CIF
CIS
Delivery including cost and freight
Represent the cash costs of production of iron pellets from own ore, divided by production volume from 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
Delivery including cost, insurance and freight
The Commonwealth of Independent States
Company
Ferrexpo plc, a public company incorporated in England and Wales with limited liability
CPI
CRU
CSR
Consumer Price Index
The CRU Group provides market analysis and consulting advice in the global mining industry
(see www.crugroup.com)
Corporate Safety and Social Responsibility
CSR Committee
The Corporate Safety and Social Responsibility Committee of the Board of the Company
DAP
DFS
Delivery at place
Detailed feasibility study
Directors
The Directors of the Company
135
Ferrexpo plcAnnual Report & Accounts 2012 Glossary continued
Dragline Excavators
Heavy machinery 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 and non-recurring exceptional items included in other income and other expenses, share-based
payment expenses and 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
Executive Directors
The Executive Directors of the Company
FBM
Fe
Ferrexpo Belanovo Mining, also known as BGOK, a company incorporated under the laws of Ukraine
Iron
Ferrexpo
Ferrexpo plc and its subsidiaries
Ferrexpo AG Group
Ferrexpo AG and its subsidiaries including FPM
Fevamotinico S.a.r.l.
A company incorporated with limited liability in Luxembourg
First-DDSG
First-DDSG Logistics Holding GmbH (formerly Helogistics Holding GmbH) and its subsidiaries, an inland waterway
transport group operating on the Danube/Rhine corridor
FOB
FPM
FRMC
FTSE 250
FYM
Group
Delivered free on board, which means that the seller’s obligation to deliver has been fulfilled when the goods have
passed over the ship’s rail at the named port of shipment, and all future obligations in terms of costs and risks of
loss or damage transfer to the buyer from that point onwards
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 Yeristovo Mining, also known as YGOK, a company incorporated under the laws of Ukraine
The Company and its subsidiaries
Growth Markets
These are predominantly in Asia and have the potential to deliver new and significant sales volumes to the Group
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 beneficiation process with enriched iron content
Iron ore sinter fines
Fine iron ore screened to -6.3mm
136
Ferrexpo plcAnnual Report & Accounts 2012 overview
Business review
governance
financial statements
Iron ore pellets
Balled and fired agglomerate of iron ore concentrate, whose physical properties are well suited for transportation
to and reduction within a blast furnace
JORC
K22
KPI
kt
LIBOR
LLC
LTIFR
LTIP
m3
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
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
These include Turkey, the Middle East and Western Europe and are those markets where Ferrexpo has
a competitive advantage over more distant producers, but where market share remains relatively low
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 90,000 tonnes of cargo 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 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
137
Ferrexpo plcAnnual Report & Accounts 2012 Glossary continued
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
US$/t
Sinter
Spot price
Sterling/£
STIP
Tailings
Tolling
Ton
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 fine iron ore and/or
iron ore concentrate, other binding materials, and coke breeze as the heat source
The current price of a product for immediate delivery
Pound Sterling, the currency of the United Kingdom
Short-Term Incentive Plan
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
These lie within Central and Eastern Europe and include steel plants that were designed to use Ferrexpo pellets.
Ferrexpo has been supplying some of these customers for more than 20 years. Ferrexpo has well-established
logistics routes and infrastructure to these markets by both river barge and rail. These markets include Austria,
Czech Republic, Hungary and Slovakia
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
An alternative measure 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
Ukrainian Hryvnia, the currency of Ukraine
The quality certification system in Ukraine, regulated by law to ensure conformity with safety and
environmental standards
Underlying Earnings
UAH
Ukr SEPRO
138
Ferrexpo plcAnnual Report & Accounts 2012 overview
Business review
governance
financial statements
VAT
Value Added Tax
Value-in-use
WAFV
WMS
The implied value of a material to an end user relative to other options, e.g. evaluating, in financial terms,
the productivity in the steel making process of a particular quality of iron ore pellets versus the productivity
of alternative qualities of iron ore pellets
Weighted average fair value
Wet magnetic separation
Yeristovo or Yeristovskoye The deposit being developed by FYM
139
Ferrexpo plcAnnual Report & Accounts 2012 140
Ferrexpo plcAnnual Report & Accounts 2012 Shareholder information
registered Office
2–4 King Street
London
SW1Y 6QL
www.ferrexpo.com
advisors
Share registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Financial
JPMorgan Cazenove Ltd
25 Bank Street
London
E14 5JP
corporate Brokers
JP Morgan Cazenove Ltd
25 Bank Street
London
E14 5JP
Deutsche Bank AG
Winchester House
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
2– 4 King Street
London
SW1Y 6QL
Tel: +44 207 389 8300
www.ferrexpo.com
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www.ferrexpo.com